Watch out, pharma. Fitch says the M&A party could come with a hangover

Biopharma has been on a bona fide dealmaking binge. Trouble is, that binge is starting to get too expensive--and too risky. That's what Fitch Ratings says in a new report that cautions against fast-and-loose dealmaking.

The danger lies in a confluence of the race for next-generation blockbusters and the availability of cheap financing, Fitch says. Those two factors are "leading to riskier M&A activity," the firm says.

And they're hiking prices, too. "Valuations have probably been boosted by pharma companies' low borrowing costs and deep market liquidity," Fitch posits.

Pharma companies have been shopping the biotech world for new meds for years, but these days, it's even tougher to project future sales from biotech pipelines, particularly as competition in some key treatment areas heats up, the ratings agency says.

For instance, Valeant Pharmaceuticals ($VRX) recently snapped up Dendreon and its Provenge cancer therapy, confident it can turn the flailing drug into a viable competitor in that tough market. That remains to be seen, but the fact that Valeant bought the drug out of bankruptcy at least gives the company some room to spend on the project. Not all dealmakers can say the same.

Plus, some new drug classes are crowded, and payer pricing pressures are heightening the uncertainty. And Fitch expects the pushback over specialty drug prices to keep mounting. "The uncertainty will be exacerbated by cost sensitivity over specialty drug prices in developed healthcare systems, which will intensify as the next round of drugs comes to market," the report states.

There's plenty of peer pressure to make deals. Some investors have been criticizing drugmakers that have stayed mostly on the sidelines during the latest dealmaking wave--such as Teva Pharmaceutical ($TEVA), which earlier this week announced it would get back into M&A with a $3.2 billion deal for California-based drug developer Auspex Pharmaceuticals ($ASPX).

But then again, investors have criticized other companies that might have paid too much for the their buys. Consider the outcry after AbbVie ($ABBV) snapped up Pharmacyclics for $21 billion, for one. Criticism has extended to much smaller deals, too; just yesterday, when Dr. Reddy's Laboratories said it would buy a basket of drug rights from Belgium's UCB, analysts questioned the €118 million price, which was more than 5 times sales.

- read the release from Fitch

Special Report: Top 10 pharma M&A deals of 2014

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