Opinion: Zachary Tsai

Amid the backdrop of a difficult global M&A environment, with European private equity activity in Q4 being the lowest it has ever been in 15 years and relatively flat volume growth of corporate M&A from 2010, Pharma has bucked the trend with the value of M&A transactions in 2011 valued at $224bn.

Relatively speaking, the most exciting growth has come out of emerging economies. Global drugs businesses have had a keen eye on the BRIC economies due to the restrictions on organic growth in mature markets such as patent cliffs, pressure on healthcare budgets, limited R&D conversion rates and pricing & regulatory reform. Whilst these pressures enhance inorganic growth potential in mature markets, the potential for success in further afield has been the star of the show in 2011.

Recently speaking to a contact who heads up a previously pan-European pharmaceuticals business, he recalled how he spent a great deal of 2011 acquiring and integrating pharmaceutical businesses in Brazil into their now global business. Brazil, as with other emerging markets, has a large growing population with a rising wealth profile and increasing numbers of chronic diseases. It is a market rife with opportunity as socio-economic conditions evolve and government spending on healthcare becomes increasingly fundamental. This will naturally enhance M&A activity as companies seek to exploit immature growth markets, access local expertise and distribution networks, and create diversified and global synergistic businesses.

The value of M&A deals was $6.4bn in the BRIC economies in 2011. This is nearly 200% up even from the heady days of 2006. Despite the US remaining the hub of activity for pharma M&A, countries such as China are making leaps and bounds - moving from 13th by value in global pharma deal sizes and contributing only 0.3% of the global pharma market five years ago to being 4th with 2% respectively in 2011.

Whilst the exodus of big pharma from the UK has continued since my last blog, with Novartis shutting its West Sussex factory, this is not all doom and gloom for the UK. One pocket of opportunity for the UK should continue to be outsourced clinical trials.

The CRO market projected to grow globally at 8.5% CAGR to $32.7bn by 2015, outstripping the growth of the pharmaceuticals industry which is predicted at around 5%. This is combined with the increasing trend in outsourcing with 49% of pharma companies increasing spending on outsourced services this year, and 54% projecting to spend more next year. In comparison to this only 23% and 21% respectively have spent less this year and are expecting to spend less next year.

In the budget the government committed to making the UK a more attractive location for the carrying out of clinical trials and radically reducing the time required to obtain approvals. With larger CROs focused on building presence in developing markets, this will leave a gap for opportunistic mid-market CROs with local expertise to grab UK market share. This should be especially prevalent in the therapeutic areas where the UK has already established itself as a centre of excellence such as CNS and oncology.

In a market expected to grow strongly up until 2021 and constituting nearly a third of all pharmaceutical R&D spend, investment prospects will continue to be strong. Institutional investors have shown their support over the last 18 months with, among others, Elephant Capital’s investment in ClinTec, Greenhill Capital’s investment in Chiltern International and Inflexion’s recent buy-out of Phlexglobal. CROs establishing themselves as leaders in the UK, especially within niche areas, should prove to be especially attractive acquisition opportunities once bigger trade fish set their sights back on the country.

Although pitfalls remain, the pharmaceutical market continues to drive new opportunities for everyone involved in the industry.

The decrease in R&D spend over the last decade and the decline in new drug launches and new molecular entity discoveries in recent years has forced pharmaceutical companies to refocus efforts on maximising efficiency. Many large companies are redeploying research resources to a smaller number of disease areas and entering into shared risk schemes whilst they focus on driving value out their existing portfolio of drugs. The UK has taken a significant brunt of these measures in the last year with AstraZenaca closing 2 sites, MSD closing its site in Scotland and headcount reductions by Eli Lilly, Pfizer, and GSK. Most recently, Pfizer have announced their intention to shut their R&D site in Kent.

However it is not all doom and gloom. Expiring patents over the next few years (including Pfizer’s Lipitor, the world’s biggest blockbuster drug) and declining numbers of new drugs means that the generics market will continue growing, with some analysts predicting a global market of $150bn by 2015. The UK will certainly be a contributor to this with an attitude shift in the NHS towards generic substitution in an already significant UK pharmaceutical market worth over £20bn. Furthermore, the switch from PPRS to outcome based measures from 2014 is certain to attract a host of new products and new entrants servicing drug companies and governments in result and efficacy monitoring and consulting. Efficiency and cost mitigation will be key in a market where price makers become price takers, and there will be a continuing increase in the quantity of outsourced services as drug companies seek to reduce their risk and take advantage of local expertise.

From a transactional angle in the mid-market there will likely be continued consolidation as some assets come out of their private equity owners; and the growth of new entrants taking advantage of new opportunities in this evolving industry will potentially boost transactional volumes in the coming years.

In summary, the UK pharmaceutical market is undergoing a period of difficult change and, in some areas, decline; but I see plenty of opportunity presenting itself and it is a space I will continue monitoring eagerly.