The drivers behind the Pharmaceutical M&A boom

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The pharmaceutical sector has witnessed a record breaking wave of M&A deals in 2015 totaling a value of $ 724 billion, with an average of more than one life science acquisition per day. A number of factors lie behind this merger fever: in the US in particular, where the highest number of deals were taking place, the availability of cheap financing due to low interest rates and tax inversions deals with foreign companies to escape high corporate tax rates were very influential.

A key component of this increase in deals was the specialization of large firms looking to replenish their drugs baseline as developing a new drug has become very risky, so they opted to invest in companies that have already developed a smash-hit drug. Famous examples of such are Pfizer and GlaxoSmithKline that were built around this strategy. This type of deals surely creates synergies but also increases sales especially when a company´s blockbuster drug´s patent is about to expire and thus the revenues to be generated from the new acquired drug can compensate for the ending drug´s sales. As companies rely heavily on blockbuster drugs, they are willing to bid with premiums to acquire them, which leads to companies’ overvaluations. Such a case was seen when AbbVie bid a premium of 50% over its opponents for the start-up Pharmacyclis to acquire a very promising cancer drug to add to its oncology line.

Also, the success of start-ups and small companies in developing new drugs but lacking the expertise, the financial means to deal with regulators and how to market their products was an important driver in M&A transactions for big companies who somehow were not as resilient in the R&D area. Estimates in this field show a cost of $ 2.5 billion to market a single new drug.


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