To make up for weak pipelines, and to take arms against a sea of generic-drug competitors, many large pharmaceutical companies have pursued mergers and acquisitions. This strategy began to gain popularity about 10 years ago, and the industry’s new motto seems to be “When the going gets tough, the big get bigger.” Has this strategy improved drugmakers’ pipelines or bottom lines?
Not at all. In fact, it’s been a resounding failure, according to an analysis by Burrill & Company. Acquisitions have not improved Big Pharma’s pipelines. The industry now produces roughly the same number of new drugs annually as before, even though it’s spending more money on research and development (R&D). To add insult to injury, small drug companies are producing a growing share of new drugs—and doing it more cost effectively than their bigger competitors.
Acquisitions have translated into financial losses, too. Ten years ago, “the combined market capitalization of 17 of the industry’s most active acquirers was $1.57 trillion, excluding Johnson & Johnson,” according to Burrill & Company’s research. “By Dec. 31, 2010, that figure had shrunk to $1.04 trillion, a loss of more than $500 billion in market value.” The picture is worse when you subtract the value of these companies’ acquisitions: about $425 billion. That adds up to a loss of about $1 trillion.
Mergermania has been profitable for law firms, banks, and investors, though. In one three-month period in 2009 alone, pharmaceutical-company mergers and acquisitions yielded $500 million in advisory fees for investment banks, The Wall Street Journal reported. Merger activity provided banks, such as J.P. Morgan Chase, Goldman Sachs Group, Citigroup, and Morgan Stanley, with much-needed business at a time when the financial sector was struggling, according to Pharmaceutical Technology Europe.
Maybe Big Pharma’s advisors are steering it in the wrong direction, but I think the industry’s best hope is in R&D. If small companies can do it, and if the National Institutes of Health is offering its help, I don’t see why Big Pharma can’t improve its pipelines and secure its profitability by discovering more new drugs.