After Pfizer (NYSE: PFE ) made its move to buy Wyeth (NYSE: WYE ) , it didn't take long for the merger-and-acquisition opinion mill to shift into overdrive. Who's going to be the next big deal for big pharma?
Since the announcement, several executives, not surprisingly, have said they're only interested in strategic additions rather than megamergers. All I can say when it comes to big deals is, don't do it.
Don't be swayed by suggestions that synergies will emerge, that banks will magically start lending again, or that stock prices will revive quickly.
As for Pfizer-Wyeth, there are some reasons to make a deal. But there are as many, if not more, reasons to let these companies pursue smaller deals and collaborations rather than become just another part of a hyphenated corporate name.
Exactly what is it you do again?
When two companies hook up, there are a lot of details to rearrange. This can get the new, larger company bogged down. There's merging cultures, firing staff, romancing lenders, managing patent expirations of acquired drugs, firing more staff, addressing acquired legal problems, selling or spinning off assets, and rewriting strategic plans.
Does that leave any time to develop new drugs?
Besides, who can afford it?
There aren't many buyers that could afford one of the popularly discussed targets. After all, their market caps range from roughly $60 billion (Merck) to $30 billion (Schering-Plough).
And, of course, some of the players are probably out of play:
- Roche has eyes only for the 44% of Genentech (NYSE: DNA ) it doesn't already own. After Genentech rejected as too low Roche's $47.3 billion offer, things turned nasty when Roche made a hostile, lower offer.
- Novartis is now pursuing a slow-motion acquisition of Alcon, the world's largest eye-care company, whose controlling shareholder is Nestle. Last year, Novartis bought a 25% stake in Alcon from Nestle. Next year, it has the option to buy Nestle's remaining 52% of Alcon stock.
- Johnson & Johnson (NYSE: JNJ ) is a serial acquirer, but it seems to prefer more modest deals, such as the recent purchases of Mentor and Omrix Biopharmaceuticals. And, it's willing to walk away from deals that get just too crazy (shades of Guidant).
- Lilly just bought ImClone and is going to require some time to work that company into its own operations.
With Pfizer out of the picture, there's talk hovering around Merck. But, it has preferred in recent years the pursuit of collaborations and small to modest acquisitions. Nevertheless, Richard Clark, chairman and CEO, stirred M&A speculation recently when he told analysts: "Concerning large-scale transactions, as I said before, I wouldn't rule anything out. I don't think in today's world, any CEO can categorically rule out any type of transaction."
Big drug blues
The trouble is, everyone seems to be facing a version of Pfizer's "Lipitor disease" -- a best-selling drug with limited remaining patent life accounting for a huge percentage of revenue:
- Merck lost protection on Fosamax early last year.
- Merck is seeing protection disappear by 2012 on the two drugs that made up 40% of revenue through the first nine months of 2008 -- Cozaar/Hyzaar and Singulair.
- Bristol-Myers' Plavix, creating 27% of 2008 revenue, gets chopped in 2011.
- Lilly's Zyprexa, bringing in 23% of last year's revenue, is also done for in 2011.
Several other strong-selling drugs at Bristol-Myers and Lilly are facing patent expirations or expiring licensing deals between 2011 and 2014.
Then there's the plate of spaghetti that is today's pharma. Many companies have complex licensing and marketing deals, including agreements that have change-of-control terms. That means a buyer could pay full price for a target company without getting full benefit.
If Schering-Plough were acquired, the rights to Remicade, for several inflammatory diseases, and the experimental anti-inflammatory golimubab could revert to its partner, Johnson & Johnson. The rights to the cholesterol-fighter Vytorin could be acquired by joint-venture partner Merck.
Plus, there are licensing deals to disentangle. For instance, several big Bristol-Myers' drugs come from somebody else: Plavix and Avapro are licensed from France's Sanofi-Aventis. Abilify was developed by Japan's Otsuka Pharmaceuticals.
Don't forget the R&D collaborations, either. Picking on Bristol-Myers again, it has partnerships with AstraZeneca to develop a diabetes drug and with Pfizer to work on an anticoagulant. What happens with those in any sort of acquisition?
And, of course, there are always those that just don't seem to be a good fit for anybody. Schering-Plough purchased Organon BioSciences in 2007 from Akzo Nobel, and is still awaiting part of the payoff from the deal designed to bolster its human and animal pharmaceuticals. It is still waiting for the FDA's verdict on the schizophrenia drug Saphris, a key element of the Organon deal. Although Schering-Plough was a favorite takeover rumor for many years, with Merck often in the role as a fantasy suitor, it doesn't appear to be a strategic fit with most big drugmakers.
Pfizer decided that the rewards for buying Wyeth outweighed the legal, financial, R&D, and strategic risks that are part of the package. If the Alzheimer's disease drug being developed by Wyeth and Elan is a winner, Pfizer CEO Jeffrey Kindler will be hailed as a genius. If not, well, Charlie Brown could use the company after he loses the ballgame.
I'm not opposed to balancing risk and reward, especially if big pharma companies continue making collaborations with and incremental purchases of biotech companies. However, it just seems that in any giant pharmaceutical deal, most of the reward goes to the investment bankers.