Money can’t buy innovation
Nuala Moran
Nuala Moran, Senior Editor
Wallets at the ready, big pharma is swaggering through the financial crisis. Before the rest of us were used to writing 2009 when signing cheques, Pfizer announced the acquisition of fellow big pharma Wyeth for $68 billion in cash or shares.
Soon after, the collegiate atmosphere that has always ruled the relationship between Roche and Genentech was soured when Roche went hostile in its bid to buy the minority stake in the Californian biotech it does not own already. Now this week Sanofi-Aventis and Merck have said they are on the hunt for major acquisitions.
Pfizer’s CEO Jeff Kindler told analysts recently that every acquisition should be in pursuit of a strategy – the current number one strategic objective in the case of the world’s largest pharma company being how to avoid falling off a cliff when its patents on Lipitor expire in 2011. The cholesterol-lowering drug is the world’s biggest-selling pharmaceutical with sales of $13 billion per annum.
A mega merger with Wyeth will boost revenues and should offer some further opportunities for cost-cutting. But on this front Pfizer’s previous form is not reassuring. The acquisitions of Warner-Lambert in 2000 and Pharmacia brought a lower share price in their wake.
Buying Wyeth may plug the Lipitor gap (though Wyeth’s biggest product, the anti-depressant Effexor, is also due to go head-to-head with generics in the next two years), but the bigger challenge is how the lacklustre portfolio can make up for subsequent patent expiries. As A. Shabeer Hussain, programme leader at Frost and Sullivan’s Pharmaceutical and Biotechnology Healthcare Group, puts it “Though its pipeline has 200 products, there are no blockbusters to even dent the [hole] of around $30 billion left by the patent expiry of 13 drugs by 2014.”
Mine’s bigger than yours
As Hussain notes, most of the big pharmaceutical companies face declining revenues and earnings in the next five years, and the Pfizer and Wyeth merger is likely to spread M&A contagion. Novartis is sitting on a cash mountain of $15 billion, Roche $13.5 billion, Johnson & Johnson $13 billion, Merck $10 billion and GlaxoSmithKline $9.5 billion.
As blockbusters go off patent, organic growth is stopped in its tracks “Phama companies have resorted to inorganic growth through M&A. However, this growth cannot form a sustainable business model for long,” says Hussain. In other words, buying Wyeth is a stop-gap arrangement enabling Pfizer to stay afloat during the expiry of the Lipitor patents. Wyeth, facing generic competition to the $3.92 billion per annum Effexor, considered buying Dutch vaccines company Crucell, but in the end had no other choice than to fall into Pfizer’s arms.
The prime question: Does M&A favour innovation? The short answer: No. Buying Wyeth is a crisis management measure. In stripping Pfizer of its $23 billion cash pile, this deal will leave the company unable to access the wealth of innovation now languishing in undervalued biotechs.
It may enhance the share price for now, but Pfizer and its peers still need to replenish their portfolios. Mega mergers are not the long-term solution to pharma’s R&D productivity problems.