MELISSA BLOCK, HOST:
The pharmaceutical industry is undergoing some sweeping changes so the past few days, some major deals have been announced. The first involving a trio of big named companies: GlaxoSmithKline, Novartis and Ely Lily. The second is a proposed deal between Quebec-based Valeant Pharmaceuticals and California's Allergan, the maker of Botox. That deal is valued at $45 billion. NPR's Jim Zarroli reports.
JIM ZARROLI, BYLINE: In the drug business, Valeant is known for spending little money on researching new drugs. Instead, it's gotten bigger and bigger by acquiring other companies. It strikes about 25 deals a year. Many of the companies it buys are small, but some, such as eye care company Bausch and Lomb, are much bigger.
Analyst Ronny Gal of Bernstein Research says once Valeant buys a company, it cuts costs sharply.
RONNY GAL: Valeant is saying, look, the product that you've already made are great, but we think that by just taking the products as they are and not reinvesting we can make higher profits.
ZARROLI: This cost cutting has made Valeant a big favorite among hedge funds and other investors. This week, it announced it was joining up with investor William Ackman to try to make another acquisition. California-based Allergan is probably most famous for a single product that a lot of people are reluctant to admit they use.
UNIDENTIFIED WOMAN: Come on, you've heard about it. Maybe you've had friends who've gotten treated with it. Isn't it time to ask your doctor about Botox cosmetic?
ZARROLI: Allergan says it's studying the offer, but if it says yes, a lot of things are likely to change for the company. Analyst Damien Conover of Morningstar says Allergan spends a lot of money on research, but Valeant is likely to change that.
DAMIEN CONOVER: If you see R and D cuts, that really hurts these companies' abilities to continue to generate strong returns so over the long term, it's a very difficult strategy to employ. Over the short term, it can be pretty profitable.
ZARROLI: The deal comes at a time when the drug industries fortunes are improving. A few years ago companies faced something called the patent cliff, a time when patents on a lot of their most popular drugs were expiring at the same time. Revenues took a big hit. But Ronny Gal says some companies have had more success lately, developing breakthrough drugs to replace them. He also says the United States remains a very profitable market for drug makers.
GAL: So the U.S. is showing no ability to control its drug budget and therefore, you're able to charge $50,000 per patient per year when you break through medication.
ZARROLI: At the same time, he says the middle class is growing in developing countries like India and people there are buying more drugs. It represents a big potential market for pharmaceutical companies. But Gal says the business has also gotten a lot more competitive. At one time a company could survive by selling a single cancer drug.
GAL: Right now, we're looking at markets where there are five or six or seven companies developing similar compounds. And you're not going to be successful unless you are one of the best ones.
ZARROLI: For that reason a lot of companies are selling off smaller divisions, in an effort to focus on what they do best. This week there have been several multibillion dollar deals announced involving the world's biggest drug companies. For instance, Novartis says it is selling its animal drug business to Eli Lilly at the same time it announced it was buying an oncology unit from GlaxoSmithKline.
Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.