In a single day last week, $40 billion worth of deals were announced in the pharmaceutical industry.  The jaw-dropping, combined value of the announced mergers and acquisitions has turned heads, and has prompted analysts to question the impetus behind these deals.

The increased activity may come as a surprise to some, as recent changes by the Obama administration have been aimed at limiting inversions – a type of merger in which a company (often American) buys a foreign counterpart, and then moves abroad to lower its taxes.  These rules put an end to what would have been the largest inversion to date, a $150 billion takeover in the pharmaceutical industry.

In spite of these changes, which go beyond just targeting inversions but also attempt to dissuade a tactic known as earnings stripping, deals worth nearly $60 billion were announced in the health sector last week.  While not all of these transactions will be successful, and in fact one takeover bid worth nearly $10 billion has already been rejected, the activity suggests pharmaceutical companies see size as a significant factor in their ability to compete – bigger equals better.

Though $40 billion worth of deals in one day may be coincidence, data compiled by Thomson Reuters suggests that Thursday’s deals were part of the busiest period since June 2015. Analysts have suggested that the motivation for these deals may be the need for more bargaining power when negotiating deals with hospitals and insurance companies, which can be achieved when a company merges with another leading producers of the same product line.  There are also new U.S. rules which require bundling health services: smaller less diversified companies simply won’t be able to provide bundled services.  Another possible explanation is that pharmaceutical companies are trying to replace older products whose sales are declining by acquiring growing, specialized firms.  While the exact motivation for last week’s deals may not be known, it does not seem like there will be any shortage of mergers in the pharmaceutical industry in the near future.

The author would like to thank Rayomond Dinshaw, articling student, for his assistance in preparing this legal update.

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