Private equity groups turn to pharma sector

According to a Financial Times (FT) report, private equity groups are moving toward the pharmaceuticals sector and are in discussions which may trigger the takeover of a "large quoted drug company", according to an industry consultant.

The FT interviewed Neal Ransome, head of the European corporate finance team at PricewaterhouseCoopers (PwC). He revealed there was growing demand for advice from his team from investors who have worked in the healthcare sector. Their involvement in the industry to date has included investments in the generic drugs industry and contract manufacturing.

Ransome predicted that renewed interest could lead to a private equity takeover of one of the world's largest pharmaceutical firms by 2010, if industry executives became interested enough to join. He was not expecting a huge rush, but had been in discussions regarding how these executives would, in theory, take over a pure pharmaceutical company, re-engineer and de-risk it.

The news follows recent rumblings from institutional shareholders who have publicly expressed disappointment in the poor returns from Big Pharma, which is struggling to develop new medicines. For example, GlaxoSmithKline has attempted to soothe investor gripes by offering increased share buy-backs and dividends.

Ransome told the FT that the discussions with private equity investors concentrated mainly on divesting the research functions of large pharmaceutical companies, boosting sales and efficiency and "running them for cash".

A PwC report also released an analysis of deals in the pharmaceuticals sector in 2006, which showed a surge in mergers and acquisitions led by mid-market consolidation in the EU market.

The report forecast continued activity in 2008, with pharmaceutical companies divesting OTC and animal health divisions to focus on ethical medicines, while scaling down operations as patent expirations put pressure on sales.