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Jul 17, 2009

This Year’s Major Mergers—What Makes Sense and What Doesn’t

Five big pharma firms spend big bucks to fortify businesses.

  • During the first half of 2009 we have seen the continuation of a trend toward consolidation in the biopharmaceutical industry with a number of significant mergers and acquisitions involving various combinations of acquirer type and target players. Among the highest-priced acquisitions, five involve big pharma and highlight their need to boost their pipelines and/or commercial portfolios.

    Big Pharma Buying a Large Biotech

    Roche’s $46.8 billion acquisition of Genentech represents the former’s desire to gain access to Genentech’s revenues and its pipeline of oncology biologics. Over the past decade Roche had acquired a 56% stake in Genentech, and the companies worked closely and harmoniously, with the Swiss pharma giant receiving a lot of credit around the industry for leaving— at least for the most part—the princess of biotech alone to develop its oncology treatments. In July 2008, however, Roche made an offer of $89 per share to acquire the remaining 44% of Genentech’s outstanding shares.

    The deal eventually closed in March 2009 for $95 per share, a 16% premium over what DNA was trading before the initial offer, in what ended up being a testy process. The main motivation behind the acquisition for Roche was access to Genentech’s pipeline of marketed biologic agents for the treatment of cancer, including multiblockbusters Avastin, Herceptin, and Rituxan. In terms of merger integration, we expect to see a shift in R&D, with Genentech focusing on earlier-stage research and taking programs up to Phase II. Roche with its deeper pockets and longer experience will likely take over once a program is ready for Phase III testing and run late-stage trials.

    Avastin’s failure in early-stage colon cancer announced just a few weeks after the merger had been completed was definitely not the news Roche was hoping for. Yet Avastin, which is being tested in a number of other solid tumor settings, still has a decent chance of success in one or more additional indications. Roche’s current disappointment could be overcome with additional Avastin sanctions, sales growth in the indications Avastin and Genentech’s other biologics are approved in, and finally, from new compounds currently in earlier-stage testing in the Genentech pipeline.

    Big Pharma Taking Over a Small Biotech

    Johnson & Johnson’s (J&J) $893.7 million purchase of Cougar Biotechnology was for access to a single drug: abiraterone acetate, a Phase III prostate cancer treatment. In May J&J announced that it was willing to pay $43 per share in cash, representing a 16% premium on the previous day’s close. Abiraterone, also known as CB7630, is an oral treatment and has shown impressive efficacy and safety results in four Phase II studies.

    Should the strong data on PSA responses and tumor shrinkage translate into overall and progression-free survival (PFS) advantages in the two pivotal Phase III trials, then J&J will benefit a lot more than the $893.7 million it paid. Abiraterone could become a successful drug commercially with the potential to reach multiblockbuster status given its safety profile, oral administration, and the large market it addresses. This acquisition, however, is not without risk for J&J: All the data we have seen thus far from the abiraterone trials are from uncontrolled, open-label, single-arm studies. Additionally, efficacy results albeit impressive will have to surpass the hurdle of translating into a survival and PFS benefit.

    In another example of a big pharma acquiring a smaller biotech, GlaxoSmithKline acquired privately held Stiefel Labs for $2.9 billion this April. Stiefel is a dermatology specialist selling both prescription and OTC products including medications for acne. It grossed about $900 million in sales during 2008. The main impetus behind GSK’s acquisition of Stiefel was its desire to increase its presence in the dermatology space, which resulted in $550 million in sales last year.

    This acquisition is viewed as being completely on the other end of the spectrum from the J&J/Cougar acquisition in many ways. There is limited clinical and commercial risk associated with the Stiefel takeover, since its products are already on the market.

    Big Pharma Acquiring a Big Pharma Peer

    This year has seen two such mergers: Merck & Co. with Schering-Plough and Pfizer with Wyeth. 2009 opened with the $68 billion Pfizer/Wyeth marriage, combining the most powerful pharma sales and marketing machine with one of the most highly regarded and most “biotechy” of the U.S. large-cap pharmas. The result is a company with a combined $71 billion in sales.  The $68 billion price tag is nothing to sneeze at, of course, but we remind investors that in 2000, Pfizer paid $89 billion for Warner Lambert.

    In its deal with Wyeth, Pfizer agreed to pay $50.19 per share for Wyeth, a 30% premium, in a part-cash/part-stock transaction. Each outstanding Wyeth share was converted into $33.00 in cash plus 0.985 of a share of Pfizer stock valued at $17.19 per share. The acquisition was financed through a combination of cash, debt, and stock, with Pfizer borrowing around $22.5 billion to finance the transaction.

    The impetus behind Pfizer’s desire to acquire Wyeth has a lot to do with the impending Lipitor patent expiration in 2011. The drug has brought in about a quarter of the company’s revenues every year. In terms of cost savings, the companies believe they’ll save approximately $4 billion annually, which partially comes through a 15% reduction of their combined workforce.

    Pfizer is undoubtedly known for its ability to take products it has acquired or in-licensed and market them extremely effectively. On the other hand, Wyeth has its own blockbusters including Enbrel for the treatment of rheumatoid arthritis, which is co-developed with Amgen, and Prevnar, a pediatric vaccine. Plus it has one of the most promising pipelines among U.S. big pharma companies, so the marriage of the two makes a lot of sense, at least at the high level.

    Given the number of mega-mergers that have not really worked, especially in pharma and especially the ones involving Pfizer, this merger would have to provide significant synergies and cost reductions to end up being labeled a success, though.

    The next big pharma merger came in early March when Merck acquired Schering-Plough for $41 billion, or $23.61 a share, a 34% premium over the firm’s previous day closing price. The deal included $10.50 in cash and about 0.6 of a Merck share for each Schering-Plough share.

    The deal had been rumored to occur for a number of years, partly because the two companies share the rights to the $4 billion Zetia and Vytorin cholesterol franchise, which has had a difficult year due to controversy over their safety and efficacy. In addition, Merck is losing patent protection for Cozaar, a hypertension drug, as well as Singulair, which treats allergies and asthma. Schering-Plough, on the other hand, has relatively few products that are close to patent expiration.

    Finally, Schering-Plough has a strong ex-U.S. presence, generating about 70% of its revenue outside the U.S. The synergies and cost savings could come from the streamlining and re-focusing of the R&D, sales, and marketing organizations. In terms of integrating R&D, the merged entity will have to combine three organizations, since Schering purchased Dutch drug maker Organon just two years ago for $14 billion.

    All told, these acquisitions total $109 billion. Additionally, having come in such close succession, they mark a heightened level of interest on big pharma’s part in the biotech space. The consequences of such major consolidations will not be evident for a while, and questions remain as to whether we’ll see the bigger biotechs implement a similar acquisition strategy. These large biotechnology firms continue to face the need to replenish their pipelines given the demand for continued revenue and bottom-line growth and the ever increasing threat from biosimilars.

     


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