Drug company deals give markets a shot in the arm

It seems the good times are back for Big Pharma. The sector sparked a market rally this week after several companies unveiled mergers and tie-ups worth billions.

Britain’s GlaxoSmithKline revealed it would sell its cancer drugs portfolio to Swiss Novartis for around £9.5bn, while buying the Swiss firm’s vaccines unit for up to £4.2bn. The two firms will also combine their consumer health business in a join venture.

Novartis is also selling its animal health business – in this case, to America’s Eli Lilly for $5.4bn. Canada’s Valeant Pharmaceuticals made a $47bn cash and stock offer for Botox maker Allergan, supported by Allergan’s biggest shareholder, activist investor Bill Ackman. The news pushed Allergan’s shares up by 15%, while Valeant’s rose by 7.5%.

There was also speculation that US giant Pfizer had approached London-listed AstraZeneca about a $100bn takeover – which would be the biggest purchase of a UK company ever.

What the commentators said

“In part, the dealmaking reflects renewed bullishness in the sector, as drugmakers begin to eye new growth opportunities after clearing the worst of the patent losses and innovation drought of recent years,” said Andrew Ward in the Financial Times. Certainly, Novartis must believe that GlaxoSmithKline’s cancer treatments are “pretty special”, said Jonathan Guthrie in the FT.

The Swiss firm is paying seven times forecast 2014 sales and four times peak expected revenues for the unit. But it looks a smart move for GlaxoSmithKline. While looking for cancer cures is “the traditional test of virility for a big drugs group”, the failure rate is extremely high.

Mega-deals are often driven by the “Napoleonic ambitions” of executives, said Leonid Bershidsky on Bloomberg View. But in pharma, they make sense. Consultancy McKinsey & Co found that of the 11 pharma groups that remained in the global Top 20 since 1995, seven had made more than $10bn-worth of acquisitions each.

On average, the deals boosted shareholder value, unlike most industries. “In a world where old cash cows are dying off, new breakthrough drugs are few and far between and time to market is longer and longer,” expect the consolidation to continue.

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