In recent years, the healthcare industry has witnessed a flurry of activity in M&As, licensing deals and strategic collaborations involving pharmaceutical and biotech companies around the globe. From pharmaceutical and biotech giants, including Pfizer, GSK, Baxter and Amgen, to smaller but actively growing players, such as Jazz Pharmaceuticals, Alexion, Valeant and Alkermes, the race for these companies to strategically position themselves – and in many cases, acquire a competitive advantage in a fast-paced and highly competitive marketplace – is on.
Leading deal drivers
The patent cliff is arguably the biggest problem currently facing large pharmaceutical companies such as GSK, Johnson & Johnson and Pfizer. Since 1977, when Tagamet (cimetidine), which earned GSK over $1 billion in its first year, was approved by the US Food and Drug Administration (FDA) as an ulcer medication, pharmaceutical companies have been engaged in a hunt for blockbuster drugs – new efficacious therapies that cater to large unmet medical needs.
Many companies have succeeded in doing this, and drugs such as Prozac (fluoxetine), the first selective serotonin reuptake inhibitor; Mevacor (lovastatin), the first statin; and Lipitor (atorvastatin), have historically been the largest contributors to the annual revenues of their respective companies. These are troubling times for large pharmaceutical companies, as many blockbusters that were launched in the 1990s have either lost patent protection or are on the verge of doing so.
Innovation has unfortunately been a challenge recently in the industry, causing a decrease in the number of blockbusters launched annually. In addition, total new drug application (NDA) and biological licence application (BLA) approvals by the FDA declined by approximately 15% from 123 in 2009 to 107 in 2011, despite efforts by the FDA to reduce the approval times for new drugs and biologics. Although the number of new molecular entities (NMEs) increased by 52.2% from 23 in 2010 to 35 in 2011, it still shows a 34% decrease from 41 in 1997 (FDA, 2012). Some biotech companies have shown better performance in innovation than larger pharmaceutical companies, and are consequently being increasingly targeted for M&As, licensing and collaboration deals.
Shift to emerging markets
Since 2007, the US pharmaceutical industry has failed to replicate the same aggressive growth that it showed previously. This has been primarily due to the shift in growth away from the developed economies to the fast-emerging economies of countries including Brazil, China, India and Russia.
Bearing in mind that many of these companies are relatively unfamiliar with these markets, making deals with local companies offers an easier route of entry and, potentially, a greater chance of success.
Review by deal type
During Q3 2010-Q2 2011 and Q3 2011-Q2 2012, the total number of deals declined by 13.2% from 4,644 to 4,029. Not all deal announcements disclosed value, but where this information was made public, the total value decreased by 17.9% year on year, from $319.7 billion to $262.4 billion during the same time frame. With the exception of venture capital (VC) deals, which witnessed a 26% increase between the periods Q3 2010-2Q11 and Q3 2011-Q2 2012, the pharmaceutical industry experienced double-digit declines across all deals, regardless of deal type.
GlobalData believes that VC deals increased because of the growing importance of innovation in the pharmaceutical industry. With the patent cliff approaching, many large pharmaceutical companies are constantly seeking targets to acquire. Consequently, VC investments in promising biotech companies, which could be sold to larger drug companies for significant sums, have become increasingly popular in the industry.
The largest decline in deal type was in private equity, which decreased 26.9% year on year, from 175 in the Q3 2010-Q2 2011 period to 128 in Q3 2011-Q2 2012. The primary driver of the downward trend in deals is the European debt crisis: increasingly, governments have been cutting healthcare spending, thereby reducing drug purchases. Consequently, there has been an increase in scepticism regarding deals, shown by drug companies in recent times as most of them try to avoid high-risk, high-reward deals.
Reorganisation and consolidation within the pharmaceutical industry in 2009 and 2010 led to the spike in the number of deals in Q3 2009-Q2 2010. Mega deals involving major players including Roche, which acquired Genentech in a $46.8 billion deal, and Pfizer, which completed a $68 billion deal to acquire Wyeth, resulted in a flurry of deals activity.
Licensing, collaborations and M&A activity continue to account for a significant percentage of all completed deals. Collectively, they accounted for 53.8% (2,166) of all deals completed within the period Q3 2011-Q2 2012, a decrease year on year from 60.2% (2,795) of all deals completed within Q3 2010-Q2 2011.
Review by therapy area
CNS, infectious disease and oncology were the top three therapeutic areas in terms of deals activity during Q3 2011-Q2 2012, with 604, 519, and 514 deals respectively.
This affirms the growing interest of drug companies in these underserved and high-growth therapeutic areas. The infectious disease area witnessed the largest deals value within this same period with approximately $71.7 billion spent on deals between Q3 2011 and Q2 2012. Metabolic disorders, CNS and oncology were next with $55.8 billion, $55.6 billion and $54.9 billion respectively.
