Pharma Merger Season?

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We talked about Pfizer and AstraZeneca in the first part of this mini-series. A merger that is less about what is good for the pharmaceutical offerings of both firms than it is a means to exploit holes in the tax codes of various nations.

The need for R&D to develop new drugs was also discussed- and how bureaucratic these big pharmaceutical companies have become. Today, we will talk about the spin-offs and mergers among big pharma players that are meant to rationalize operations (i.e, align corporate operations with corporate objectives).

Big Phara- Mega Mergers

There is a three-way deal in the works between Novartis, Glaxo-SmithKline (GSK), and Eli Lilly. This could be among the most true methods to rationalize business, increase one’s strengths, and drop product lines (actually sell them to others) where one is not the prime player. This is one of the key concepts that business schools stress in their curricula, but it has not been the way most of big pharma operated in the previous decades.

Eli Lilly has a strong animal drug business.   Novartis has its strengths in cancer therapy, and GSK is strong in vaccines. And, now they will each become stronger in those core competencies. Because Novartis plans to spin off its animal drugs portfolio to Eli Lilly and its vaccines to GSK, while it acquires cancer treatments choices from Glaxo. Glaxo’s cancer therapy business has some $ 2 billion in annual turnover, and Novartis has $2 billion in sales for its vaccines. Oh, and GSK and Novartis will create a joint venture in consumer health (also known as non-prescription sales), where $ 8.75 billion from GSK and $ 4 billion from Novartis will form the new basis for that venture.

When all these transactions are complete, Novartis will have three core competencies- generic drugs, eye care, and prescription drugs. Some 20% of its $55 billion in sales will arise from its cancer therapies.

GSK will center its business around non-prescription drugs, vaccines, respiratory care, and HIV therapy. These will comprise about ¾ of their annual sales.

Lilly will now have its veterinary business comprising 10% of sales, with $ 2.15 billion in annual sales just from its animal health efforts.

This sort of spin-off is not new. Some 30 years ago, Johnson and Johnson sold its Extracorporeal Division (which specialized in dialysis) to Baxter.   (Extracorporeal was to have introduced the new dialysis therapy we had developed to the marketplace; this divestiture by J&J means our development no longer had a big corporate sponsor.)

These mergers have less in common with the Pfizer-AstraZeneca deal mentioned above (which has the link to the post)- but especially different from what is about to happen to the smaller of the big pharma firms, Allergan. Here, we have Valeant working with William Ackman, the venture capitalist/hedge fund manager that has been in the news telling the truth about Herbalife, which he claims is a Ponzi scheme. (I have felt so since I was first introduced to Herbalife  some 30+ years ago,)

Valeant and Ackman plan to merge Allegan into Valeant in a $ 46 billion deal. Like Pfizer and its slashing of R&D when it merges with other firms, Valeant will probably decimate the R&D operations of Allergan. (Allergan current spends 1/6 or 17% of its revenue on R&D.) It is expected that about 1/5 of the workforce will be given walking papers as a result of this merger- that is some 1400 employees.

If you examine Valeant you will see that it focuses on cutting costs to the bone and honing tax advantages, rather than making profits from new or advanced therapies. The latter has always been the focus of Allergan.

Yes, I think this merger is bad for pharma, in general.   So, three big deals of which only one could really benefit the core business of the firms.  Tomorrow, another one that seems to make good business sense.

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7 thoughts on “Pharma Merger Season?”

  1. I’m glad to hear that there are at least some companies interested in increasing their strengths, not just cutting costs and benefiting from tax breaks.

    1. The small labs are the ones that seem to be innovating, Muriel. Whether its the bureaucracy or the need for a drug to only be a blockbuster to muster developmental resources, the newer creations seem to be stemming from the smaller entities.
      But, it’s not the monopoly per se of corporations- the way our regulators work, it’s the monopoly of ONE approved drug (hence the term patent medicines), even if those drugs involve a $100K cost for a three month course of therapy (like the newly developed Hepatitis C cure).

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