Healthcare mergers mark end of the blockbuster era

Last week saw several mergers and acquisitions (M&A) in the healthcare sector.

Last week saw several mergers and acquisitions (M&A) in the healthcare sector.

Roche, a Swiss-based drugmaker, agreed to buy all remaining shares in Genentech for $46.8 billion (£34 billion) in a takeover described as the largest in Swiss corporate history.

Earlier in the week, Merck announced it was buying its rival, Schering-Plough, in a $41.1 billion deal, creating one of the world’s biggest pharmaceutical companies. The news comes three months after Pfizer’s $68 billion takeover of Wyeth.

Evan McCulloch, the manager of the Franklin Biotechnology fund, says the many M&As in the sector highlight the problems faced by large pharmaceutical companies, such as weak pipelines, patent expirations and difficulties in generating sustainable earnings growth.

McCulloch says these companies may speed up consolidation to strengthen their new product lines.

John Bowler, the manager of the Schroder Retail Medical Discovery fund, says: “I don’t think it will change things dramatically. Pressure on companies to increase their productivity and cut their costs will remain.” At the end of January, his fund was 95.98% exposed to the healthcare sector.

Andy Smith, the manager of the Axa Framlington Biotech fund, says M&A in the sector has always been high.

“In the 1970s and 1980s, the classic blockbuster drugs were invented, drugs that sell over $1 billion a year,” says Smith.

But most of these blockbuster drugs have now been developed, he says. “The main reason for a merger is cost-cutting, because it is becoming more and more expensive to develop new drugs.”

Smith says the latest developments are beneficial. “It creates competition.” But the real effects on the sector are hard to predict.

“It is difficult because some ­people start to speculate which will be the next company to merge or acquire another company. It is very dangerous and impossible to predict. Fund managers should rather invest in those companies that are the best.”

For Americans, the year began with high expectations for the Obama stimulus as they anticipated improvements to the healthcare system.

Tana Focke, the manager of the Smith & Williamson North American trust, says: “Over the last month the only two sectors that showed growth were healthcare and utilities.”

However, she says the hopes of early 2009 were “dashed by confusion about what the stimulus package would contain”.