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Is the pharmaceutical sector heading for a bubble?

There has been break-neck consolidation in the pharmaceutical sector this year -- deals in the first five months of this year have already blown past the whole of last year and it is starting to raise questions of whether the sector is headed towards a bubble.

SINGAPORE: Multi-billion dollar blockbuster deals, soaring stock prices, and a scramble to be part of the acquisition action -- there is little denying a pharmaceutical frenzy, but experts said that this does not mean the sector is headed towards a bubble.

Abhijit Ghosh, the pharmaceutical and life sciences leader at PwC, said: "We've been expecting this for at least one-and-a-half years.

"The pharma sector, especially the big pharma companies, are facing multiple challenges as we speak. So that is propelling them to think of something different."

And "different" means consolidating -- 95 global pharmaceutical merger and acquisition deals have been announced so far this year as of 10 May 2014, according to Mergermarket, with the deals valued at a total of US$93 billion. That is 22.2 per cent higher than the whole of 2013, which saw 290 deals totaling US$75.8 billion.

There is one mega-deal in the works that could blow that figure out of the water -- Pfizer's US$106 billion bid for AstraZeneca. The offer has so far been rejected for being too low.

There is also Valeant Pharmaceuticals US$48 billion bid for Botox-maker Allergan -- that deal has also been rejected for undervaluing the company.

The heady valuations come as companies scramble to restructure, reshuffling their portfolios to keep pace with a healthcare model that is morphing from vast to niche.

Mr Ghosh added: "They will be more focused on individualized treatment... You cannot handle cardiovascular, as well as oncology, as well as diabetic at the same time. So it's a matter of now refocusing back on a certain sector where you can hope to win in the market.

"Specializing in a handful of products makes it easier to come up with new treatments. It also means streamlining roles, boosting efficiency… and ultimately creating more value for investors.

Raman Singh, president of emerging markets at Mundipharma, said: "In the past, every incremental innovation has been valued very high. But that's not the case anymore. Hence, you will see there'll be constant consolidation, constant inward view of an organization -- what your core competencies are, what do you do best?"

With the biggest deals yet to come, what "Big Pharma" will be doing best is grabbing headlines. 

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