M&A set to rise in pharma sector, analysts say

With large pharmaceutical companies sitting on extra cash and billions of dollars in drug patents set to expire in the next three years, a flurry of mergers and acquisitions in the biotechnology sector is likely this year, analysts from Morningstar Inc. said today. In a report released by the Chicago-based research company, analysts identified 15 firms that are likely targets for acquisition, including Biogen Idec Inc. of Cambridge, Mass.; Elan Corp. PLC of Dublin, Ireland; NeurogesX Inc. of San Mateo, Calif.; Rigel Pharmaceuticals Inc. of San Francisco; and Vertex Pharmaceuticals Inc., also of Cambridge. Eleven of the largest pharmaceutical companies represent nearly $1 trillion in market capitalization. These companies on average have about $11 billion in cash on their balance sheets, which could be used for acquisitions, Mr. Conover said. “Also, they have strong cash flows,” he said. Some of the firms most likely to make acquisitions include Amgen Inc. of Thousand Oaks, Calif.; Bristol-Myers Squibb of New York; Johnson & Johnson of New Brunswick, N.J.; and Novartis International AG of Basel, Switzerland. Several factors are spurring consolidation in the industry. For starters, many pharmaceutical companies are facing a “patent cliff” from 2011 through 2014, said Damien Conover, an equities strategist at Morningstar and co-editor of the report. “Many patented drugs will lose their exclusivity during this period,” he said. Meanwhile, large companies are seeking to add more innovative products, possibly through the acquisition of smaller rivals, Mr. Conover said. “The managed-care system also allows companies with innovative drugs to have more pricing power over the long term,” he said. Smaller biotech firms are feeling the credit crunch, the analysts said. “Because they need access to capital, that has increased the incentive for them to be taken out,” Mr. Conover said. The drugs with the highest demand — and most likely to receive Federal Drug Administration approval — are in the areas of oncology and immunology, the authors found.