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2015: The Year of the Pharma Mergers

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AstraZeneca announced Thursday that it will buy at 55% stake in biotech company Acerta Pharma. AstraZeneca will pay an initial $2.5 billion for the stake and a further $1.5 billion upon the regulatory approval of Acerta's cancer drug, acalabrutinib, or the end of 2018, whichever is first.

AstraZeneca has been scrambling to boost its drug portfolio as generic equivalents to some of its top-sellers, such as Crestor, will be hitting the market in the next several years. Acerta's acalabrutinib is a type of cancer drug known as a BTK inhibitor. Competitors AbbVie (ABBV - Free Report) and Johnson & Johnson (JNJ - Free Report) are already selling a BTK inhibitor.

Last month, AstraZeneca agreed to buy California-based biotech company ZS Pharma for $2.7 billion. Just yesterday, AstraZeneca said it will purchase the respiratory business of Japan-based Takeda Pharmaceutical (TKPHF) for $575 million; in another announcement, the company said it will invest $100 million in Chinese bio-drug maker WuXi AppTec.

The New Normal

It's clear that AstraZeneca has been busy with M&As this year, and this is indicative of what might become the new normal for pharmaceutical manufacturers. Since the Affordable Care Act went into effect, the entire healthcare sector has been scrambling to sure-up efficiency and profits. Drug companies in particular have been consolidating with the competition to boost revenues.

The most obvious example of this is the $160 billion deal between Pfizer (PFE - Free Report) and Allergan (AGN - Free Report) . This all-stock merger was the largest ever in the pharmaceutical industry. What's even crazier is that right before that deal was made, Teva Pharmaceuticals (TEVA - Free Report) bought Allergan's generic business for $40.5 billion and Allergan purchased biopharma firm Naurex for $560 million.

Since the massive Pfizer-Allergan deal, the M&A activity in the sector has cooled off a bit. Nevertheless, in the first half of 2015 there were $221 billion worth of pharmaceutical deals completed, tripling the amount during the same time-frame in 2014. With the Pfizer-Allergan deal going down in the second half of the year, this year's total numbers should crush 2014's.

What we are looking at is a reinvention of the pharmaceutical industry as it becomes more shareholder-focused. Investors want revenues now, and in today's complex world of scientific innovation, it is often much cheaper and faster to buy out the next big drug maker rather than commit money to research and development.

In fact, it has been investors that have been pressuring the industry to make these moves. We are even seeing prominent activist investors make their voices loud and clear. For example, Bill Ackman, founder of Pershing Square Capital, made headlines late last year by campaigning for Valeant Pharmaceuticals to buy Allergan.

While that deal never went through, Ackman's large stake in VRX gained value and he committed to being a long-term investor in the company. In 2015, Valeant has notably acquired Salix Pharmaceuticals for about $16 billion.

Bottom Line

AstraZenaca's deals this week are important not only to its own business, but also for the rest of the pharmaceutical industry. These mergers are the latest in a massive wave of pharmaceutical deals this year. It is clear that these deals are for a calculated purpose—boosting revenues ASAP. This investor-focused industry is what we should all expect to be the new normal.

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