Making a big deal of mergers

One of the challenges of being a monthly news-based magazine is that, sometimes, things fall through the cracks. Well, not exactly; sometimes they just don’t get into the niche you might have wanted. Back in mid-November came the news that Actavis had announced a definitive agreement by which it would acquire Allergan in a deal worth approximately $66 billion, serving as the rescuer for Allergan, which had been fending off an unsolicited—and unwanted—offer from Valeant Pharmaceuticals.

 

It was too late to shoehorn that story into the December print issue, which was well underway, and by the time this January issue was being planned, the news didn’t seem fresh enough to run on the cover or in one of our news sections. Still, $66 billion is a mighty large number, and the story bears mentioning in some form in print, so why not here? (We did cover the story on our website, and you can read it by searching for the Editconnect number, which is E11201401.) In fact, this “Editor’s Focus” isn’t the only place it’s mentioned. In our Finance & Markets section this issue, on page 4, G. Steven Burrill, CEO of Burrill Media, notes that not only did the deal help push 2014 merger and acquisition (M&A) activity to clearly record levels, but also that it signals a more competitive environment in which a lot of companies with money to spend or financing they can access are trying to gobble up valuable assets that they didn’t develop. As he noted, “The accelerated pace of activity this year is an acknowledgement that companies can’t generate adequate growth through internal development of their own pipelines” and that they are looking not just for potentially valuable pipeline-boosters, but also for companies that are synergistic with their own goals and philosophies.

 

Looking at the Actavis-Allergan deal, Zacks Investment Research wrote, “The addition of several blockbuster therapeutic franchises will boost Actavis’ North American Specialty Brands business significantly … the combined company will have three blockbuster franchises (ophthalmology, neurosciences/CNS and medical aesthetics/dermatology/plastic surgery), each with annual revenues of more than $3 billion. Meanwhile, the specialty product franchises (gastroenterology, cardiovascular, women's health, urology and infectious disease) will have combined revenues of about $4 billion.”

 

Still, it remains to be seen whether that $66 billion will pay off handsomely in the long run. And while other deals weren’t so big, they also raise concerns that—at least in some cases—too much might be getting spent on the as-yet-unrealized promise of payoffs.

 

For example, in an M&A story that appears on the cover of this issue, Merck & Co. decided to strike a deal to buy Cubist Pharmaceuticals Inc. in a transaction valued at around $9.5 billion ($8.4 billion upfront and assumption of more than a billion in debt). Both investors and analysts have expressed concern that Merck may have paid too much, perhaps by as much as $3 billion. That may not seem like much in comparison to the Actavis/Allergan deal, but it matters. This is an industry where no therapeutic or diagnostic is guaranteed to win approval and make it to market, and the costs are high.

 

As Forbes noted in an August 2013 article, 66 of 98 companies studied launched just one drug over the previous decade, and that was at a median cost per drug of $350 million—more startling was that for companies that approve more drugs, the costs rose drastically until it hit $5.5 billion for companies that have brought to market between eight and 13 medicines over a decade. In more recent data in November 2014, the Tufts Center for the Study of Drug Development estimated that drug makers can expect to spend more than $2.5 billion over a decade before winning approval to sell a new prescription medicine.