S&P: Pharmaceutical sales growth spurs mergers

Standard & Poor's said in a report that strong global sales growth and the race to develop blockbuster drugs will continue to drive the wave of mergers and acquisitions in the European pharmaceutical industry through 2006.

Following Bayer AG's (BBB+/positive/A-2) successful takeover of Schering AG (BBB+/positive/A-2) in July, M&A activity in the sector picked up speed in the second quarter of the year, the agency said.

Merck KGaA (BBB+/Watch negative/A-2) secured more than 75% of the votes of Serono SA (A-/Watch negative), Nyco Holdings 2 ApS (B/Watch positive) acquired unrated Altana AG's pharmaceutical arm for €4.2 billion and unrated UCB acquired unrated Schwarz Pharma AG for a total of €4.4 billion, the agency added.

"The bulk of these transactions involved formerly family-controlled midsize pharma businesses and could therefore partly reflect personal deliberations on tax and succession," said S&P credit analyst Olaf Toelke.

"However, they mainly appear to reflect concerns about critical size, as all the transactions, including the Bayer-Schering link-up, have taken place in a market dominated by the need to fund ever-increasing R&D budgets in the race for the next blockbuster drug."

The larger rated European pharmaceutical companies' above-industry-average global sales growth and strong cash generation, is increasing their flexibility for M&A activities, the report said, adding that most rated companies reported sales growth of about 10% in the second quarter of 2006, compared with an average assumed industry growth of about 6%-7%.

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