Europe's Drugmakers Step Up Consolidation Plans as Profits Lag
Bloomberg News
March 16, 1999, 12:15 p.m. ET
Europe's Drugmakers Step Up Consolidation Plans as Profits Lag
Frankfurt, March 16 (Bloomberg) -- Europe's biggest drug
companies stepped up plans to unite amid signs their profit
growth this year will lag U.S. rivals such as Merck & Co., the
world's biggest drugmaker.
Hoechst AG of Germany and Rhone-Poulenc SA of France agreed
to accelerate a plan to create the world's No. 2 drugmaker amid
shareholder criticism, while Zeneca Group Plc of the U.K. said
it's close to winning U.S. approval for a $35 billion purchase
of Sweden's Astra AB. And as Sanofi SA of France won European
approval to buy Synthelabo SA, Germany's Bayer AG indicated it
will join the acquisition fray.
The consolidation comes as Novartis AG, the world's No. 3
drug company, indicated earnings growth will slow this year
after a 20 percent increase in the second half of 1998,
highlighting concern that European drugmakers won't be able to
match profits growth at U.S. rivals such as Merck or Pfizer
Inc., maker of the impotence pill Viagra.
''You look at all of the major blockbusters of the last
three years, and the vast majority of them originate in the
hands of American companies,'' said Viren Mehta, a managing
member of the research firm Mehta Partners in New York. European
companies ''recognize that, and they're trying to address it.''
While Novartis's earnings grew in double digits, Roche
Holding AG, a Swiss rival that makes the slimming pill Xenical,
indicated earlier this month its second-half profit rose 2.3
percent. Zeneca's implied second-half profit grew just 1.8
percent. Pfizer, by contrast, said in January its fourth-quarter
earnings rose 42 percent, helped by Viagra and by Zithromax, an
antibiotic.
Faster Track
Hoechst and Rhone-Poulenc said they plan to complete their
merger, worth at least 16 billion euros ($17.5 billion), this
year instead of the original 2001 deadline. Their announcement
followed prompting by Kuwait Petroleum Corp., the German
company's biggest shareholder with 24.5 percent, amid concern a
three-year timetable would hand an advantage to competitors.
Separately, Zeneca said it expects to complete negotiations
with the U.S. Federal Trade Commission by the end of this month
over what products to divest to win approval of its plan to
unite with Astra, creating one of the world's biggest
drugmakers. Zeneca and Astra have said they plan to complete
their union by the end of the second quarter.
Today, Bayer AG of Germany became the latest company to say
it wants to expand in drugs and agrochemicals as its earnings
come under pressure from falling prices of chemicals, its other
major business. Chief Executive Manfred Schneider said the
company is prepared to spend ''significantly more'' than last
year's 12 billion deutsche marks ($6.7 billion) to expand.
Pressure to Grow
European drug companies are combining and acquiring as
government-imposed price cuts and soaring development costs make
it more expensive to develop blockbusters such as Viagra, or
Monsanto & Co.'s new painkiller Celebrex, which had the second
most successful introduction in the U.S. behind Viagra.
Novartis's best-selling drug, the organ-transplant
treatment Sandimmun/Neoral, had 1998 sales of 1.85 billion Swiss
francs ($1.26 billion), up just 2 percent from 1997. Voltaren, a
painkiller that once was the Basel, Switzerland-based company's
main product, yielded sales of 1.57 billion francs, down 2
percent from 1997, the company said today.
''They've really got a lot to prove,'' said Annabel
MacIver, a drug industry analyst at Enskilda Securities in
London.
While Novartis tries to introduce new products, Pfizer's
Viagra, for one, is expected to produce $1 billion in sales
soon, while Eli Lilly & Co.'s Prozac had annual sales of $2.55
billion in 1998, up 10 percent.
Lagging Returns
In the past five years, Novartis shareholders have made a
total of 240.7 percent on their investment, one of the best
performances among European drugmakers. Glaxo Wellcome Plc
returned 231 percent, while Hoechst generated about 150 percent.
Merck shareholders, by contrast, had a return of 448
percent, while Pfizer investors made 877 percent.
''European companies just don't seem to match up to U.S.
rivals,'' said Yves de Vilmorin, who helps manage $1.3 billion
in shares at Banque Privee St. Dominique in Paris. He said he's
considering selling some of his shares in Novartis, Roche, Glaxo-
Wellcome and Rhone-Poulenc to buy U.S. drugmakers.
While mergers are the quickest way for European companies
to grow, ''so far, that doesn't seem to be enough,'' he said.
--Reto Gregori in the Frankfurt newsroom (49-69) 92041-146,
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