Big Pharma's Patent Panic

By Julius Kalvelage


Over the past years, large pharmaceutical companies have experienced a deterioration in their ability to grow organically as the investments in R&D, as well as the efficiency of in-house research, have fallen. As a result, we have seen an increasing number in acquisitions among companies in this sector which shows the consolidation that is currently underway. The majority of mega-deals hereby often come from “Big-Pharma” companies while firms in the subsector of biotechnology serve as targets in many of the acquisitions.

Facts and Figures

This trend has made the PMD (Pharma, Medical and Biotech) sector the second largest sector by value in 2019 with a 14.3% share of global M&A activity, which corresponds to over USD 477bn in deals and 7 mega-deals, thus doubling the PMB value in the US market. In Europe, it also broke new records as it made up 21.2% of total M&A volume – the highest figure on record.

Further Trend Analysis

Most drug makers are very dependent on only one or a few drugs in their portfolio which usually make up a large percentage of the company’s revenues - AbbVie’s HUMIRA, for example, made up 61% of its sales. The development and commercialisation of those drugs is also very expensive and averages at over $2bn a drug. According to a report recently published by Deloitte, the average return on R&D at 12 of the world’s largest pharmaceutical companies fell to just 1.9% in 2018, the lowest level in almost a decade, as the cost of discovering new drugs has risen sharply. This is well below the rate at which companies can borrow money and because investments in R&D have been so fruitless, many large drug makers have relatively few therapies in the pipeline to drive sales once patents run out on existing drugs. Given this business model of heavy reliance on one product for a limited period of time and the ineffectiveness of R&D, companies are left with no other option than the acquisition of new products when patents expire.

The existential threat to large parts of their revenue generators incentivise a diversification of their revenue sources. Firms can of course try to drive organic growth by investing heavily but even if a company has not been unsuccessful with R&D, the enormous costs one drug can have, coupled with the remaining risk that R&D does not yield results or that a drug is not approved, may incentivise firms opt for inorganic growth. Inorganic growth allows them to purchase new portfolios with established patents and drugs and full R&D pipelines that can strengthen their position in the current market or could allow them to diversify revenue sources towards a new category within the pharmaceuticals sector. For example, Gilead became a leading player in cell therapy for cancer treatment by acquiring Kite Pharma while its previous blockbuster drugs were treating Hepatitis C.

Who are the Main Parties Involved?

In addition to this, the high-end pharmaceuticals market is an industry with enormous growth and development as new innovative and disruptive treatments are developed at a constant rate. This comes particularly from companies in the biotechnology field that are seen to have a much more innovative culture than big pharma and a leaner structure in development that pharma companies want to access. As a result, large firms have a great incentive to use the cash generated by past blockbuster drugs for acquisitions that stock up their product portfolios and pipelines.

Deals to Know About Bristol-Myers Squibb buys Celgene Announcement date: 03/01/2019 Acquirer: US-based company engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceutical and nutritional products Target: US-based biopharmaceutical company engaged in the discovery, development, and commercialization of therapies designed to treat cancer and immune-inflammatory-related diseases Advisors:  N/A Value: $89,48946m Rationale: 

  • The transaction significantly expands Bristol-Myers’ phase III assets, which represents greater than USD 15bn in revenue potential.

  • It will provide strong returns and significant immediate EPS accretion to Bristol-Myers.

  • The transaction will enable significant investment in innovation by Bristol-Myers as it provides a strong balance sheet and cash flow generation.

  • It will also enable Bristol-Myers to realize run-rate cost synergies of approximately USD 2.5bn by 2022.

Consideration: 35,012 Cash and 36,714 Equity Premium paid: vs. share price 1 day before: 53.71%