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What’s Next In Pharma M&A?

For the last year, traditional and bio-pharmaceutical deal making has been in a holding pattern. Uncertainty regarding U.S. tax plan implications, steep deal prices, geopolitical uncertainties and questions around breakthrough drug performances – such as the first gene therapy from Spark Therapeutics and cancer-killing T-cells being sold by Novartis and Gilead – have all tempered M&A activity.

This year, however, pent-up acquisition energy and a number of catalyzing market forces appear primed to rev the deal-making engines in pharma.

Going Global

Pharmaceutical market demand is anticipated to more than double to $1.3 trillion, with most of the BRIC (Brazil, Russia, India and China) and MINT (Mexico, Indonesia, Turkey but with the notable exception of Nigeria) economies expected to account for 20% of all sales globally. With instances of chronic medical conditions growing, increasing demand for medicine in emerging markets, plus the considerable consumer market trends materializing in the developing world, big pharma’s market focus will certainly shift.

In a report by Bernstein, analysts noted that the pharmaceutical sector in emerging markets grew 6.1% sequentially in Q2 of 2017 – the fastest in more than two years. The report highlights AstraZeneca, GlaxoSmithKline, Eli Lilly, Merck & Co., Novartis, Pfizer, Roche and Sanofi as the drivers of this growth. These markets represent a bright spot  against the 0.1%  revenue growth these companies managed to collectively squeeze out of the U.S. and the rest-of-the-world for the same period.

Similarly, a widely-reported pharma executive survey reinforces the reality that, as a byproduct of growing prosperity and nutrition, disease patterns in emerging and second-tier markets are changing and shifting toward “lifestyle diseases [being] more common in mature markets.” This evolution in individual health dynamics is significant and opens up new markets for existing products.

While affordability remains a challenge, go-to-market approaches can now start to mirror R&D, manufacturing, sales and delivery practices in established markets. For established companies, developed market playbooks can now start to be used to take products to new, emerging markets. Companies that win in these markets, however, must have the requisite channels for development and delivery. An obvious way to create such access is to merge or acquire an in-market specialist with a proven approach for success. In as early as 2011, Sanofi was employing a significant localization strategy and committed to re-shape its portfolio with emerging markets as a central pillar. Now, based on sales, the company maintains leadership in most emerging markets and is positioned to capitalize on future growth opportunities. 

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Industry news site FiercePharma points to broader macro factors that may spur renewed global market emphasis via “a series of policies either [newly] proposed or already implemented by the Chinese government[,] aiming at faster drug approval and wider reach of innovative treatments [that are] opening up new growth opportunities for multinational pharma companies.”

Buy Over Build?

In 2017, the U.S. Food and Drug Administration (FDA) approved 46 new molecular entities; that's more than double the number approved in 2016 and establishing a 21-year high. Similarly, the agency appears to be prioritizing the generic-drug review process to stimulate new industry competition. In 2017, the FDA recorded the highest annual total of generic drug approvals in its history, and according to a recent published statement by its commissioner, the agency expects to exceed this record number of generic drug approvals in 2018.

Reuters reports that a growing share of product approvals were from small, innovative start-ups. Big pharma is already watching competitive advantages disintegrate as drug patents expire and more generic alternatives are approved. This, plus steady R&D productivity declines, may result in an innovation crisis for industry leaders. Pressure from these factors suggests an obvious play for large companies to backfill in-house innovation development pipelines via acquisition.

According to one sector analyst, “pricing pressures on established medicines [...] are driving big players into niche disease areas where biotech groups often excel.” Industry pressures, growing drug pricing transparency legislation and the reality that nearly 90% of prescriptions in the United States, for example, are generic signal that acquisition sprees are likely to re-capture positioning this year. Otherwise, renewed deal-making focus will be had around treatments for diseases like cancer, which is a leading cause of global mortality rates. AstraZeneca is a major player in this field and potential acquisition activities for this lucrative pocket are likely to grow.

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Corporate balance sheets are ready too. The U.S. tax overhaul and lower tax rate for repatriation of offshore cash will undoubtedly be wielded in deal negotiations. Goldman Sachs estimates some $160 billion across the health-care sector being unlocked and primed for aggressive capital allocation. Already in Q1 of 2018, merger mania appears underway, with Sanofi agreeing to pay $11.5 billion for the hemophilia drug maker Bioverativ, Roche acquiring cancer-specialist Ignyta just before year-end, Celgene paying $9 billion for cell-therapy pioneer Juno Therapeutics and perhaps, most notably, the $69bn merger between CVS and Aetena (which has still not crossed the line).

Unconventional Disruption

Innovation uncertainties are significant today but may ultimately pale in comparison to the impact that emerging industry disruptors will have in the future. This year the scope and scale of this wave of non-traditional competition may finally come into focus.

In January, representatives from a mega-partnership of Amazon, JPMorgan Chase and Berkshire Hathaway announced plans to tackle the “ballooning costs of healthcare” that, according to Berkshire CEO Warren Buffett, “act as a hungry tapeworm on the American economy."

What this means today is speculative. However, the collective firepower and commitment to technological solutions and disruption opportunity for this formidable alliance –  which together represents over 1 million employees – is significant. In the United States, more than 4 billion prescriptions are ordered every year. In 2015, estimated spending on prescription drugs was $300 billion and last July Amazon set up 1492, a secret lab dedicated to healthcare innovation. Since then, they’ve recruited a number of healthcare experts including Taha Kass-Hout, former chief health informatics officer for the U.S. Food and Drug Administration (FDA). Amazon has also quietly secured regulatory approval from 12 states for wholesale distributor licenses, further reinforcing its ambitions around pharmacy and drug value chains (this is in addition to their $14bn foray into the grocery market via the acquisition of Whole Foods in 2017).

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Beyond this collaboration, outside innovation in areas of tele-medicine, AI, amd big data driven insights into drug outcomes and value-based pricing – plus evolution in consumer driven medicine where software helps individuals control drug choices and skip doctor visits - may add up to fundamental changes in how drug companies do business.

While its premature to say that Amazon itself may cause upheaval in an industry that has proven generally impervious to major reform, it is representative of a movement. Its rise will also undoubtedly fortify the start-ups and established corporates set to eat away at the edges of this profitable sector.

If the first few months of the year are any indication, 2018 should be a year of market movement and deal making within pharma. It may also be the year referenced back on when a disruptive company finally cracked the code on re-imaging a new pharmaceutical and healthcare industry model.

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