The pharmaceutical industry is undergoing significant changes, with mergers and acquisitions (M&A) playing a pivotal role in shaping its future.
Understanding the motivations behind these deals, the impact on the competitive landscape, and potential integration challenges is critical for industry stakeholders.
Recent Trends in M&A in the Pharmaceutical Industry
Steady Growth in M&A Activity
M&A activity in the pharmaceutical industry has been steadily increasing over the past few years. In the first half of 2018, there were 212 deals in the sector worth more than $200 billion, an increase from 151 deals in the previous year.
As of the second half of 2023, M&A remains a vital transformation tool for health and pharmaceutical companies.
Sectors Attracting Investment
Both pharmaceuticals and life sciences (PLS) and healthcare services (HCS) continue to attract significant investor interest, and this trend is expected to persist throughout the latter half of 2023.
Large-cap pharmaceutical companies are keen on investing in midsize biotech firms to bridge pipeline gaps. Meanwhile, portfolio reviews and divestitures of non-core assets remain a priority for these companies.
Private equity firms are also actively looking to acquire innovative healthcare assets.
Motivations Behind M&A in the Pharmaceutical Industry
Acquiring Innovations
One of the primary reasons for M&A in the pharmaceutical industry is to acquire innovations. M&A deal-making has been fairly consistent, with occasional fluctuations in activity.
Notable deals include Pfizer’s $43 billion acquisition of Seagen in 2023, Amgen’s $27.8 billion acquisition of Horizon Therapeutics in 2022, and AstraZeneca’s $39 billion acquisition of Alexion Pharmaceuticals in 2020.
Such mega-deals underscore the trend of major pharmaceutical companies aiming to expand their portfolios and establish a presence in high-growth therapeutic areas.
Capturing Synergies
Another motivation for M&A in the pharmaceutical industry is capturing synergies. Consolidation enables companies to eliminate duplicate work streams, leading to significant financial and operational savings.
Companies with high margin spreads can capitalize on these synergies by acquiring subscale portfolios.
Driving Revenue Growth
M&A is also a standard component of the pharmaceutical business model. With the complexity of developing breakthrough medicines, many pharma companies view acquisitions as the most viable way to sustain revenue growth, as it’s often cheaper to acquire the next blockbuster drug than to develop it in-house.
Impact of M&A on the Industry’s Competitive Landscape
M&A activity affects competition within the pharmaceutical industry. Several factors contribute to the increase in M&A deals, including achieving economies of scale and scope, gaining corporate control, acquiring specific assets like patents, and buying out dying or financially weak companies.
However, M&A can also hurt innovation in the long run. Although mergers might boost short-term profits, they can lead to a decline in innovation.
Challenges Faced During Integration
Regulatory Risk
One of the most significant challenges in M&A deals is regulatory risk. Pharmaceutical companies are subject to various regulations, both domestically and internationally.
Regulatory agencies are considering adjustments in their definitions of anticompetitive behavior for pharma mergers, moving beyond traditional molecule and indication overlaps.
Unintended Side Effects
Unintended side effects of M&A deals, such as employee dissatisfaction, layoffs, attrition, management issues, customer/HCP defection, and decreased productivity, can be particularly impactful for pharmaceutical companies due to the highly specialized and knowledge-based nature of the industry.
Conclusion
M&A activity in the pharmaceutical industry has been on the rise in recent years, driven by motivations such as acquiring innovations, capturing synergies, and shifting product portfolios. While M&A can impact the industry’s competitive landscape and hurt innovation in the long term, it remains a crucial tool for health industries companies.
Despite integration challenges like regulatory risk and unintended side effects, M&A enables companies to drive business transformation and deliver sustained outcomes by creating value over the long term.