By and large, when you see a lot of merger-and-acquisition activity from pharmaceutical companies, it's usually targeted at adding development-stage compounds, proven drugs, or additional manufacturing capacity. Swiss drug company Novartis
Late Thursday, Novartis announced that it had reached an agreement with Bristol-Myers Squibb
On first blush, Excedrin appears to be the real prize here. The pain reliever accounted for about $160 million of the $258 million in sales that the acquired business totaled in 2004. What's more, Novartis really has no over-the-counter adult pain medicine of its own, so I can see why Excedrin would be an appealing product line to add.
For Bristol-Myers, this seems like a pretty solid deal. The price paid seems fair -- neither a bargain nor a fleecing -- and it will allow Bristol-Myers to focus on higher-margin businesses. While $660 million won't make much of a dent in the company's debt balance of more than $8 billion, it's still a good chunk of change, and it represents a good return for a business that the company really didn't want to keep.
As for Novartis, I think I'm finally figuring out what it's up to. In buying Hexal and Eon Labs, Novartis has become the largest generics company in the world. And now that it's bought Bristol-Myers' OTC business, Novartis will also be among the world's largest OTC drug companies. Scale matters in these lower-margin businesses, and by getting bigger, Novartis may, in fact, be getting better as well.
Broad diversity has worked well for other large players in the pharmaceutical space, and it seems as though Novartis is following that basic model, albeit with its own twist.
It takes literally years for these decisions to play themselves out as being good or bad, but I'd be inclined to give Novartis the benefit of the doubt. Future margins may not be as high as they once were, but if the company can produce a lot more cash flow, investors won't mind a bit.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).