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It’s spring. It’s the end of the financial year for many companies. And it’s the time of year when a lot of them hold annual shareholders’ meetings, so there’s a certain temptation to make announcements that will excite shareholders (or maybe that’s just me being cynical). Some or all of those things may be contributing to the media and rumour mills working overtime about mergers and acquisitions in the pharmaceutical and chemical sectors.
For the last few years, things have been rather quiet in terms of pharma megamergers – in which already large companies crash together in the hope of finding ‘efficiency savings’ and ‘synergies’. Most of the more recent deals have been big companies snapping up smaller startups to acquire specific products or technologies that fit with their priorities. A lot of analysts and industry commentators have been making noises along the lines of ‘pharma has learned its lesson: megamergers cause a lot of disruption for not much overall gain’.
But then, in February, consultancy firm McKinsey put out a report that essentially said, ‘you know what, those mergers did actually do something positive, they “resulted in positive returns for shareholders”’. Whether or not this is a good thing for the overall health of the firms, and of their R&D pipelines is another discussion entirely.
The most recent deal that’s actually been confirmed seems to fit this model – Novartis, GlaxoSmithKline and Eli Lilly have agreed to a roughly $25 billion (£15 billion) three-way asset shuffle in an attempt to focus on what they’re best at, and slim down their sidelines.
It’s all getting a bit hostile
Then there’s Valeant pharmaceuticals gunning for Allergan, the makers of Botox (onabotulinum toxin A). Rather than engage in expensive and risky R&D, Valeant has built up its business by buying established products and squeezing all the value it can out of them. Last week, Valeant revealed that it had teamed up with activist investor Bill Ackman and launched a hostile bid to try and buy up Allergan’s shares. If it goes through, the deal would be worth somewhere in the region of $47 billion.
In response, Allergan has activated a ‘poison pill’ defence, which gives other shareholders rights to purchase additional shares if a single party builds up more than a 10% share in the company, weakening the aggressor’s ability to force a deal through. Allergan’s board has indicated that it might not be averse to a deal with Valeant, but doesn’t want to be bullied into a quick decision without making sure the terms are right.
From the point of view of Ackman, this is a slightly unusual alliance. It is much more common for an activist investor to build up an influential share in a target company, then try and force the board to sell (or otherwise influence the company’s strategic direction), rather than to team up with a prospective buyer.
Boxing with the big boys
There’s also Pfizer and AstraZeneca (AZ). The UK’s second largest pharma firm has confirmed that the world’s biggest drugmaker made a surreptitious pass at a merger deal late last year. AZ politely but firmly gave Pfizer the brush-off, but the behemoth is reportedly coming in with a second, much more brazenly public, offer. But AZ appears not to be for turning. As far as its board is concerned, AZ’s future is as an independent company – perhaps even a slimmed down version of today’s AZ that will follow GSK and Novartis’s lead, and ‘focus on what [it does] well’, in the words of chief executive Pascal Soriot. Whether the door is truly closed, or these are just the opening gambits in a long and drawn out battle, we must wait and see. But there are plenty of people who don’t share Pfizer’s confidence that the deal is such a good idea.
Smoke and mirrors
And then there are the more nebulous and speculative announcements. According to the rumour mill, US giant Merck & Co has been touting its over-the-counter medicines business for several months. A story from Reuters suggests that German firm Bayer and UK-based Reckitt Benckiser are vying to get in on the action, with a price tag somewhere in the region of $14 billion. Reckitt is already well established in the consumer products market, and, if a Bloomberg story is to be believed, Bayer is looking to divest its Material Science polymers division (with Evonik the potential buyer) and focus on healthcare, which would raise around $10 billion for acquisitions. That might follow the pattern of focusing on your core area within the industry, but it would certainly be a big change in direction for Bayer. Needless to say, none of these companies is saying anything official just yet.
Stories of this nature are always credited to ‘people with knowledge of the matter’ or other such disguised sources. That always makes me wonder just exactly how much ‘knowledge of the matter’ those sources actually have. Deals of this magnitude don’t happen quickly – there’s a whole lot of ‘due diligence’ to go through. Each company needs to check out the other’s claims and proposals, then there’s the twists and turns of political manoeuvring and boardroom negotiations. So there are opportunities for the right people to get hold of information.
But there are equally a lot of people who might gain from these nuggets of ‘information’. News outlets get to write breathlessly speculative pieces with sensational headlines; investors are happy because these disclosures often bump up share prices. While the chemists carry on working in labs and plants, with a growing sense of dread about whether their job will even exist next year.
And we’re still really no closer to knowing – is there a fire in the pharmaceutical sector, or is it all just smoke and mirrors?
Phillip Broadwith, Business editor