This Corporate Trend Is the Secret to Big Pharma Profits

by 

There has been no sector hotter for deal-making than the pharmaceutical sector. Last year saw in excess of $250 billion worth of deals struck, a record for the sector.big-pharma-profits
So far this year, we’ve seen an even more torrid pace. In the first three months of 2015, there was a total of $95.3 billion worth of deals announced. According to Reuters, that is a 70% increase from the same period a year ago.
But behind all these headline grabbing deals is a trend that may have escaped the notice of investors seeking Big Pharma profits. The large pharmaceutical companies are pursuing a very specific strategy – what Novartis AG (NYSE: NVS) CEO Joe Jiminez calls “precision M&A.”
Jiminez says this kind of deal-making is a drastic change from the mega-mergers of the past, which often left the newly merged company nothing more than a collection of assets that really didn’t fit well together.
The Precision M&A Trend Is Clear
Big Pharma companies have decided to focus solely on a few select strategic core areas and sell off their remaining divisions. That means drug companies will likely be facing only two or three other competitors in a specified area, rather than the wild free-for-all in the past where everyone competed against each other in nearly every disease category.
A look at recent Big Pharma moves show this trend to be accelerating.
One of the largest precision M&A deals consummated last year was a $20 billion swap between the aforementioned Novartis and GlaxoSmithKline PLC (NYSE: GSK). The Swiss company traded most of its vaccine division for GlaxoSmithKline’s cancer medicines division. The two also agreed to form a joint venture in consumer health care.
But that is hardly the only such Big Pharma streamlining deal out there. Other notable deals include:

  • The $2 billion sale by Johnson & Johnson (NYSE: JNJ) of its cardiovascular care business to Cardinal Health (NYSE: CAH). Johnson & Johnson also sold off its blood testing business in a $4.15 billion sale to The Carlyle Group (NASDAQ: CG).
  • The $17 billion acquisition by Pfizer (NYSE: PFE) of Hospira (NYSE: HSP). The deal boosted Pfizer’s portfolio of injectable drugs and biosimilar drugs.
  • AstraZeneca PLC (NYSE: AZN) had some smaller, streamlining deals, such as a $325 million sale of its Myalept drug and a $600 million purchase of the rights to Actavis PLC (NYSE: ACT) branded respiratory drugs in North America.

Sensible Deals
Investors may be wondering if this new strategy being pursued by Big Pharma companies make sense. According to a 2014 study from consultancy Bain & Company, it does.
Bain looked at the industry over a 20-year period and found that 10 companies consistently outperformed, based on total shareholder return.
Big-Pharma-chart
The secret to success? Bain found three factors, two of which, I believe, are extremely crucial:

  • Focus on building leadership in categories and capabilities.
  • Use targeted M&A strategies to build leadership positions.

The third factor was developing distinct capabilities in one of four repeatable business models.
Bain pointed out the value of targeted M&A versus prior megadeals by saying that in 2010, 46% of all pharma deals resulted in underperforming companies. But today, many of the deals are different and more targeted.
The bottom line for investors is that the current wave of precision M&A deals are just what the doctor ordered.
Just look at the model for this new era – the GSK-Novartis deal. It created leaders in both oncology (Novartis) and vaccines (GSK). Their joint consumer health venture also created a leader in the consumer health care sector – and additional value for their respective shareholders.

How to Profit Off the Next 3D Printing Revolution

3D printing is without question one of the most stunning technological achievements the world has ever seen. And it’s only just getting started. What do I mean? Well, in 2016 its next iteration is going to hit markets. And the Silicon Valley insiders who’ve seen it are blown away. One says, “It’s not only a game-changer, it’s going to rewrite the rules of the 3D printing industry.” And Computer World magazine says “Rival 3D printers will have to step up their game or be left behind.” Don’t be left behind – discover all the details behind 3D Gen2 right here.

To top