What Summer 2016 Pharmaceutical M&A Can Teach Us About the IndustryAuthor: Max Odenthal
Two of the biggest deals in recent pharmaceutical history have been put on the table over the past month and not without the help of virtual data rooms, apparently. Abbott Laboratories, an American pharmaceutical giant that has been active since the 19th century, and the French behemoth Sanofi are planning to expand their portfolio with acquisitions in lucrative niches. Abbott’s deal with heart device manufacturer St Jude Medical has already been confirmed and is worth $25 billion, and Sanofi has made a bid of over $9 billion for biotech start-up Medivation. Both deals reveal trends in the pharmaceutical industry to which investors should pay attention.
Sanofi’s bid for Medivation and its cutthroat tactics in the lead-up to a possible deal presage the importance that biotech will have in the pharmaceutical industry in years to come. First of all, it suffices to look at how many of Sanofi’s competitors were vying for control of Medivation to realize how desperate large pharmaceutical companies are to expand their biotech operations. Before Sanofi’s bid, Pfizer, Amgen, Novartis and Gilead Sciences had all shown interest in acquiring Medivation. Secondly, Medivation’s reluctance to sign a deal with Sanofi means the start-up knows the huge potential of its products. If only current share prices of Medivation were taken into consideration, their refusal of Sanofi’s bid seems mad. However, as Medivation’s CEO David Hung points out, their cancer drug Xtandi, is a “fast-growing, multimillion dollar oncology product”, and their pipeline products like Talazoparib (another cancer drug) might well produce even better results. Medivation argues, therefore, that the deal is significantly underpriced and initially refused to have discussions. In response, Sanofi showed their eagerness to make the deal happen by threatening to take over Medivation’s board of directors if they refused to start negotiations, which they have now begun to do.
Both deals are evidence of increasing domination of the pharmaceutical industry by a small number of huge companies. To maintain growth, the leading forces of the industry must continue to diversify their portfolios. Sanofi, which is suffering from declining sales of its Lantus insulin, would ramp up its offering of drugs by acquiring Medivation. Abbott, which has recently focused on generic drugs and over-the counter nutrition products, will gain access to new technology in an often-overlooked sector with reliable revenues. The continuing expansion of these companies is good news for shareholders both of the large pharmaceutical companies and of the smaller companies they acquire. Medivation shares jumped 4.2% after the first reports of talks over a confidentiality pact with Sanofi and, after the deal between Abbott and St Jude Medical was announced, St Jude shares jumped by 26%.
Shareholder satisfaction, however, is not the only effect that deals such as these will have. Large pharmaceutical companies are gaining more negotiating power as their portfolios diversify, which could be bad news for other players in the industry. Medivation filed a complaint to the U.S. Securities and Exchange Commission that it was being forced into an unfair, underpriced deal with Sanofi, and yet the deal seems to be going through regardless. The St Jude deal means that with access to new technology, hospitals will be unable to haggle down the prices of essential products like defibrillators and cardiac rhythm management devices. In the current heyday of revolutionary biotech and medical innovations, we are likely to see more innovative startups being snapped up by big pharma, possibly to the detriment of the entrepreneurs who build them, as well as the hospitals and patients who need them most.