You can guess some of the likely suspects, but in a lengthy investor report issued today, Deutsche Bank analyst Barbara Ryan posits that Merck and Pfizer will likely be acquirers, while Bristol-Myers Squibb and Wyeth are bait. The impetus: the approaching 'patent cliff' between 2010 and 2013, when many big drugmakers lost still more big sellers to cheap generics.
Despite numerous cost-cutting and restructuring efforts, Ryan writes that pharma "will have to move aggressively to convert its cash and strong balance sheets into revenues and earnings to fill the void in the cliff period via M&A and mergers of equals, which will likely also serve to reduce usustainable substantial inefficiencies in the pharma/biotech model."
In her view, consolidation and more acquisitions are inevitable for several reasons: R&D spending levels are not sustainable; overcapacity remains rampant...at every level; and the cost to develop 'me-too' drugs is going up, while returns are falling; and the risk/return equation has changed for the worse. So far, cutbacks have allowed ceo's to postpone the inevitable, and while "hope springs eternal on the R&D front...the cliff is rapidly approaching" she writes. "...it may soon be panic time."
The companies most likely to make acquisitions that could significantly enhance their long-term outlook, in her view, are Pfizer, Merck and Bristol-Myers Squibb, and those most likely to be acquired are Bristol-Myers Squibb, Wyeth, Amgen and Gilead Sciences. Pick whichever combination you like. As an aside, Deutsche Bank has relationships with each of the four big drugmakers mentioned in the report.