United States / Analyst Insights
Rising M&A Activity Shakes Up Pharmaceutical Industries
by Nick Masters, Lead Industry Analyst 
Aug 01 2019

Allergan, the drugmaker best known for Botox, is again in the spotlight as the latest major drug company to be acquired by another major drug company. Due to few opportunities for organic growth and approaching patent expirations, the Brand Name Pharmaceutical Manufacturing industry (IBISWorld report 32541a) is turning to strategic mergers and acquisitions (M&A) to sustain growth prospects. 

This industry trend is characterized by the recent merger announcement by drugmakers AbbVie and Allergan, a massive deal worth $63 billion. The reasoning behind the merger starts with AbbVie’s anti-inflammatory drug Humira, the best-selling drug in the world.  

The runaway success of Humira has done just that, with the drug accounting for an alarming 60.9% of AbbVie’s total revenue in 2018 (latest data available). As the hit drug approaches the end of its patent exclusivity in the United States, AbbVie’s purchase of Allergan is effectively a purchase of prepackaged diversification and stable cash flows. The merger is an example of the industry’s recent struggle to reproduce the success of drugs like Humira while mitigating the threat of biosimilars and generics.  

 

 

Industry headwinds promote M&A activity  

The industry’s growth is expected to slow in 2019 due to lackluster drug pipelines and rising research and development (R&D) costs. Revenue rose 3.3% in 2018 but is only expected to grow 2.5% in 2019.  

Drugmaker Celgene, for example, has struggled to repeat the success of its 2017 blood cancer drug RevlimidTwo of its most promising drugs were cancelled during late-stage clinical trials, sending the company’s stock price tumbling. Moreover, the company is expected to face substantial generic competition for Revlimid when its patent exclusivity expires in 2022.  

With a weak pipeline, looming exclusivity expiration and a bargain stock price, Celgene’s attractiveness as a takeover target led to its acquisition by major player Bristol-Myers Squibb in early 2019. The $74.0-billion deal is set to be the third-largest pharmaceutical merger in US history, and when closed, will significantly boost Bristol-Myers’ current market share of 6.9%. 

The fundamental drivers of the Celgene-Bristol-Myers deal are similar to those that influenced the AbbVie-Allergan deal. Due to upcoming patent-exclusivity expirations on blockbuster drugs, industry operators are consolidating to shore up growth and diversify cash flows. 

 

 

What lies ahead? 

Over the coming years, the competitive landscape of the Brand Name Pharmaceutical Manufacturing industry is expected to shift as other major players realign their strategies to better compete with newly merged powerhouses. With the advantage of more stable and diversified cash flows, these combined operators will double down on R&D expenditure, particularly on highly profitable orphan drugs, or niche medications for rare conditions, as well as specialty therapies for diseases such as multiple sclerosis and cancer. Given larger R&D budgets and forthcoming patent expirations, the means and market pressure to develop a new round of blockbuster drugs will sustain the industry’s growth over the next five years.  

However, due to the time-consuming and complex process of completing billion-dollar mergers, the uncertainty of such industry-altering mergers will remain a key risk factor in the near-term. Additionally, the potential for more M&A activity in the industry is likely given low interest rates and stagnant market values, as reflected by an exchange traded fund of pharmaceutical companies.  

On balance, the industry’s shake-up will continue to present a degree of risk within the next several years, yet with the prospect of significant reward. 

 

 

 

Looking for additional coverage on pharmaceutical legislation?  Check out our previous Analyst Insight on drug importation programs here!  

  

 

Edited by Kieran Newton 
Infographic Design by Stephanie Conte