Vantage Point - Big pharma on a diversification spending spree

Analysis

A combination of low valuations and some companies selling off business units to raise much needed cash last year appears to have lured big pharma in to one of its biggest spending sprees in recent times, even excluding the mega-mergers of Wye-Pfi and SchMerck.

Big pharma splashed out $34.5bn in 2009, excluding the mega-mergers, across 36 company acquisitions or major strategic investments, with Sanofi-Aventis and Abbott Laboratories leading the M&A charge, between them accounting for 15 deals and $21bn spent. Last year also saw a significant rise in the acquisition of companies and assets to help diversify big pharma’s business operations, further proof, if any were needed, of how the patent cliff is changing the dynamics of the pharma industry (see tables below).

Spending out of trouble

Following on from our analysis at the end of the third quarter last year (Vantage Point - Is big pharma spending its way out of trouble?, October 2, 2009), the data below completes the M&A picture for 2009 and does indeed suggest that big pharma is spending big to help negotiate one of the toughest periods in the industry’s history.

Taken from EvaluatePharma’s M&A database, and excluding the takeovers of Genentech, Wyeth and Schering-Plough which skew the analysis, an underlying picture of deal activity can be seen. This also excludes any money spent on licensing deals, a breakdown on which we aim to publish shortly.

M&A Activity: 2007 to 2009
2009 2008 2007
Deal count Total value ($bn) Deal count Total value ($bn) Deal count Total value ($bn)
 Sanofi-Aventis  8  9.9  2  1.1  -  -
 Abbott Laboratories  7  11.1  1  0.04  -  -
 GlaxoSmithKline  5  4.2  2  0.8  3  2.2
 Johnson & Johnson  5  4.1  4  0.5  1  1.4
 Novartis  3  2.0  5  11.8  -  -
 Roche  2  0.1  5  4.5  4  1.1
 Pfizer  2  0.1  3  0.2  2  0.4
 Merck & Co  2  0.1  -  -  1  0.4
 Bristol-Myers Squibb  1  2.4  1  0.2  1  0.4
 AstraZeneca  1  0.5  -  -  2  15.8
 Bayer AG  -  -  5  1.0  -  -
 Eli Lilly  -  -  2  6.6  2  2.6
 Wyeth  -  -  1  0.2  1  -
 Amgen  -  -  -  -  2  0.7
 Schering-Plough  -  -  -  -  1  15.6
Annual Totals  36  34.5  31  26.7  20  40.5
Mega-mergers  2  109.1  1  46.8  -  -
Total with mega-mergers  38  143.6  32  73.5  20  40.5

After being relatively quiet in terms of M&A activity in 2007 and 2008, Sanofi and Abbott have been making up for any lost ground, with Sanofi’s new chief executive last year, Chris Viehbacher, clearly making his presence felt.

Abbott’s purchase of Solvay’s pharma business for $7bn and Sanofi’s $4bn acquisition of Merck & Co’s 50% interest in Merial, their animal health joint venture, were the biggest deals last year.

Sanofi actually features three times in the top ten deal league table last year. Its acquisitions of Zentiva and Chattem are indicative of a desire to diversify its business operations, moves unlikely to have happened under Sanofi’s previous management team.

Top 10 Big Pharma M&A Deals in 2009 (excludes mega-mergers) 
Rank Acquiring Company Target Company or Business Unit Deal Value ($bn) Financing Deal Type Business Type Deal Classification
1 Abbott Laboratories Solvay  7.0 Cash Business Unit Pharmaceutical Bolt-on
2 Sanofi-Aventis Merial  4.0 Cash Majority Stake Animal Health Bolt-on
3 GlaxoSmithKline Stiefel Laboratories  3.2 Cash Company Acquisition Pharmaceutical Bolt-on
4 Abbott Laboratories Advanced Medical Optics  2.8 Cash Company Acquisition Hospital & Healthcare Supply Bolt-on
5 Bristol-Myers Squibb Medarex  2.4 Cash Company Acquisition Pharmaceutical Technology platform
6 Sanofi-Aventis Chattem  1.9 Cash Company Acquisition Pharmaceutical Diversification
7 Sanofi-Aventis Zentiva  1.7 Cash Company Acquisition Pharmaceutical Diversification
8 Novartis EBEWE Pharma's Injectable Generics Business  1.3 Cash Business Unit Pharmaceutical Bolt-on
9 Johnson & Johnson Mentor  1.1 Cash Company Acquisition Hospital & Healthcare Supply Bolt-on
10 Johnson & Johnson Cougar Biotechnology  0.9 Cash Company Acquisition Pharmaceutical Bolt-on

Sanofi and Glaxo’s increasing move into the generics space, coupled with Pfizer’s broad collaborations with the likes of Wockhardt, indicate a pretty dramatic change in strategic direction for big pharma, unthinkable a few years ago.

For example, three of this year’s ten biggest deals by big pharma were in the generics sector, compared with two last year, and only one in 2007.

Urge to diversify

This need to diversify, to reduce these companies’ reliance on multiple-blockbuster products, which cause so many problems when market exclusivity runs out, is illustrated in the analysis below.

While classifying deals into bolt-on (acquisitions which enhance core operations), technology platform (acquisitions where the primary objective is to access a vital technology platform rather than the specific products) or diversification (acquisitions which enable access to new areas of healthcare or geographical regions) can admittedly be subjective, any trends identified are certainly valuable.

While bolt-on acquisitions around a company’s core operations are largely unchanged in the last three years, a real shift seems to be occurring towards deals which diversify and away from those which access a new technology.

Classification of Deals 2007 - 2009
2009 2008 2007 Total
Deal Classification count % count % count %
 Bolt-on  23  64%  20  65%  10  50%  55
 Diversification  9  25%  4  13%  2  10%  16
 Technology platform  4  11%  7  23%  8  40%  16
 Total  36  31  20  87

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