Pharma Mega-Mergers: When you can’t innovate, merge

In April of 2009, Pfizer agreed to buyout Wyeth for $68 billion; Pfizer’s market cap at that time was just around $100 billion. The following month Merck trumped the Pfizer deal with a $41 billion merger with Schering-Plough. What was Merck’s market cap at the time? – Roughly around $50 billion. Not to be outdone, Roche rounded-up the mega-mergers of 2009 (so far) with a $46.8 billion deal to acquire Genentech. However, it must be mentioned that Roche already had a majority stake in Genentech (55.8%), so we’re really talking about $46.8 billion for the remaining 44.2 % of Genentech it did not already own.

So why are these behemoth size deals taking place – especially in the face of the greatest recession in the United States since the Great Depression? Could this be another round of rash and risk-bloated decisions by big business as that seen by the banking and mortgage industries? It is my opinion that these mergers may reflect failure on part of the respective companies to innovate new ideas and drugs. Pfizer, even with it’s army of researchers and billion dollar buyouts, only has one drug in the top ten by sales in 2008 – Lipitor. Lipitor was the number one selling drug in the world in 2008 and brought in $13.5 billion (25% of revenue) for the company. With the patent for Lipitor ready to expire in 2010 and fourteen other patents expiring through 2014, it’s no wonder Pfizer is flexing its muscle while it still has muscle to flex. Pfizer has to be careful that it is not just making this bubble of a mess larger such that when it finally does burst, it won’t be bad but rather catastrophic. That’s usually how big business goes out – with a violent bang like Arthur Anderson, Enron, Bear Stearns, Morgan Stanley, AIG, and Lehman Brothers. It seems like Pfizer was bent hell on the deal paying a 29 percent premium over the share price and borrowing $22 billion to do so. The acquisition was financed by four banks that received U.S. government bailout money: Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America. Now, this deal may help Pfizer to buy some time and explore some opportunities. Unfortunately, initially at least, instead of focusing on the pipeline, Pfizer will have to diligently work on merging together two giant Fortune 500 companies. If you’ve ever worked at a Fortune 500 company, you should get shudders just thinking about all the combining and streamlining of processes, systems, jobs, etc.

On to Merck and Schering-Plough – what do I really have to say here? The numbers speak for themselves: a company swallowing another company that’s about the same size. Merck, the worlds seventh largest pharmaceutical, does not even have a drug on the top ten sales chart for 2008. It’s pipeline, although not as bad as Pfizer’s, is nothing short of dismal. Merck’s hypertension drug, Cozaar, is set to expire in 2010 and its asthma drug, Singulair, expires in 2012. This merger makes Merck the second largest pharmaceutical company in the world and doubles the number of drugs that Merck has in late-stage development to 18. Basically, this seems like another failure to innovate story and “buy ourselves into short-term profits” strategy. Eventually it could catch-up with Merck, because if the core strategy, policies, and procedures failed you once, they will fail you again unless you can transform in time – and the larger you get, the harder it is to transform.

Roche already owned 55.8% of Genentech, so in my mind, a 16% premium over the stock price was considerable. Fortunately, Genentech is a highly innovative company and a great acquisition, but I think to buy up the rest of the company at such a cost is not necessary unless you need to please Wall Street and have little else in the pipeline of your own. Partially owning other great companies is a great strategy that balances profits and risk. Still, even at the price Roche paid, I feel they got the best deal of the three.

It will be interesting to watch the future of these companies unroll. Pfizer and Merck more-so; they have a lot of work to do. Roche will probably ride it out and benefit both short-term and long-term from the Genentech buyout.

I’m not trying to blast these companies as I feel all three can succeed and do fairly well; it all depends on the decisions and moves they make from here on forward. Pharmaceutical companies are some of the most innovative and risk-taking companies around, but one must always be ready to praise and constructively criticize when necessary.