Pharma Mergers: ‘It May Soon Be Panic Time’
15 CommentsBy Ed Silverman // November 25th, 2008 // 1:03 pm
You can guess some of the likely suspects, but in a lengthy investor report issued today, Deutsche Bank analyst Barbara Ryan posits that Merck and Pfizer will likely be acquirers, while Bristol-Myers Squibb and Wyeth are bait. The impetus: the approaching ‘patent cliff’ between 2010 and 2013, when many big drugmakers lost still more big sellers to cheap generics.
Despite numerous cost-cutting and restructuring efforts, Ryan writes that pharma “will have to move aggressively to convert its cash and strong balance sheets into revenues and earnings to fill the void in the cliff period via M&A and mergers of equals, which will likely also serve to reduce usustainable substantial inefficiencies in the pharma/biotech model.”
In her view, consolidation and more acquisitions are inevitable for several reasons: R&D spending levels are not sustainable; overcapacity remains rampant…at every level; and the cost to develop ‘me-too’ drugs is going up, while returns are falling; and the risk/return equation has changed for the worse. So far, cutbacks have allowed ceo’s to postpone the inevitable, and while “hope springs eternal on the R&D front…the cliff is rapidly approaching” she writes. “…it may soon be panic time.”
The companies most likely to make acquisitions that could significantly enhance their long-term outlook, in her view, are Pfizer, Merck and Bristol-Myers Squibb, and those most likely to be acquired are Bristol-Myers Squibb, Wyeth, Amgen and Gilead Sciences. Pick whichever combination you like. As an aside, Deutsche Bank has relationships with each of the four big drugmakers mentioned in the report.
Nathan
Barbara Ryan writes a lot of these type of “investor reports” that speculate a lot of things. Are her reports publicly available? Do you have a link?
Outside the Box
Ms Ryan seems to me to be missing the point - big pharma buying big pharma doesn’t fit the longer term trend. That trend is towards the Hollywood model where products and the rights to products are controlled much more through licensing and smaller scale acquisition than through the acquisition of huge companies. Where she mentions Gilead as a possible target she is getting into the right size area, but all the others carry far too much excess baggage in their own right to be truly viable acquisition targets. Companies are looking to acquisitions and licensing that can improve shareholder return more quickly than large acquisitions would be able to achieve (not to mention the additional organisational turmoil that comes with the bigger acquisitions).
Virtual Memories
Far be it from me to call someone utterly addled, but I’m not sure how two companies suffering from overcapacity and under-filled pipelines are going to benefit by, um, INCREASING THEIR TOTAL CAPACITY THROUGH A MERGER.
It seems to me that they may be better served by cutting capacity and headcount, licensing in more developmental compounds, and re-setting shareholder expectations so that new drugs can be “successful” without reaching the multi-billion-dollar threshold that almost always seems to be at the same threshold as improper marketing practices.
Or, hell, just buy more time by acquiring BMS or Wyeth and rambling about synergies and back-office costs. Whatever.
Ed Silverman
Hi Nathan,
Sorry for the delayed reply. Anyway, no, the report isn’t publicly available, or I would have included the link. But I have the report and read it through, all 40-something pages. If you care to know something else, just ask me and I can look for whatever.
Cheers
ed
Nathan
Thanks Ed. Maybe a more general question is in order: What are the purposes of her reports? Who reads them and who pays for them? I often see her quoted in news articles, but I never see the primary reports that see writes.
Ed Silverman
Hi Nathan,
The reports are for big clients, such as institutional investors, which are funds of various sorts - pension funds, mutual funds, hedge funds. If you have the money, they will sell you the research. That’s why the reports are proprietary, but some firms still provide them to the media, provided they are not circulated. However, we are free to quote from them. Deutsche Bank is one of several firms that makes reports available. Merrill used to distribute its report and so you would see David Risinger quoted often, but Merrill stopped doing so and Risinger disappeared from sight - at least to the general public.
Regards
ed
Robert Bird
“R+D spending levels are not sustainable”
Then, pray tell, where does Ms. Ryan expect companies to get drugs? No one seems to know how to optimize research, and littler companies are unlikely to afford the kind of studies needed to determine whether the candidates that bigger companies would like to purchase are actually good, or potential sinks for Phase III cash, so that buying drugs from smaller companies won’t keep the drugs from failing later and more expensively. Cutting research funding means that you should already have a blockbuster or two in the pipeline so that you can afford to cut research now and rebuild when your drugs reach market and generate money - otherwise, you’re dooming your company to starvation (everything goes off patent, after all) on a bigger scale than the smaller biotechs who go that route. Since they don’t, how does cutting research help them?
Merging gives companies a bigger pool of cash, but it hasn’t seemed effective at making them more efficient - if they’re not more efficient, then you haven’t solved your problem (not enough drugs, too much spending) that you had before. Mergers aren’t going to solve problems - if the purchased company is badly enough off, a merger won’t even help its stockholders (and if they were efficient, they probably wouldn’t be in that position), let alone the purchased company. It may help executives (by giving them a bigger company and thus a potentially larger salary), but I didn’t think that was the point of a merger.
pharmavet
I worked for Abbott in the 1980’s. During that time Abbott was highly diversified into three non-overlapping divisions: Pharmaceutical Products, Diagnostics and Hospital Products. During my tenure, Diagnostics was the most successful division, and its revenues helped support operations in other divisions. J&J is another example. Merging unsuccessful R&D of one pharma with another unsuccessful one makes no sense save for cost savings. Even buying biotechs does not leverage risk. Diversification, as in the Abbott model is a prudent way to leverage risk.
Christopher
The problem many big pharma companies face just now is not having enough cash to do a deal, it’s matching the respective valuations of either party. Smaller, would-be purchased companies feel they are worth more than their currently depressed share price, and bigger pharma cannot go beyond a premium over what the market says the target stock is worth. So despite both sides wanting a deal, neither can justify the price to shareholders.
Big pharma can pump as much money as possible into mega deal but we haven’t seen many, if any, of these succeed - yet. BlockbusterDays are over: investors looking for those to come back are doomed to failure. What’s smarter is selective licensing, intelligent strategic investments, and fostering better alliances with mid-size companies, not the big guys. No secrets there.
With so many biotechs and small pharmas considered worth less than their cash holdings there are some wacky deals ahead. But mega mergers of the sort suggested in the article will happen no doubt, but in my opinion as a result of panic buying not smart medium to long term strategic planning.
Lisa Van S
Christopher,
I love to invest!! Biotech and Pharma is not a place Id like to squander my money on. Wacky Deals dont sound very kosher
Nathan
CNN just picked up the same story. Except that they make it sound much more ominous for those of us in R&D.
I’ll quote: “Ryan said that in recent years, with the patents on key products expiring, drug makers have increased their profits by restructuring. But she said Wall Street doesn’t think that trend can continue forever… meaning the buyouts may be accompanied by cuts in research spending.
The companies are now spending close to 20 percent of their revenue on research and development, Ryan wrote, but they’re getting less and less for their money and can’t sustain that level of spending through the patent cliff period even if they do develop novel and in-demand new drugs. Capacity is too high and many of the big pharma players are developing similar products, and Food and Drug Administration regulators are now demanding increased testing and are rejecting more drugs, she said.”
Link:
http://money.cnn.com/news/newsfeeds/articles/apwire/703dea4d80d40fc1237df957556f1ea0.htm
ol cranky
Actually Robert, the reason R & D spending levels are not sustainable is due to poor management and lack of efficiency (and, to a lesser extent, unwillingness to limit pay to investigators to a fair rate). Those lame-ass reorganizations big pharma have all put their research staff through have not helped the bottom line, they’ve actually lead to unnecessary duplication of efforts, study teams that are at odds leading to poor operationalization of trials (which must negatively impact data), salary and title inflation and outrageously bloated study budgets.
Want to optimize (clinical) research? Go back to the traditional study team model - if necessary overlay an insourcing model to expand fluidity of teams (and, of course, pass personnel costs off as research costs). Also, if you have a rich pipeline with multiple candidates for the same or overlapping indications, don’t oversaturate the market and set up your resources to compete with one another.
In a nutshell, logic and common sense are sorely lacking in drug development. The sooner people start relying on these the sooner companies will be able to shed the bloat and run good, quality trials that kill of compounds or put them on NDA/BLA track in a timely and efficient manner.
Lisa Van S
Ol Cranky,… Missed you, hope all is well with you and your family!!
Nathan
Ol Cranky, I’m not sure what you mean by a couple of your statements.
1) You write: “the reason R & D spending levels are not sustainable is due to…unwillingness to limit pay to investigators to a fair rate.”
Are you saying that pharma researchers are overpayed? Or something else?
2) You write: “if you have a rich pipeline with multiple candidates for the same or overlapping indications, don’t…set up your resources to compete with one another.”
That’s easily said — but you know very well that the odds of success are so low that we MUST have multiple candidates for overlapping indications. Even a postitive phase III trial is far from a guarantee of approval these days….
Rod
Ed,
Is the cited Deutsche Bank analyst report a company specific report? Like a Merck report, or a Pfizer report? Or was it just an outlook on the industry in general? I have access to her reports, but I haven’t been able to find it. Thanks for your help!