Following frenzied M&A activity at the beginning of the year, the credit crunch has left the pharmaceuticals sector in a state of uncertainty. Co-Head of Healthcare at law firm Linklaters, Nigel Jones, looks back on the deals of 2007 and predicts what 2008 will bring.

“In the largest biotech deal of the year, AstraZeneca acquired MedImmune for $15.6 billion, its biggest acquisition since its creation in 1999. The purchase reflects the wider trend of big pharma’s willingness to pay large sums of money to secure increasingly sought-after biotech technology. Numbers of publicly traded biotechnology companies have increased by 5% since 2006, while revenue generated from their M&A deals has increased by nearly triple this amount. Competition is fierce, exemplified by the MedImmune purchase price – inflated by a furious bidding war – which some analysts believe was excessive.

“The recent announcement that Japan's Eisai is to buy MGI Pharma for $3.9 billion is yet another indicator that biotech M&A deals are set to remain hot. Several reasons explain this, including the desire of companies to restock drying product pipelines.

“In another high profile deal, Mylan’s 4.9 billion euro acquisition of Merck’s generics business added 400 new products to the pipeline, and also demonstrated a growing trend for companies to spread their global footprint. Through the acquisition, Mylan gained a presence in several key markets including Australia, France, Japan, Portugal and Spain. Benefits of acquisition over outsourcing can also lie in diversification of exposure to profitable markets.

Emerging markets
“A number of new players have emerged in recent years. Markets such as India, Central and Eastern Europe (CEE), China, Korea and Brazil have opened up and seem likely to attract further attention in 2008. Ranbaxy, India’s largest drugs maker, has followed its 2006 acquisition of Terapia by continuing to publicise its intention to use its warchest to make further substantial acquisitions. Ranbaxy looks set to become a much bigger player in the sector as it seeks to expand both domestically and overseas in 2008.

“The CEE region has been particularly ripe for M&A and deals are creating firms with growing power. Hungary's Gedeon Richter’s 231 billion forint ($1.3 billion) merger with Polish firm Polpharma, for example, will create the largest pharma player in CEE, with pro forma market capitalisation of around $5.4 billion.

“Despite the sector’s need for long-term investment traditionally having been at odds with the shorter term horizons of private equity, 2007 began to see more of this type of investment. However, the trend was muted as further investment became dampened by the credit crunch. TPG Capital’s acquisition of Axcan Pharma, for $1.3 billion, was something of an anomaly amid tightening credit conditions. It remains to be seen whether large cap deals will pick up significantly in 2008.

The year ahead
“Any gap left by a temporarily less active private equity market may well be filled by sovereign investment funds, which have the potential to become players in the sector for 2008. In emerging markets, hot spots such as India and CEE countries may steal the limelight, with significant potential for further consolidation and growth in this sector.”