Pharma sector consolidation will continue, report predicts

As pressures on the pharmaceutical industry increase, global consolidation will continue, predicts the latest Pharma Insights report from UK-based PricewaterhouseCoopers.

The lack of r&d productivity, patent expiries, generic competition and high profile product recalls are driving the current level of mergers and acquisition (M&A) activity in the sector, it says.

The report, published annually by PricewaterhouseCoopers Corporate Finance,

predicts the following impact of these pressures:

• Further big pharma companies divesting non-core divisions such as OTC

• Continuing consolidation in the Asia Pacific region

• The creation, by consolidation, of new 'big biotech' companies

• One or two deals furthering mid-tier consolidation in the European pharmaceutical sector

The Asia Pacific prediction builds on figures from 2004, which revealed that, for the first time, the number of deals in Asia Pacific (278) exceeded those in North America (252). The value of the Asia Pacific deals was also materially larger than in prior years, dominated by the US$7.9bn merger of Yamanouchi and Fujisawa in Japan.

In contrast to the pharma sector, the biotech sector is going through a period of relative calm from an M&A perspective. This is, in part, due to the number of biotech companies that have set their sights on an Initial Public Offering (IPO). Most of the significant recent acquisitions in the sector have been led not by pharma companies, but by emerging 'big biotech' companies.

There is still a small window of opportunity for pharmaceutical and biotechnology flotations, the report says, although investors are undoubtedly more cautious than they were when the IPO window was last open in 2000. Pharma Insights predicts that investors will now be looking for companies with diversified product portfolios and established revenue streams.

There are rumoured to be more than 200 biotech companies working towards IPOs in the near future, although the number that succeed will be considerably lower. As IPO aspirations fail and cash piles start to dry up, the sector's M&A imperative will strengthen, the report adds.

'We are expecting a healthy level of M&A activity to continue in the next 12 months, particularly as consolidation in Europe and Asia remains high on the agenda,' said Neal Ransome, European pharmaceutical sector leader, PricewaterhouseCoopers Corporate Finance. 'We are expecting a healthy level of M&A activity to continue in the next 12 months, particularly as consolidation in Europe and Asia remains high on the agenda.

'It is positive to see a good flow of fundraising in the sector, with 2004 witnessing the highest level of funds raised since 2000. However, the IPO windows of the world will not remain open indefinitely and as they start to close we expect to see an increasing number of biotech companies become available for acquisition.'