Pharma Executives Aim At Small, Strategic Deals

At the JPMorgan Healthcare Conference in San Francisco last week, big pharma CEOs painted a picture for investors of how they plan to grow their businesses in an era of fewer blockbuster drugs. They suggested that megamergers would not provide long-term solutions to their problems and that the focus this year will stay on smaller, targeted acquisitions.

Growth at major pharmaceutical firms now lags—substantially—growth in the global drug market, according to a report released at the event by Ernst & Young. “It’s hard to present to shareholders over time that you’re not growing as fast as the market,” said Glen Giovannetti, the firm’s global life sciences sector leader. “It is a reality that some of the large companies will look for deals to help, in part, deal with the gap.”

At the health care meeting, company executives discussed what those deals might look like. Most anticipate another year of smaller “bolt-on” acquisitions that fill a gap in their firms’ pipelines or bring in a promising technology.

“I don’t see us looking for another large combination,” said Merck & Co. CEO Kenneth C. Frazier. That sentiment was echoed by many of his competitors. Looking back at several decades’ worth of deals, Merck has reached the conclusion that its sweet spot is licensing or acquiring projects in the earliest stages of research, Frazier said. “When things get to be late stage, you’re in the middle of a bidding war, and it’s hard to acquire in a way that creates value.”

Several companies pointed to emerging markets as key areas for growth. Sanofi is interested in acquisitions in the $1 billion to $2 billion range, with emerging markets as a prime target, said CEO Christopher A. Viehbacher. By picking countries where most competitors have yet to arrive, Sanofi has been able to expand without paying a premium for new assets, Viehbacher said. Roughly two-thirds of its sales in emerging markets are outside the big BRIC countries of Brazil, Russia, India, and China, he added.

Sanofi is one of several companies keen to tap into the animal health segment. “Significant megatrends” are driving growth in that area, Viehbacher said, pointing to an expanding global middle class that wants to consume higher-quality food.

Eli Lilly & Co. also sees emerging markets and animal health as avenues to sustain growth during a tough period. In 2011 the company lost patent exclusivity on its top-selling antipsychotic drug, Zyprexa, and this year will face generic competition on its second-highest-selling drug, the antidepressant Cymbalta.

CEO John C. Lechleiter said Lilly’s Elanco subsidiary is the world’s fourth-largest animal health company and the fastest growing. In 2016, he told attendees, four segments—animal health, emerging markets, Japan, and diabetes treatment—could represent more than 60% of Lilly’s sales.