Corporate Consolidation and Research and Development in the Pharmaceutical Industry

November 12th, 2018 - 0 Comments

Pharmaceutical companies are being driven towards mergers and acquisitions because of the increasing costs of drug development, tightened regulatory approvals, and some of the bestselling products going off patent. The pharmaceutical industry uses M&As as a strategic growth option to further add revenues and align on a growth trajectory. The top 10 pharmaceutical companies have invested enormous amounts on acquisitions in the past decade – an estimated US$ 465 billion* was spent during 2007-2018. Each of these companies has been engaged in at least three big acquisitions on an average (above one billion US$) or two really major acquisitions (above two billion US$). Some major acquisitions by the top 10 companies in the last decade are exemplified in the table below. The total costs add up to US$ 350 billion* in 2017 alone, the acquisition costs were about US$ 46 billion* by these top 10 companies.

DateMajor Acquisitions in 2007-2018BN US$
2009PfizerWyeth68.0
2009Merck & Co.Schering-Plough42.1
2009RocheGenentech46.8
2010NovartisAlcon39.3
2017Johnson & JohnsonActelion30.0
2015AbbViePharmacyclics21.0
2011SanofiGenzyme Corporation20.1
2012Johnson & JohnsonSynthes19.7
2015PfizerHospira17.0
2017Gilead SciencesKite Pharma11.9
2018SanofiBioverativ11.6
2011Gilead SciencesPharmasset11.2
2013AmgenOnyx Pharmaceuticals9.7

Sources: Company media release## and publicly available news articles#

A merger or an acquisition can significantly boost a company’s capabilities in developing new drugs on one hand while on the other hand the cost cutting due to the acquisition can drop the R&D performance due to reduced funds.

The pharma industry is research driven. Therefore, companies are expected to invest large amounts on R&D as well. The top 10 pharmaceutical companies generated over US$ 300 billion** in revenue in 2017, while spent over US$ 60 Billion** on R&D in the same year. These companies have spent on an average US$ 58 billion** per year on research and development over the last decade, with the total expenditure on R&D adding up-to an estimated US$ 634 billion**. Novartis, Roche and Pfizer are among the top three companies spending the most during this decade on both R&D as well as on acquisitions. The expenses on R&D have been high but the cost of drug development has also increased over the years. Research and development is a crucial growth component for the pharma industry and the investment in drug development is a must for advancement in healthcare as well as in revenue generation.

If we compare the change in the ratio of R&D spending and revenue after the first major acquisition in the last decade (>1 Bn US$), there is a drop in R&D spending, but not by much. However, the R&D spending tends to normalize after a long period of time and hence does not grow significantly (Figure 1).

Figure 1: Change in the Ratio of R&D Spending and Revenue after the First Major Acquisition in the Last Decade (>1 Bn US$)

Source: Calculation based on the data from company websites, annual reports and 10-K filings

The chart above shows the change in the percentage allocation towards R&D after a company has had a major acquisition of greater than One billion US$. The median shows a general trend of reduced ratio of R&D spending and revenue. This would imply that the companies have either underperformed or have cut down on expenses including R&D. The cost cutting is not significantly high but considering the average gap in stabilizing to the pre-acquisition benchmark, it adds up significantly.

Keeping in mind that the global political, legal and economic environment is not considered in this analysis, the rate at which the R&D could grow is not at its full potential. The gap on normalizing and further increasing the expenditure on R&D can still be narrowed down and the industry still has the potential to witness an increased rate of new drug development.

Sources:

*  Acquisition costs, company media release## and publicly available news articles#

** R&D expenditure, calculation based on the data from company websites, annual reports and 10-K filings

(Note: All websites accessed on 10th September 2018)

# Pfizer-Wyeth deal: The New York Times,

https://www.nytimes.com/2009/01/26/business/26drug.html

# Merck & Co, Schering-Plough deal, Business Insider/ Insider

https://www.businessinsider.com/its-a-deal-2009-3?IR=T

# Roche-Genentech deal: The New York Times,

https://www.nytimes.com/2009/03/13/business/worldbusiness/13drugs.html

# Novartis- Alcon deal: Thomson Reuters,

https://www.reuters.com/article/us-novartis/novartis-to-buy-alcon-stake-for-39-billion-idUSZAT00762320080407

# AbbVie-Pharmacyclics deal: The Wall Street Journal,

https://www.wsj.com/articles/abbvie-to-buy-pharmacyclics-in-21-billion-deal-1425528086

#  Sanofi-Genzyme deal: The Wall Street Journal,

https://www.wsj.com/articles/SB10001424052748703373404576147483489656732

# Pfizer-Hospira deal: CNBC,

https://www.cnbc.com/2015/02/05/what-does-pfizer-get-with-the-hospira-deal.html

# Sanofi-Bioverativ deal: Thomson Reuters,

https://www.reuters.com/article/us-bioverativ-m-a-sanofi-fr-haemophilia/sanofi-digs-deep-to-buy-u-s-hemophilia-group-bioverativ-for-11-6-billion-idUSKBN1FB1KS

# Gilead-Pharmasset deal: The Financial Times,

https://www.ft.com/content/845d40be-1441-11e1-85c7-00144feabdc0

## Johnson & Johnson-Actelion deal: Actelion,

https://www.actelion.com/media/media-releases?newsId=2113719

## Johnson & Johnson-Synthes deal: Johnson & Johnson,

http://www.investor.jnj.com/releasedetail.cfm?releaseid=683098

## Gilead Sciences-Kite Pharma deal: Gilead,

http://www.gilead.com/news/press-releases/2017/10/gilead-sciences-completes-acquisition-of-kite-pharma-inc

## Amgen-Onyx Pharmaceuticals deal: Amgen,

http://investors.amgen.com/phoenix.zhtml?c=61656&p=irol-newsArticle&ID=1860143

 

Leave a Reply

Your email address will not be published.

*