by Helen Collis
LONDON, Feb 13 (APM) - Pharma will have to seek innovative solutions to streamline business and ensure a healthy balance sheet as there remain few cost-cutting measures left without damaging existing research programmes, according to a senior analyst.
“Cost cutting is going to be quite a difficult area and it’s not going to be a major driver for M&A. May be there’s still some room (for cost cutting) in generics but I don’t know that there’s an awful lot more in big pharma unless they do spin offs,” said Ana Nicholls, managing editor of the Economist Intelligence Unit's Industry Briefing business.
For these reasons, AstraZeneca and Allergan fought hard to escape takeovers from Pfizer and Valeant respectively, she said.
“Acquisition targets are very nervous about cost cutting now; they know so much of the fat has been trimmed and so cost cutting now starts to eat into the meat.”
Pharma has seen a broad range of M&A strategies in the last 18 months, Nicholls said, with restructuring and refocusing business activities resulting in buying and selling businesses and assets, research collaborations and licensing deals, flotations as well as the more recent mega asset swap deals that have begun to emerge.
Most notably Novartis and GlaxoSmithKline have agreed to swap large businesses divisions, with GSK gaining Novartis’s vaccines platform, excluding influenza vaccines and the Swiss firm acquiring GSK’s cancer portfolio, excluding most of its pipeline. They will also jointly create a consumer health business. (APMMA 38087)
On such vast deals, Nicholls said: “This is less expensive but complicated to arrange, but they do at least mean they don’t have to come up with the finance for an acquisition and there is some mileage still in refocusing.
“This type of deal... is partly a risk sharing scheme which fits quite nicely into refocusing at the same time, as they’re hedging their bets,” she said.
However, she underlined that in the current climate, business valuations are high, so companies are more likely to sell sections they don’t want as opposed to entering into a complex asset swap deal.
“The chances of finding a partner company wanting to do the exact opposite of what you want to do - that’s also difficult,” she said.
One area that continues to see a “huge amount of activity” in M&A is generics, Nicholls said, highlighting numerous deals with Actavis, as well as India’s Ranbaxy and Sun Pharma and Mylan buying Abbott's established markets generics. (APMMA 39081)
She said the reasons were twofold: in line with recent consolidation in the distribution business and cost cutting.
“There was quite a big wave of consolidation in the distribution business a few years ago and I expect that that has had ramifications in the supply chain in the generic business. It hasn’t driven down prices but it has made it more imperative to strike distribution deals - because the balance of power has shifted.”
She said the over-the-counter medicines market has also seen a similar effect following the consolidation of pharmacies.
“There has also been a general trend towards cost cutting in generics,” she said and forecast further M&A activity to come in the generics sector where there were still opportunities to make savings.
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