Mergers – Mania or discretion?

While merger mania is gripping the global pharma industry, a similar trend may soon spill over to the Indian market, with pharma companies quoting at low valuations and saddled with huge debt.

Recently, there has been a spate of deals in the pharma space lead by Pfizer’s acquisition of Wyeth for $68 billion, followed by the merger of Merck and Schering Plough. Experts believe that Bristol Myers Squibb may be the next target of an acquisition, and many more deals are inevitable. Back home, there has been speculation about Wockhardt and Piramal Healthcare being potential acquisition targets.

Analysts believe that the trend may intensify in India. Due to global consolidation pricing pressures, regulatory compliance issues and leverage taken on books for past high priced acquisition, large Indian pharma is feeling the pressure and there will be substantial consolidation within the Indian market.

The primary drivers of global mergers and acquisitions are falling revenues of Big Pharma due to slow down pressure and a shrinking blockbuster drug pipeline. Pharma consultancy IMS Health estimates that by 2011, drugs worth some $60 billion will come off patent.

So MNCs are trying to augment revenues by acquisitions and alliances with generics and other companies where they see additional businesses like vaccines, biotech drugs and specialists therapies. For instance, Pfizer gets the biotech business and OTC business of Wyeth to increase its revenues through the acquisitions.

Pipelines have seen stagnating hence there is need to replenish them. In the recent Merck Schering Plough deal, Merck’s pipeline will double to 18 late-stage drugs with a formidable R&D pipeline.

In the current economic environment, big mergers and deals are a good strategy to improve bottom line and cut costs. Research and development and marketing expenses account for a whopping 35-40% of total expenses. These deals will allow for synergies and cost reductions when a merger happens.

Pharma biggies like Glaxo are trying to bolster their presence in emerging markets and in generic companies. There are many Indian companies whose valuations have reduced by 70-80%. Experts believe that some of them will fall prey to either big Indian companies or foreign players.

This is the perfect time to shop for companies that are strategically compatible and are available at much lower valuations. Companies with a reasonable risk appetite make best use of such opportunities and the phenomenon is quite apparent with number of deals happening in global pharma space. Pharma is still perceived as the industry, which is relatively immune to any downturn, and hence most M&A activity is happening in this space while earlier it used to be services or technology. As for trend spilling to India, companies are taking a wait and watch approach as of now.

As far as availability of funds is concerned, Big Pharma, for all its problems – does have massive cash resources and can do these blockbuster deals as well as attract the needed bank funding as Pharma has been less affected by the downturn on account of the defensive nature of the industry.

Top Billed Embrace:

Deals Size
Pfizer Inc-Wyeth Inc 68
Roche 47
Merck-Schering Plough 41
GSK-Archemix Corp 1.4

Bristol Myers may be the next target like Wockhardt, Piramal at home

Figs, in $bn.

Mergers in fact take place in any industry including pharma as a strategy to optimize cost and increase the market share. Synergy, backward and forward integration are also some of the strategies which induce organizations to go in for mergers. The mergers are more predominant in corporate sector or small and medium companies belonging to a group of companies but may not be much prevalent in smaller businesses.