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December 4, 2006
Volume 84, Number 49
Web Exclusive

Mergers & Acquisitions

Megadeals wane, but consolidation continues

Joanne Grimley, IMS Management Consulting

The era of the megamerger within the pharmaceutical and biotechnology industries appears to be at an end. The last such deal, valued at nearly $70 billion, took place in August 2004 when Sanofi-Synthelabo and Aventis merged to form Sanofi-Aventis. Although megamergers no doubt lead to increased critical mass, as demonstrated by the global ranking of the top five companies by sales, they do not always bring a solution for every problem, particularly poor R&D productivity.

Indeed, mergers can actually disrupt the work of researchers as pipelines are reviewed and projects are reprioritized. After its creation in 2000, GlaxoSmithKline, for one, subsequently split its R&D teams into smaller groups based on therapy areas to encourage the levels of innovation seen in smaller biotechnology rivals.

The largest deal of the past 12 months was the battle for Germany's Schering AG, which was won eventually by domestic rival Bayer for about $19 billion (C&EN, June 19, page 15). This transaction, alongside Merck KGaA's earlier attempt to buy the Berlin-based drug company for about $16 billion, dwarfed the rest of merger and acquisition activity in European pharmaceuticals, which largely consisted of gaining footholds in new regions or bolt-on acquisitions that fit naturally with the buyer???s existing business lines or strategy.

The deal tentatively rebalances Bayer's portfolio in favor of its prescription business, which had been in danger of being overwhelmed by its recent efforts to expand its consumer health care business. Quite how Bayer intends to extract cost synergies from the acquisition without selling off Schering's diagnostic imaging business and Medrad injection systems subsidiary is difficult to fathom alongside the longer term pipeline issues that Schering brings to the table.

On Sept. 21, Germany's Merck snapped up the founding Bertarelli family's 64.5% stake in Swiss biotech company Serono for $13.3 billion to create Merck-Serono Biopharmaceuticals, with combined annual sales of nearly $10 billion (C&EN, Sept. 25, page 16).

The same day, German chemical and pharmaceutical company Altana Group, owned by the billionaire Quandt family, announced plans to sell its drug business to Danish drugmaker Nycomed for approximately $5.7 billion (C&EN, Sept. 25, page 47). The deal is almost certain to prove challenging for Nycomed with generic competition for pantoprazole overhanging in 2009. The stomach-ulcer-buster pantoprazole is Altana Pharma's biggest drug, with sales of $1.3 billion in the 12 months to June 2006, representing 54% of its pharmaceutical revenues.

On Sept. 25, Belgium's UCB announced a $5.6 billion takeover of Germany's Schwarz Pharma (C&EN Online Latest News, Sept. 26), marking it the third takeover of a family-controlled European pharmaceutical player in less than a week. The cash-and-stock deal will potentially transform the second-tier drugmakers into a leading European biotechnology firm focused on neurology, inflammation, and oncology, with annual sales of more than $4 billion.

Among the buyers, UCB had a less acute need to make an acquisition than did Merck. The latter's failure to secure the clearly desirable Schering in the face of a counterbid from Bayer had left it in obvious want of a deal. Schwarz's pipeline should allow UCB to bridge an awkward earnings gap when Keppra, its flagship epilepsy product, faces generic competition in the U.S. beginning in 2009. UCB gains access to potential blockbusters, such as lacosamide, an anticonvulsant compound with potential as a treatment for epilepsy and neuropathic pain. Meanwhile, Schwarz will benefit from the Belgian company's stronger marketing capabilities, especially in the U.S.

IMS anticipates more deals to come. Pharmaceutical companies simply need more products but don't have the R&D capacity to meet what their earnings growth estimates dictate. Still, spending in what some cases amounts to triple-digit premiums on biotechnology assets is not a new phenomenon. And it is not confined only to the search for new products, but it is also applied to securing prominent technology platforms.

Roche, for example, spent about $180 million to buy the Swiss company GlycArt Biotechnology last year in a bid to strengthen its preclinical research. In the U.S., Pfizer was willing to spend an equivalent sum to buy Idun Pharmaceuticals, and Merck & Co. in the U.S. acquired GlycArt competitor GlycoFi for $400 million in May (C&EN, May 15, page 10).

Paying a total of about $1.1 billion, AstraZeneca shelled out a 67% premium for the U.K.'s Cambridge Antibody Technology in August. The deal was very much a technology-driven acquisition, as was its December 2005 $210 million purchase of U.K.-based KuDOS Pharmaceuticals, which had a technology similar to Idun's drug-induced cell apoptosis.

The pace of consolidation in 2006 shows no sign of slowing. There are always continuing rumors and speculation about megamergers involving the likes of AstraZeneca, GSK, Merck & Co., Novartis, Schering-Plough, and Wyeth. Even if these fail to materialize, bankers in the life sciences sector still are set to have plenty of business coming their way.

Joanne Grimley is a consultant with IMS Management Consulting. IMS is a provider of market intelligence and strategic consulting services for the pharmaceutical and health care industries. All data in the article are sourced from IMS, unless stated otherwise. For further information about IMS, visit

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