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By Caroline Humer
April 22 (Reuters) - A series of agreed or proposed drugcompany deals may herald a new era of acquisitions not seensince last decade as pharmaceutical companies improve their bestbusinesses and exit weaker ones.
Novartis and GlaxoSmithKline agreed totrade more than $20 billion worth of assets, boosting Novartis'cancer-drug business and Glaxo's vaccines business. ValeantPharmaceuticals made a $47 billion unsolicited offerfor Allergan Inc, the maker of Botox, to boost its skincare business. Reports that Pfizer Inc was rebuffedearlier this year in discussions to buy AstraZeneca Inc for more than $100 billion only fed anticipationthat more mergers are ahead.
Linking this activity together is a combination of economicconditions and industry- specific developments including lowinterest rates, a desire by U.S. firms to make overseasacquisitions to shield foreign profits from U.S. taxes, and therealization that deals can be made to focus on a drugmaker'sspecific strengths, investors, analysts and investment bankerssaid on Tuesday.
"The rumor about Pfizer's possible deal with Astrademonstrates the industry is moving perhaps into another periodof consolidation," said Richard Purkiss, an analyst withAtlantic Equities in London. "Large cap pharmaceutical comparedto more mature global industries is still fragmented and so cancontinue to concentrate."
ANIMAL HEALTH
Tuesday's deals also included a transaction in whichNovartis is selling its animal health arm to Indianapolis-basedEli Lilly for about $5.4 billion in cash. That wouldmake Lilly's Elanco unit the world's second-largest animalhealth business when that deal closes early next year.
Large drug companies are focusing on a small number ofleading businesses, while smaller specialty and genericproducers seek greater scale. Deal values have almost doubledsince the start of 2014 to $77.9 billion from a year earlier,according to Thomson Reuters data.
Healthcare companies are looking carefully at theircompetitive businesses and deciding which businesses they wantto lead in, investors said. Merck Inc, for instance, isworking on the sale of its consumer business and even after allof its Tuesday deals, Novartis still plans to sell its fluvaccine business.
In the Novartis transaction, each company got exactly thebusiness it wanted, without having to do the type ofmega-mergers that consumed big pharma in the 1990s and early2000s, said Sam Isaly, a managing partner of OrbiMed Advisors,which has $10 billion in healthcare assets under management.
Those deals did not work out well for the acquiringcompanies as they became mired in cumbersome integrations thatcut into drugs research, and in the last decade, the largestdeal has been Pfizer's 2009 purchase of Wyeth.
"It's very interesting that Glaxo and Novartis didn'tcombine and then spin stuff off. They just shuffled their decks,like shuffling a deck of cards," Isaly said.
Isaly expects more of these targeted deals, as well as morelink-ups and purchases among smaller companies. Other analystsand investors said that companies could still do this type ofdeal, and then trim back their assets to areas they want tostrategically target.
CASH OVERSEAS
Other reasons for deal-making include a desire by companiesto change their headquarters to countries with lower tax ratesas they consider how to spend cash they have built up overseas.Pfizer, for instance, has tens of billions of dollars overseas,analysts said. Pfizer declined to comment.
There is also the stock prices of big pharma compared withbiotechnology companies to consider. The Nasdaq BiotechnologyIndex of more than 100 companies -- many with marketvalues of less than $500 million -- has risen almost 126 percentsince the beginning of 2012, even with this year's declines. Bycontrast, the Standard & Poor's 500 index of pharmaceuticalstocks, which contains just 12 members, is up 55percent in that time.
"At this point in market history, with small caps asovervalued relative to large caps as they've been anytime in thelast 30 or 35 years, it would be a natural that M&A activitywould move to large because of small being so picked over," saidBill Smead, Chief Investment Officer of Smead CapitalManagement, which holds Pfizer and Merck shares among otherpharmaceutical companies.
A flow of patent expirations that has plagued many largepharmaceutical companies over the past few years as genericproducts cut into revenue has begun to subside as new drugsstart to come further into development and investors are takingnotice, Smead said.
ANOTHER STRATEGY
Valeant's $47 billion bid for Allergan, in which it's beingaided by Pershing Square Capital investor Bill Ackman,represents another strategy. Ackman had already acquired almost10 percent of Allergan, and the Allergan board will consider theoffer.
Valeant has been on a buying spree since 2010 and last yearacquired contact lens maker Bausch & Lomb Holdings. ChiefExecutive Michael Pearson said in January the drugmaker wants tobecome one of the world's top five pharmaceutical companies bymarket capitalization by the end of 2016, largely throughacquisitions.
That unsolicited deal comes after generic company Mylan Inc tried to buy Sweden's Meda for about $24billion, which Meda rebuffed.
The transactions, and their hint of more deals ahead for thedrug sector, lifted the ARCA Pharmaceuticals Index 1.8percent.
Lilly's Elanco animal health unit will acquire about 600animal health brands from Novartis, including vaccines andanti-parasite medicines that will allow it to enter theaquaculture, or fish farming, market.
This would be the eighth and largest acquisition since 2007for Elanco, which by global sales would trail only Zoetis Inc, which also specializes in products for farm animals andpets.
Last year Elanco had sales of $2.15 billion, compared with$1.1 billion for Novartis Animal Health.
"Novartis has agreed (to) an elegant set of transactionsthat either removes or strengthens its underperforming assets,while boosting its oncology portfolio," Jefferies analysts said.
(Reporting by Caroline Humer, Ransdell Pierson, Olivia Oran,Rod Nickel, Caroline Copley and Paul Sandle and in London,Anjuli Davies and Pamela Barbaglia, editing by John Pickering)
