Taking Stock
Tue, 15 Dec 1998, 8:08am EST
Dabbling in Drugs May Boost Your Wealth: Taking Stock (Update2)
Dabbling in Drugs May Boost Your Wealth: Taking Stock (Update2)
(Updates with talks between Zeneca and Astra in third and 13th
paragraphs.)
Paris, Dec. 8 (Bloomberg) -- Remember a better time to buy
drug shares? Investors said they don't.
The financial pressures that last week led to the two
biggest linkups in Europe's drug industry since 1996 haven't
relented, and investors said they're gearing up for a rash of
mergers.
Just today Zeneca Group Plc, the No. 3 U.K. drugmaker, and
Astra AB, Sweden's biggest drugmaker, said they are in advanced
merger talks. Other forthcoming transactions may involve Novo
Nordisk A/S of Denmark and Gemany's Schering AG.
While that's a gamble, investors argued it's a safe one
because the prospect of slow economic growth suggests the
investment will pay off anyway: drug shares tend to be among the
least sensitive to economic swings because, when times are hard,
consumers cut back on non-essentials such as perfume and
clothing rather than medicine.
''Merger prospects add spice to what was already a good
investment,'' said Alan Day, who helps manage $3.3 billion at
Stratevest Group in Burlington, Vermont.
When the Bloomberg index of 500 European stocks plunged 32
percent between July and October 1998 amid worries about
recession, the sub-index of 25 pharmaceutical stocks fell by
about half of that, or 18 percent.
That's why, as recession in Asia and parts of Eastern
Europe and Latin America threatens to choke European economic
growth, investors said pharmaceuticals are a good way to cushion
the blow.
Recession-Resistant
''Drug stocks are a bit like an insurance policy,'' said
John Hatherly, who helps manage about 19 billion pounds ($31.6
billion) at M&G Investment Management Ltd. ''You can't afford to
be out of them.''
Signs that European growth is slowing already prompted the
European Union last month to cut its 1999 growth forecast for
the 11 countries adopting the single currency to 2.6 percent
from 3.2 percent. Consumer spending alone accounts for two-
thirds of most European countries' gross domestic product.
''I'd cut back on makeup and clothes, but I can't imagine a
situation where I'd stop buying medicine,'' said Magali Etienne,
a mother of one who lives in the Paris suburbs.
European governments are increasing the pressure on
drugmakers to combine. While lower company profits are eating
aim to make savings, by capping or
lowering drug prices and looking to restrict health provision.
Latest Transactions
In two transactions last week, European companies showed
that one of the favorite ways of responding to the changing
climate is to look for a partner. In the continent's two biggest
combinations since Switzerland's Sandoz AG and Ciba-Geigy AG
merged to form Novartis AG in 1996, Rhone-Poulenc SA of France
said it would pool its drug, seed and pesticide units with those
of Germany's Hoechst AG, and French drugmaker Sanofi SA agreed
to buy its smaller rival Synthelabo SA.
Today Zeneca and Astra said they were in merger talks, a
transaction that would be worth at least $30 billion if concluded,
based on Astra's market capitalization.
Such tie-ups are bound to serve as a wake-up call for many
other drugmakers that need to cut costs and boost their drug
pipelines to compete better in the $242 billion industry,
according to investors. Pressures to merge and the expectation
of slowing economic growth prompted Olivier Lefevre, who helps
manage about $90 million at Monte Paschi Banque in Paris, to
increase to 15 percent the proportion of his portfolio devoted
to drugs, from less than 10 percent before the summer.
Shares in Rhone-Poulenc and Hoechst, the biggest drugmakers
in France and Germany, had already climbed more than 30 percent
in a month on merger speculation when the companies said last
week they will join forces to create Europe's top drugmaker.
Those of France's Sanofi and Synthelabo had risen about 20
percent in the two months leading up last week's accord, which
will form Europe's ninth-biggest drug company.
Analysts pointed to three needs that may drive drugmakers
to consider a merger or takeover: money, access to successful
drugs and marketing reach.
Marrying for Money
Some are looking for a partner that can afford to pump
money into research. A merger with Synthelabo will allow Sanofi,
which has 21 compounds in clinical development, to reap the
benefit of its own research instead of looking for marketing
partnerships to help shoulder the cost of product development,
analysts said. Boosting research budgets also increases the
chance that smaller companies can compete with the heavyweights
that emerged from an earlier wave of industry consolidation,
such as Novartis and Glaxo Wellcome Plc.
Others need to boost their pipeline of existing drugs:
Novo Nordisk, for example, is looking to reduce its reliance on
diabetes treatments -- it's the world's largest maker of
insulin, on which many diabetics rely. In September it had to
abandon development of its osteoporosis drug levormeloxifene,
which it had hoped would help widen its range of successful
drugs, and now analysts think joining with another company may
be the best way to do that.
Best-Selling Drug
Sometimes, even companies with the most popular products
need outside help. Analysts said Astra needs to boost its range
of drugs before the patent for its ulcer treatment Losec, the
world's best-selling prescription drug, expires in 2001.
Others still seek a bigger marketing network to promote
their products. Analysts said Schering, the world's largest
maker of oral contraceptives, would benefit from a better reach
in the U.S., the most profitable market for drugs.
Some companies decide to combine because they are looking
to solve all three problems at once, as analysts said was the
case for Rhone-Poulenc and Hoechst.
While mid-sized drugmakers are the most likely merger
candidates, they're not the only ones, according to Robin
Campbell, an analyst at Paribas Capital Markets in London.
''There is a group of larger companies that are edging gingerly
down that route but can afford to wait until they find the right
mate,'' said Campbell.
Those include Glaxo Wellcome and SmithKline Beecham Plc,
which failed to reach an agreement in merger talks they held
earlier this year.
Investors said mergers in the drug industry tend to go down
well with shareholders because companies can argue that they are
in a business where profits are growing, and will enhance their
growth prospects by combining. Sanofi and Synthelabo, for
example, were expected to report double-digit profit growth this
year and next even before they said they'd join forces.
''The oil mergers we've seen were mostly a cost-cutting
exercise'' to cushion declining earnings, said Plum Shipton, a
European equity strategist at Merrill Lynch. ''In
pharmaceuticals, the emphasis is on faster growth.''
--------------------------------------------------------------------------------
|
