While partnering strategies can provide access to essential products and technology, mergers and acquisitions can achieve the same goals and also provide greater leverage and control of the acquired assets. With a wide variety of biotech companies that have promising candidate products in late-stage clinical trials, and pharma companies still needing to tweak their product portfolios, the expectation is that the next big pharma acquisition of a biotech company is only just around the corner.

According to a recently released U.S. Pharmaceutical and Life Sciences Deals Insights Quarterly from global consulting firm PwC, the dealmaking trends experienced in the past few quarters are likely to continue. The report indicates that the number of transactions for the rest of the year is not likely to slow down as pharmaceutical and biotechnology companies look to strengthen their product pipelines, including expanding their geographic reach – in select asset classes such as neurodegenerative diseases including Parkinson's and Alzheimer's disease – through strategic acquisitions.

"No matter what the economic climate, companies are always looking to replenish their cash flow generating assets," Dimitri Drone, leader of PwC's Pharmaceutical & Life Sciences Deals practice told BioWorld Insight. "This means that it is business as usual in terms of deal flow for the sector."

Deal Flow

PwC notes the value of pharmaceutical and life sciences (including medical devices and diagnostics) deals closed during the first quarter of 2013 increased 336 percent relative to the previous quarter and 255 percent relative to the first quarter of 2012. These increases in deal value are attributed largely to the completed initial public offerings (IPO) of AbbVie Inc. by Abbott Laboratories and Zoetis Inc. by Pfizer Inc.

In fact, after Pfizer sold off 20 percent of its animal health unit in the IPO, it recently announced that it intends to split off its remaining interest in Zoetis Inc., of Madison, N.J., in an exchange offer, in which its shareholders can exchange all, some or none of their shares of Pfizer common stock for shares of Zoetis common stock owned by Pfizer. The completion of the full separation of Zoetis is expected to be accretive to Pfizer's earnings per share beginning in 2014. (See BioWorld Today, May 23, 2013.)

Excluding deal values in excess of $1 billion, PwC recorded 12 transactions that occurred in the pharmaceutical sector during the first quarter of 2013, up from five during the first quarter of 2012. The value of first-quarter transactions rose 137 percent to $2.9 billion, compared with $1.2 billion for the same quarter of 2012.

For biotech companies PwC found that deal volume remained relatively consistent compared with the first and fourth quarters of 2012. However, the deal value remained modest as compared with historical periods, signaling a reduction in average deal value. Deal volumes in this sector are predicted to remain consistent or increase for the rest of the year.

From BioWorld Snapshots data, in the first quarter biotech and pharma companies collectively concluded 18 M&As.

Emerging Markets Attractive

In addition to the projected increase in M&A activity domestically, pharmaceutical and biotechnology companies are also looking to penetrate emerging markets by acquiring foreign firms.

Elan Corp. plc, for example, is executing such an M&A strategy signing an acquisition agreement with AOP Pharmaceuticals AG worth €263.5 million (US$339.3 million) in cash (€175.7 million) and shares (€87.8 million) initially – plus another potential €270 million in milestones – and a deal to acquire a 48 percent stake in Newbridge Pharmaceuticals FZ-LLC for $40 million, along with an option to acquire the company outright for another $244 million. The new deals, if they are voted through by shareholders, would give Elan commercial footholds in Central and Eastern Europe and in the Middle East, respectively. (See BioWorld Today, May 21, 2013.)

These emerging markets are becoming very attractive because of rapidly growing and aging populations in these countries, an increasing prevalence of chronic diseases and a burgeoning middle class requiring quality and accessible health care.

As demand for medicines rises in the emerging markets the management of pharma and biotech companies are recognizing that sustained growth will require tapping into this opportunity.

The initial focus has been on the BRIC countries – Brazil, Russia, India and China. However, penetrating these markets needs to be approached carefully.

"Although emerging markets are often touted as the way forward for healthcare companies, recent protectionism laws and fierce competition from generics may have reduced the appeal of countries such as India and China, leading some to believe they aren't the 'promised land' they once were," according to Frost & Sullivan Partner Reenita Das in a recent analyst briefing.

To complicate matters, a Frost & Sullivan perspective points to a changing attitude from regional BRIC governments.

The China Food and Drug Administration's (CFDA; previously known as the SFDA prior to a restructuring in March 2013) fast-track process, implemented in 2007, for example, was designed to help jump-start the country's burgeoning homegrown biopharma sector; qualifying for fast-track approval requires local manufacture of the drug in question. (See BioWorld Today, May 21, 2013.)

Russia is proposing to limit the state purchasing of foreign medicines, and Brazil has introduced higher import tariffs to encourage local industry.

This is probably why companies may be turning their attention to other regions in addition to the BRIC countries. PwC, in its Deals Insights Quarterly, spotlights Southeast Asia as "a rising star of the global market." The region, PwC outlines, is led by its fastest-growing countries: Indonesia, Malaysia, the Philippines, Thailand, and Vietnam — the "fastest five" – driven by an expanding middle class and ample supply of low-cost and highly skilled workers.

"Entering foreign markets is certainly contemplated by many companies because they are looking for growth," noted Drone. "However, they need to be mindful of the complexities and challenges that such a strategy entails."

For example, in its report PwC said that, "in addition to a heightened risk of infringement of intellectual property rights through theft, piracy, and counterfeiting, multinationals may face challenges and risks stemming from an overall lack of transparency in business and government."

Shifts in the landscape will require companies to carefully balance their commercial strategies with in-depth knowledge about the local markets they are entering.