The CEO of a $50 billion company explains why big-time dealmaking has dropped

Reuters

Shire CEO Flemming Ornskov

For big drugmakers that want to grow their business, acquiring smaller companies with one or two products is often a surefire way to make sure that happens.

But in the past few years, we've seen a slowdown in M&A, with acquisitions in the first quarter of 2017 down 35% from the same period two years ago.

Flemming Ornskov, the CEO of $50 billion drugmaker Shire which had one of the biggest pharma mergers in recent history with the $32 billion acquisition of Baxalta at the very start of 2016, said he knows there's been less M&A than usual.

"I have a few people I've worked with in the past that are investment bankers and they moan about the tough times they're going through," Ornskov told Business Insider.

Shire, which is headquartered in Dublin, is known for making ADHD medicine, like Adderall and Vyvanse, and its focus on rare diseases like the blood disorder hemophilia. Ornskov said there are a few reasons why things might be quiet now - but that won't always be the case given the nature of the industry.

"If you look at pharma in a 30-year history, it is a consolidating industry," he said. That's because companies need new products to drive growth, and most of those new products come from smaller, newer biotechnology companies.

But, that consolidation is cyclical, and we're currently at a point in the cycle where there's too much we don't know.

"I think we're in a little bit of a cycle where there's a lot of unknowns ... that you would like to know if you do M&A, particularly big M&A," Ornskov said.

Here's what's currently unclear:

• If you're looking to merge with a US-based company, you'd likely want to know what the corporate tax rate is. That's something that could change, depending on whether President Donald Trump's tax plan passes. The current tax rate for corporations is 35%, but under Trump's plan it could be slashed to 15%.
• If a company's looking to take on debt, knowing more about the deductibility of interest (something that's up in the air because it's related to tax reform) is also key.
• Whether companies will be able to repatriate cash they might have outside of the US is also a big concern.

Plus, many of the deals that are happening are costing a premium - causing companies that might be interested in M&A to consider waiting out the high valuations.

Growth without M&A

At the same time, there are other factors that make non-M&A business plans thrive. There are plenty of options for companies (especially smaller ones) to raise money without necessarily selling their company, such as IPOs, Ornskov said.

Investors are also seeing value in splitting large companies up. One of the most recent examples of this was when biotech giant Biogen spun out its hemophilia drug business at the beginning of 2017 to make Bioverativ.

Even so, the pharma industry could return to a period of prolific deals - 2017 just might not be the right time.