Patent Cliff Creates Huge M&A Demand in Little Pharma

by Mike Kapsch

Patent Cliff Creates Huge M&A Demand in Little Pharma

by Mike Kapsch, Investment U Research

Friday, January 20, 2012

Believe it or not, over the past 14 years, Lipitor has earned Pfizer (NYSE: PFE) close to an astounding $154 billion. It has been deemed "the best selling drug in history."

Zyprexa, a drug used to treat schizophrenia, has helped Eli Lilly (NYSE: LLY) rake in nearly $65 billion.

Levaquin, an antibiotic from Johnson and Johnson (NYSE: JNJ), has brought in just around $22 billion.

But last year all three of these blockbuster drugs lost their patent protection, allowing other drug companies the chance to sell generic versions. And now, over the next year, big pharma firms stands to lose over $19 billion as more patents expire. By 2015, it's estimated an additional $200 billion in sales is at risk of being lost.

While this "patent Armageddon" is scary news for most major drug companies, it's also creating a number of opportunities for investors to cash in...

Little Pharma Firms Are Ripe for the Taking

Big drug companies are urgently looking to buy up smaller firms to fill in their revenue gaps. In fact, for the past two years, mergers and acquisitions (M&A) activity in the biotech, pharma and generics industries have hit record numbers. And this has pushed premiums for smaller drug companies way up.

According to Reuters, the average takeover premium for biotechnology firms alone are nearly double the average premium across all other industries.

One investment banker even said, "...there is a panicky quality to deals as companies appear to be playing musical chairs and they are grabbing at things to avoid being left alone when the music stops."

Last year, Israeli generics firm Teva Pharmaceuticals (NYSE: TEVA) alone completed five takeovers totaling $13.5 billion. Gilead Sciences (NYSE: GILD) paid $11 billion, an 89% premium, to acquire Pharmasset (NYSE: VRUS) in November. And Bristol-Myers Squibb (NYSE:BMY) picked up Inhibitex for $2.5 billion... a 163% premium.

There's no doubt these inflated prices will continue to be up for grabs over the next few years. And investors will want to take notice.

So where are some places to sniff out the best M&A deals?

The Lowdown on Little Pharma Takeovers

At the J.P. Morgan Healthcare Conference, which Senior Analyst Marc Lichtenfeld attended, Pfizer's CEO Ian Read said the company is scoping out a number of small deals in China, India and Turkey.

Reuters says bankers and executives also agree that emerging markets are an ideal place to scour for potential takeovers.

And according to, investors will most likely want to look for deals around the $2-$3 billion range. Companies like Roche (PINK: RHHBY), Novartis (NYSE: NVS) and Sanofi (NYSE: SNY) have all expressed interest in looking for deals in this range.

Good Investing,

Mike Kapsch

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