Pharmaceutical Giants May Be On The Prowl
Pfizer, Merck Considered Likely To Consider Buying Smaller Firms
February 17, 2005
By JEANNE WHALEN, and LEILA ABBOUD Wall Street Journal With big pots of cash to spend and holes to fill in their product offerings, the world's biggest pharmaceutical firms such as Pfizer Inc. and Merck & Co. in the United States and GlaxoSmithKline PLC will probably consider acquisitions this year. Their favored targets could be smaller companies with successful drugs in sought-after therapeutic areas.
Analysts say there is a range of possible targets, including mid-size drug makers Bristol-Myers Squibb Co. and Wyeth of the United States, with their solid pipelines of products. AstraZeneca PLC of the United Kingdom, which has been struggling with regulatory issues and a sunken share price, also might be ripe for takeover, possibly by Glaxo, a British rival twice its size by sales, analysts say. And investors speculate that Schering-Plough Corp. and Merck, both of the United States, could pair up. They already jointly market two cholesterol drugs.
Not only do big pharmaceutical companies want to find products that will drive their growth, this year the U.S. giants will have more cash in hand to do it. Under a one-time federal tax break, the federal government is permitting the repatriation of profits from overseas operations at a 5.25 percent tax rate rather than the usual 35 percent.
Pfizer, the world's largest drug maker with $52.5 billion in sales last year, will have as much as $38 billion from the repatriated profits, in addition to other cash on hand. Merck, stung by the withdrawal of its Vioxx arthritis drug, has $14 billion in cash and investments and $15 billion eligible for repatriation, though it hasn't decided yet how much to bring back.
Drug makers have been struggling for several years to come up with enough new products to keep their revenue growing. Many have sought to complement their internal research by licensing products from smaller biotechnology companies. Such licensing deals will remain hot, but with so many big companies chasing the same deals, licensing is becoming increasingly expensive.
Anne Marieke Ezendam, manager of a $20 million global health-care fund at Threadneedle Investments in London, said it is starting to make more sense to just buy small biotech companies outright, and gain exclusive access to their technology. "If you buy the company nobody else can get in," said Ezendam, whose fund has widespread holdings across the industry.
Among smaller firms that could be attractive targets, analysts point to:: Allergan Inc., a leader in ophthalmology; Millennium Pharmaceuticals Inc., which has a drug to treat multiple myeloma, a form of bone-marrow cancer; and Cephalon Inc., which has four new drugs, including one to treat anxiety, close to approval in big markets.
Generics companies - such as Mylan Laboratories Inc. and Germany's Hexal AG - also could be targets.
One large-scale pairing possible at some time in the future is Merck and Schering-Plough. With its share price down about 35 percent since the Vioxx withdrawal, the once fiercely independent Merck may be forced to undertake a large-scale acquisition.
In December, after the withdrawal of Vioxx, the company told investors it was "actively monitoring the landscape for a range of targeted acquisitions." Merck, based in Whitehouse Station, N.J., had sales of $22.9 billion last year. Schering-Plough, of Kenilworth, N.J., had sales of $8.3 billion.
Merck's chief executive, Raymond Gilmartin, played down the idea of a deal earlier this month, telling MarketWatch: "We don't see large-scale mergers as adding to our pipeline or contributing to our long-term growth."
But analysts believe Merck would like to snag all the profits from Zetia and Vytorin, the cholesterol medicines it markets under a joint venture with Schering-Plough. Consolidating these profits would help Merck offset the loss of its top seller, the cholesterol-lowering drug Zocor, which is scheduled to go generic in mid-2006, and help it weather a recent patent setback on its osteoporosis drug Fosamax.
Bristol-Myers could also be a target for the promising diabetes and rheumatoid-arthritis drugs it has in late-stage development, and for its cancer drug Erbitux. Some believe Bristol would not be taken over until patent litigation over Plavix, its top-selling blood thinner, is resolved, something that could take more than a year. Bristol declined to comment on the possibility that it would merge or be acquired, but said it would act in the interest of its shareholders.
Wyeth, of Madison, N.J., had long been immune to takeover pressure because of its massive legal woes over the diet drug combination commonly called fen-phen. As litigation and payouts over diet pills withdrawn from the market in 1997 winds down, Wyeth's mix of biotechnology drugs, vaccines and conventional medicines could be appealing to larger companies.
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