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Industry braced for more mergers

Published on 11/02/09 at 11:29am

In retrospect, Pfizer's move to buy another major pharmaceutical company was inevitable. Like its peers, Pfizer has been energetically restructuring itself in recent times, from its salesforces to its R&D, but the fruits of these reforms cannot come quickly enough.

When Lipitor's US patent expires in 2011, it is set to lose most of its current $12 billion annual revenue in the space of just a few years. Meanwhile, other patent expiries and the relative failure of products like smoking cessation drug Champix/Chantix means there is nothing in the company's portfolio to replace it.

Pfizer's acquisitive approach to growth has set the pace for the industry over the last decade, and it is obvious that at least some of its peers could now follow its latest example.

The current status of Roche as big pharma's most dynamic company is largely (but not exclusively) down to its relationship with Genentech, with which it has co-developed and marketed a string of oncology blockbusters, such as Avastin.

Roche has held a controlling stake in Genentech for some time, but last summer launched a bid to buy the remaining share of the US biotech. Once this is complete, there will be little need for Roche to consider another large-scale acquisition.

Among the remaining major US pharma companies, Merck looks to be among the most likely candidates to take the plunge into a large-scale M&A.

Chief executive Richard Clark recently told analysts the company would look "across the whole spectrum" of deals, including a major takeover. "I don't think in today's world any CEO can categorically rule out any type of transaction," he said.

Merck has now largely cleared itself from the liabilities relating to the withdrawal of Vioxx in 2004, but hasn't found a product that equals the former blockbuster in revenue terms.

The company has forged a successful co-marketing partnership for cholesterol combination Vytorin with Schering-Plough, and this is the most obvious partner for a merger.

Schering-Plough has come a long way since Fred Hassan took over an ailing corporation in 2003. Hassan had performed a similarly impressive feat at Pharmacia, and ultimately made it a more attractive prospect takeover target, with Pfizer buying the company in 2002.

The cultural fit between the companies, and the potential for massive cost savings make it one of the most likely pairings.

Sanofi-Aventis has had a new chief executive as of December, when Chris Viehbacher was drafted in from GlaxoSmithKline to takeover after Gerard Le Fur was judged to have underperformed in the role.

A merger between Sanofi and Bristol-Myers Squibb, its US marketing partner for Plavix, could definitely be on the cards. At the end of 2008, the companies gained clear legal protection against any further generic assaults on their co-marketed Plavix.

However, the companies have just two years before the US patent expires in 2011, leaving them facing a huge loss in earnings.

Viehbacher may seize the opportunity before then to merge with BMS, which would create a company to rival the enlarged Pfizer in scale.

Novartis has just posted some of the best results in the sector for 2008, and has a number of promising products in the pipeline. However, its biggest selling product Diovan faces patent expiry in 2012.

The company is said to be focused on replacing lost revenue and finding additional income through organic growth in the remaining years.

But, like Pfizer, Novartis could run out of time. Chief executive Daniel Vasella has increased his company's stake in Swiss neighbours Roche to 33%, but Novartis cannot gain a controlling stake without the say-so of Roche's family-run board, which has so far remained out of the question.

One attractive, large-scale candidate for a Novartis tie-up would be Amgen. After years of stellar growth on the back of its biologics portfolio, the US biotech company came back down to earth with a bump in 2007 and 2008, as sales of its anaemia portfolio were hit hard due to safety concerns. Amgen shareholders' desire for renewed growth means it could be open to offers, and its expertise in biological drugs certainly makes it appealing to pharma companies with limited presence in biotech.

Andrew Witty, chief executive of GlaxoSmithKline since May 2008, has stated categorically he is not seeking a mega-merger. He said GSK would not "be distracted by large-scale M&A" at the company's 2008 results press conference, and its recent moves into smaller acquisitions and emerging markets back this up.

This means that an often mooted tie-up between GSK and the other major British pharma company AstraZeneca remains unlikely.

Indeed, Witty's approach may be more indicative of how pharma will be managed. He has now refused to issue short-term earnings guidance, reinforcing a shift away from pandering to the immediate gains that the markets hunger for.

Traditional 'big pharma' has a number of imperatives in terms of its long-term profitability and success. Chief among these is the need to diversify in terms of its research base (biotechnology, stem cell research etc) and in its geographical reach, particularly in emerging markets.

So while large-scale mergers between established US and European pharma companies will create cost savings and buy time, they won't help pharma reinvent itself for the 21st century.

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