Special Lecture, Networking Dinner, 5 October 2005: Industry Consolidation and the Emerging Shape of R&D

The pace of industry consolidation shows no signs of slowing down, and more mergers seem inevitable. Who will be the biggest players in another 10 years? Which companies look set to be swallowed up? A leading pharmaceutical analyst and former investment banker made his predictions at the Networking Dinner of the ACT European Summit.

The top six pharmaceutical companies in 2014 will be Roche Novartis, Pfizer, Sanofi-Aventis, Merck, Glaxo-Zeneca, and GE Healthcare, according to Dr. Jonathan de Pass, CEO of Evaluate plc.

Since 1985, 27 major corporate mergers have reshaped the industry, and the merger of Daiichi and Sankyo and formation of Astellas (from Yamanouchi and Fujisawa) will not signal the end of deals, he explained during Wednesday evening's congress dinner. The top 10 companies have nearly doubled their market share over the past 15 years, and now account for around 47% of the sector. In a mature industry driven by the need to make efficiency gains, this trend will probably continue, although at a less frenetic rate.

"It's easier to sell a deal to shareholders if your target is high growth, but more companies are now in the low growth zone and there are less attractive merger partners around," de Pass noted. "European Union companies have stronger growth drivers than U.S. companies, however."

Deals are also subject to ever greater scrutiny by analysts and regulators. Moreover, market expectations for pharmaceuticals have decreased, bid premiums are modest, and the emphasis is on boardroom accountability and accounting changes (accounting for tangibles), he said. The continuing influence and control of families and foundations (e.g., Roche, UCB, Solvay, Altana, Novo, Boehringer Ingleheim) also reduces the likelihood of numerous further mergers.

The 'serial acquirers' tend to fall into two broad categories: those who prefer big deals and those who prefer small deals. At one end of the spectrum is Pfizer, which favors large, transforming deals. At the other end is Johnson & Johnson, which prefers cherry-picked, bolt-on acquisitions. Through a series of smaller deals, JNJ has sustained a more consistent pattern of efficient use of capital, according to de Pass.