A
recent article in the November 15th edition of The Economist discuses how the pharmaceutical industry is shaped by
M&A’s more than any other industry. This is because a lot of big pharma
companies like GSK, Pfizer, and Merck prefer acquiring other companies that are
doing what they want to do rather than doing it themselves.
What is interesting about the pharma
industry is that companies are no longer aiming for the “sheer scale” method.
Up until recently companies used to just develop as many drugs as they could
and not necessarily specialize in any specific area; they preferred breadth
over depth. However, as of recently big pharma companies have started to
specialize in order to gain more market share in their decided field. A study
done by a consulting company known as Bain & Company found that over the
past 20 years the 10 most successful pharma companies in terms of stockholder
returns all used M&A’s to build market share in select areas. A good
example of this is how recently GSK has swapped assets with Norvatis so
that GSK can strengthen its leads in vaccines and Norvatis its standing for
cancer related drugs.
Another thing that pharma companies
are doing is acquiring smaller pharma companies. A big part of being successful
in the pharma industry is being able to come up with a good idea. So, if big
pharma companies aren’t able to come up with an idea they just use their
billions of dollars in cash to acquire a smaller company that does have a good
idea. For example, Merck put forth a deal to purchase Idenix for $3.9 billion.
The reason Merck wanted to acquire Idenix was to strengthen its pipeline for
hepatitis treatments. Recent studies done by Bain, a consulting company, have
shown that over 70% of the best performing pharma companies have not developed
their drugs in house but instead acquired smaller companies.
A big question to most is why
exactly are these small companies with great ideas selling themselves out to
the pharma giants. Well, a big part of the pharma industry involves having the
expertise to organize clinical trials, deal with regulators, and get drugs
successfully to market. This expertise is something that the smaller, naïve per
se, pharma companies lack. So, deals between the smaller and larger pharma
companies allow the larger companies to not have to come up with their own
ideas and allow the smaller companies to not have to worry about developing and
marketing their drugs as well as jumping through regulations. One last and commonly overlooked reason is because a lot of the pharma giants are in countries with heavy taxation rates. So, they simply just acquire companies that are based in countries with low tax rates so that they can develop a drug there and pay taxes for that respective country. This is why so many pharma companies in Ireland have recently been bought up.
It sounds like the industry is becoming an oligopoly. I wonder if any government will interfere and make a policy that prohibits or discourages the purchase of smaller pharma companies by pharma giants.
ReplyDeleteThe pharmaceutical industry has been a huge industry for a long time now. This sort of behavior isn't entirely new, but the scale at which it's happening is very impressive. I'm also curious as to how the government might react, and even more interested in whether or not there will be some sort of struggle between small and large companies in the future.
ReplyDeleteSince most of the mergers are between larger companies and smaller companies I don't think the government will interact. Mainly because a monopoly isn't really being developed, but instead the larger companies are acquiring the good drug ideas from the smaller companies and actually testing and regulating them: something that requires the capital that the smaller companies simply just don't have. Also, since a lot of these mergers are taking place with foreign companies the U.S. government doesn't really have the jurisdiction to do too much.
ReplyDeleteGaining market power, innovating and expanding through M&A's is a concept prevalent in the tech industry and has lead to the rise of startup culture. For example Google has acquired 173 Companies since the company started. M&A's are known to be a more efficient way to grow business as the risk is lower. It is no surprise that firms in other industries are adopting the trend especially in the pharmaceutical sector.
ReplyDeleteWith the pharmaceutical sector being so competitive, allowing another company to develop a drug and then buying them is just the cost of doing business. The larger companies have the ability to market, test, and produce on a larger scale than the smaller company could have ever done. This in turn allows that smaller company to shift it's focus to something and all the bigger company take over.
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