Deals and IPOs

Pharma M&A is back—Can it cure the sector’s ills?

Novartis acquisition adds 'tremendous value'
Novartis acquisition adds 'tremendous value'

First there were rumors surrounding AstraZeneca, then Botox-maker Allergan was caught in a takeover storm and on Tuesday GlaxoSmithKline (GSK) and Novartis announced a $16 billion commercial tie-up. The pharmaceutical industry has been swept up in a wave of mergers and acquisitions.

Industry observers have been waiting for a rush of deals for months, as cash-rich companies work to reshape themselves. And over Easter weekend, that activity sharply picked up pace.

Rumored tie-ups in the sector now include a whopping $100 billion bid for AstraZeneca by Pfizer, the biggest company in the sector, and a mooted $50 billion pitch for Botox maker Allergan by Valeant and activist investor Bill Ackman.

"Bid rumors occur relatively frequently in the pharma sector," as Mark Clark, analyst at Deutsche Bank, pointed out. However, there are several factors driving companies to make deals at the moment: such as the sector's well-publicized difficulties with developing new products and pricing as well as a move to exploit a U.S. tax law.

GlaxoSmithKline CEO: Widest portfolio of vaccines in world
GlaxoSmithKline CEO: Widest portfolio of vaccines in world

Read MorePfizer takeover of AstraZeneca isn't as crazy as it sounds

One deal which is definitely going ahead is GSK and Novartis' trade-off of different areas of their businesses, announced Tuesday morning.

GSK will get most of its Swiss rival's vaccines business and its consumer healthcare, while Novartis will pay up to $16 billion for GSK's oncology business. In the meantime, Eli Lilly of the U.S. is to pay $5.4 billion for Novartis' animal health division.

This is an unusual set of moves, in a sector where traditionally huge companies have swallowed up their slightly smaller rivals.

Price pressures around the world are one of the key factors driving the wave of deal-making at the moment, Andrew Witty, chief executive of GlaxoSmithKline, told CNBC.

What's behind these pharma M&A deals?
What's behind these pharma M&A deals?

"This is about how industry players need to be positioned over the next decade. You need to look forward 10-20 years rather than two-three years," he said.

"We have very long product life cycles and sometimes that can give a sense of great calmness, but the reality is that companies understand what's happening in their markets."

"Today's transaction shows management will not sit idly by waiting for the pipeline to mature but will take brave decisions to unlock shareholder value," Savvas Neophytou, pharmaceuticals analyst at Panmure Gordon, said – and upgraded his rating of GSK from Hold to Buy.

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Pharma stocks shot up in European trading Tuesday, with AstraZeneca and perennial bid target Shire, which specializes in ADHD treatments, leading the pack.

Yet this is not just about buying in a better pipeline for the future.

U.S. tax law is one of the key factors driving companies to make deals. If at least 20 percent of a U.S. company's shares are held overseas, it can re-domicile its tax base and make savings on its tax bill. Buying a foreign domiciled company can be a quick win for U.S. pharma groups, which mostly have a solidly American shareholder base, to bring in more overseas shareholders.

—By CNBC's Catherine Boyle. Follow us on Twitter: @CNBCWorld