Acquisitions in the pharma sector in 2015 are even higher than the record-breaking 2014, with the year crowned by the announcement that Pfizer and Allergan will merge in a $160 billion deal, pushing total pharma M&A to well over $500 billion

The drivers underlying growth in the pharma sector are well known, including an ageing population and chronic disease in the West, and increasing demand in emerging economies as populations grow and healthcare spend rises. Deal activity is supported by the need to replenish drug pipelines, increase scale and streamline operations.

In previous M&A cycles, big pharma opted for ‘mega mergers’ – think Glaxo Wellcome/SmithKline Beecham, Merck/Schering-Plough, Sanofi/Aventis, etc – but the current cycle is characterised by a larger number of mid- and smaller-sized deals as big pharma buys up biotech companies that have produced promising medical advances. For example, US groups Abbvie and Pfizer – who failed in their respective bids to acquire Shire and AstraZeneca – rebounded in 2015 by acquiring Pharmacyclics for $21 billion and Hospira, a specialist in injectable drugs, for $15 billion respectively. The competitive battle for Pharmacyclics in particular was driven by Abbvie’s desire to acquire Imbruvica, a blood cancer drug, which many analysts believe has blockbuster potential. Also, Valeant acquired gastroenterology specialist Salix Pharmaceuticals for $13.1 billion.

However, there are signs that the deal binge may slow. Over the summer, the benchmark NASDAQ Biotechnology index fell around 25 percent, a decline driven in part by concerns raised by Hillary Clinton over high drug prices after the news that Turing Pharmaceuticals would raise the price of a decades-old drug from $13.50 to $750 per pill. With global healthcare budgets under strain, it is perhaps no surprise that companies are under pressure to justify high prices.

Looking ahead to 2016, what can we expect? Notwithstanding a trend away from ‘mega mergers’, the Pfizer-Allergan tie-up shows the option is still on the table. It has also re-ignited the debate over so-called tax inversions where US multinationals change their domicile by acquiring a foreign rival. Pfizer failed to acquire AstraZeneca in 2014 in part because of political pressures but also due to efforts by the Obama administration to make tax inversions harder to implement, and it looks as if the administration will tighten the rules further. If the merger completes it will be largest ever deal in the healthcare sector – and the second largest deal ever.

Big pharma will continue to plug gaps in its portfolios through acquisitions, expand into emerging markets and divest unwanted assets. Companies like Johnson and Johnson – which lost out to Abbvie on the acquisition of Pharmacyclics – are on the hunt and Amgen indicated in November that it wants to make an acquisition in the region of $10 billion. Mid-sized players will also continue to make acquisitions to avoid falling prey to larger competitors; for example, Shire followed its acquisition of NPS Pharma for $5.2 billion in January with the acquisition of rare disease drug maker Dyax for $6 billion in November, and is still looking to complete the hostile acquisition of Baxalta for around $30 billion.

In summary, 2016 will likely be another strong year for pharma deal activity, however, with caution creeping into the sector in the second half of 2015, it would perhaps be no surprise if deal levels slow from the record levels of 2014 and 2015.

The author:

James Baillieu is a senior associate at global law firm Norton Rose Fulbright LLP