Teva
On Monday, Teva Pharmaceutical Industries Ltd. announced a $40.5 billion purchase of Allergan PLC -– the latest in a series of deals that have put the pharmaceutical industry on track to beat the record-setting value of mergers and acquisitions made in 2014. An employee of Teva Pharmaceuticals watches pill bottles on a production line at the company’s manufacturing plant in Jerusalem in this 2011 photo. Reuters/Ronen Zvulun

This year is on track to become the pharmaceutical industry's hottest deal-making year ever. In 2014, drug companies agreed to mergers and acquisitions worth a record-breaking $212 billion, shattering 2009's previous record of $152 billion, according to EvaluatePharma. But it’s only July, and industry deals are already well on their way to overtake last year's value. Mergermarket reports that total deals in the first half of 2015 reached $159 billion.

"Not only is activity up, but dollar values are way up," Laura Vitez, principal biotech analyst with Thomas Reuters, says. "It's pretty mind-blowing."

Those early deals included Pfizer Inc.’s purchase of Hospira Inc. for $17 billion and Valeant Pharmaceuticals International Inc.’s $15.8 billion acquisition of Salix Pharmaceuticals. In the latest installment, Teva Pharmaceutical Industries Ltd. announced on Monday that it would buy the generic drug unit of Allergan PLC for $40.5 billion. Teva is the world's largest maker of generic drugs and Allergan was one of its fiercest competitors.

Teva Pharmaceuticals USA Inc. (TEVA) | FindTheCompany

Why the sudden increase in expensive agreements? Many leading pharmaceutical companies are feeling pressure to cut costs as they approach the “patent cliff,” a wave of expiring patents for blockbuster medications. Once a patent expires, other companies may begin producing generic versions of the medicine which will knock its price down considerably.

Teva’s acquisition helps position the drugmaker, which already sells 12 percent of generic drugs purchased worldwide, to own an even larger share of the generics business as more medicines are up for grabs and competition for the generic versions is stiffer than ever. Teva immediately launched a generic version of an antipsychotic medicine called Abilify, which brought in $7.8 billion in 2014 sales for Bristol-Myers Squibb and Otsuka Pharmaceutical Co. Ltd., when the patent expired in April.

FiercePharma estimates that makers of non-generic drugs could lose up to $44 billion in sales from medicines set to go off-patent this year, including Sanofi’s top-selling treatment called Lantus for diabetes and the antibiotic Zyvox by Pfizer. By consolidating, manufacturers save on expenses and acquire a new pipeline, which ensures that they have strong new drug candidates to bring to market to replace the huge losses.

But Teva is also vulnerable to the loss of patent protection for its own brand name medicines. A portion of the company's drugs are patent-protected. Earlier this year, the company took rival Mylan to the Supreme Court and won a longer period of exclusivity for its leading medicine called Copaxone, which treats multiple sclerosis.

Aside from the pharma industry's impending patent cliff, companies have also recently come under fire for runaway drug prices --for both generic and brand name prescriptions. Public pressure from payers such as Express Scripts has lately forced the industry to concede lower prices and try to propose new value-driven arrangements that payers will tolerate, but which may cut further into revenue. In the midst of those concessions, companies are trying to justify high prices for new medicines for rare diseases and curative treatments. PricewaterhouseCoopers suggests medical device companies and specialty pharmaceutical companies are particularly interested in consolidation to preserve the negotiating power they hold with private insurers as well as Medicaid and Medicare.

The purchasing trend is also indicative of a new business model that has emerged within the pharmaceutical industry – more often, major drug companies are leaving the research and development up to smaller biotech firms and startups. Forbes describes it as a sort of pyramid, with a handful of large drug manufacturers at the top purchasing the rights to make promising drugs developed by many smaller companies. Since a recent estimate indicates that it now costs $2.5 billion on average to bring a drug to market, large pharmaceutical companies prefer to bet on candidates which have already been vetted to some degree, rather than start from scratch. Simply by its structure, this model results in more frequent acquisitions.

Vitez says it's an "eat or be eaten" world. "In general, large pharma companies are working really hard to fill both their marketed and development pipelines by bringing outside stuff in," she says. "Those companies grow by buying products, buying product lines and buying other companies."

Financing schemes and trends have also played a part in spurring deal activity. PricewaterhouseCoopers also suggests that a stronger dollar has enabled some U.S. companies to be bold about acquiring those based elsewhere. At the same time, the Wall Street Journal reports that access to lower tax rates has enabled companies based outside of the U.S. to make big purchases. Teva’s headquarters are in Jerusalem, Israel. Pharmaceutical Executive points out that more fluid financing through debt markets and increased cash flow have recently persuaded companies that the time is ripe for making deals.

But the magazine has also stated that although merger and acquisition activity appears to have ramped up over the past two years, 2012 and 2013 were relatively slow years for comparison because the heightened valuation of many pharmaceutical companies over a short period of time discouraged deals.

In response to all this deal-making, pharmacy chains are also combining forces to boost their ability to negotiate for cheaper drugs – CVS Health acquired Omnicare for $12.7 billion in May and Rite Aid took over EnvisionRX for $2 billion at the start of the year.

Health insurers have also announced new agreements at a rapid clip. Notable deals this year include UnitedHealth’s acquisition of Catamaran for $12.8 billion, Aetna’s move to take over Humana for $37 billion and Anthem’s purchase of Cigna for $54 billion. Those deals are meant to give insurance companies more clout in bargaining with both drug companies and negotiating with hospitals for lower costs of patient care. Insurers are also seeking ways to cut costs as the Affordable Care Act brought more patients to payers but also squeezed profits by requiring insurers to accept everyone at a fair rate.