M&A in pharmaceutical industry: Analysis of strategic intent

Abstract

There has been a surge in M&A activity in the pharmaceutical industry in the recent past with deal volumes reaching peaks of 115 billion USD in Quarter 1 of 2009. Pharma industry has been going through a period of change with competitive landscape being redrawn with changing regulations, increasing demand for cheaper drugs by governments and insurance firms, rise in lifestyle related diseases and their cures to name a few. In this light, there is a need to analyze the strategic intent behind the M&A deals in pharma sector to understand thewhat the future holds for pharmaceutical indsutry. Literature survey of management objectives behind M&A deals reveal the following motives for mergers & acquisitions in any industry 1. To obtain and exploit economies of scope 2. To deal with ongoing & critical interdependencies with others in a firm’s environment 3. To expand current product lines and markets 4. To enter new businesses 5. To maximize and utilize financial capability The type of M&A deals are again classified as horizontal, vertical, conglomerate or concentric mergers. These identified motives are used as basis for indentifying rationale in this study. Pharma companies are be classified as Innovator, Generic, CRAMS or Distributor firms based on the nature of products or services that they are offering. This study analyzes M&A deals in the industry in all these categories from 1-Jan-2006 to Jun-2009 to understand the rationale behind the acquisitions. Cluster analysis techniques are applied for the sample data to group them based on the type of firms, geographic regions of origin and the deal rationale. From the cluster groupings obtained thus it is observed that horizontal mergers are the most prevalent in the pharmaceutical industry and the primary reasons for acquisitions are product line or market access. It is seen that innovator firms acquire innovator firms for product line and generic firms acquire generic firms for market access or product lines. When faced with the make v/s buy decision, pharma companies are increasingly going towards the buy decision due to the inherent time and capital investments required in this industry for developing product or market resources. Thus out of the five reasons for M&A deals in general, the major force acting in the pharma industry seems to be expansion of current product or markets.