Over the past few years, the life science industry has witnessed unprecedented pharma M&A activity. Both 2015 and 2016 saw a wave of consolidation—driven largely by specialty pharma companies, which target niche markets with unmet needs.
This year, the winds may be blowing in a different direction. The future of US healthcare reform is uncertain, but there’s still more pressure than ever to lower the cost of drugs to consumers. This will almost certainly propel further consolidation and cost reduction. However, the type of activity may be different.
My prediction is that life science M&A activity in the next year will be driven by the industry’s largest players: big pharma. But rather than going after headline-grabbing mega mergers, these companies will likely pursue smaller and more targeted deals.
Here are three things it will help them do.
1. Increase agility and innovation
It’s expensive to introduce new drugs to the market. Large pharmaceutical companies can leverage their own resources to move through the research, testing, approval, and production of new drugs. They can also support smaller companies with specialized technical expertise.
When big companies acquire these players, it propels them through the product development lifecycle, shortening both costs and time-to-market. It also brings them insight into cutting-edge research areas and increases their ability to compete across different markets.
2. Capitalize on regulatory opportunities
Both the US Food and Drug Administration (FDA) and its EU counterpart, the European Medicines Agency (EMA), have created programs to fast-track the approval of new drugs that address rare diseases or improve existing therapies. The two agencies are also exploring ways to increase cooperation by, say, jointly recognizing clinical trials, and the FDA seems to be loosening its approval criteria for certain EU-approved drugs to be sold in the US.
This creates an opportunity for US Pharma companies to seek acquisitions outside the US and determine how their equivalent remedy can compete with the EU brand.
3. Respond to market pressures
The political pressure to lower drug prices has been building for some time. A more competitive health insurance market will put even greater pressure on the pharma industry to respond to cost-cutting calls.
Acquisitions, of course, are only one way for companies to respond to margin pressures. But big pharma will be hunting for assets in therapeutic areas where drug sales represent a smaller portion of total health costs. Targeted acquisitions and bolt-ons accelerate their competitiveness in these areas.
Big Pharma, meet Big Chem
The chemical industry—which also deals in molecular compounds and is subject to a tangle of regulatory and data housing requirements—has also been going through a wave of consolidation to improve synergies and focus on specific product types. Big pharma may follow the same pattern.
Some of the larger chemical companies launched new revenue streams by supporting smaller players. BASF, for example, has created a division that provides IT support to smaller chemical companies. It’s helped the company not just gain insight into what the smaller firms are researching but accelerate the commercialization of their products—not to mention learning how to better partner with them and/or acquiring a few.
Small ideas, big wins
M&A in the Pharmaceutical Industry appears to be at the starting gate of an interesting race. In 2016, only a few drugs gained FDA approval, and the Pharma indexes on the major exchanges seemed to suffer.
This year, I’m expecting more growth and more robust M&A activity as companies look for more product synergy and more innovative approaches to lowering drug costs.
Ed Trevisani is a global business transformation executive with deep experience in the pharma, chemicals, manufacturing, and IT services sectors. He's helped BTG clients streamline digital media sales processes and implement enterprise-wide HRMS and FMS solutions.