Pharmaceutical Mergers and Acquisitions

Mergers and acquisitions go through stages based upon economic conditions. The current stage is fuelled by debt as companies are using debt to fund mergers and acquisitions. Some of the companies that are being bought are suffering from high debt levels and facing administration.  An example of this is Peacocks who are being bought by Edinburgh Woollen Mill.

There is high sector concentration with mergers and acquisitions. This is due to the risk factor. Shareholders do not need companies to protect themselves against risk through diversification, as shareholders can easily diversify their own portfolio cheaper and quicker. This means companies generally stick to industries similar to their core business activity.

One industry that uses mergers and acquisitions for many reasons is the pharmaceutical industry.  They keep to the sector concentration theory as they buy either competitor pharmaceutical companies or research and development facilities. Through mergers and acquisitions, pharmaceutical companies are able to purchase competitors patents, access new therapy areas reducing the R&D investment and gain access to international markets.

For this industry, I believe that mergers and acquisitions serve a real purpose as even though they may not create a vast amount of shareholder wealth, they are providing services to a wider population. Many pharmaceutical companies admit that shareholders are not their main priority. For example, Johnson and Johnson put the patient’s needs first and work to satisfy their needs and requirements as opposed to increasing shareholder wealth.

Currently gaining access to international markets is becoming increasingly important due to the healthcare reforms in developed countries. Governments are reducing their expenditure on innovative healthcare products and moving towards cheaper generic products, therefore savings that mergers can create are important. Emerging markets are spending more on products making them an increasingly important market for companies to enter and create a presence.

Pharmaceutical mergers are normally a form of ‘synergy’ due to the share of resources and the combined companies being worth more together than apart due to economies of scale and market power. Critics of mergers within the pharmaceutical industry have claimed that shareholder wealth is being destroyed rather than created.

The majority of pharmaceutical companies have under gone a merger at some point in their history. Examples include SmithKline Beecham and Glaxo Wellcome to form GlaxoSmithKline and Merck and Schering-Plough joined together in 2009.

One company who may wish to consider mergers and acquisitions are AstraZeneca. They recently announced redundancies due to the large number of patents expirations within the near future and increase competition from generic products. An option for them to gain patents without spending huge amounts on R&D and by-pass the lengthy testing phase which can take up to 10 years. If they purchased a company with existing patents they could use the high revenues towards R&D and new product development.

Through numerous mergers and acquisitions within the pharmaceutical industry, a set of ‘key players’ have emerged which effectively keeps new developing businesses out of the industry. As the companies are judged by size and activity, it may lead to moves that are not in the shareholders’ best interests and are done to increase the status and power of the company.

Within the pharmaceutical industry, mergers and acquisitions increase consumer access to products and provide essential funding for R&D activities. It does also lead to increased prices due to the power of the key companies, which in turn leads to NHS trusts in the UK not being able to afford these life-saving treatments. Is it unfair that companies are able to create monopolies and try everything within their power to deny generic drugs access to the market?

Generics are cheaper versions of drugs that are off patent and within the pharmaceutical market is a huge business. Doctors and hospitals tend to offer generics opposed to branded products, so you could argue the leading businesses are trying to protect themselves by doing what they can to reduce generic competitors. Without the big companies creating innovative products, generic competitors would not have the ideas to create cheaper versions of patented products.

I believe that for a vital industry such as the pharmaceutical market, any method which is able to advance medication and increase access to these life saving products is worthwhile. Advancing treatment areas could be at the expense of shareholders due to the lower returns, caused by the lack of focus on them. This is the nature of the market and if the shareholders do not agree with how the healthcare services work then they can easily move their investment, to one which provides higher returns. Personally I would invest in the pharmaceutical market as at some point each and every one of us will use a selection of these innovation treatments that help to save millions of lives every day.

Therefore within the pharmaceutical industries, I believe mergers and acquisitions are a great way of sharing technology and lowering costs. Another method that pharmaceutical companies use are joint ventures as ways to create new innovative medicines that offer value for money.

(Sources - The Financial Times. Wall Street Journal, BBC News, GSK, and Pharmaweb).