PHARMA CONSENSUS: Big Pharm Chooses to Buy vs Develop 

April 26, 2014

The stock market continues its dizzying ascent into the stratosphere. While all boats are being floated, some sectors are surging more than others. None more so than the pharmaceutical business . In the last few months there has been a wave of major acquisitions in the space. Almost 13 percent of M&A deals this year have been pharma related. That’s about $140 billion year to date. Some of the notables:

  • Novartis selling its animal health business to Eli Lilly for $5.4 billion.
  • GSK selling its cancer drug portfolio to Novartis for $16 billion.
  • GSK also bought out their vaccines unit for $7.1 billion.
  • Valeant Pharma and activist investor Bill Ackman disclosed they will make a move for Botox maker Allergan for a whopping $48.1 billion.
  • Rumours abound that Pfizer is now looking to buy AstraZeneca for an insane $100 billion.

So what’s driving this frenzy? Pharma companies are at a crossroads. It costs a lot of money to develop drugs and the success rate for drugs to get government approval is very low. It’s a classic build or buy decision. In Pharma’s case, the decision is pump money into Research and Development and hope or pay a premium for drugs that are established and are generating meaningful cash flow for a long period of time before the patents expire. The companies have chosen the latter . Another reality is that the large drug companies either have very little in the way of new drugs coming online or are now seeing their core drugs patents expiring and under threat from generic pharmaceutical companies like Teva. So the purchases are at the least an effort to keep themselves relevant. The big issue here is whether this is just a cash grab or will this strategy create less incentives to invest in research and development which despite its inefficiencies is what sustains innovation and wealth creation in society.

The momentum is now in full swing as the media outlets are now all aboard with such articles as “Just Say Yes To Pharma Stocks”. Usually when the mainstream media gets their hands on a trend, the big money has been made. Retail investors usually come to the party pretty late in the cycle so all the usual elements are there for a pullback.