Shire CEO Flemming Ornskov.

Shire CEO Flemming Ornskov said there were a few reasons there aren’t many deals right now — but that that won’t always be the case.

For big drugmakers that want to grow their businesses, acquiring smaller companies with one or two products is often a way to ensure that happens.

But there has been a slowdown in mergers and acquisitions recently — pharmaceutical acquisitions in the first quarter of 2017 were down 35% from the same period two years ago. Total US M&A volume was flat in the first half of 2017 against the first half of 2016, despite record highs in the stock market and a perceived bump in CEO confidence.

Flemming Ornskov, the CEO of the $50 billion drugmaker Shire, which had one of the biggest pharma mergers in recent history when it acquired Baxalta for $32 billion at the start of 2016, says he knows there has been less M&A activity than usual.

“I have a few people I’ve worked with in the past that are investment bankers, and they moan about the tough times they’re going through,” Ornskov told Business Insider.

Shire, headquartered in Dublin, is known for making ADHD medications like Adderall and Vyvanse and focusing on rare diseases like the blood disorder hemophilia. Ornskov said there were a few reasons things might be quiet now — but that that won’t always be the case, given the nature of the industry.

“If you look at pharma in a 30-year history, it is a consolidating industry,” he said. That’s because companies need new products to drive growth, and most of those new products come from smaller, newer biotechnology companies.

But that consolidation is cyclical, and we’re at a point in the cycle where there’s too much we don’t know.

“I think we’re in a little bit of a cycle where there’s a lot of unknowns … that you would like to know if you do M&A, particularly big M&A,” Ornskov said.

Here’s what’s currently unclear:

  • If you’re looking to merge with a US-based company, you’d most likely want to know the corporate tax rate. That’s something that could change if President Donald Trump’s tax plan is passed. The current tax rate for corporations is 35%, but under Trump’s plan, it would be 15%.
  • If a company’s looking to take on debt, it’s key to know more about the deductibility of interest — something that’s up in the air because it’s related to tax reform.
  • Whether companies would be able to repatriate cash they might have outside of the US is also a big concern.

Plus, many of the deals that are happening are costing a premium — causing companies that might be interested in M&A to consider waiting out the high valuations.

Growth without M&A

At the same time, other factors make non-M&A business plans thrive. There are plenty of options for companies (especially smaller ones) to raise money without selling themselves, such as initial public offerings, Ornskov said.

Investors are also seeing value in splitting large companies up. One of the most recent examples of this was the biotech giant Biogen spinning off its hemophilia drug business at the beginning of 2017 to make Bioverativ.

Even so, the pharma industry could return to a period of prolific deals — 2017 just might not be the right time.


Source: Pulse nigeria

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