GlaxoSmithKline chief questions rivals' chasing M&A deals

GlaxoSmithKline's chief executive has warned that cheap money has increased the risk of companies making "poor choices" in mergers and acquisitions and questioned the "stretched" valuations of recent pharmaceuticals deals.

Sir Andrew Witty said ultra low interest rates inevitably reduced M&A discipline and cautioned investors that not all the medicines being snapped up in multibillion-dollar deals would pay off.

GSK has remained on the sidelines of the pharma M&A boom in recent months as other drugmakers have paid big premiums for growth assets.

"Some of these valuations look stretched," he told the Financial Times in an interview. "We're not going to get drawn into the idea that just because money is cheap we can do anything."

More than $460bn of deals have been struck across the pharma and biotech sectors since the start of last year - the busiest period of M&A on record.

An $8.4bn takeover of Synageva Biopharma by Alexion, a rival US rare disease drugmaker, last week, involved a premium of 124 per cent above the target's share price a week earlier. This was the fourth highest premium on record for US deals over $5bn, according to Dealogic.

Without singling out specific deals, Sir Andrew said: "When interest rates are essentially zero it is inevitable that you are going to see a discipline reduction in M&A . . . and therefore the probability of people making poor choices must have gone up."

He said the mood reminded him of the last biotech boom around the turn of the millennium when investors were enthused by a wave of scientific breakthroughs - only to see many of them fall flat. "It is a little bit reminiscent of the early 2000s where every bit of new scientific news was good and would be permanent and would lead to great value creation."

Other industry leaders have argued the latest boom is sustainable because it is underpinned by more mature science. But Sir Andrew said not all new drugs would obtain the high prices needed to justify current valuations.

"Either only a few will make it and you get really good rewards, or lots will make it, in which case competition is going to bring the price down. In either scenario the model that says everybody succeeds and everyone gets maximum returns doesn't work."

The one big deal GSK has done in the past year involved a $20bn asset swap with Novartis in which the UK group traded its cancer drugs for vaccines and consumer products. This has reduced GSK's dependence on pharmaceuticals in line with Sir Andrew's belief that developed world drug pricing is set to come under sustained pressure.

"Believing that the pharmaceuticals industry can carry on relying on pricing power and believing, no matter how high the price, no matter how small the patient base, that it is going to be paid for; it is quite hard to see how that carries forward."

Sir Andrew is known for his cautious approach to M&A and some critics believe this explains why GSK has been left so badly exposed to the decline in its best-selling Advair asthma drug in the past year. "He should have bought something in the US to fill that gap," says a senior healthcare banker.

But Sir Andrew said the "artificial high" from M&A was often not worth the cost and disruption. "We've made enormous progress replacing sales lost to generics. It means the top line hasn't moved much but we've done it without a big deal. Everybody else has . . . done a big deal. The approach we've taken is more cautious but I think it's the right one."

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