Fitch Ratings says that over the next few years it expects M&A to remain high on the agenda of global pharmaceuticals companies as they seek to counteract sales and profit declines due to upcoming patent expirations.
“Fitch believes that the rated pharmaceuticals companies most exposed to operating challenges over the next three years and benefitting from deep pockets - Pfizer Inc, Eli Lilly Co., Merck & Co, Bristol-Myers Squibb Company and AstraZeneca PLC - may be tempted to increase M&A expenditure beyond their normal budgets for bolt-on acquisitions,” says Britta Holt, a Director in Fitch’s Corporates group in London. .
Almost all of the large, rated pharmaceuticals companies favour small and medium-sized targeted acquisitions, with a focus on specific pipeline projects, specific technology, or portfolio or geography gaps rather than mega-mergers.
Fitch calculates that of the 82 $1bn-plus acquisitions in the pharmaceuticals industry over the past 10 years, almost 50% (40) have been announced since 2009 – with the patent cliff imminent. The value of these acquisitions was half ($358bn) of the total value of acquisitions over the past 10 years ($710bn). Since the emergence of the patent cliff Pfizer, Merck, Novartis AG, Roche Holding Ltd, Sanofi SA and Johnson & Johnson Inc., chose to pursue large acquisitions (above $15bn), while other pharmaceuticals, such as BMS and Amgen pursued smaller, more targeted acquisitions, despite operating challenges ahead, and accepted that they faced a period of declining sales.
In terms of the ability to cope with (partly) debt-financed acquisitions, the track record of Fitch-rated pharmaceuticals companies suggests that the companies are able to absorb even large acquisitions without prompting downgrades of more than two notches.
Despite the M&A potential, Fitch expects global pharmaceuticals to remain one of its highest-rated industries. The reasons include superior cash flow generation, large cash balances and strong liquidity – driven by high unsatisfied medical needs, favourable demographics, technological advances and the persistence of chronic diseases.
In the event that companies decide to significantly change their financial policies, Fitch believes that the ‘A’ rating category, ensuring access to the tier-one commercial paper market, will generally be the lowest category that the agency assigns to large pharmaceuticals companies.
For details, see the full Fitch report M&A Pressure to Persist for Global Pharmaceuticals Companies.