Fitch Ratings is raising the flag on pharma M&A. The credit ratings agency says the current spate of dealmaking is putting some pressure on European Big Pharma players.
No wonder: Competition for promising deals has intensified recently, with prices for some buyouts raising eyebrows among investors and analysts alike. AbbVie’s $21 billion deal for Pharmacyclics may be the most obvious example, but smaller deals have come with big premiums, too.
Drugmakers in Europe and Britain have been among the most active buyers in recent months. Pharma giants GlaxoSmithKline and Novartis wrapped up the biggest deal of the year so far, when GSK nabbed Novartis’ vaccines unit, and Novartis bought out GSK’s oncology business–and set up a consumer health joint venture to boot.
Meanwhile, Germany’s Bayer bought Merck & Co.’s consumer business for $14 billion, and its fellow German drugmaker Merck KGaA agreed to acquire Sigma-Aldrich for $17 billion. Smaller drugmakers, including Ireland-based Shire, have been on an acquisition binge as well; Shire snapped up NPS Pharmaceuticals in January for $5.2 billion.
These deals all have one thing in common: Drugmakers are working to exit businesses they don’t think they can dominate, while building up where they already are strong. Shire’s NPS deal helped beef up its gastrointestinal business, for instance, while Bayer’s consumer health buyout is part of a play to become top dog in that field.
The strategy may be sound, but Fitch is warning pharma investors to keep an eye on how drugmakers are financing their buys. “[T]he effects of recent M&A activity continues to negatively affect the ratings headroom for European pharma players,” the ratings agency noted Thursday, “as they seek to position themselves in key treatment areas and consolidate market positions.”
It’s not as if it’s a new idea, however. Merck & Co. executives recently remarked that they might prefer using cash to buy back shares, if prices rose too high; even more recently, they announced a $10 billion expansion to the company’s buyback program. And Sanofi ($SNY) Chairman Serge Weinberg told Les Echos that his company can do without dealmaking at today’s prices. In scouting for buys, Sanofi “found the asking prices to be too high for the businesses,” Weinberg told the French pub, adding that the company’s balance of innovation and diversification “makes acquisitions not indispensable.”
By Tracy Staton
