Global Mergers and Acquistions (M&A) activity reached record levels for the first half of 2007. Recent data from Dealogic has revealed a 50% surge in activity, with deals totalling some $2,780 billion. KPMG, meanwhile, has warned that, as the credit markets continue to struggle, the M&A frenzy is set to peak and the volume of deals will slow. So what does this mean for the cash rich, global pharmaceutical sector, which itself underwent frenzied M&A activity around the turn of the century but has subsequently slowed down?

Until recently it did appear that the era of the pharmaceutical mega-merger was over. Back in the late 90s, global blue-chips AstraZeneca, Aventis (Hoechst and Rhone-Poulenc), Sanofi-Synthelabo and GlaxoSmithKline were each the product of high-profile merger activity within an 18-month period. At the same time, Pfizer continued its growth by acquisition with the $90b purchase of Warner-Lambert.

Since then, the pace of consolidation across the sector has relented. The only major deals of note have seen Pfizer acquire Pharmacia (2003), and Sanofi merge with Aventis (2004).

But is activity about to kick-start again? Rumours that Sanofi-Aventis is poised to bid for the troubled Bristol-Myers Squibb have been circulating since the beginning of 2007. BMS’ recent appointment of a new interim CEO has done little to quell the speculation. Likewise Novartis appears eager to acquire. Analysts have long tipped the Swiss giant to make a move for Roche, in whom it already holds a 33% stake. Although Novartis is currently keeping its cards close to its chest, the company only this week signalled its interest in ‘selective’ takeovers in the coming months.

So is the mega-merger about to make a comeback? History suggests that the ‘buy big’ strategy is flawed. While the attraction of a company acquiring its way to the top of the global rankings may have a certain appeal, current consensus appears to be that the inherent disruption engendered by merging is a high price to pay for critical mass. Pharmaceutical companies have historically regarded M&A activity as an R&D short-cut, a quick-fix solution to a stagnant pipeline and an easy means to enhance their competitive edge. The reality is often different. The challenge of merging R&D departments can be counter-productive, and the upheaval this causes can hand competitive edge back to the very competitors an acquisition was originally designed to unsettle.

Nevertheless, despite such high risk, M&A will continue to shape the pharmaceutical landscape. In the past year, big names such as GSK, AstraZeneca, Novartis, Sanofi-Aventis and Merck & Co have all been linked with a mega move. As yet, nothing has materialised, but, even in a climate where M&A activity is forecast to slow, don’t be surprised if pharma bucks the trend.