Last year, the value of mergers and acquisitions (M&A) in the pharmaceutical industry surged to $224 billion, the highest level recorded since 2007, according to new research.

Global deal values last year were up 18% over 2010, although still substantially behind the mega-merger boom of 2006, when deal values reached $303 billion globally, says the report, from international law firm Freshfields Bruckhaus Deringer.

Global drugmakers continue to penetrate the emerging markets, with the value of pharmaceutical deals involving Brazilian, Indian, Chinese and Russian (BRIC) companies outpacing the growth of global M&A activity in these regions over the last five years, it says.

The value of M&A deals involving pharma companies in the BRIC economies reached $6.4 billion last year, which is up 198% on 2006 levels compared to an increase of 127% across all sectors, the research shows. Pharma M&A involving the BRIC economies accounted for 3% of the total global value of M&A in the sector in 2011, up from 0.8% in 2006 and 0.2% in 2000, it adds.

35% of patents on the global pharmaceutical industry's best-selling prescription drugs are set to expire in the US over the next two years, and half are already off patent, Freshfields notes.

"Pharma companies continue to face several key restrictions to growth in their core markets, including patent cliffs, growing pressure on healthcare budgets, low innovation productivity and increased regulatory reform," says Julian Long, head of the firm's health sector group.

"Alongside therapy adherence and other initiatives, M&A is a necessary strategic tool for pharma companies seeking to balance the impact of key growth restrictors on revenues and margins," he adds.

The US remains the most active country in terms of deal volumes and values in the pharma sector, leading the field with 809 deals worth $162.6 billion in 2011. However, in the emerging markets - which saw 200 deals worth $4.3 billion recorded last year - China is leading the pack, jumping from the 13th biggest market for healthcare deals to fourth, in terms of value, in five years. Last year, China accounted for 2% of the pharma industry's total M&A, compared to 0.3% five years ago.

The "pharmerging" markets are obvious investment choices for Big Pharma, comments Mr Long. "Large and expanding populations, rising wealth, greater government investment in healthcare and increasing incidence of chronic diseases are all boosting demand for medicines. M&A activity in these regions therefore continues to gain momentum, and relevance, as companies seek to access new markets, distribution networks and local market expertise. Over-the-counter pharmaceuticals and domestic generics and manufacturing companies will increasingly be focal targets for diversified players," he adds.

The report also finds that the volume of licensing agreements aimed at drug discovery increased in line with M&A activity last year, rising 14% over 2010 and 178% compared to 2000.

"Acquisition strategies will increasingly be complemented by in-licensing activities and collaborations, as pharma companies address the innovation challenge," says Mr Long.

"Developing and bringing the next blockbuster drug to market is hugely expensive and carries a great deal of risk. Licensing agreements, as opposed to pure M&A, hedge the risk of drug discovery without the significant up-front cash investment needed to develop a product from scratch. Over the medium term, the sector will likely see more licensing collaboration and greater focus on development-risk- sharing as Big Pharma seeks to boost productivity and investors call for better returns on R&D efforts," he forecasts.