Clinch the deal

The wave of mergers in the pharmaceutical and biotech sectors continues to roll on with no hint of faltering yet. The market wisdom is that such bid frenzy results from big pharmaceutical groups taking over their smaller brethren in order to get their hands on new drugs in the bid target's pipeline.

We believe that players are trying to position themselves for the future by buying biological pipelines. The latest bids come on top of Bayer/Schering, AstraZeneca/Cambridge Antibody Technology, Shire /TKT and Amgen/Abgenix, comments Navid Malik, analyst at broker Collins Stewart.

This has certainly been the case with AstraZeneca (AZ) which has clinched deals with other companies to provide the next generation of drugs. It has licensed in Protherics' sepsis drug, Cytofab, and has also bid for rivals such as Cambridge Antibody Technology and Kudos to bolster its own drugs pipeline.

However, the reasons for the wave of mergers in the pharma sector are more complex than merely bolstering drug pipelines, as an analysis of some of the major bids over recent months detailed in this article reveals.

Bayer & Schering - complementary
German company Bayer scooped up Schering AG for Ä16.3bn after rival Merck KGaA abandoned its bid for the company. The rationale for the merger lies in the fact that the two businesses complement each other and have followed much the same development lines. While true, Bayer also secured a promising drug pipeline as part of the deal.

This is a merger aimed at positioning Bayer Schering Pharma as a global pharmaceutical business, said Dr Hubertus Erlen, the chairman of Schering's executive board. He emphasised that both businesses are complementary and follow the same strategy.

Bayer secured a merger with a research-based pharmaceutical company focused on four key business areas, comprising gynaecology and andrology, oncology, diagnostic imaging and specialised therapeutics for the treatment of disabling diseases. Schering had been aiming for leading positions in these specialised markets worldwide and the merger with Bayer means that the combined units should achieve this aim.

Bayer also secured a high value in-house research and development division, along with an exclusive global network of external partners, plus a promising product line. The merged company has R&D centres in Berlin, Wuppertal and in Richmond, Berkeley and West Haven in the US.

The bid cannot be classed as an opportunistic attempt to bolster Bayer's drug pipeline, although it will have that beneficial effect. The two pharma giants were working on similar, complementary lines and the merger should deliver considerable synergy benefits as well as cost savings - a necessary step for both companies if they wish to stay near the top of a global pharmaceutical market.

UCB & Schwarz Pharma - size
Belgian pharma firm UCB is buying Germany's Schwarz Pharma for Ä4.4bn. The simple and sensible rationale for the deal is the creation of size in the marketplace and epitomises the current consolidation trend among medium-sized pharmacos.

Size, UCB reckons, increases the allure of the combined group for attractive licensing deals and R&D collaboration. The entity will have sales of Ä3.3bn, combined R&D spending of Ä770m and an attractive neurology and inflammation drug pipeline.

UCB itself has a promising new drug Cimzia, a treatment for intestinal disorder Crohn's disease, which could generate sales of approximately Ä794.9m ($1bn) a year. UCB has been seeking new drugs ahead of the loss of US patent protection on Zyrtec, its top-selling allergy drug, due in December 2007.

Back in 2003, Schwarz Pharma was the only seller in the US of a generic version of AZ's anti-ulcer drug, Prilosec, but other generics firms soon came into the market with competing copycat drugs.

By way of response, Schwarz Pharma has evolved from a generic drugmaker to a company that develops its own drugs, and its pipeline now features promising neurology treatments.

The UCB-Schwarz Pharma deal will yield synergy benefits of over Ä300m after three years and will add to earnings after the second year.

Merck KGaA & Serono - desperation
The market was taken by surprise in September when Merck KGaA launched a bid of Ä10.6bn ($13.3bn) to buy the Swiss biotech firm Serono. This is a case of two mid-sized European drugmakers merging to gain leverage in a global marketplace, facing tough competition and rising R&D costs.

Given that Serono is Europe's largest biotech firm, the combined companies - the merger is set to close early in 2007 - will form one of Europe's biggest drug groups with annual sales of almost $10bn and a research budget of $1.3bn.

Serono's chief executive Ernesto Bertarelli - the Bertarelli family holds 64.5 per cent of Serono's equity - had been actively seeking takeov er targets before reversing his position to find a buyer for Serono. Merck KGaA had failed in its earlier attempt to buy rival Schering and struck a deal with Serono's founding Bertarelli family to buy their stake, offering SwFr1,100 (Ä690.5)-a-share to the other shareholders.

Most dealers in the market were unimpressed and felt the merger smacked of desperation. One German fund manager commented: I don't think it's a great idea. They were desperate and had to do something.

Another fund manager commented that the deal gives Merck a strong multiple sclerosis franchise through Serono's Rebif drug, but fails to improve the pipeline, given Serono's poor research productivity record.

Yet a further analyst was more optimistic, noting that even though the valuation does not imply a bargain, the strategic rationale of an expanded pharmaceutical business might pay off over time.

Analyst Navid Malik is also bullish that the offer for Serono is a transformational deal. It allows Merck to move aggressively into the biologicals market - an area of the market with which Merck is already familiar through sales of the antibody Erbitux for colorectal cancer.

Nycomed & Altana - expansion
Denmark's third biggest drug maker Nycomed successfully bought out Altana`s pharmaceutical division in a Ä4.2bn deal; the combined companies will have sales of Ä3bn.

The two entities got together to achieve a leading position in their home and neighbouring markets, as well as to expand overseas. HÂkan Bjˆrklund, Nycomed's chief executive, spells out the rationale for the merger as: Combining the two companies will give us a leading position in our European markets and a solid platform for growth in some of the world's most attractive markets for pharmaceuticals, including Russia and South America.

The product pipelines include Altana's ulcer treatment Pantoprazole, along with products such as Alvesco and Daxas, as well as a healthy combined annual income of Ä3bn.

Gilead & Myogen - scientific fit
Biopharma company Gilead is merging with Myogen which was set up to focus on cardiovascular disorder treatments. The deal will dilute Gilead's earnings in 2007 and 2008, they will be neutral in 2009, but it will add to earnings in 2010 and beyond.

Myogen`s lead product is ambrisentan, an orally available endothelin receptor antagonist for the treatment of pulmonary arterial hypertension. Endothelin is a small peptide hormone that is believed to play a critical role in the regulation of blood flow and cell division. Myogen expects to file a new drug application with the Food and Drug Administration by the fourth quarter of 2006.

Explaining the rationale for the merger, Dr John Martin, president and chief executive of Gilead Sciences, said: Myogen represents a unique scientific and strategic fit, with the company bringing to Gilead a late-stage product candidate that addresses an area of significant unmet medical need and further enhances our pulmonology as initially established through our recent acquisition of Corus Pharma.

Pfizer & PowderMed - unusual
Pfizer, the leader of the global pharmaceutical sector, has scooped up PowderMed, the private Oxford, UK-based biotechnology company which developed a needle-free technique for firing DNA-coated particles into the skin to combat viral diseases.

The PowderMed deal is a departure from Pfizer's usual acquisition strategy which is to buy in or license late-stage products, yet the deal gives Pfizer a direct investment in a potentially extremely lucrative market. Fears of a bird flu pandemic are turning the low profit margin vaccines sector into one of the fastest growth areas of the pharmaceutical industry.

Buying PowderMed is a sign that Pfizer will go into the field and revolutionise it, Clive Dix, PowderMed's chief executive is reported as saying at the time to Bioworld International. This is the start of a campaign to build a vaccines franchise with 21^st Century technology.

For its part, a spokesperson for Pfizer said the deal gave it the opportunity to leapfrog decades of old egg-based vaccines technology.

Pfizer's strategic advance into vaccines brings it a portfolio of products. PowderMed's lead product against seasonal flu has just entered into a phase I/IIa clinical trial in London and a phase I trial in the US. It is in line to become the first DNA vaccine to reach the market.

Prospective powdermed products
Also in the PowderMed portfolio of products is a lung cancer vaccine, a project which is partnered with the Ludwig Institute for Cancer Research, while the company has focused additionally on developing vaccines for infectious diseases, including chronic viral disease.

The firm has an HIV/AIDS vaccine in phase I, for which it has partnered with GlaxoSmithKline (GSK). There are also two other phase I products, against herpes simplex virus and hepatitis B, and a genital warts programme currently at the preclinical stage. The hepatitis B and genital warts programmes were in-licensed from GSK.

According to David Shedlaz, vice chairman of Pfizer, the PowderMed deal is evidence also of Pfizer taking a fresh approach to expanding its pipeline by in-licensing less advanced products, also noting that with PowderMed's novel DNA technology and its portfolio of early-stage vaccine candidates, we are adding high potential, externally sourced product candidates to our R&D portfolio.

Potential bids in the pipeline
There is, at the moment, constant speculation that GSK could bid for Novartis of Switzerland, while similar bid speculation has boosted AZ's share price this year with Novartis the market favourite to make a move on it.

Yet, it seems that US company Bristol-Myers Squibb (BMS) has jostled AZ out of the running as the biggest prize for any predator at the moment, says Malik. BMS has a pipeline that is late-stage and covers oncology and diabetes.

Bristol-Myers Squibb will be in the bid sights of sanofi-aventis as both companies market Plavix. Another bidder could be a US player, such as Schering-Plough, however consensus analysts forecasts for its top six products account for only $1.27bn by 2010 without any of them appearing to be of blockbuster potential.

In the UK, there are three large pharmaceutical companies in the market, but most informed comments tend to compare GSK and AZ against each other. Shire, which is a speciality pharmaceutical company selling niche medicines to specialist doctors, is in the number three position and there are constant rumours that Shire will fall to a bid from GSK, AZ or a big foreign pharma group.

Shire has recently clinched a deal with Barr Laboratories to keep copycat versions of Adderall, its attention deficit hyperactivity disorder, off the market.

Shire is an excellent target for a bid, Malik stresses. It already has biologicals technology from last year's Transkaryotic Therapies acquisition, and the platform technology that has so far produced four biological products with peak sales potential of $1bn can generate much more. This gives the potential to offer significant value to a company looking for a transformational acquisition as an entry point into the biologicals market.

He adds: Having resolved the generic Adderall overhang, Shire is now an acquisition target and a good fit for many companies in the US specialty pharmaceutical market, such as Medimmune and Forest.

Howard Miller, head of research at Teather & Greenwood, is a little more cautious in his comments of M&A in big pharma: In general, I don't see much more consolidation among the major European pharma companies. All the consolidation in the current wave of mergers has been among the medium or small cap pharmas and biotechs, such as Cambridge Antibody Technology or Celltech. Among the remaining biotechs, most are likely to get involved in licensing deals.

Time will tell if the current wave of consolidation continues, or peters out into a rash of licensing deals and R&D collaborations.

The Author
Malcolm Craig is one of the industry's most respected investment commentators and the author of 14 books on various aspects of successful investment