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Big Pharma Mergers: A Quick Fix, Not Strategic

China Views
March 14, 2009

Swiss pharmaceutical giant Roche on Thursday announced plans to buy out California-based
biotech pioneer Genetech for 46.8 billion U.S. dollars. The
transaction is the latest megadeal in a burst of Big Pharma

What will consolidation bring to the industry? Will the
tie-up lead to an upsurge in new drugs? Is acquisition a
panacea for drug makers facing increased cost pressures as key
patents expire?


Pfizer Inc., the world's largest drug maker, said on Jan.
27 that it was buying rival Wyeth for 68 billion dollars in a
deal to boost its revenue and diversification.

Pfizer announced the cash-and-stock arrangement after it
said its net income for the fourth quarter dropped 90 percent
from a year earlier. The company also said it planned a severe
cut in its dividend, a shockingly low profit forecast for 2009
and 8,000 job cuts.

On Monday, meanwhile, U.S.-based Merck agreed to buy rival
Schering-Plough for 41.1 billion dollars.

As for Roche and Genetech, the deal values Genetech as a
whole at 100.1 billion dollars when including the portion of
the company already owned by Roche. That almost matches the
combined acquisitions of Merck and Pfizer.


The pressure of cost savings is among the main reasons
driving the takeovers. As a result of its acquisition of
Schering-Plough, Merck was expected to save about 3.5 billion
dollars. Roche expects to save 750 million to 850 million per

U.S. healthcare reform, with President Barack Obama aiming
to control prescription drug prices, has added pressure to the
industry. Some analysts say that if medicine prices decrease,
acquisitions could boost sales and pave the way for more
cost-saving cuts to maintain margins.

Under the currently difficult economic environment,
pharmaceutical companies also are rushing to diversify before
they lose many of their blockbuster drugs as their patents expire.

For instance, the patent on Liptor, Pfizer's best-selling
cholesterol fighter, will expire in 2011. Buying Wyeth is a
short cut for Pfizer to transform from the maker of Liptor and
Viagra into a one-stop shop for vaccines, biotech drugs,
traditional pills and OTC products for both people and animals.

As for Roche, its acquisition gives the company added
commercialization rights beyond 2015 to key cancer drugs
developed by Genetech. The current commercialization deal,
which gives Roche sales outside the U.S., is set to expire
after 2015.


Industry analysts say the mergers do solve short-term
problems but they still cast doubts on the long-term benefits
of such deals.

One part of a drug company's operation that never seems to
do well in a Big Pharma merger is research and development,
said Joseph Schles singer, chairman of the Department of
Pharmacology at Yale's School of Medicine.

Plenty of huge mergers have been seen in the
pharmaceutical industry in the last decade, including several
by Pfizer.

Statistics show that Pfizer has spent more than 60 billion
dollars on research and development over the past eight years
but has not produced one drug from its own labs.

"These mergers tend to have a negative effect on R&D
culture in general, particularly when scientists are
jettisoned along with other staffers in the inevitable wave of
layoffs following a takeover," Ian Wilcox, global director of
the pharmaceutical practice for Hay Group Consulting, told
Business week magazine.

Matt Curin, senior consultant with Hay Group, said
takeovers are a quick fix for Big Pharma companies that face
the loss of billions of dollars in revenues when their
best-selling drugs lose patent protection and face generic
competition for the first time. The deals, however, "are
defensive acquisitions, not strategic," he said.



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