A clearer picture is emerging of which major drug companies
might follow the lead of Pfizer Inc. (PFE) and Roche Holding AG
(RHHBY) in pursuing huge acquisitions - and which might sit on the
sidelines.
Those that appear open to large combinations include Merck &
Co. (MRK) and Sanofi-Aventis (SNY), although not necessarily with
each other. Merck Chief Executive Richard Clark said Tuesday that
he was open to "the entire spectrum" of transactions, including a
large-scale deal. Clark previously expressed interest in acquiring
a biotechnology company, but his comments Tuesday seemed to leave
room for a tie-up with a traditional Big Pharma peer.
Meanwhile, Sanofi-Aventis is lining up bank financing for
potential deals, the Financial Times reported Sunday, partly in
response to Pfizer's agreement last week to buy Wyeth (WYE) for
more than $60 billion. Speculation that Sanofi would go after
Bristol-Myers Squibb Co. (BMY) drove up Bristol shares Monday;
however, some analysts have since expressed doubts that Sanofi
would make such a large purchase.
In contrast, other big drug makers have clearly stated they
don't intend to pursue large-scale combinations, including Eli
Lilly & Co. (LLY) and AstraZeneca PLC (AZN). Lilly Chief
Executive John Lechleiter said last week that large-scale
combinations haven't been kind to shareholders, and that Lilly
planned to invest in its research pipeline and make small and
medium-sized acquisitions. AstraZeneca CEO David Brennan told
investors last week that "large acquisitions" weren't part of the
company's strategy.
So who's right? "We're only going to know in hindsight which was
the right answer and which was the wrong answer," said Edward Jones
analyst Linda Bannister. "It's so dependent upon each company's
unique set of circumstances."
Large-scale combinations run the risk of messy integrations,
which have plagued such deals in the past. But avoiding such deals
runs the risk of becoming out-muscled in an increasingly globalized
industry.
Several big drug stocks were rising Tuesday, with
Schering-Plough Corp. (SGP) up 9.3% to $19, Merck up 7.5% to $31,
Lilly up 4% to around $39, and Novartis AG (NVS) up 4.3% to $42.65.
Both Merck and Schering-Plough reported better-than-expected
fourth-quarter earnings, although sales of their jointly marketed
cholesterol drugs were down.
One of the driving forces for industry consolidation is that
many large pharmaceutical companies are facing intensifying
competition from generic drugs, and their internal efforts to
replace lost revenue with successful new products have been
insufficient.
So the question becomes whether to buy big, medium or small.
Pfizer has chosen the big route, concluding that Wyeth's assets
will help cushion the loss of market exclusivity for its biggest
drug, cholesterol pill Lipitor, in 2011, and for other drugs in
ensuing years. Pfizer also plans to generate significant cost
savings partly by reducing the companies' combined work force by
15%, or more than 19,000 employees.
Merck's Challenges
Merck and Sanofi-Aventis face similar challenges. Merck faces
the loss of patent protection for its best-selling drugs over the
next three years. Hypertension drugs Cozaar and Hyzaar face patent
expirations next year, while the Singulair allergy and asthma
medication is set to lose protection in 2012. Together, the drugs
accounted for about one-third of Merck's 2008 revenue.
Merck has hit setbacks finding newer drugs to replace revenue
lost to generic competition. An experimental cholesterol drug,
Cordaptive, was rejected by the U.S. Food and Drug Administration
last year, and sales for cervical-cancer vaccine Gardasil are
expected to continue to erode because of Merck's failure so far to
significantly widen its approved uses.
Clark said Tuesday that any deal would have to create value for
shareholders, and that Merck intended to support its dividend. He
didn't identify any potential acquisition targets.
A Merck purchase of Schering-Plough could alleviate some of
Merck's pain. Schering has less exposure to generic competition,
and it has a rich late-stage pipeline of experimental drugs. Some
analysts have cited Schering-Plough as a possible takeover
target.
Spokespeople for Merck and Schering-Plough declined to
comment.
Another possibility, however, is that Johnson & Johnson
(JNJ) would buy most of Schering-Plough, with Merck buying out
Schering's share of the cholesterol joint venture, said Bernstein
analyst Tim Anderson. The cholesterol agreement has certain
provisions governing each company's rights in the event of mergers
and acquisitions.
J&J Chief Executive William Weldon told analysts last month
the company would consider the right pharmaceutical acquisition,
but he indicated that high prices have kept J&J away from big
drug-industry deals.
It's also possible that Merck's Clark could stick with his
previous preference for a biotech deal, and some analysts have
suggested Gilead Sciences Inc. (GILD) or Biogen Idec Inc. (BIIB) as
fits. Another biotech that's been cited as a potential takeover
target is Amgen Inc. (AMGN), but its market capitalization of $59.5
billion might make it too pricey.
Sanofi's Possibilities
Sanofi also faces loss of market exclusivity for top drugs in
coming years, including anti-clotting drug Plavix in 2011. Sanofi
co-markets Plavix with Bristol-Myers. It also has had setbacks
bringing new drugs to market, such as the anti-obesity drug
Acomplia.
A possible Sanofi purchase of Bristol-Myers has been rumored in
the past. Whether such a deal makes sense is less clear. Bristol
faces its own wave of loss of exclusivity for top drugs in coming
years, and Bernstein's Anderson said Sanofi's recent change in
leadership may make a large deal less likely for now. Still,
Anderson considers Bristol-Myers a takeover candidate.
Roche recently went hostile with its pursuit of the stake in
Genentech Inc. (DNA) that it doesn't already own, a deal it's been
pursuing since last summer.
Abbott Laboratories (ABT) Chief Executive Miles White said last
month that he's focusing on acquisitions that build up the
company's non-pharmaceutical divisions, but he didn't rule out a
pharmaceutical purchase if the right opportunity came along.
GlaxoSmithKline PLC (GSK) CEO Andrew Witty previously has said
the company's not interested in a mega-merger. Investors may learn
Thursday - when Glaxo reports quarterly results - whether Witty's
thinking has changed after the Pfizer-Wyeth deal.
-By Peter Loftus, Dow Jones Newswires; 215-656-8289;
peter.loftus@dowjones.com
Click here to go to Dow Jones NewsPlus, a web front
page of today's most important business and market news, analysis
and commentary. You can use this link on the day this article is
published and the following day.