Five years ago, experts predicted the dwindling importance of German pharmaceutical companies, and they were right. Bayer is only the world’s fifteenth-largest pharmaceutical company, taking a tumble. Other German firms, Boehring and Merck Group, are also trailing American rivals, globally ranked at 18 and 28 respectively. The underlying problem is not about growth – it’s about mergers and acquisitions.
All three companies grew reasonably well last year, with Bayer expanding by about 4 percent, Boehring between 8 and 10 percent. The reason German companies have declined is a timid approach towards mergers and acquisitions. They currently prefer organic growth and forming research alliances, such as Bayer’s tie-up with Loxo Oncology, and Boehringer’s recent partnership with OSU Immunotherapeutics of France.
This tentativeness could leave Bayer and other German pharma companies high and dry as a new consolidation wave in the global pharma business looms in 2018. Analysts say all signs points to an imminent upsurge in activity, with many companies flush with cash and looking to overcome sluggish growth.
Bayer and its German rivals have not been passive by any means. Bayer bought Merck & Co’s consumer health division in 2014, and is on the verge of swallowing agro-biotech giant Monsanto. Merck Group paid $17 billion for Sigma-Aldrich a year later, while Boehringer bought Sanofi’s animal medication division. But these deals were mostly aimed for diversification and risk equalization, rather than bold moves within the pharmaceutical industry itself. Only Fresenius announced two large US deals last year, but it might walk away from buying US generic drug maker Akorn, while the takeover of US blood dialysis maker NxStage is still subject to regulatory approval.
There is remarkable unanimity about prospects for an M&A boom. “The stage is set for an extraordinary year,” said a recent PwC report. British consultancy Evaluate Pharma is predicting a “big year for takeovers.” A flurry of medium-sized deals, like Sanofi grabbing hemophilia biotech Bioverativ, and Japan’s Takeda allegedely planning an audacious $50 billion bid for British biotech specialists Shire, could be on the horizon.
M&A activity in the pharma business tends to go on a four-year cycle: the last big peak came in 2014–15, which saw the merger of Allergan and Actatis, Bayer’s Merck & Co deal, and two failed mega-mergers by Pfizer. Evaluate Pharma’s figures show deal volume fell from a highpoint of $220 billion that year to just $80 billion in 2017. But 2018’s first quarter has already seen $46 billion in industry deals.
With patent expirations and price pressure putting a lid on organic growth, many firms are tempted to buy their way out of stagnation. Many big pharma companies are sitting on nest eggs. Debt levels across the sector are low compared with other industries. The Trump tax cut has injected even more cash into the system.
US giant Pfizer will probably buy big as it will almost be fully debt-free when it offloads its consumer health division. A move for its US rival Bristol Myers Squibb, which boasts strong growth and $21 billion in revenue, is looking more and more likely. The deal would give Pfizer a strong position in the key oncology market.
A Pfizer-BMS mega-deal could cost upwards of $120 billion. The massive Swiss group Novartis could also enter the market, perhaps spending $15-40 billion on a medium-sized player like Alexion, Incyte or Vertex, or slightly more for US biotech Biogen. Overall, consultancy EY thinks the pharma industry’s “M&A firepower” – calculated from market capitalization and debt capacity – stands at around $1 trillion.
Any new M&A boom may depend on how firms interpret the outcomes of the last big wave, four years ago. Not every deal was a winner back then. Teva, an ambitious Israeli company, bit off more than it could chew with a $40 billion acquisition of Actavis’s generics division, while Shire paid too much for Baxalta, the former biopharma division of Baxter International.
Bayer itself is thought to have substantially overpaid for Merck & Co’s consumer health division, possibly through inadequate due diligence on the brands it was acquiring. German firms may find themselves under pressure to unwisely pile in, for fear of missing out.
Siegfried Hofmann is Handelsblatt’s chemical and pharmaceutical industries correspondent. To contact the author: firstname.lastname@example.org