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.

Recommended

Why investment forecasting is futile
Investment gurus

Why investment forecasting is futile

Every year events prove that forecasting is futile and 2020 was no exception, says Bill Miller, chairman and chief investment officer of Miller Value …
21 Jan 2021
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
US stocks are obviously in a bubble. But is it a rational bubble?
US stockmarkets

US stocks are obviously in a bubble. But is it a rational bubble?

Everyone wants to know if the US stockmarket is in a bubble. But that is the wrong question, says Merryn Somerset Webb. Of course it’s a bubble. The r…
14 Jan 2021
Yes US stocks are in a big bubble. But when will it burst?
US stockmarkets

Yes US stocks are in a big bubble. But when will it burst?

There are plenty of indicators to suggest that US stocks are in a massive bubble right now, says John Stepek. Here, he looks at what might pop it.
11 Jan 2021

Most Popular

A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Here’s why markets have shrugged off the US political turmoil
Investment strategy

Here’s why markets have shrugged off the US political turmoil

Despite all the current political shenanigans in the US, markets couldn’t seem to care less. John Stepek explains why, and what it means for your mone…
7 Jan 2021
Free 6 issue trial then continue to