Big Pharma's future
The business outlook for pharma companies is mixed, as pharma companies struggle to realign themselves to a new business model
that will work. The solution will be different for each company.
Although the pharmaceutical industry has been less affected by global economic conditions compared to most industries, going
forward the impact will be more prominent as governments attempt to control healthcare costs as part of their deficit reduction
efforts. The revenue challenges will be tied directly to the difficulties in getting drugs approved, reimbursement challenges,
patent expirations, weak product pipelines, and failing business models.
The stock market has partially forgiven the ethical pharma industry due to an overall bullish attitude toward the equity market.
But real turnaround in valuations will require structural changes that investors believe will be effective. Generic pharma
companies, however, are being treated well by investors, but with caution as the revenue cliffs that once were just the terrain
of the ethical pharmaceutical companies are now migrating to the generic sector as well.
Pharma M&A will continue to be active, but modest in terms of the size of deals. There is a desire to make deals strategically
focused. Although there have been a few announced large deals recently, such as Perrigo/Elan, Amgen/Onyx and Actavis/Warner
Chilcott, these are not mega transactions.. We do not see many mega deals happening in the next couple of years. We do expect
companies to continue to divest non-core assets and review established product lines.
The major debt refinancings were completed quite a while ago and new debt issuance will depend on the number and size of M&A
transactions that will have to be financed. Non-investment grade debt will be issued more sporadically.
Equity issuance will continue to be modest primarily because pharma companies generally do not need equity. So even though
the IPO and general equity issuance markets have revived, pharma issuance of public equity will remain limited.
Biotechs bask in success
Biotech companies are continuing to demonstrate their ability as a group to be effective at developing new drugs and diagnostics
methods, but the challenges that face drug development generally will confront biotech companies as well.
Historically, the biotech industry's relationship with the debt and equity markets has been volatile. The good news is that
the current love affair that the equity markets have with biotech companies shows no sign of slowing down on both the stock
market and the equity issuance fronts.
The primary biotech M&A theme will continue to be pharma and big biotech acquisitions of biotech companies for pipeline enhancement.
Historic M&A volume has been modest as, pharma and big biotech continued to use non-M&A methods to achieve their pipeline
goals, much to the detriment of biotech companies seeking an exit. M&A volume will likely continue to be modest, particularly
with the existence of numerous external uncertainties that will tend to dampen biotech M&A for a period of time. The heavy
activity will be in the form of partnering, licensing and shedding of more non-core assets.
Peter Young is President and Managing Director of Young and Partners, an international investment bank serving the pharma, biotechnology,
and chemical industries. He can be reached at email@example.com