The drug industry has been experiencing intense activity on the merger front over the past year. The two deals that have grabbed the most headlines, due to their sheer size, have been Pfizer’s  (PFE) acquisition of Wyeth (WYE), valued at $68 billion, and Merck’s (MRK) purchase of Schering-Plough (SGP), worth $41 billion. Meanwhile, a host of smaller mergers, including Teva Pharmaceutical’s (TEVA) $7.5 billion buyout of Barr Pharmaceuticals (BRL), and licensing agreements, such as Valeant Pharmaceuticals’ (VRX) pact with GlaxoSmithKline (GSK), have been completed or are in the works.

One reason for these developments is that a number of blockbuster pharmaceuticals will be losing patent protection in the coming years, which will, undoubtedly, draw the attention of generic drug manufacturers. As a result, companies are looking to boost their product lines with currently available drugs that have longer periods of market exclusivity, and to bolster their pipelines with pharmaceuticals that are in later stages of development.

Mergers also provide the opportunity to achieve substantial reductions in operating expenses. Indeed, savings can be realized through such measures as the consolidation of research and development departments and manufacturing facilities, plus the elimination of redundancies (including administrative and marketing functions).   
Rumblings in Washington over healthcare reform may be another factor behind the consolidation trend. The proposal, now under review in the Senate, calls for nearly every American to be covered. It also contains a controversial government-run insurance option that is strongly opposed by the pharmaceutical industry, in general, due to concerns about competition. The outcome remains to be seen, but drug companies appear to be preparing for the worst, with the thinking that a bigger pharmaceutical firm may have more influence when dealing with the government.

Consolidation in the drug industry can be likened to an arms race. Indeed, companies have been forced to consider teaming up with a rival to compete more effectively, or run the risk of being taken over. Of course, there is no guarantee that a merger will meet expectations, but it is a trend that has and will continue to reshape the face of this sector.