Two Pharmas Are Better Than One… Here Are the Ones to Buy in This Merger-Mad Industry
Tony Daltorio, Investment U Research
Pharmaceutical companies have launched themselves into the fall season with a vengeance, gobbling up acquisitions like dots on a Pac-Man board.
The most notable recent buyout was a deal that sees Abbott Laboratories (NYSE: ABT) expand both its product range and its presence in notable emerging nations with its purchase of Belgian-based Solvay Group’s pharmaceutical arm for a $6.5 billion fee.
That price tag is just one indication of the money washing around this industry these days, which makes the current consolidation trend chock full of profitable opportunities.
As Investment U’s own “takeover tracker” Louis Basenese does all the time, he positions investors for some pretty lucrative short-term profits by buying takeover targets, then riding those deals all the way into long-term profits by purchasing the larger firms hungry for acquisitions.
Let’s see how it’s going down in Big Pharma at the moment…
A Cure-All For Sector Woes
Pharmaceutical companies have every reason to be on the lookout for potential acquisitions these days. Not only are drug sales slowing down around the world (and especially in the U.S.) but several Big Pharma firms need to replenish their dwindling drug pipelines.
According to Fred Hassan, head of Schering-Plough before Merck & Co. (NYSE: MRK) took it over earlier this year, the financial sector mess has caused much of the increased consolidation. He argues that banking woes accelerated existing costs and pricing pressures.
For example, in 2006, more than half the growth in the pharmaceutical market came from the U.S. Yet analysts expect global sales to rise no more than 3.5% this year and they foresee a 1-2% decline in the U.S., which still accounts for two-fifths of all industry revenue.
That means pharmaceutical companies have more reason than ever to branch into emerging markets like China, Brazil, South Africa, India and Russia.
However, while this opens the doors for long-term profits, it also creates numerous short-term complications…
Where is the Big Pharma Money Going?
One such problem is the pricing of products for patients with significantly smaller incomes and little in the way of healthcare coverage.
And even if pharmaceutical companies ignore emerging markets, they still have to deal with greater pricing scrutiny and expiring drug patents.
That’s why even the biggest, internationally known pharmaceutical companies are snapping up rivals.
- For example, GlaxoSmithKline (NYSE: GSK) and Pfizer (NYSE: PFE), the latter of which just acquired Wyeth to bolster its presence in vaccines and over-the-counter drugs.
- Johnson & Johnson (NYSE: JNJ) recently paid $442 million for 18% of Crucell (Nasdaq: CRXL), giving it developmental rights on a flu vaccine designed to protect against all future strains of the virus.
- Sanofi-Aventis (NYSE: SNY) expanded into generics and animal health with its buyout of Merck’s share of Merial, while Merck itself is strengthening its animal health position by taking over Schering-Plough.
- Novartis (NYSE: NVS) dove into the eye care field by purchasing Alcon. This boosts its foray into the vaccination field having also bought Chiron.
And this is just the beginning…
The Next Pharma Deals Are Looming on the Horizon
While some companies, such as Eli Lilly & Co. (NYSE: LLY), AstraZeneca (NYSE: AZN) and Roche Holding (OTC: RHHBY), have stuck it out as “pure” pharmaceutical purveyors, they risk falling behind their more open-minded competitors, who are busy diversifying into other healthcare fields.
And the global pharmaceutical sector has little choice but to continue expanding through mergers and acquisitions for some time to come. The sector is ripe for the picking, too, with the financial crisis having created an impressive buyer’s market for larger companies, as smaller firms struggle to extend financing.
And since they’re bound to struggle through the end of 2009 and beyond, we could see more deals made by the likes of Amgen (Nasdaq: AMGN), Biogen Idec (Nasdaq: BIIB), Bristol-Myers Squibb (NYSE: BMY), and Elan (NYSE: ELN).
UBS pharmaceutical analyst Gbola Amusa, sums it up: “The big theme this year is the true globalization of pharmaceuticals. Most of the growth in the next few years will be outside the US, Europe and Japan. It’s a very dynamic time for the industry and anything can happen.”
A dynamic time for them… and a potentially lucrative time for investors.
Good investing,
Tony Daltorio
P.S. As I mentioned above, you can get the inside track on the next wave of takeovers corporate takeovers by following industry expert Louis Basenese. His Takeover Trader service does exactly what it says – separates fact from fiction in the rumor-filled M&A world and alerts investors to the most profitable takeover deals. For example, it’s recently churned out gains of 51% on the first half of an E*Trade Financial (Nasdaq: ETFC) position… profits of 175% and 116% on the first and second half of Saks (NYSE: SKS) call options respectively… and a current 55% winner on Trident Microsystems Inc. (Nasdaq: TRID). For more information, check out this report.
And if you want to drill down and focus on the healthcare sector in even more detail, check out Marc Lichtenfeld’s Access service, which is dedicated exclusively to finding the most profit-packed small-cap healthcare and biotech companies. For more details, take a look here.
- Emerging Market for Pharma
- Healthcare M&A Activity: Three Healthcare Small Caps Primed For Takeovers
- Look Who Just Showed Up to the Takeover Party
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