Merging in the Pharmaceutical sector
Our expert's opinion
"This article explains quite well why pharmaceutical companies are making such huge mergers and acquisitions (M&A), the latest being the Bristol-Myers Squibb buying Celgene for $68-74 billion, and why tech companies aren’t merging as much.
The point with pharmaceutical companies is that their patents have a finite lifetime and for a company to stay big and relevant, it needs to acquire new patents to develop more products (because R&D brings so few of these). Pharma companies are looking to acquire interesting firms that could complete their portfolio to really market themselves as specialist in some specific sectors in the industry.
I find it interesting to read and I’m always amazed by the massive value of these deals (like the Takeda-Shire deal that has just passed through last year). What do you think about these mergers and what they represent?"
- Antoine Desprez, Associate Consultant
Why pharma companies merge
This week's mega-deal was the announced $74 billion acquisition of Celgene by Bristol-Myers Squibb. BMS is paying one share of its own stock, plus $50 in cash, for each share of Celgene, which works out to about $68 billion at current prices. The combined company looks to be worth on the order of $150 billion, making it the 6th-largest pharmaceutical company in the world.
The big picture: Pharmaceutical mega-mergers are common. (Wikipedia has an exhaustive list.) Pfizer, in particular, is a product of M&A, having bought Pharmacia, Wyeth and Warner-Lambert in deals worth a combined $244 billion. Meanwhile, technology mega-mergers are rare, with the disastrous exception of AOL-Time Warner.
- Yet despite the relative lack of M&A, the technology industry is much more concentrated than the pharma industry. The top 10 largest tech companies, led by Microsoft, Alphabet, Apple, Facebook and Tencent, account for 41% of the sector. The equivalent number in the pharma sector is just 29%.
- Worth noting: A capitalization of $150 billion doesn't even get you into the top 10 in tech.
Be smart: Mega-mergers don't necessarily make for highly concentrated industries, especially not when it comes to pharmaceuticals. Patents have a finite lifespan, which means that if a company wants to stay big, it needs to acquire new drugs, either via R&D (which has a relatively low success rate) or else via M&A. Big pharma mergers are often a case of running to stand still.