The Pharmaceutical Industry Merger Mania-”The Consolidation Camp” vs. “The Diversification Camp”

The Pharmaceutical Industry Merger Mania-
”The Consolidation Camp” vs. “The Diversification Camp”


Consolidation in the Pharmaceutical and Biotechnology Industry has been grabbing headlines lately and of course we have a strong point of view about how this may shape or mis-shape the industry going forward. While the biggest headlines involve the Pfizer-Wyeth, the Merck-Schering Plough and Roche-Genentech consolidations, we feel compelled to discuss these and alternatives that may have been considered and the landscape that may develop as a result of these moves.

Let's look at some of the alternative strategies that can be deployed given that most CEO's would acknowledge that the combination of low ROI from R&D investments, patent expirations, demise of the blockbuster model, ineffectiveness of the sales force armies, excess manufacturing capacity, increased regulatory oversight, significant pricing pressures, and the lack of success (failure?) of large consolidations wreak havoc with long term direction.

Chris Viehbacher, the new CEO of Sanofi characterized two strategic camps in a recent interview with Bloomberg News-they are the “Consolidation Camp” and the “Diversification Camp”.

To us, Pfizer is the prime example of the Consolidation Campers with expenditures of nearly $200 billion in the last several years to acquire Warner Lambert and Pharmacia along with several other smaller acquisitions, only to have its stock market cap for the consolidated company reach under $100 billion despite loads of restructuring, re-engineering and synergy targets. It appears that once synergy targets are met (1-4 years), company values as measured by stock market capitalization seem to wane quickly and the quest/thirst for more consolidation continues at a frantic pace.

For us the leaders of the Diversification Campers are Johnson & Johnson and Abbott. Both companies have major lines of business outside traditional large molecule pharmaceuticals with significant and growing businesses in consumer healthcare and medical devices and diagnostics. Their acquisition strategy seems to be small to mid size chunks, notably J&J's $16 billion+ acquisition of Pfizer's Consumer Healthcare Businesses as well as numerous biotechnology companies, while Abbott has acquired Advanced Medical Optics (AMO), Guidant's Vascular Intervention and Endovascular businesses and Kos pharmaceuticals.

Both J&J and Abbott seem to have incremental “bite sized” acquisitions, all meant to provide a portfolio of “health care” lines albeit balanced among multiple sub segments of the industry. Both companies seem to have accelerated the success of these acquisitions by leveraging existing franchises and/or management and infrastructures. Notably one wonders why they haven't or if they might look at generic pharmaceuticals and/or animal health to round out their portfolios.

We will next discuss our opinions of the recent merger wave and who were the smart ones (could it be Pfizer, Merck or Roche??). Stay tuned and we will look at other alternatives we think may be developing.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.


Contributed by Larry Rothman

What Does Barron's See in Abbott that We Don't?

We’re well into the second month of the year, the world hasn’t fallen apart as some had predicted. But, then things haven’t taken off as others had hoped. Things are kind of, please excuse the technical term, blah.

Yet, some people are still back in the good old days, or, wish that they were. I found an example in this week’s Barron’s. Neil A. Martin penned an article about Abbott Laboratories (NYSE: ABT) entitled “Abbott Labs: a Prescription for Success”. He paints a very optimistic picture for Abbott. Yet, somehow, I couldn’t help but think that I’ve heard this all before.

Much is made of Abbott’s drug pipeline and how, unlike its competitors, they aren’t about to have any patents expire soon on their key products such as Humira, Niaspin, and Similac. OK, but, don’t patents eventually expire? (OK, I know some of you are snickering out there in the Blogosphere and saying to yourselves, “Not if you’ve got good lawyers.” I don’t buy that and will deal with you in a future blog.) They do. In some parts of the world, like India, they don’t care about your patents and if you try to introduce your products there, you’re going to run into the buzzsaw called ‘generics’.

Much is made of Xience, Abbott’s drug eluting stent acquired from the late Guidant Corporation. Between stents, drug eluting or otherwise, becoming a commodity and the risks from government healthcare reform, I’m not so sure that I’d get too excited about this.

Now, I don’t want to appear to be too critical. Neil does mention Wall Street’s concerns about Abbott’s growth being unsustainable. Though, he does try to minimize their arguments.

CEO Miles D. White is quoted as saying that Abbott if done with acquisitions for a while thereby violating Guy’s Third Rule of Being a CEO, always talk about the possibility of acquisitions. I suspect that White realizes that he can’t do acquisitions anymore for a variety of reasons ranging from financial to organizational.

Here’s why I’m harping on this article and poor Martin. Things have changed in the life sciences sector significantly over the last few years and will continue to do so. Pipelines come to an end. Companies without strong intellectual capital and lengthy track records of scientific achievement, not necessarily resulting in new products, cannot achieve these overnight. Companies with these assets are led by PhD’s in the sciences, MD’s, and similar credentials not MBA’s from Stanford University accomplished in the legerdemain of corporate finance.

The recent lessons from Wall Street and the American banking industry should be sufficient proof that there’s more to running to running a successful business than just a mindless shell game of assets shuffling.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Wow - What a Week for Pharma M&A and Our Opinions on What's What

Larry and I have been blogging a lot recently about the Pfizer/Wyeth merger and some other possibilities. I want to spend a little more time because I think that it’s fundamental to what’s happening in Big Pharma right now. Also, with Tom Daschle dropping out of consideration for a Cabinet post, President Obama won’t be able to start his agenda for U.S. healthcare policy for a while, so we have some time to focus on M&A activity in the BioPharmaceutical Sector.

While I’m still not a big believer in the sense or economics of mergers in the drug industry, they sure generate a lot of ink in the press. (Or, are they are electrons in the age of blogs? I’m having a difficult time adapting my metaphors to the Internet age.) I get the reasons, falling stock prices, lots of cash on drug company balance sheets, and CEO’s desperate to do anything to appear to be adding growth to the top line. Also, the lack of any real news seems to engender a lot of wishful thinking out there in the media.

Here’s one example. Jim Cramer over at CNBC recently blogged (http://www.cnbc.com/id/28813740 ) about the possibility of a merger between Abbott Laboratories (NYSE: ABT) and Celera (NYSE: CRA). Seems that Abbott’s CEO, Miles White, has been talking about the possibility of acquisitions (But then don’t CEO’s always talk about this? This is Guy’s Third Rule of Being a CEO.), and they are both already working together in the area of personalized medicine. Jim admits freely that he is only speculating here, but, given the article in Barron’s which came out today chiding him about his track record in making predictions, I don’t think I’ll put much into this one. I did find Jim’s summary of personalized medicine interesting and I’ll return to this in a future blog.

Meanwhile, Mike Huckman is keeping hopes alive over at his blog (http://www.cnbc.com/id/29014145 ) about the possibility of Roche (SWX Europe: ROG) acquiring Genentech (NYSE: DNA) in a hostile takeover. This was his second prediction for the pharmaceutical industry in 2009. Now, I’m not picking on Mike. I have a lot of respect for him. But, looking at his photo on his blog, I think I can safely say that I’m a few years older than him. OK, maybe more than a few years. Anyway, my point is that since 1976 when Robert Swanson and Dr. Herbert Boyer launched Genentech, I’ve been hearing people talk about a hostile takeover. It’s a perennial. Also, as I’ve blogged before, this kind of deal doesn’t make sense to me.

This week, Merck's (NYSE: MRK) CEO, Richard Clark stepped back from their long standing high and mighty point of view against mergers and "hinted" (http://blogs.wsj.com/health/2009/02/03/as-sales-slump-merck-ceo-clark-looks-to-acquisitions/ ) by saying “I don’t think any CEO in this environment can categorically rule out any transaction,” Clark said, according to Dow Jones Newswires. “There are opportunities across the whole spectrum we would look at.” We're not that clear on the position Andrew Witty, Glaxo's new CEO is taking first saying that there will be no acquisitions, and then suggesting "bolt-ons" and then suggesting that acquisitions will take a prominent role as Glaxo looks to back away from the traditional big pharma "Blockbuster" model and move further into consumer, vaccine and emerging markets (http://www.natap.org/2009/newsUpdates/010909_05.htm ). It may be of some interest that almost simultaneously and representing only about 1% of the value of the Pfizer-Wyeth deal, Glaxo acquired UCB's emerging market business for $687 million. In the meanwhile, Astellas launched a $1 billion hostile tender for CV Therapeutics (http://www.dealmakersforum.com/) and rumors continue to abound about a potential BristolMyers-Squibb-Sanofi hook up. Quite a week!

Other possibilities exist including Carl Icahn's continuing pursuit of "enhancing shareholder value" (e.g. sale to a Big Pharma company) at Biogen-Idec . That’s the fun thing about this kind of market, anyone can speculate about anything, even me. Let’s see what happens, I think that this is going to be a very interesting year.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin