AstraZeneca-Pfizer, Novartis-GSK: Big Pharma is making deals again

It's been years since pharmaceutical companies had a proper spending spree. But with two big deals hinted at in as many days, it looks like Big Pharma is about to start a Big Love-in.

by Emma Haslett
Last Updated: 28 Apr 2014

It’s been a weekend of love-ins for Big Pharma: first, there was the revelation that European (Swedish-British) firm AstraZeneca and American firm Pfizer had been in talks. Now, Novartis (Swiss) and GlaxoSmithKline (British) have decided to combine their consumer healthcare units. Aaaah.

To the Novartis/GSK tie-up first: the deal means the Swiss company will acquire its British rival’s cancer drugs business for $16bn (£9.5bn), and sell its vaccines arm (excluding the lucrative flu unit) to GSK for $7.1bn. The two will then combine their over-the-counter units, creating one super-headache pills manufacturer with annual revenues of £6.5bn.

This is partly because Novartis has had a spot of bother with slow growth over recent years, although GSK chief exec Andrew Witty reckons it will ‘substantially strengthen two of our core businesses’, as well as ‘increase overall GSK revenues by £1.3bn to £26.9bn’. Not bad for a day’s work. Shareholders certainly seem impressed: GSK’s share price was up almost 5% this morning.

Shareholders are also pleased, to the tune of almost 8%, with the idea Pfizer might make a second approach for AstraZeneca. The two companies are said to have held talks over a deal late last year which came to nothing, but apparently Pfizer is now planning on having a second go at buying out its rival.

The European firm has apparently engaged a ‘strong team’ to ensure it’s a merger of equals, rather than a buyout. That brings up questions about whether anything can really be a merger of equals - although while AstraZeneca may be the smaller company (its $87bn market cap is less than half Pfizer’s $197bn), Citi analyst Andrew Baum reckons it has more potential.

‘Pfizer’s recent pipeline launches Xeljanz [an arthritis treatment] and Eliquis [for heart disease] have both materially disappointed. Most importantly, we believe that Pfizer has recognised that the commercial potential for cancer immunotherapy is materially higher than market estimates’.

Not coincidentally, AstraZeneca is particularly strong in the field of immunotherapy - boosting the body’s immune system to fight tumours. It’s a relatively new field, which means there’s lots of potential for growth.

What’s also interesting about the deal is that Pfizer currently has tens of billions of dollars sloshing around bank accounts overseas. To repatriate it into the US would incur a huge tax bill. If it moved its headquarters to the UK, though, getting access to that money might be easier: at 21%, our corporation tax is just under half the US’ 40%.

Both these deals suggest consolidation among Big Pharma is back on the cards: after the last round in the late 1990s, the popular view was that megamergers like this tend to destroy value. Research by McKinsey published in February, though, suggested mergers between big pharmaceutical companies tend to produce average shareholder returns 5% above the industry average. We give it six months before there’s a pharmaceutical company with a name so long it won’t fit in a tweet...

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