Pharmaceutical M&A

Industry overview

Industry Brief History

The pharmaceutical industry is responsible for the development, production and marketing of medications. Thus, its immense importance as a global sector is inarguable. In 2014, total pharmaceutical revenues worldwide had exceeded one trillion U.S. dollars for the first time. North America is responsible for the largest portion of these revenues, due to the leading role of the U.S. pharmaceutical industry. However, as in many other industries, the Chinese pharmaceutical sector has shown the highest growth rates over previous years.

Pharmaceutical Industry subsectors

  • Prescription branded drugs
  • Generics
  • OTC

Largest global pharmaceutical markets

The world pharmaceutical market was worth an estimated € 763,101 million ($ 844,676 million) at ex-factory prices in 2016 and currently valued at $1.1billion. The North American market (USA & Canada) remained the world’s largest market with a 49.0% share, well ahead of Europe and Japan. Distribution margins, which are generally fixed by governments, and VAT rates, differ significantly from country to country in Europe. On average, approximately one third of the retail price of a medicine reverts to distributors (pharmacists and wholesalers) and the State.

Global Pharmaceutical Sales

The global prescription drug market grew a little (+0.8%) in 2017compared to 2016 due to the depreciation of the USD against most of other currencies, especially Asian ones, as the US is the largest outlet for foreign medicines with a world market share of 33%. All drug makers have to cope with governments’ tightening cost controls over drug price fixing as it is one way to keep new medicines v affordable for patients in spite of their growing criticism about too expensive health prices have become recently.

Pharmaceutical sales Market Growth Drivers

The key growth drivers are as follows:

  • Recurring high level of M&A activity aimed at bolstering big pharmaceutical’s pipelines as a more efficient alternative to internal R&D investments
  • Competition from generic and biosimilar drugs eating away at patented drugs market shares
  • Continuous rise in the number of new drug launches in 2018
  • Negative regulatory fallout from drug price gouging in the US

Mergers and acquisitions

M&A can include a number of different transactions, detailed below.

  • Merger
  • Acquisition
  • Consolidation
  • Tender Offer
  • Acquisition of Assets
  • Management Acquisition

Difference between a Merger and an Acquisition

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. A merger occurs when two separate entities (usually of comparable size) combine forces to create a new, joint organization in which theoretically both are equal partners.

Varieties of Mergers

From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

  • Horizontal merger:
  • Vertical merger
  • Congeneric mergers
  • Market-extension merger
  • Product-extension merger
  • Conglomeration
  • Purchase Mergers
  • Consolidation Mergers

Details of Acquisitions

In an acquisition, as in some mergers, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y’s assets for cash, which means that Company Y will have only cash (and debt, if any). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.

Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to acquire financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares.

Mergers and Acquisition Valuation

There exist many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Below is a few:

Comparative Ratios

  • Price-Earnings Ratio (P/E Ratio)
  • Enterprise-Value-to-Sales Ratio (EV/Sales)

Replacement Cost

Discounted Cash Flow (DCF)


Mergers and Acquisition Reasons

By merging, companies hope to benefit from the following:

  • Becoming bigger
  • Preempted competition
  • Domination
  • Tax benefits
  • Staff reductions
  • Economies of scale
  • Acquiring new technology
  • Improved market reach and industry visibility

A merger can also improve a company’s standing in the investment community: bigger firms often have an easier time raising capital than smaller ones. Synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers – who have much to gain from a successful M&A deal will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price.

Mergers and Acquisitions-Prone Industries

  • Health care
  • Technology industry
  • Financial services
  • Retail sector
  • Utilities sector

Merger and Acquisition Firms

  • Investment Banks
  • Law Firms
  • Audit & Accounting Firms
  • Consulting & Advisory Firms

Mergers and Acquisition Failures

It’s no secret that plenty of mergers don’t work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.  Different systems and processes, dilution of a company’s brand, overestimation of synergies and lack of understanding of the target firm’s business can all occur, destroying shareholder value and decreasing the company’s stock price after the transaction.


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