A record-breaking year in Life Sciences M&A has just ended. And despite the initial turbulence in global stock markets at the start of this year, there is no evidence that the deluge of deals is about to cease.

Total mergers and acquisitions in chemicals and pharmaceuticals amounted to $372 billion in 2015. This represents an increase of 74 % compared with 2014 ($214 billion). Transactions in the pharmaceutical sector amounted to $298 billion in 2015, well above the previous record year of 2000 ($253 billion), as evident from a KPMG analysis based on figures released by Thomson Reuters. Several pharmaceutical companies have resorted to M&A not only to strengthen their positions in the market but also to refocus their activities.

Largest merger in pharma history

All indications are that the largest deal announced in the past year will be the largest merger in the history of the pharmaceutical industry and the third-largest transaction ever: the US group, Pfizer, plans to take over the pharmaceutical company Allergan for $160 billion. At a combined market value of currently $320 billion, the new pharmaceutical giant would surpass the industry heavyweight Johnson & Johnson and reach the size of Denmark's GDP. This new industry leader would generate estimated annual sales of $65-70 billion with its brands Viagra, Botox and Prevnar 13 as well as leading-edge treatments for Alzheimer's and rheumatoid arthritis.

German companies, too, are strategically refocusing their portfolios. In October 2015, Bayer successfully listed its MaterialScience division under the name of Covestro in order to further strengthen its focus on Life Sciences. Merck KGaA, based in Darmstadt, was given the green light in November 2015 for the acquisition of the American laboratory equipment manufacturer Sigma-Aldrich, thus strengthening its focus on innovative research activities. Boehringer Ingelheim announced in December 2015 that it intends to focus more strongly on the animal health sector. By swapping its consumer healthcare business plus an additional payment of €4.7 billion, for Sanofi's animal health division (Merial), Boehringer will become the second-largest player in this segment. These innovative and ground-breaking transactions are having a decisive impact on the transformation of the industry and act as catalysts for further change in the sector.

Chemical industry also reports mega deal

Global M&A deal volume in chemicals amounted to $74 billion in the past year. There was a distinct shift towards larger deals. The total value of the ten largest completed transactions ($51 billion) more than doubled compared to the previous year. The total value of the ten largest transactions − so far only announced in 2015 − quadrupled compared to the prior year, to $149 billion.

This is due, to a considerable extent, to yet another mega deal. The market leaders in the chemicals industry are experiencing substantial change: Dow Chemical and DuPont are planning a $62 billion merger. The two global players will first merge their portfolios and then split into three independent, highly-focused companies in agrochemicals, high performance materials and specialty chemicals.

This mega merger could also lead to a paradigm shift in the agrochemicals sector. The Swiss group Syngenta, for example, attracted a substantial interest in 2015. After rejecting a $46 billion bid from the global market leader for seeds, Monsanto (USA), the Swiss crop science company was faced with a $42 billion offer from the state-owned Chinese chemical giant, ChemChina. Although this bid, too, has been rejected, the seeds of further consolidation in the sector have been sown.

Generally, the trend in M&A is away from basic chemicals and towards specialty chemicals. Deals increasingly focus on the higher end of the value chain, particularly on the final stages of chemicals processing and specific applications. These high-margin businesses are popular not only with strategic investors, but also attract financial investors looking for opportunities with lucrative yields.

Both the chemical as well as pharmaceutical sector are set to experience continued high levels of activity in 2016. In fact, KPMG’s Deal Thermometer indicates that the environment for M&A activity in pharmaceuticals will remain ‘hot’ in 2016 as companies continue to use their financial fire-power to refocus and strengthen their market positions