Mega mergers sweep pharma industry

Merger-mania is gripping the global pharma industry. Just six weeks after Pfizer agreed to buy Wyeth, US pharma companies Merck & Co. and Schering-Plough announced they are to merge. Just a couple of days later, Roche won its long-running battle for full control of Genentech, and US biotechs Gilead Sciences and CV Therapeutics also agreed to merge.

Merck and Schering-Plough predict their merger will result in annual savings of $3.5 billion (?2.5 billion) from 2011, and the combined development pipeline contains 18 late-stage drugs. Around 15 per cent of the workforce will be cut, resulting in approximately 16,000 job losses. ’The combined company will benefit from a formidable R&D pipeline, a significantly broader portfolio of medicines and an expanded presence in international markets, particularly high-growth emerging markets,’ claimed Merck’s chairman, president and chief executive Richard Clark. ’The efficiencies we gain will allow us to invest in strategic opportunities.’

The non-hostile deal, which values Schering-Plough at $41 billion, is being couched in terms of a reverse takeover, with Schering-Plough acquiring its larger rival and changing its name to Merck. Had Schering-Plough been taken over, it would have had to return the non-US marketing rights for autoimmune disease treatment Remicade (infliximab) to Johnson & Johnson. This drug alone earned the company more than $2 billion last year. 

Roche, meanwhile, already owned just over half of San Francisco-based Genentech, and last July bid $89 per share for the remaining 44 per cent of the company. The bid was rejected, but after several increased bids, Genentech finally capitulated at $95 a share. Roche estimates the takeover will generate cost savings of at least $750 million a year.

The third deal resulted from a hostile $16 a share bid from Japan’s Astellas, made last November for CV Therapeutics. This was rejected, and instead CV accepted $20 a share from its Californian neighbour Gilead Sciences. Gilead specialises in HIV drugs, but is also active in the cardiovascular market, which is CV’s speciality.

In the current economic climate, big mergers provide a relatively easy fix to improve both costs and the bottom line. ’In an ideal world, companies would be researching their way out of the situation,’ says Kevin Bottomley, senior principal at UK-based consultancy firm PharmaVentures. ’But there is a lot of pressure from patent expiries on companies’ margins, and one way to get short- to medium-term benefit is through a merger. Schering-Plough has a relatively good pipeline, and relatively low exposure to patent expiries. Merck has replenished its pipeline in one fell swoop.’ 

The Roche deal is more about cost-savings from synergies, he says. ’Roche essentially owned Genentech already, although the companies really operated separately in the US. Going back a decade, a lot of store had been placed on maintaining Genentech’s independence and retaining its creative vitality, but that’s less important now as some of the products they were nurturing have now reached the market.’ 

More mergers inevitable

Cost savings, particularly in the US, are now essential, according to Mahmud Hassan, director of the pharmaceutical MBA programme at Rutgers Business School in the US. ’Managed care is having a big influence, as it’s not just physicians who dictate the line of treatment any more,’ he says. Coming healthcare reforms will also inevitably see prices paid for drugs fall, and a greater reliance on cheap generics. ’Unless companies take care of the negative impact now, it will be too late.’

Mergers offer an attractive alternative to specialisation as a means of increasing value thanks to the element of time, offering faster returns than focusing effort on a specialist niche. ’Mergers are painful but within a year or so the benefits will be seen,’ says Bottomley. ’Specialisation takes time to do, and also indicates that a company cannot compete in every market.’ 

The fact that takeovers are happening on a smaller scale, such as Gilead and CV, reinforces the trend, Bottomley says. In recent weeks there has been much market speculation that some companies have cash but deficient pipelines, and will be looking to merge, he says. ’Merck and Pfizer were two of those named, and Schering-Plough and Bristol-Myers Squibb have good pipelines but lack critical mass. Amgen has been talked of as a takeover partner, too, and there are other potential targets outside the US. I think the restriction will be more on the companies that can afford to do the acquisition. They either need large reserves of cash, or access to funding - and that is quite challenging in these times.’ 

Hassan agrees that more mergers are inevitable. ’I should be surprised if there’s not another big deal coming up in the next couple of months,’ he says. ’The business environment is unstable so it’s a no-brainer they are doing this.’

Sarah Houlton