In its December 2014 cover story, Financier Worldwide provides an overview of the factors in 2014 that provided, and will continue to provide, favorable conditions for the high value and volume of pharmaceutical mergers and acquisitions. In the first half of 2014 alone, there was a total value of $317.4 billion USD in M&A deals. Financier Worldwide identifies three reasons why the markets have been ripe for M&A: (1) pharmaceutical companies are making changes in the way they do business; (2) there is a rapidly-growing market and supporting industry in China; and (3) tax inversion regulations have been, at least historically, hospitable to M&A.
Business Changes
Pharmaceutical companies are adapting to healthier global markets by using their large cash reserves and credit supplies to make incremental changes in the way they do business. They have begun strengthening their commitments to long-term objectives, specializing their offerings, and divesting non-core business units. Financier Worldwide highlights the "particularly long product life-cycles" as being the cause of these changes and a decrease in internal research and development a result. In addition, private equity firms such as the Carlyle Group and Blackstone Group are becoming major players in the pharmaceutical industry, focusing on "low-growth, mature drug portfolios."
China
China's demand for pharmaceuticals is expanding rapidly, and with it, a national industry to support it. It is the third largest market for pharmaceutical products globally, due to the size of its population, aging demographics, and a growing middle class. Over and above that, a recent increase in what Financier Worldwide refers to as "Western" diseases is putting further demands on the pharmaceutical market. The government has recently committed to providing universal healthcare in the coming years, which will take China's share of global pharmaceutical spending from roughly 8% to 15%.
Tax Inversions
A tax inversion, simply, is the process of re-incorporating a company in a foreign jurisdiction whose tax laws are more favorable than those of the jurisdiction in which the company is ordinarily resident. In the first three-quarters of this year, there was over $315 billion USD in tax inversion deals in the pharmaceutical industry, which is more than four times the amount in the same period in 2013. But this may all soon change, as regulators in the United States and Ireland—jurisdictions that have traditionally hosted many of these deals—have issued new guidelines and regulations that will halt this type of transaction.
Financier Worldwide predicts that M&A in the pharmaceutical sector will continue strong for the foreseeable future, as companies use it strategically in pursing their objectives.
The author would like to thank Reuben Zaramian, articling clerk, for his assistance in preparing this legal update.
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