Pharma: If You Can’t Build It, Buy It
The Actavis CEO, Brent Saunders, says his company is a pioneer in growth pharma. Basically, if you can’t build it, buy it.
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There’s a frenzied M&A bubble sweeping the pharma industry. This idea of “growth pharma” is a new age for pharma giants who can no longer get growth from developing blockbuster new drugs, rather, they are attempting to buy growth via M&A.
According to a report by KPMG, first half of 2015 has seen pharma deals worth $221 billion, up some 300% year-over-year. The buyouts, divestments, mergers, spinoffs, etc. have created a new industry structure barely recognizable from a few years ago.
Just have a look at the deals this year: Actavis completed the acquisition of Botox maker Allergan for $219 a share and a $85 premium from when the company was put in play by Valeant and Pershing Square.
Then, we had the new Actavis-Allergan buy bought Kythera Biopharmaceuticals for $2.1 billion just two weeks after the merger.
Teva Pharma bought up Allergan’s generic business $40.5 billion dollars recently. Allergan also decided to spend some $560 million on a deal for the biopharma company, Naurex.
Roche has bought a majority stake in Bill Gates funded Foundation Medicine for more than $1 Billion. There was also Abbvie’s acquisition of Pharmacyclics for $21.1 Billion and the Pfizer- Hospira $17 Billion buyout.
The big question becomes; are these deals a positive for the end user?
The industry is now divided into two segments. The riskier startups developing groundbreaking new drugs and the established pharma giants commercializing the drugs with their distribution machinery and then marketing the new drugs via large sales forces.
Once new drugs are on the verge of getting through the clinical phase trials, it’s starting to make sense for the big commercial pharma companies to acquire them to shorten time to commercialization.
So you have the argument that this consolidation helps turn the science in labs into good medicine quicker and more efficiently.
But don’t be fooled, it’s all about the benjamins, from buying growth to tax inversions to reduce taxes.
Now, we’re on the verge of a mega pharma deal, with certain companies being too big to be able to really juice growth from a $50 billion acquisition. For instance, the $200 plus billion market cap of Pfizer is going to need a hefty target. Ideal candidates include newly slimmed down Allergan, Amgen or even Larry Robbins’ favorite AbbVie. Yet, this drug induced M&A party won’t end well for everyone.
The famed short seller Jim Chanos took on Valeant Pharma in 2014, calling it a short with aggressive accounting practices. That hasn't worked out well for ole Jimmy, but his point is not lost upon us.
Then there’s Kyle Bass out there challenging drug patents. That’s one way to go against the market. Interestingly enough, Bass’ piecemeal shorting of pharma stocks could reveal a larger theme he has up his sleeve, per IAM media:
A final thesis is that Bass is going big. The “short” being set up is the entire brand pharmaceutical industry. He is going to short the entire sector. And the thesis is simple: drug prices are getting higher, meanwhile brand pharma is gouging the sick by stretching out their monopoly pricing based on weak, obvious and invalid patents. Bass’ proof will be in the pudding. He targeted a small sampling of high priced drugs, filed IPR petitions against the patents, and successfully invalidated most of them. If Bass can show that his small sampling is infected, then what will that say about the $450 billion brand pharmaceutical industry as a whole?