A good deal better: pharmaceutical mergers and acquisitions

The pharmaceutical industry recorded significant mergers and acquisitions (M&A) activity in 2012 and the trend has continued in 2013, spurred by the need for pharmaceutical companies to plug the revenue gaps resulting from the patent cliff and intense generics competition.

Consequently, drug makers have resorted to M&As as a quick way to fix their dwindling revenues, innovation and product pipeline by gaining access to novel technologies and compounds, currently marketed products and markets.

So far in 2013, 2,578 deals totalling about $109 billion have been completed, with Q2 2013 witnessing the greatest amount of deals activity. The quarter saw the completion of 1,021 deals worth $59.8 billion, a noteworthy increase from 938 deals totalling $35.8 billion in Q1 2013. Figure 1 shows the trend of completed deals in the pharma industry from Q3 2012 to Q3 2013.

Venture capital funding continued to account for a significant percentage of completed deals in the industry, averaging 24.5%, while M&As and collaborations averaged 14.3% and 20.4%, respectively, over the past five quarters. The volume of completed M&As decreased marginally by 0.8%, from 123 in Q1 2013 to 122 in Q2 2013 - consistent with a gradual decline in the volume of completed M&As over the period from Q3 2012 to Q2 2013.

According to GlobalData, this potentially signifies a more cautious approach by large pharmaceutical companies towards bolt-on acquisitions, bearing in mind the pitfalls of inadequate post-acquisition alignment and synergy. Consequently, more companies are favouring relatively less risky options such as partnerships and collaborations. So far, in Q3 2013, only 86 M&As worth $13.4 billion have been completed.

Figure 2 shows the trend analysis of deals completed in the pharmaceutical industry from Q3 2012 to Q3 2013.

North America continues to dominate deals in the pharmaceutical industry, making up close to 54% (1,816) of all deals completed so far in 2013. In Europe and Asia-Pacific, 700 and 526 deals respectively have been completed in 2013; deals in these regions grew by 10.4% and 16.3% respectively in Q2 2013. South and Central America also witnessed a 7.7% growth in completed deals in Q2 2013, as pharmaceutical companies continued to flock to emerging markets to drive sales.

Figure 3 shows the breakdown of completed deals in the pharmaceutical industry so far in 2013 by region.

Perrigo acquires Elan for $8.6 billion

On 29 July 2013, Ireland-based Elan agreed to be acquired by US-based Perrigo in a cash-and-stock deal worth $8.6 billion (including Elan's current cash balance, which was over $1.9 billion at the end of June 2013).

Under the terms of the deal with Perrigo, Elan's shareholders will receive $16.50 per American depository receipt (ADR) in cash and shares, 10.5% above the $14.93 closing price of the company's ADRs on 26 July, 2013. This translates to $6.25 in cash and 0.07636 of a Perrigo share for each ADR.

GlobalData believes the allure of a lower tax rate in Ireland is one of the drivers of Perrigo's acquisition of Elan. Furthermore, Perrigo will benefit from royalties resulting from Tysabri (natalizumab), Elan's only marketed product, which was sold to Biogen in February 2013.

Ireland, with a corporate income tax rate of 12.5%, has recently emerged as a market of interest for multinational companies aiming to increase profitability. For companies such as Perrigo, which are involved in the low-margin generics business, margins take on an added importance.

Already, Perrigo has announced that the combined company will be based in Ireland after the completion of the deal. Consequently, the company's corporate income tax rate is expected to decrease significantly from the current rate of about 30%. Perrigo also expects to save over $150 million in annual taxes and operational expenses due to this deal.

Perrigo, which generated total revenues of over $3.5 billion in its financial year ending 30 June 2013, will benefit significantly from Elan's Tysabri, despite the transfer of the drug's marketing rights to Biogen.

Tysabri is a humanised monoclonal antibody (mAb) against the cell adhesion molecule a4-integrin, which was approved by the US Food and Drug Administration (FDA) in 2004 to treat multiple sclerosis (MS). Despite being withdrawn shortly after launch due to being linked with progressive multifocal leukoencephalopathy (PML) when administered in combination with interferon ß-1a, it was reintroduced in 2006 after the FDA determined that its clinical benefits outweigh the associated risks. The drug is also indicated for Crohn's disease.

In addition to the $3.3-billion upfront cash payment made by Biogen, Elan will receive royalties on all future global net sales of Tysabri - 12% during the first 12 months following the completion of the deal, 18% thereafter on annual global net sales up to $2 billion and 25% on annual global net sales above $2 billion.

GlobalData's estimation of the net present value of both the upfront cash payment and royalty sales from Tysabri for the MS indication over the next ten years totals about $4.3 billion. Therefore, the drug will be a welcome addition to Perrigo's current product portfolio.

Furthermore, Perrigo could potentially generate revenues from ELND005, Elan's developmental candidate, which is currently in phase II clinical trials for Alzheimer's disease and bipolar disorder.

Pharmstandard's $630-million acquisition of Bever Pharmaceutical

On 9 July 2013, Russian drug manufacturer Pharmstandard announced plans to expand its operations by acquiring Singapore-based Bever Pharmaceutical in a transaction that could be worth $630 million.

Pharmstandard's announcement came on the heels of the company's announcement of its decision to spin off its over-the-counter (OTC) business, weeks after rumours of the segment's potential $2.5-billion sale emerged.

The primary driver of Pharmstandard's decision to spin off its OTC business segment could be the segment's decline in revenues last year due to ageing brands and sales erosion by competition.

In 2011, OTC sales generated R15.5 billion ($510.4 million), accounting for about 37% of the company's total revenue for the year. However, the OTC business segment yielded R14.8 billion ($487.3 million) in 2012, accounting for 29.6% of the company's total revenue and 4.5% less than in 2011.

GlobalData expects Pharmstandard, which had a cash balance of about R8.7 billion ($260 million) at the end of 2012, to take on significant debt to fund its acquisition of Bever Pharmaceutical. Currently, Pharmstandard is minimally leveraged, with long-term loans of only R47.8m ($1.6 million) at the end of 2012.

Therefore, the company's decision to spin off its OTC business segment rather than sell, and to acquire Bever Pharmaceutical, potentially places some strain on its working capital, unless it raises funds through debt. There are indications, however, that the company could still opt to sell its OTC business segment instead of spinning it off.

Pharmstandard's acquisition of Bever Pharmaceutical would enable it to grow its business operations outside Europe, the only region where it currently has a significant presence. Consequently, Pharmstandard would be aiming to use its operations in the high-growth Singapore pharmaceuticals market as a beachhead for the rest of the Asia region.

This will possibly result in faster growth of the company's revenues, which increased by 20.7% to R51.4 billion ($1.7 billion) in 2012 from R42.7 billion ($1.4 billion) in the previous year.