Earlier this week, The Economist travels over well-trod ground in an article on pharmaceutical industry M&A:
It used to be all about achieving sheer scale, and building a broad portfolio of potential treatments for a range of illnesses. Now it is increasingly about drug companies concentrating on what they do best, and getting out of areas in which they are weak.
Continuing with their insights:
Mergers rarely produce significant advances in innovation or research productivity…
At the risk of patronizing our audience, there are some basic reasons (and combinations of these) to pursue an M&A strategy:
Boost Existing Capabilities – In our industry, “Existing capabilities” would include R&D. Hence the willingness of a company to spend billions to acquire a company with Preclinical or Clinical assets.
Enter New Markets – Entering a new therapeutic category is arguably best done by acquiring a company that is already expert in that space.
Enter New Geographies – The market for companies in Emerging Markets has cooled slightly, but some excellent acquisition opportunities remain in Latin America and Asia.
Asset Monetization – There was a time when Big Pharma would absolutely never ever divest one of their branded products, even when they were already generic. Now that’s simply not the case. Companies are increasingly willing to divest “legacy” products in order to generate cash for shareholders or re-investment.
Financial Gymnastics – Acquisitions purely for tax or other financial machinations fall into this category.
Scale – More (like Pfizer/Warner Lambert)…while squeezing out operational cost savings.
So is dealmaking “inevitable” as The Economist says it will be?
Of course it will.
But is this value-creating with respect to the creation of novel therapies?
Will “Big Pharma” companies continue to buy Revenue, to the detriment or basic and applied research?
But, as long as there is a market of buyers waiting for venture-backed companies with innovative therapies, then there will continue to be new therapies being developed.
In other words, we do not believe that large-scale M&A will necessarily come at the expense of innovation.
It simply means that the innovation will come less from Big Pharma, and more from the venture-backed community of small biotechs and small pharma companies.
And, if you believe the argument that small companies are more innovative to begin with, then the less R&D performed by big companies will result in more innovation, not less.
So in the end, we’ll see more innovation from smaller companies and (hopefully) better returns to shareholders of large companies.
Is that so bad?