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Deal activity remained buoyant in the pharmaceuticalsector in the first half of 2002 relative to most otherindustries, with Pfizer’s proposed acquisition ofPharmacia indicating that the days of the mega-deal inthe sector are not yet over. PricewaterhouseCoopers(PWC) based this conclusion on its latest analysis of dealactivity in the global pharmaceutical sector. The surveyfound a marginal increase in deal numbers, comparedwith the same period in 2001, although the value ofdeals done has been significantly reduced.

More Deals, Less Money

There were 171 pharmaceutical mergers and acquisitionsannounced in the first half of 2002, a marginal increaseover the total of 165 in the equivalent period in 2001(table 1). The value of these deals at $US5 billion wassignificantly lower than the $US27 billion in the first halfof 2001. However, Pfizer’s recently announced proposedacquisition of Pharmacia for around $US53 billion – thefirst mega-deal for two years – means that the value ofdeals in the whole of 2002 is extremely likely to exceedthe 2001 total of $US61 billion.

Neal Ransome, European pharmaceutical sector leaderfor PWC Corporate Finance, explained that thepharmaceutical sector `remains fragmented relative tomany other sectors, and previous mega-mergers havedemonstrated that companies can significantly enhanceprofits by taking cost out of the combined businesses …However, the key challenge facing most pharmaceutical

companies is to improve the productivity of their R&Dpipelines, and the ability of mega-mergers to achieve this holygrail is not wholly proven.’

Regional deal numbers in the first half of 2002 wereremarkably similar to the first half of 2001. NorthAmerica again led the way with 65 deals, compared to57 in the prior period. The most notable feature was thecontinuing rise of M&A activity in Asia Pacific. 2001 wasa record year for M&A activity in this region, but 2002looks set to beat this record (44 deals in the first half ofthe year). The deal values in Asia Pacific are smallerthan those in Europe, but it is possible that 2003 may seethe number of deals done in Asia exceed the numberdone in Europe.

Top 10 Deals Reflect Strategic Trends in Pharma

Sector

The top ten deals in the first half of 2002 reflect most ofthe key strategic trends that lie behind all merger andacquisition (M&A) activity in the pharmaceutical sector(table 2). According to PWC, those trends include:

• Drug delivery companies re-engineering tobecome fully integrated pharmaceuticalcompanies. The largest deal in the first half of2002 was Alkermes’ acquisition of ReliantPharmaceuticals for $US934 million. Theacquisition gives drug delivery companyAlkermes rights to Reliant’s five marketedproducts and sales force, significantly advancingAlkermes’ aim of becoming a fully integratedpharmaceutical company (“fipco”). The fipcomodel is attractive to drug delivery companiesbecause it should enable them to enjoy the fullbenefit of intellectual property, rather than justthe top slice in the form of royalties.

• Pharmaceutical companies focusing primarilyon product-based acquisitions rather thantechnology platforms. In the previous bullmarket, many companies made acquisitionsdesigned to gain access to the wide array oftechnology platforms being developed bybiotechnology companies. In these more

EMERGING ISSUES

Merger and Acquisition ActivityRemains Buoyant in 2002

Table 1. Summary of M&A activity

Year Number of Value* deals ($US billions)

2000 Full year 341 109 Q1+2 152 82 Q3+4 189 27

2001 Full year 334 61 Q1+2 165 27 Q3+4 169 34

2002 Q1+2 171 5

* defined as those deals where the terms of the bid (particularly the value ofthe consideration) have been disclosed

Merger and Acquisition Activity Remains Buoyant in 2002

difficult times, the focus has switched back tothe product and this is reflected in the top tendeals. Examples of product-based acquisitionsinclude Johnson & Johnson’s acquisition ofTibotec-Virco and Schering’s acquisition ofCollateral Therapeutics. Two of the deals in thetop ten were simple product deals ratherthancorporate acquisitions. These deals wereSchering’s acquisition of Leukine fromImmunex and Amgen’s acquisition of Europeanrights to filgrastim and pegfilgrastim fromRoche. It is interesting that both of theseproduct deals have links with previouslyannounced corporate deals: the sale of Leukinewas designed to facilitate antitrust clearance ofAmgen’s acquisition of Immunex, while the sale to Amgen of European rights to Roche’sproducts was made in the context of Roche’splanned merger with the Japanese companyChugai, which is developing another competitorimmunostimulant product.

• Biotech-biotech consolidation. Most M&Aadvisers continue to forecast that the floodgatesare about to open on a tide of consolidation inthe biotech sector, driven by factors such as thepharmaceutical industry’s need to fill its R&Dpipeline and the cash burn rate of the biotechsector. However, the predicted wave ofconsolidation has not appeared so far this year.According to PWC, the most exciting biotechdeal in the first half of 2002 was probably BernaBiotech’s acquisition of rival vaccine companyRhein Biotech. This deal will make the enlargedgroup the world’s second largest vaccines-onlycompany behind the UK’s PowderJect.Biotechnology is radically reshaping thevaccines sector and PWC expects further M&Aactivity in this area in the near future.

• Western pharmaceutical companiesstrengthening their commercial position inJapan. Abbott Laboratories is planning to takefull control of Hokuriku Seiyaku Co Ltd byacquiring (for $US293 million) the equity in the company which it does not currently own.With this deal Abbott will become the firstWestern company to wholly own a Japanesepharmaceutical company. Other recent deals byglobal pharmaceutical companies in Japan haveincluded Boehringer Ingelheim’s increasedstake in its Japanese subsidiary SSP, and

Roche’s agreement to with Chugai. Japanremains a key target territory for most Westerndrug companies because it represents theworld’s second largest pharmaceutical market.However, the rate of pharma M&A activity inJapan continues to fall short of analysts’expectations.

• The generic drugs sector transitioning from a regional to a global market. Recently, thegeneric sector has begun to mirror the globalreach of its ethical big brother. In 2001 therewere four generic sector deals with values inexcess of $US300 million. In 2002 to date, therehas been only one comparable transaction – the$US211 million acquisition by the Croatiancompany PLIVA of the US activities of theDutch company Sobel.

Looking Back at M&A Activity for 2001

Back in April 2002, Pharmaceutical Innovation coveredPWC’s interim analysis of M&A activity in the first halfof 2001 [Pharmaceutical Innovation 2002; 11(3): 38-40].PWC’s subsequent analysis of the full year showed that,overall, the number of deals in the healthcare arena wasdown 14% compared with 2000 and that the value ofthese deals decreased 38% to $US91 billion. Thehealthcare arena showed a degree of `strength inadversity’, according to PWC, given that deal numbersfell only 14% in a period during which most industries

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Table 2. Top 10 deals in the first half of 2002

Target Acquirer Value* ($US millions)

Reliant Pharmaceuticals (US) Alkermes (US) 934

Immunex – Leukine (US) Schering (Germany) 380

Viatris (Germany) Advent International (US) 345

Tibotec-Virco (Belgium) Johnson & Johnson (US) 320

Wyeth – ESI Lederle Baxter Healthcare (US) 305 assets (US)

Rhein Biotech Berna Biotech 257(The Netherlands) (Switzerland)

Hokuriku Seiyaku (Japan) Abbott Laboratories (US) 252

Sobel USA (US) Pliva (Croatia) 212

Collateral Therapeutics (US) Schering (Germany) 141

Roche – filgrastim (Switzerland) Amgen (US) 138

* total value of Top 10 deals equals $US3.28 billion

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experienced a downturn of 25% or more. Interestingly, ifthe $US76 billion deal creating GlaxoSmithKline wasexcluded from the 2000 figures, the value of dealsannounced in 2001 was 30% higher than the previousyear (and 85% higher in the pharmaceutical sectoralone). Neal Ransome viewed this increase as `justifyingthe [healthcare] sector’s reputation for recession resistance’.Other key features for the year include:

• The aggregate value of deals in the healthcarearena was dominated by the pharma sector(67% of the total; 75% in 2000);

• An absence of mega-mergers in the pharmasector; instead, deal activity was dominated bybiotech companies (comprising $US27 billion ofthe $US61 billion of deal values). According toPWC, Amgen’s bid of $US17 billion forImmunex signaled the arrival of “Big Biotech”.

Pharma Restructuring, Biotech GrowingIn 2001, the value of M&A activity in the pharma sectorbucked the downward trend seen in most other sectors,almost doubling from $US33 billion in 2000 (excludingthe GlaxoSmithKline deal) to $US61 billion. The keydrivers of deal activity identified by PWC were:

• a boost from the biotech sector;

• restructuring by “Big Pharma” – designed tobuild more focused and efficient operations;

• strategic positioning in growth areas –investment in promising franchises (genericsand vaccines) and key territories (US and theFar East).

The biotech sector has boosted the value of deals in thepharma sector by $US27 billion – the highest recordedlevel of M&A activity in any year. With nopharmaceutical mega-mergers in 2001, biotech hascontributed an unprecedented 44% of the total value ofdisclosed deals in the pharma sector (table 3). The lastfour months of 2001 saw four biotech deals valued atover $US1 billion each. The strength of deal activity inthis sector was evident beyond these deals, with 16 dealsvalued at over $US100 million each and 25 deals over$US50 million.

Amgen’s bid for Immunex was the largest deal in theoverall sector in 2001 and represented a new form ofdeal-making among biotech companies. `With this deal,plus a further $10 billion of biotech deals in 2001, thefoundations are being laid for a Big Biotech sector that willincreasingly compete with Big Pharma’, noted NealRansome. But rather than signaling a string of furtherbiotech mega-mergers, the next $US15 billion plusbiotech deal may be some time in coming as the marketcapitalization of other companies in the Big Biotechrange is substantially below that of Amgen. As BigBiotech moves into Big Pharma’s traditional marketspace, the key challenge will be the ability to deal

EMERGING ISSUES

Table 3. Top 10 pharmaceutical deals in 2001

Target Acquirer Value* ($US millions)

Immunex† (US) Amgen† (US) 16,900

ALZA (US) Johnson & Johnson (US) 11,070

DuPont Pharmaceuticals (US) Bristol-Myers Squibb (US) 7,800

Roche [20%] (Switzerland) Novartis (Switzerland) 2,788

COR Therapeutics† (US) Millennium Pharmaceuticals† (US) 2,417

ImClone Systems† [19.9%] (US) Bristol-Myers Squibb (US) 2,007

Aviron† (US) MedImmune† (US) 1,665

Chugai Pharmaceutical [50.1%] (Japan) Roche (Switzerland) 1,240 **

FH Faulding (Australia) Mayne Nickless (Australia) 1,218

Mayne Nickless-Faulding Alpharma (US) 660

Oral Pharma (US)

* total value of Top 10 deals equals $US47.77 billion† denotes a biotech company** excludes value attributed to Roche’s Japanese subsidiary (Nippon Roche), which was merged with Chugai as part of the transaction

Merger and Acquisition Activity Remains Buoyant in 2002

successfully with the same issues confronting pharmacompanies (e.g. declining R&D productivity and morelimited product monopolies).

The smaller biotech companies have continued toconverge with the traditional pharmaceutical sectorthrough consolidation and integration along the valuechain. The key trends seen in the biotech sector in 2001included:

• Biotech-biotech consolidation – aimed at gainingthe critical mass needed to attract analystcoverage and investor interest, and to providemore comprehensive product offerings topharmaceutical customers;

• A shift towards product-based businesses –while the initial focus was on offering theirtechnologies to pharma companies on a fee-for-service basis, a growing number of technology-platform companies are evolving into product-based companies;

• Biotech companies’ acquisition of commercialinfrastructure from pharma companies –increasingly, biotech companies are choosing tohave a greater share of the pharmaceutical valuechain by acquiring manufacturing and/or salesand marketing capability. ■

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