Pharma Mega Merger.

American Pharma giant Pfizer recently made a $110 billion bid to acquire Astra Zeneca.

What does it mean for the industry and consumers? There is speculation that the American pharmaceutical company wants to dodge hefty tax liability by operating overseas. But many believe that there is more to this mega-merger. Big pharmaceutical firms face slowing growth as governments around the world attempt to reduce healthcare costs. In turn, this is leading to the rise of low-cost drug manufacturers and generic suppliers that make cheaper versions of proprietary drugs. For example after the loss of the Lipitor patent, Pfizer profits declined by 19%.Uncertainty in the healthcare industry has lead the pharmaceutical companies to fight for a bigger market share to secure profit margins. Almost 700 mergers and acquisitions have taken place over the past three years among pharmaceutical and biotech companies. 

Mega-mergers do not always see synergies or economies of scale because of the integration challenges. The pharmaceutical industry is somewhat unique in this respect. McKinsey’s analysis of 17 large Pharma deals that occurred between 1995 and 2011 concluded that mega mergers add to the shareholders’ value and the long term survival of the acquirer. Companies may also choose to integrate their businesses, like Glaxo SmithKline and Novartis did recently. The two drug companies will join forces in the consumer healthcare sector, while exchanging their oncology and vaccine businesses.

Some other trends are noteworthy in the Pharma industry. Although mergers are the norm in this market, they may have a negative effect on the research and development arm of the companies. Industry consolidation has resulted in less competition and less investment in research and development, at a time when the need for new medical treatments and advancements has never been greater.

One can assume that mergers will increase number of monopolies in the market and to control this growing power government regulation will have to be put in place. Almost 20% of national health care spending is on pharmaceuticals and with a drive to control costs in all sectors of  health care industry, it’s obvious that the Pharma industry will see significant price cuts. The latest news reports have a common thread; that is acquisition (or integration) of the cancer drugs arm of the acquired companies. With the aging population and increased incidence of cancer it is foreseen as a profitable sector of the market. Similarly, with the new health plans covering preventive medicine, acquisition of companies that manufacture vaccines may reap future benefits. These types of mergers raise concerns for the government and insurers; as these mergers can take away much needed leverage, at the negotiating table, in rapidly changing health care environment.

Sources:

1. WSJ    

2. Mckinsey 

3. BBC