Industry Changes: View From The Equity Market

The pace of consolidation within the pharmaceutical industry is likely to slow down, at least over the next couple of years, with the obvious candidates having now gone and the obvious deals having been done, according to forecasts by European pharmaceuticals analyst James McKean, a vice president at Morgan Stanley & Co.

Mr McKean told a meeting organized by the Pharmaceutical Marketing Society in London last month that the stock market's perception of the pharmaceutical industry has gone through a number of phases during the past three to four years. From 1992 until the middle of 1994, there were real concerns in the market about health care reforms, but after that point the merger and acquisition cycle started, the environment turned out to be less hostile than had previously been feared, and investors became more comfortable with the industry's prospects. From the later part of 1994 until early 1996, the pharmaceutical industry's market valuation outperformed the general indices by a considerable margin, Mr McKean told the meeting.

Valuation Hit By Concern At Reform Threats From 1993 into 1994, health care reform, or the threat of it by governments worldwide, depressed pharmaceutical industry valuation. This was the result of investors' concerns that national health care systems would introduce therapeutic substitution as well as generic substitution, and mandate the use of the cheapest available generic product, which would as a consequence reduce the return on R&D investment for the industry, said Mr McKean.