It's clear that big pharma will face a triple whammy of problems—patent expiry, regulation and health-spending restrictions—in the coming years, and large-scale mergers and acquisitions should come back onto the agenda after a relatively quiet 2010.
But midsize players may be waiting for one of the big guns to make a move before pulling the M&A trigger themselves. The problem is, some of the largest pharmaceutical companies—Pfizer, Switzerland's Roche Holding and Merck & Co. of the U.S.—are busy integrating major acquisitions done in 2009.
A report from Moody's lists increasing exposure to major patent expiries, high regulatory hurdles to drug approval and "austerity" measures as health care is reformed around the world as three key reasons why the ratings agency has a negative outlook on the industry as a whole.
Meanwhile, "2009 saw three big M&A moves, and the companies involved are still in the process of digesting these acquisitions," says Moody's senior analyst Marie Fischer-Sabatie. Nevertheless, Moody's expects more M&A next year as companies grapple with these problems.
Interestingly, the agency says debt will likely be a major source of financing. "We have seen some levering up over the past year, and this has generally translated into ratings downgrades. But pharma is still under-levered compared with other industries," says Ms. Fischer-Sabatie.
The key additional question is how much headroom for debt-financed takeovers the likes of Pfizer, which has gross debt of 1.9 times reported earnings before interest tax, depreciation and amortization, still have. Patent issues may be pressing, but there is far less of a cushion now to fund M&A without credit-rating consequences, says Moody's.
Given that many of the industry's players take their cue from the U.S. giant, this could prove to be another stumbling block.
Roche could be another leading indicator. "Small bolt-on acquisitions could be accommodated within [Roche's] A2 rating category, but we would expect the company to focus on deleveraging" following its $46.8 billion purchase of Genentech, Ms. Fischer-Sabatie says.
So is it the case that all the main players know they'll be hit by patent expirations and a thin pipeline over the coming years, and realize that if they do nothing they'll just struggle together and the status quo will be maintained? That's probably too cynical a view.
But it's a fact that Eli Lilly & Co and U.K.-based GlaxoSmithKline—whose exposure to patent expiries and challenges over the next three years amounts to 40% and 32% of group sales, respectively—have been resolute in their rejection of M&A as a means of growing their way out of trouble.
Where does Ms. Fischer-Sabatie expect consolidation to take place? Generics and consumer health as pharma tries to diversify, as well as emerging markets and vaccines businesses.—Jacob Plieth
Monday, November 22, 2010
Who Will Make the First Pharma M&A Move? - WSJ.com