Drug company deals give markets a shot in the arm

A spate of merger deals between Big Pharma stocks has given the flagging sector a much-needed boost.

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 investorBill 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

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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