Pharma Megamergers: Will They Continue?

It has been expected that some large pharmaceutical companies would begin to join forces for some time now, and another merger was announced this morning. This time, Merck and Company (MRK) announced plans to acquire Schering-Plough (SGP) for $41 billion. This adds to a list of pharma megamergers including the Pfizer (PFE) and Wyeth (WYE) deal that analysts have largely been unimpressed with and Roche’s hostile takeover of Genentech (DNA). CNBC’s reported this morning:

“Two big pharma megamergers in as many months. And Roche’s hostile bid for Genentech could be the next to get done. A few analysts say this latest deal could attract a bidding war…and analysts say it won’t be the last transaction, that consolidation is inevitable and throw out names like Eli Lilly and Bristol-Myers Squibb, as being in the take out target price range.”

Graph 1Our valuation methodology agrees with the commentary regarding the Eli Lilly (LLY) being attractive at current levels, but as you can see from our major drug maker industry chart, we believe there are many more drug makers more attractive than Bristol-Myers (BMY). We do have an Undervalued rating on SGP as well. There are a few companies that get the “Undervalued” rating but have lost quite a bit in market value in the last half a year, obviously these are probably too risky for anything investment purpose other than pure speculation.

With the market being at very depressed levels, and healthcare stocks taking a major hit recently some huge drug makers are starting to look more and more attractive. It looks like companies are beginning to think that the risk/reward tradeoff in these deals is worth it at this time. This latest merger between MRK and SGP will strengthen the combined companies pipeline of drugs and give the company cost savings in the neighborhood of $3.5 billion annually.

Clearly the companies would not do this if the financial reasons were not solid, but could there be a political reason as well. There has been speculation that the political climate could become more hostile towards the major drug makers. Drug makers often take some heat over the rising cost of healthcare because of major expenditures in Research and Development. Could that be an additional reason to join together with some of the stronger competitors in the field?

Pharma Megamergers: Will They Continue?

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