Magazine
Merger Mania?
Our new columnist speculates on the Pfizer/Wyeth fallout
By Ed Silverman
For the past two years, Jeff Kindler regularly demurred when asked about making a big acquisition. The Pfizer chief executive repeatedly insisted that buying another large drugmaker was not at the top of his list, even though the patent on the Lipitor cholesterol pill — the world’s best-selling medication with $12.4 billion in 2008 sales — expires in 2011 and there was nothing in the pipeline that could come close to compensating for the loss.
For instance, in January 2007, he told Wall Street analysts, “I don’t believe size, for the sake of size, is something to aspire to. Regarding a mega-transaction, we’re not ruling anything out. However, I think we’ve been very clear we’re only interested in strategic transactions for the good of our shareholders.”
By March 2008, he was less equivocal, citing a pair of huge deals Pfizer previously undertook. You remember them — the 1999 Warner-Lambert deal that yielded Lipitor, and Pharmacia in 2002, which added the painkillers Celebrex and Bextra. The idea was simple: pump up revenue and profits would flow to the bottom line as costs were cut. But it didn’t work out entirely as planned, partly because of side effects associated with the painkillers. But Mr. Kindler acknowledged something else:
“Look, the Warner-Lambert and Pharmacia transactions brought us a lot of things. . . . But they took a long time to integrate, they were extremely disruptive. . . . You can’t get around the fact that it impacted our R&D productivity. . . . As I sit here today, I don’t see a combination with another big biopharma company where the strategic value and the long-term value to our shareholders is good enough to offset these considerations that I’ve described.”
That doesn’t sound like someone who was rushing to buy another big drugmaker, does it? What he didn’t say, of course, is that the Pfizer board was actually spending a great deal of time trying to sort out acquisition possibilities. For a while, the drugmaker seriously considered buying one or more biotechs, such as Biogen, as a way to bolster its pipeline and branch out to other therapeutic markets. Later, Pfizer explored scooping up Amgen.
But another line of thinking dictated that the target really should be a big drugmaker, especially since Wall Street was clamoring for Pfizer to do something — anything! — to bolster its stock price. The board was feeling the pressure and, for a time last year, Bristol-Myers Squibb was reportedly the focus of some discussion.
Of course, Pfizer eventually targeted Wyeth in a deal worth $68 billion. The move has since raised numerous questions about whether Pfizer made the right decision, especially since Mr. Kindler recently acknowledged that digesting Pharmacia was an issue for the R&D team. It is not a new axiom in the pharmaceutical industry that cost cutting is a sure means to finding hot sellers in the laboratory.
Whatever the merits, the merger agreement revived fevered speculation that a wave of consolidation is about to sweep the pharmaceutical industry. The deal may “mark the beginning of a year of sector consolidation and could trigger other pharma-pharma or pharma-biotech deals,” wrote Credit Suisse analyst Catherine Arnold in a report to investors.
Will this actually happen? Hard to say, but Merck chief executive Dick Clark shortly thereafter deliberately sent a few signals by publicly confessing to interest in a big deal of some sort. That’s a significant departure for Merck, a company that spent decades priding itself on a philosophy that eschewed mega-mergers and products that weren’t homegrown. But times haves changed and big pharma companies can’t go it alone anymore.
That’s no secret — big drugmakers have been stepping all over themselves the past few years as they woo biotechs and specialty pharmas to strike development deals, ink licensing pacts, or take minority positions. Given the financial crisis and ensuing credit crunch, this would seem like a better time than ever for a big drugmaker to gobble up one or more of these smaller outfits, assuming the price tag isn’t too rich.
Now, though, investment bankers, fund managers and competitive intelligence purveyors are checking sources and swapping speculation to sort out which pairing should occur next. Key questions: Who has the biggest patent cliff? Who has the weakest pipeline? Which board would be willing to deal? Which chief executive is the toughest negotiator? And which company is likely to be able to raise financing, anyway?
You know the saying — if we knew the answers to these questions, we probably wouldn’t be writing this column. But suffice to say that some big pharmas appear more likely than others to get talked up over the next few weeks and months, if for no other reason than that investors want to see more than cost cutting, small deals and incessant chatter about the importance of emerging markets.
For instance, Bristol-Myers Squibb has gradually repositioned itself as a specialty company of sorts, in such areas as oncology and may appear attractive for that reason. Sanofi-Aventis would be a likely suitor, given that the companies jointly market the best-selling Plavix bloodthinner. Moreover, the French drugmaker needs to do something dramatic to turn itself around. Maybe this is too obvious, but why rule it out?
What else? We already noted that Merck is open to a deal. And Roche is scrambling to acquire the rest of Genen-tech — the Swiss drugmaker already owns 56% — for anywhere from $44 billion to $52 billion, depending upon the final price. We’re assuming a deal gets done, but clearly, Roche wants to deal.
What about the other familiar names? Lilly is paying $6.5 billion for ImClone Systems, so perhaps chief executive John Lechleiter will be occupied for the near term. And Schering-Plough is probably seen as less desirable after Vytorin prescriptions crashed last year amid the scandal over clinical trial results. Then again, the drugmaker doesn’t face the same patent cliff as most of its rivals and chief executive Fred Hassan is as opportunistic as they come. [Ed. note: The company is in the midst of digesting Organon, so that may also put a damper on SP acquisition talk.] [2nd Ed. note: Looks like I blew that call.]
Other big pharmas maintain they are not interested in a big-time acquisition. AstraZeneca chief executive David Brennan recently insisted a merger isn’t in the cards for AZ. And Andrew Witty, the new chief executive at GlaxoSmith-Kline, prefers to talk about snapping up smaller prey, rather than doing a large acquisition. But at the end of the day, they all face similar problems and are obligated to consider every alternative.
Where does that leave us? It may well be that the only thing between the present roster of a dozen or so big pharma and a much smaller bunch is stock price and — don’t forget — personalities. Chief executives and board members are always jockeying for clout and caché. Of course, the ability to finance a deal is going be hampered for the next few months, so the odds that the industry will be reduced to just a handful of big pharmas by year’s end is unlikely.
But some certainties remain — more cost cutting will occur, and more operations will be established overseas, particularly in Asia. The number of key decision-makers may remain intact, more or less, but there will be fewer doers — those doing the actual work of developing and manufacturing medicines. And that means laboratories and plants will close.
In this environment, it doesn’t take a big acquisition or three to create upheaval.
