Pharma majors under merger pressure after Merck-Schering deal

12 Mar 2009


The recent mega mergers in the pharmaceutical sector have made other major manufacturers nervous about missing out on acquisition opportunities. According to analysts any drugmaker sitting on cash can make a bid now as most companies are pretty cheap, which could trigger a wave of mergers and acquisitions.

Earlier this week pharma major Merck Co closed a deal to acquire rival Schering-Plough Corp. in a cash-and-stock transaction. (See: Merck to acquire Schering- Plough for $41 billion)   followingthe $68-billion bid of the world's largest pharmaceutical company, Pfizer Inc, for Wyeth  in January (See: er-Wyeth create $68-billion blockbuster deal).  

In another development, Swiss major Roche Holding AG is in hot pursuit of California-based biotech company Genentech Inc. for $45.7 billion. On Monday, Roche, which already owns a major portion of the company, raised its offer to $93 for each of Genentech's remaining shares (See: Roche raises Genentech offer from $86.50 to $93 a share).

New York-based Bristol-Myers Squibb Co,  which has a gamut of experimental drugs, could be a target for French drug maker Sanofi as well as British majors AstraZeneca and Johnson & Johnson, which has, so far, been silent on any plans for a strategic acquisition.

The shares of Bristol-Myers rose 4.2 per cent in New York Stock Exchange on Tuesday on investor speculation of a possible bid.

The Merck-Schering combine will benefit from a formidable research and development pipeline, said Merck chairman and chief executive Richard T. Clark, who will lead the combined company.

Pfizer had lost 60 per cent of its value on acquiring Pharmacia Corp. in 2003. Glaxo's shares too have declined 46 per cent since the takeover of SmithKline Beecham in 2000.

R&D likely to suffer
Merck's acquisition of Schering-Plough is expected to improve its bottom line over the next two to three years, at least 16,000 job cuts and reduced operating costs. However, there are no obvious big drugs to replace the best sellers that are on the brink of losing patent protection. The reason is that in mega pharma mergers, R&D suffers.

Shedding light on this, Dr Joseph Schlessinger, chairman of the department of pharmacology at Yale's School of Medicine and the founder of three biotechnology companies says making R&D bigger does not make it more efficient. "On the contrary, it is very hard to manage science when you have huge teams of people."

Pfizer, in spite of spending more than $60 billion on R&D over the past eight years has not been able to produce a single drug from its own labs whose annual sales surpass $1 billion.

ccording to experts these mergers tend to have a negative effect on R&D culture in general.

Analysts estimate that pharma R&D productivity today has fallen to just 40 per cent of what it was 10 years ago.

However, acquisitiona are considered to be advantageous for Merck and Pfizer, both facing the loss of billions of dollars in revenues when their best-selling drugs lose patent protection over the next three years and face generic competition for the first time.

Merck and Schering-Plough do complement each other's products. Both market two cholesterol drugs. Merck has strong presence in asthma drugs and vaccines whereas Schering-Plough has expertise in biologic drugs and a leading R&D engine. The merged entity is expected to save $3.5 billion a year after 2011 and boost earnings per share in the first year after the deal is executed.

Both the Pfizer takeover of Wyeth and Merck takeover of Schering-Plough are expected to result in job loss of 35,000. 

Moreover, these drug makers are getting money from banks for acquisition. The federal bailout enabled banks to get money from the treasury which they use to lend to the acquirers. It is estimated that the banks have lent a combined $31 billion for these mega acquisition. If they get rid of people using this money, it is a cause of concern, an industry expert said.

The merger deals would have to be approved by the Federal Trade Commission, which has not stopped the companies from takeovers in the past. Job losses from big mergers are rarely a concern to regulators.

Analysts are also concerned about the effect the mergers could have on prices. Drug prices increased 7.4 per cent on average in 2007, about 2.5 times the rate of inflation.

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