Deals and rumours of deals send pharma sector into a spin

A flurry of deals and speculation of more to come has set the pharmaceuticals sector alight, sending shares in some of the UK’s biggest drugs groups soaring.

AstraZeneca shares surged by 8 per cent at one stage amid frenzied speculation that US rival Pfizer was preparing a mega-bid, having had a $100 billion approach turned down by the UK company earlier this year. If a deal were to go ahead, it would be by far the biggest ever takeover of a UK company by an overseas buyer and one of the largest deals seen in the global pharma sector.

But mega-mergers are not the only way forward for Big Pharma. Rival drugs groups GlaxoSmithKline and Novartis unveiled their own deals yesterday, swapping assets and creating a new force in consumer healthcare by combining brands including, from GSK, Aquafresh toothpaste, Beechams cold remedies and Savlon antiseptic, with Novartis's Tixylix cough medicine and Nicotinell smoking cessation products.

Asset swap
In a complex asset swap, GSK will pull out of the oncology sector, selling its cancer drugs operation to Swiss-based Novartis for $16 billion.

At the same time, GSK is beefing up its vaccines side with the purchase of the Novartis vaccines division in a move worth up to $7 billion.

In a side deal, the US drugs group Eli Lilly is buying Novartis's animal health business for $5.4 billion, a move that will take it into the number two position in the growing animal drug market.

The was deal action, too, across the Atlantic, with the Canadian Valeant Pharmaceuticals joining forces with activist hedge fund billionaire Bill Ackman to launch a $46 billion offer for Botox-maker Allergan. Shares in Allergan raced ahead as Wall Street predicted a bidding war.

Mega-mergers swept the global pharma industry in the 1990s and 2000s, with deals including the record-breaking $70-billion plus merger of GlaxoWellcome and SmithKline Beecham in 2000 and Pfizer's $68 billion takeover of Wyeth in 2009.

But such giant deals have fallen out of favour, amid a widespread view they destroy shareholder value rather than create it, and that the biggest winners tend to be the army of investment bankers, accountants and lawyers brought in to broker the transactions.

That view was challenged earlier this year by management consultancy firm McKinsey. In a report entitled Why Pharma Megamergers Work , it rejected the conventional wisdom that integration on such a large scale is too complex and that such deals disrupt vital R&D functions.

Instead, it said its research showed large M&A action among pharma companies has generally resulted in “positive returns” to shareholders, and that deals in the pharma sector had performed significantly better than in other industries, particularly the technology sector. Not all were convinced by the research and McKinsey is, of course, used extensively as an adviser to acquisitive firms around the world.

Targeted approach
One sceptic is Sir Andrew Witty, the GSK chief executive. As he unveiled the Novartis deals, Witty made it clear he prefers the targeted approach rather than the blunt instrument of the mega-merger.

Although he made no reference to takeover speculation surrounding AstraZeneca, the GSK boss said: “The problem with the massive transactions of the past is that all of them will have two of three interesting elements but they will have seven or eight which you would rather not have to worry about.”

He added: “I believe if you really focus on just the things you really care about, you can create tremendous value.”

GSK shareholders will no doubt agree – they are to be handed £4 billion from the proceeds of the oncology sale.

The attraction of the asset- swap approach in an increasingly competitive industry is that each company exits its weaker areas and bulks up the sectors in which it is strongest, without also having to take on operations it does not really want.

In oncology, GSK has failed to build sufficient mass to compete effectively, languishing in 14th place in the global cancer drugs league. In vaccines, however, it is already global leader and the addition of the Novartis operations will further strengthen its position. Novartis, meanwhile, is the world's number two in oncology, behind Swiss rival Roche.

Whether or not Pfizer makes an offer for AstraZeneca, more deals are looming in the sector. Novartis intends to offload its flu vaccine business, which is not included in the GSK deal, and GSK is looking to sell some of its older drugs, which currently account for around 14 per cent of its revenues.

Fiona Walsh is business editor of theguardian.com