May 6, 2012 7:24 pm

Drugmakers see $33bn bout of M&A activity

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A recent spate of takeovers in healthcare, as drugmakers seek to replace expiring drug patents, has made it the busiest sector in April with acquisitions around the world worth more than $33bn, according to Dealogic.

Completed transactions included AstraZeneca’s $1.3bn purchase of Ardea, which has an experimental drug for gout, while other companies of similar size named as potential takeover bids include Onyx and Amylin.

Several deals were unsolicited or have turned hostile. GlaxoSmithKline has an outstanding $2.6bn bid for Human Genome Science, joint developer of Benlysta for lupus; and Roche recently withdrew a $7bn bid for Illumina, a US diagnostics company which spurned the offer.

“We’re in an attractive M&A market as big cap pharma companies are looking to acquire innovation to address their patent cliffs,” says Rick Leaman, managing partner at Moelis & Co, the New York investment bank.

Clint Gartin, Morgan Stanley vice-chairman of investment banking and head of healthcare banking, says the heavy deal flow illustrates the fast pace of change in the sector. “In healthcare, a new drug can change the environment overnight. It can make some products not competitive, and move others to the front row.”

Borrowing is cheap, helping acquirers to boost earnings rapidly after completing takeovers. The large pharmaceutical companies also remain highly cash generative from existing products, while sales of divisions – such as Pfizer ’s $12bn nutrition disposal to Nestlé – provide more funds. Bayer and Johnson & Johnson are among those that have indicated they are interested in new transactions.

While the appetite for “mega mergers” has dulled, several midsize companies including Shire and Biogen Idec are regularly cited as potential targets. Even Bristol-Myers Squibb, Eli Lilly, AbbVie and AstraZeneca are periodically cited as takeover candidates should they fail to replenish their own pipelines.

Drew Burch, head of healthcare M&A at Barclays, says: “The nature of the business is that the revenues are dependent on patent protections. That means at some point you face a decline in that revenue stream. The replacement has either got to come from your own labs or from outside.”

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