Low rates, M&A spur flood of pharma debt deals

Merck & Co's US$8bn jumbo bond is just the tip of the iceberg of debt supply from the healthcare sector in the months ahead with brand names like Novartis and Pfizer set to compete for investor cash.

At least US$50bn of debt is expected to be launched through loans and bonds issues, and in a variety currencies including euros and dollars.

Actavis, for example, is the biggest debt financing being readied to back its US$66bn purchase of Allergan. The line up also includes AmerisourceBergan, Merck kGaA, LabCorp and Zimmer. All need to finance acquisitions that have been partly driven by record-low borrowing costs.

Pfizer joined that list on Thursday with a US$15bn acquisition of Hospira. About US$6bn of the deal could be funded with new debt, analysts said.

Many of the companies have made acquisitions to strengthen product offerings as their old blockbuster drugs go generic.

"A lot of pharmaceutical firms are struggling to find internal growth drivers and are looking for acquisitions to boost that growth," said Julie Stralow, healthcare analyst at Morningstar.

The pace of M&A is expected to continue this year, albeit slightly slower than 2014 given the absence of tax-inversion trades, as companies take advantage of strong capital markets.

"As long as low interest rates and high equity prices remain such positive factors, it's hard to see the M&A activity stop," said Stralow.

BIG APPETITE

Merck showed on Thursday there is no shortage of investor interest for pharma deals, and stock prices have consistently rallied on news of big acquisitions.

The drug company attracted almost US$30bn of demand, and is set to lock in very cheap coupon rates.

"Investor reaction is extremely favorable to M&A with acquirers' share prices reacting positively to deal announcements," said Joe Kohls, co-head of global healthcare investment banking at Bank of America Merrill Lynch.

"This, combined with the low interest rate environment and a focus on top and bottom line growth, is lending confidence to the belief that M&A is the preferred use of capital deployment within healthcare."

So far there hasn't been a problem with too many pharma bonds crowding the market, as acquisition financings have been well paced.

That, however, is more of a coincidence than planning by either the companies or their underwriters.

"We land the planes as they are ready to come in," said a senior syndicate manager at one of the five biggest bond houses on Wall Street.

"Right now it's fairly orderly and the timing between landings is very manageable so as to not cause a glut." (Reporting by Danielle Robinson; Editing by Natalie Harrison and Jack Doran).

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