Speciality players define M&A as big pharma seeks focus

Forget megamergers. For half a decade the daring deals in the pharma space have been made primarily by the speciality players.

Endo International’s move on Par Pharmaceutical last week shows how this peer group has defined M&A since 2009, when Pfizer and Merck & Co made the last major acquisitions of companies regarded as traditional big pharmas, those of Wyeth and Schering-Plough respectively. One company alone, Actavis, has been responsible for nearly a third of the value of the top 25 deals in this time, transforming itself from a respectably sized generics company into the world’s second-biggest seller of skin and eye disease drugs (see table below).

Tax pressure

To be sure, big pharma companies have been active acquirers, but their activities have been confined primarily to achievable bolt-on transactions to bring in interesting developmental assets or promising business lines, not the megamergers that tend to grab headlines.

Two deals proposed and then abandoned last year might have changed this picture substantially and moved nearly $150bn onto the side of big pharma. AstraZeneca successfully fought off Pfizer, however, and AbbVie had a near-miss with its takeout of Shire – scuttled because of changes to US tax rules.

In fact it was speciality companies rather than pharma giants that wrung most of the value from tax deals before laws making inversions much less appealing were enacted. Before Actavis became the world’s 19th biggest seller of prescription drugs, and on its way to a top 10 ranking, it was known as Watson Pharmaceuticals. It then took the name of the Iceland-based generic company it bought in 2012, and thanks to a later takeout of Ireland-based Warner Chilcott it managed to move its domicile, slash its tax rate and free up cash on the balance sheet.

Top 25 transactions since 2009
Acquiring company Target Deal value ($bn) Date
Actavis Allergan 70.5 Nov 2014
Novartis Alcon* 28.1 Jan 2010
Actavis Forest Laboratories 28.0 Feb 2014
AbbVie Pharmacyclics 21.0 Mar 2015
Sanofi Genzyme 20.1 Aug 2010
Pfizer Hospira 17.0 Feb 2015
Novartis GlaxoSmithKline oncology 16.0 Apr 2014
Takeda Nycomed 13.1 May 2011
Valeant Pharmaceuticals Salix Pharmaceuticals 11.4 Feb 2015
Gilead Sciences Pharmasset 11.2 Nov 2011
Amgen Onyx Pharmaceuticals 10.4 Aug 2013
Novartis Alcon* 9.6 Dec 2010
Merck & Co Cubist Pharmaceuticals 9.5 Dec 2014
Perrigo Company Elan 9.5 Jul 2013
Valeant Pharmaceuticals Bausch + Lomb 8.7 May 2013
Actavis Warner Chilcott 8.5 May 2013
Alexion Pharmaceuticals Synageva BioPharma 8.4 May 2015
Roche InterMune 8.3 Aug 2014
GlaxoSmithKline Novartis vaccines 7.1 Apr 2014
Bristol-Myers Squibb Amylin Pharmaceuticals 7.0 Jun 2012
Teva Pharmaceutical Industries Cephalon 6.8 May 2011
Actavis (as Watson) Actavis  5.9 Apr 2012
Mallinckrodt Questcor Pharmaceuticals 5.6 Apr 2014
Mylan Abbott Labs branded generics 5.5 Jul 2014
Shire NPS Pharmaceuticals 5.2 Jan 2015
Total of top 25 352.4
Notes: Speciality acquirers in bold; *Novartis acquistion took place in three separate transactions beginning in 2008. Source: EvaluatePharma.

The tax-base trail had been blazed a couple of years before by Actavis’s rival Valeant Pharmaceuticals International: the Canadian company Biovail bought Valeant, took the name of the target, engineered a similar tax benefit and now climbs towards the top 25. The company that preceded the merger was almost exclusively generics, whereas now Valeant is largely concerned with patented pharmaceuticals.

This set a precedent for the likes of Perrigo Company with Ireland-based Elan and Mylan with Abbott Laboratories’ Netherlands-based generics division, to name a couple.

Caught between

The reasons for speciality’s emergence as the M&A powerhouse are twofold. On one hand big pharma has withdrawn from major dealmaking and has instead sought to rationalise its own assets. Major actions have been along the lines of Abbott’s release of its pharma division as AbbVie, the GlaxoSmithKline-Novartis asset swap, and Pfizer’s longer-term strategy to divide into three.

The fact that innovative biotech assets have risen so much in value in the past three years has not helped big pharma buy to build pipelines. Neither has it made selling up a logical route for the speciality companies.

On the other hand, many of the prominent companies in this analysis have transformed themselves from generics groups into major speciality players – Actavis and Valeant are good examples – through acquisition. This has been driven in part by competition as suppliers of bulk pharmaceuticals and ingredients have swum up the value chain and expanded generics businesses significantly – the Indian groups Lupin and Dr Reddy’s Laboratories are good examples.

Given that they rival many traditional big pharmas on market capitalisation and soon will on sales – outpacing them massively on sales growth – these speciality groups become attractive targets themselves. Teva’s play for Mylan could signify that the endgame is here for speciality pharma’s growth by acquisition strategy, and it could be that in five years many will be consumed by the sector’s giants.

To contact the writers of this story email Jonathan Gardner or Edwin Elmhirst in London at news@epvantage.com or follow @EPVantage on Twitter

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