Rating the Top Pharma M&A Moves of 2019

In recent years, the pharmaceutical market have seen a huge uptick in M&A activities. This year is certainly no exception. After much tribulation, the long-awaited $74 billion Bristol-Myers Squibb (BMY) merger with Celgene has begun to take place, and, over the summer, Abbvie initiated their acquisition of Allergan for roughly $63 billion. M&A transactions of this size will undoubtedly have long-standing implications for all companies involved, making it worthwhile to investigate the motivations for these actions and determine whether they will live up to their expectations.

Before delving into these specific cases, it is useful to review why M&A activities in the pharmaceutical sector are becoming so prevalent and happening on such a large scale. First, even though pharmaceutical companies are investing increasingly more capital into their in-house research and development (R&D), they have been met with disappoint- ing results. At the same time, the FDA has also been approving fewer new drugs. However, it is only by curating a steady stream of new drugs to bring to market (known as the pipeline) that a firm can protect itself from the eventual loss of market exclusivity on their current drugs and, ultimately, experience growth. With in house R&D expenditures less lucrative than before, many companies are therefore turning to external sources for research. One popular avenue is partnering with or acquiring smaller biotech firms. These firms are more conducive to innovation than the bureaucracy-ridden pharmaceutical giants. Large companies benefit from novel research and niche expertise; small biotech firms benefit monetarily and by realizing the resources and expertise the larger firms have for bringing a new drug to market. The alternative is for large pharmaceutical firms to work with other large firms, so that their combined resources and shared research may bring to market a product from which both can benefit.

There is considerable historical precedent when it comes to M&A activity in this sector. Pfizer’s acquisition of Wyeth in $68 billion deal is generally seen as successful. Pfizer sought to improve R&D capabilities and expand its biopharmaceutical presence and was able to do so—producing more actionable research and expanding to become a leader of the biopharmaceutical industry. On the opposite end of the spectrum, Teva Pharmaceutical’s $45 billion acquisition of Allergan’s generics business is seen as one of the worst pharmaceutical M&A deals ever made. The generic business did not present Teva with any synergistic capabilities: it simply gave them a generic segment. The lack of additional benefits made the $45 billion price tag a massive overreach on Teva’s part.

This is the context and legacy in which Bristol-Myers Squibb and Abbvie acted this past year. The two deals are derived from different motivations. The BMY/Celgene deal aims to develop synergies between the companies’ existing products and research. Oncology and inflammatory-diseases are both major pipeline segments for BMY and Celgene; BMY stands to benefit from assimilating Celgene’s pipeline with its own and achieving economies of scale through the combined resources of both firms.

In contrast, the motivation behind Abbvie’s acquisition of Allergan differs in that its primary objective was to help the former expand beyond immunology. Abbvie specializes in immunology, and one its products (Humira) accounts for 60 percent of its annual revenue. With the patent for market exclusivity for Humira expiring in 2023, Abbvie expects the generic Humira to generate just a fraction of the revenues it once did. On the other hand, Allergan’s main specialization is in the development of aesthetic products and drugs. While the company has some of the same medicinal segments as Abbvie and can help develop the synergies there, this was not the main reason for the deal. Rather, Allergan offers Abbvie an opportunity to diversify beyond both immunology and Humira. Only a company of Allergan’s size and type could hope to significantly establish itself within the larger framework of Abbvie successfully.

These deals may be perfectly logical and effective in theory, but their real-life successes are still conditional on how effective the implementation is. A major blow for BMY was the stipulation that Celgene was to divest its primary immunology drug, Otezla, before the acquisition. The fact that a $74 billion deal was executed in spite of this suggests high confidence in other synergies being realized. However, before investing, it is important to find proof of this belief—for example, look- ing for a noticeable increase in FDA testing proposals in oncological drugs or lower combined operating costs compared to total individual operating costs (evidence of economics of scale). In contrast, Abbvie’s deal appears far riskier: both Abbvie’s and Allergan’s major drugs will lose their market exclusivity within the next decade. Abbvie will need to develop a wide pipeline should they want to rebound from Humira’s loss of exclusivity. Investors looking for a successful deal should expect management to give them regular updates on Allergan’s integration process, ensuring that the drugs that Abbvie brings to testing are di- versified well beyond immunology.

For many years, pharmaceutical companies regularly produced “blockbuster drugs”, or drugs that singlehandedly brought in a considerable amount of annual revenue. As we transition into a “post-blockbuster” era, however, we will begin to see many horizontal mergers in addition to vertical ones. Pharmaceutical companies will be forced to diversify their operations, and successful deals will heavily depend on the optimization of combined R&D. It is only those companies who make an active effort to expand beyond their medicinal specialty that stand the chance to succeed in the foreseeable future.