The role of mergers and acquisitions in the pharmaceutical industry

The pharmaceutical industry is dynamic – not just in current times but also historically. It is not surprising that the industry is one of the frontrunners in the market space when it comes to M&A activity, the number of deals, deal value and innovative deal structuring. In this article we will take a closer look at the role of M&A in the pharmaceutical industry, why M&A is central to such industry and what the driving force is behind it. We will also briefly consider M&A transactions from a South African perspective.

15 Sep 2021 5 min read Healthcare & Pharmaceuticals Article

At a glance

  • M&A activity is central to the pharmaceutical industry's growth and profitability, with the industry being a frontrunner in terms of deals, deal value, and innovative deal structures.
  • Historical trends show continuous reinvention and consolidation within the pharmaceutical industry, with companies merging to streamline operations, reduce costs, and access new revenue streams for drug development.
  • Challenges such as the high costs of drug development, competition from generics, and evolving regulatory requirements drive the need for M&A transactions. However, large-scale integrations and regulatory hurdles can pose challenges to the success of such transactions. In South Africa, regulatory compliance and obtaining marketing authorizations are important considerations for M&A deals in the pharmaceutical sector.

A brief history of how the pharmaceutical industry developed

The history of the top ten pharmaceutical companies is characterised by such companies continuously reinventing themselves. By way of an example, in 2018, only one of the top ten pharmaceutical companies, Gilead, had a history of less than 100 years, which speaks to the length of time many pharmaceuticals have been in the market (Bieri “What Drives Mergers and Acquisitions in the Pharma Industry?” 2018 accessed on 27 August 2021). To further illustrate the evolution of pharmaceutical companies by way of M&A, consider that 60 of the pharmaceutical companies that existed in 1999 have been consolidated into 10 big pharmaceutical companies (Cha and Lorriman “Why pharma megamergers work” 2014 accessed on 27 August 2021). Moreover, 110 pharmaceutical companies have been consolidated into 30 in just the last three decades (Davidoc “The History of Bio-Pharma Industry M&As, Lessons Learned and Trends to Watch” 2014 accessed on 27 August 2021). Interestingly, although one often thinks of M&A in the pharmaceutical space occurring on a multi-national scale by default, this was not always the case. As Davidoc points out, the trend of consolidations among pharmaceutical companies started out with companies converging within their home countries first, and thereafter moving on to global scale consolidations when internal consolidation opportunities were exhausted. The more recent trends are spin-offs, whereby the parts of companies’ businesses with different business models, revenue streams and profit-growth opportunities are separated into smaller entities. The slow growth of specific products of a business, and competing generic products is, amongst others, one of the driving factors behind the spin-off transaction model. We will now consider other driving factors behind M&A activity in the pharmaceutical industry.

What drives M&A in the pharmaceutical industry?

As with any other business, profit-making is central to the business strategy and models of pharmaceutical companies. M&A enables companies to streamline their operations by optimising overlapping workstreams and reducing overhead costs, which can contribute to profit growth. Furthermore, M&A plays a significant role in the overall growth and expansion strategies of pharmaceutical companies. Deals focused on creating new growth platforms through consolidations are common, as they can provide companies with the capital required to fund new drug development, by providing access to new revenue streams (Alvaro, Challener and Branch “M&A: Fundamental to Pharma Industry Growth” 2020 accessed on 27 August 2021).

The ever-increasing costs associated with new drug development, which many pharmaceutical companies can no longer afford, has pushed pharmaceutical companies to find innovative ways of accessing funds for research and development. For example, specialty pharmaceutical companies who are new to the market and often funded by venture capital or private equity firms, are often acquired by larger pharmaceutical companies thereby enabling such larger companies to access new generation technologies by outsourcing the research and development thereof. The entire drug development cycle is also being reinvented by this approach, as companies increasingly outsource processes that are capital intense and provide lower returns, such as the manufacturing of commercial and clinical trial products, as well as the management of clinical trials. This trend has had a knock-on effect on the supply chain end of the drug development process as consolidations and M&A activity amongst contract research organisations and contract development and manufacturing organisations follow suite (Alvaro, Challener and Branch “M&A: Fundamental to Pharma Industry Growth” 2020 accessed on 27 August 2021).

The nature of the challenges faced by pharmaceutical companies is a strong driver behind M&A activity. In order to keep up with the rate of expansion of the critical size requirements of the pharmaceutical market segments, pharmaceutical companies were forced to consolidate in order to grow, as such growth could not have been achieved on their own. Furthermore, pharmaceutical companies continually need to keep up with advances in medicine, as pharmaceutical drugs derive their value from solving a problem which could previously not be solved, or offering something better than that which is currently available in the market, which requires cost-intensive research and development. There is also the challenge of competing with generic and biosimilar products and downward pricing pressure, as well as the challenge of reduced pipeline revenue streams due to the expiry of patents, and evolving regulatory requirements which lead to increased development costs, all of which drives cost-reduction mechanisms that can be achieved with M&A (Alvaro, Challener and Branch “M&A: Fundamental to Pharma Industry Growth” 2020 accessed on 27 August 2021).

Despite the large volume of M&A activity that one sees in the pharmaceutical industry, there is a view that such M&A transactions in the pharmaceutical industry do not work optimally, due to the disruption caused by large-scale integrations across organisations, which negatively impacts on research and development productivity (Cha and Lorriman “Why pharma megamergers work” 2014 accessed on 27 August 2021). There is also the fact that despite the cost-saving which can be achieved with M&A transactions, the complexity involved with executing such large-scale transactions can in themselves be costly. There are also various regulatory hurdles, especially in multi-jurisdictional M&A transactions, which need to be considered and overcome.

The South African perspective

The pharmaceutical industry in South Africa is regulated by the South African Health Products Regulatory Authority (SAHPRA), which is the regulatory body that has replaced the Medicines Control Council and is established by the Medicines and Related Substances Act 101 of 1965. The Pharmacy Act 53 of 1974 also applies to pharmaceutical companies in South Africa.

As mentioned above, evolving regulatory requirements are often one of the major challenges faced by pharmaceutical companies in terms of the cost and practical implications of complying with such regulations.

For example, marketing authorisations for products under South African law can take anywhere from 12-18 months to obtain from the SAHPRA. In most cases, for companies undergoing re-structuring transactions, there is a need to obtain such marketing authorisations sooner. Various structuring options are available under these circumstances to achieve the economic benefit derived from the transfer of a pharmaceutical business prior to having obtained the relevant marketing authorisations. For example, a seller and purchaser may conclude an interim licensing arrangement for the continued marketing, sale and distribution of products by the seller of such business, which already holds the relevant marketing authorisations for such products, pending receipt of such market authorisations by the purchaser.

In such instances, parties are able to minimise delays in closing transactions which may be caused due to long lead regulatory approvals. In a rapidly evolving industry such as the pharmaceutical industry, time savings such as these are crucial.


Many factors drive M&A activity in the pharmaceutical space, as companies seek ways to grow and maximise profits. Despite the challenges faced by pharmaceutical companies, M&A transactions present opportunities for companies to find unique ways to adapt their business models in a manner that meets the market needs whilst at the same time optimising their operations.

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