Vantage Point - Is big pharma spending its way out of trouble?

Analysis

The deal announced by Sanofi-Aventis yesterday to buy Fovea Pharmaceuticals, a privately-owned eye disease specialist, for an initial €370m ($540m) is just the latest in a frantic period of acquisitions from the French drug maker.

Under new chief executive Chris Viehbacher the company has struck six acquisitions so far this year, splashing out almost $4bn, making it one of the most prolific acquirers amongst the big cap pharma stocks. However, excluding the three mega-mergers the industry has seen this year, of this cohort Abbott Laboratories has by far spent the most cash on takeovers, bolt on acquisitions and stake purchases (see tables below).

By excluding the takeovers of Genentech, Wyeth and Schering-Plough, which skew the year’s total deal values considerably, an underlying picture of deal activity can be seen. This analysis also excludes any money spent on licensing deals, a break down on which is coming next week.

M&A Activity: 2007 to 2009 latest
2009 (YTD) 2008 2007
Deal count Total value ($bn) Deal count Total value ($bn) Deal count Total value ($bn)
Abbott Laboratories 6 10.5 1 0.04 - -
Sanofi-Aventis 6 4.0 2 1.1 - -
GlaxoSmithKline 5 4.2 2 0.8 3 2.2
Johnson & Johnson 4 3.3 4 0.5 1 1.4
Roche 2 0.1 5 4.5 4 1.1
Bristol-Myers Squibb 1 2.4 1 0.2 1 0.4
Novartis 1 1.2 5 11.8 - -
Pfizer 1 0.1 3 0.2 2 0.4
Merck & Co 1 0.1 - - 1 0.4
Bayer AG - - 5 1.0 - -
Eli Lilly - - 2 6.6 2 2.6
Wyeth - - 1 0.2 1 -
Amgen - - - - 2 0.7
AstraZeneca - - - - 2 15.8
Schering-Plough - - - - 1 15.6
Annual Totals 27 25.9 31 26.7 20 40.5
Mega-mergers 3 155.9 - - - -
Total with mega-mergers 30 181.7 31 26.7 20 40.5

Abbott’s purchase of Solvay’s pharma business for $6.6bn has helped the company top the tables by both deal count and cash spent so far this year. However, as a diversified company it has more targets; two of its other purchases this year were hospital and healthcare supply businesses, areas that not all of their big pharma peers would be interested in.

Still, diversification has certainly become more of a buzzword. In the past, venturing into the specialty arena or generics would have been unheard of, now it is the order of the day for more of these companies. The table below, listing the ten biggest deals this year outside of the three mega-mergers, is a truly mixed bag of pure pharma, healthcare products and generics.

With more companies going after more targets, this theme is also likely to be driving deal volumes. For example, three of this year’s ten biggest deals were in the generics space, compared with two last year, and only one in 2007.

Interestingly, it appears that the world’s biggest drug makers are spending just as much this year on acquisitions as in 2008, despite the troubled financial climate. This could be down to companies making the most of depressed valuations. In both 2007 and 2008 the ten biggest deals were all at least $2bn, whereas so far this year only five deals are above this $2bn mark.

Also, compared to 2007 deal numbers have jumped, with only 20 acquisition deals conducted that year. The persuasive whispers of investment bankers could well be helping to keep deal activity alive; they will certainly be keen to make sure that the one industry still swimming in cash keeps spending it, whilst paying their fees.

Interestingly, AstraZeneca, Novartis and to a certain extent Bayer, have taken their collective feet off the M&A pedal. The licensing analysis next week will reveal whether they have decided to spend their money here instead.

In the last few years, the woes facing big pharma, whether it is patent cliffs or huge downward pressures on pricing from payers and governments, have come into sharp relief. And it is clear that the response from many companies has been to try to buy their way out of trouble. Whether this level of activity will persist for the last three months of the year remains to be seen; there certainly seems to be no sign of it letting up.

Top 10 M&A deals so far in 2009 (excludes mega-mergers)
Rank Acquiring Company Target Company or Business Unit Deal Value ($bn) Financing Structure Business Type M&A Deal Type
1 Abbott Laboratories Solvay 6.6 Cash Pharmaceutical Business Unit
2 GlaxoSmithKline Stiefel Laboratories 3.2 Cash Pharmaceutical Company Acquisition
3 Warner Chilcott Procter & Gamble 3.1 Cash Pharmaceutical Business Unit
4 Abbott Laboratories Advanced Medical Optics 2.8 Cash Hospital & Healthcare Supply Company Acquisition
5 Bristol-Myers Squibb Medarex 2.4 Cash Pharmaceutical Company Acquisition
6 Watson Pharmaceuticals Arrow Group 1.8 Share Exchange + Cash Pharmaceutical Company Acquisition
7 Sanofi-Aventis Zentiva 1.7 Cash Pharmaceutical Company Acquisition
8 Gilead Sciences CV Therapeutics 1.4 Cash Pharmaceutical Company Acquisition
9 Novartis EBEWE Pharma's Injectable Generics Business 1.2 Cash Pharmaceutical Business Unit
10 Johnson & Johnson Mentor 1.1 Cash Hospital & Healthcare Supply Company Acquisition

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