Faced with some unpleasant ailments, the pharmaceutical industry's biggest players are reaching for a familiar old remedy in the medicine cabinet — M&A. In January Pfizer splashed out $68 billion for Wyeth, yesterday Merck agreed to pay $41.1 billion for Schering-Plough and last night Roche looked set to buy the 44 per cent of Genentech, the biotech giant, that it does not already own for $46.7 billion.

The problems afflicting Big Pharma are manifold. Many of the big players — particularly in the United States — have been reliant, for some time, on a small number of blockbusters now coming off-patent and not being replaced by new products generating anything like the same returns.

Meanwhile, makers of generic drugs are on the rise, having become expert in challenging patents on prescription drugs. They are often far nimbler in getting their copycat versions of drugs coming off-patent to market than the established players.

That has been known for a while. What has given the process added impetus is the fact that R&D costs are rising more rapidly than ever, as are the costs of winning regulatory approval for new drugs in America, the world's most important market. The need to cut costs, particularly with the present economic backdrop, is urgent.

Most significant of all, though, is the arrival of Barack Obama. His plans for healthcare reform look set to bear down on the cost of drugs and blow a hole in the profits of US drugmakers — one reason why Schering-Plough, which makes 70 per cent of its revenues outside America, has suddenly become more attractive. This was particularly the case for Merck. Schering-Plough fills a big gap in its research pipeline, that of vaccines, a sector previously notorious for its low margins but now back in vogue. Merck also faces severe competition from generics — about $8 billion worth of competition during the next five years.

The question is what happens next in the industry. With company values depressed, because of recent market falls, the big fear for executives is that they miss out on a wave of industry consolidation and, as a result, are pushed down the global pecking order.

This is why shares in GlaxoSmithKline fell yesterday. As the industry's second-biggest player, it is under more pressure than most to do a big deal, despite the protests of Andrew Witty, its chief executive, that he is not interested in M&A. It is also why shares in AstraZeneca and Shire Pharmaceuticals rose sharply. They, with Bristol-Myers Squibb, are all possible targets in any round of deals taking place soon.

Yet the scepticism of Mr Witty and others who are constantly being told that they need to do a deal, such as Novartis and Sanofi-Aventis, looks well-founded. The majority of mergers and takeovers destroy value and, in the case of the drugs industry, M&A activity has conspicuously failed to deliver the promised returns. This is because, more than most, pharmaceuticals is a “people” business, with scientists at its heart. Cost-cutting after a big merger or takeover, although giving earnings a short-term boost, is not compatible with research and development programmes stretching out over decades.

In any case, many big drug companies are already incredibly bureaucratic. Making them even bigger will not solve this problem. For that reason, it is to be hoped that Mr Witty will stick to his guns, concentrating not on delivering a small number of highly profitable blockbusters but on a larger number of less profitable new products. In doing so, Mr Witty will, rather like users of GSK's Nicorette quit-smoking gum, need formidable powers of willpower. He will face intense pressure to do a deal from investment banking advisers in the next few months.

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