Alliances Prove an Iffy Panacea For Suffering Drug Companies

Alliances Prove an Iffy Panacea For Suffering Drug Companies

If mergers are good for ailing drug companies, then what about GlaxoSmithKline PLC?

GlaxoSmithKline, of London, has gone through so many mergers during the past decade that its name resembles a law firm's. But Glaxo is suffering right along with the rest of the drug industry and has all the signs of suffering through a disastrous 2003.

Given the example of Glaxo, why, then, has Pfizer Inc. decided to buy Pharmacia Corp.? Will the rest of the industry follow its lead?

To answer those questions requires an understanding of the fundamental issue facing the drug industry: the drought in new-drug development. This drought threatens the financial health of drug makers, and forces consolidation -- even though consolidation doesn't seem to help drug-company labs create more drugs.

After falling for five years, new-drug applications to the Food and Drug Administration are expected this year to slide further. Through the first five months, the FDA had received just two new applications. Last year, total new-drug applications dropped to 24, less than half the 53 received in 1996.

Many in the industry say that past mergers may be among the reasons for these drops in new-drug discovery.

"I do not believe that financial resources are the critical ingredient in making you successful or not in science," says Daniel Vasella, chief executive of Novartis AG, of Basel, Switzerland. "I believe that size makes it a little more difficult."

DRUG GENEALOGY   See a genealogy of the drug industry in the new Health Industry Edition at wsj.com/health1   * * *   • Pfizer Worked Hard to Win Pharmacia2   • Pfizer, Pharmacia Combination Raises Little Antitrust Concern3   • Pfizer-Pharmacia Deal Means You'll Hear More of Celebrex4

So, if it is unlikely that the labs of Pfizer, of New York, and Pharmacia, of Peapack, N.J., will jointly come up with any more new drugs than they would have apart, why combine? In this case, analysts and consultants say, the merger isn't as much about science as marketing. Specifically, the merger is designed to increase Pfizer's market power and strengthen the chances that biotechnology and niche pharmaceuticals companies decide to license their most-promising compounds to Pfizer, experts say.

"Pfizer is really staking out its position as a marketing and sales juggernaut," says David Webster, an industry consultant. "They will use their market power to get better deals on products near launch, and that will give them a competitive advantage."

Pfizer's new size -- $47 billion in revenue -- will be simply too big for any one organization's labs to sustain with new products, consultants say. "They're a big hungry machine, and nobody thinks they can feed this thing with only their internal products," says Stephen Mock, an industry consultant. Even before the merger, Pfizer was probably too big to grow with its own products. The last big product to come out of its labs was Viagra, launched more than four years ago.

The combined company must now launch four to five big sellers every year to assure long-term growth. No company has managed to launch more than two big sellers during any given year. And Pfizer has never been best known for its research organization. Instead, the company licensed in its biggest sellers, getting Lipitor from Warner-Lambert Co. and Celebrex from Pharmacia. Pfizer acquired Warner-Lambert in 2000. In 4 p.m. New York Stock Exchange composite trading, Pfizer fell $3.42, or 11%, to $28.78, while those of Pharmacia rose $6.66, or 20%, to $39.25, in a typical reaction after announcement of large deals.

With Pfizer's move, other drug companies increasingly face a choice between relying on their science or relying on their market power. Jean-Pierre Garnier, CEO of Glaxo, increasingly talks about how Glaxo's size makes it the partner of choice for biotechnology companies. If he intends to continue making that pitch, Glaxo will have to get bigger to compete with Pfizer.

Merck & Co., on the other hand, long had the most productive labs in the industry and has said it intends to continue relying on that productivity. Top Merck executives have pointed out repeatedly during the past two years that mergers don't increase scientific productivity. The question is whether Merck is willing to be left so far behind on marketing power.

The Pfizer and Pharmacia deal may put the most pressure on companies such as Merck, Astra-Zeneca PLC, Novartis and Bristol-Myers Squibb Co., which previously had been among the top drug makers but are now left far behind in their share of the drug market. "It's going to become very hard to be a niche player in this industry," says David Blumberg, managing partner of Accenture's health-care consultancy. "To imagine a smaller player having the commercial clout necessary in anything but a very specific category is almost unimaginable."

Warner-Lambert and Pharmacia, Pfizer's past and prospective merger partners, are two of the healthiest smaller forces in the industry. Other mergers are likely to involve less robust companies. Industry watchers are dusting off old rumors and trying to figure out which will come true.

On the top of the list: Merck taking over Schering-Plough Corp. Schering-Plough has been hurting as the patent on its biggest seller, Claritin, nears expiration at the end of the year. And Merck is in the midst of a difficult period as patents on some of its biggest sellers expire and its labs go through an uncharacteristic dry patch. They have a co-development deal for a promising cholesterol pill, Zetia. Spokesmen for both companies wouldn't comment.

One of the most-watched European drug makers is Sanofi-Synthelabo SA, a midsize French company that sells three blockbuster drugs: sleeping pill Stilnox/Ambien, blood-clotting treatment Plavix and Avapro for hypertension. In addition, it has a pipeline of products in development that bests many of the giant drug companies.

Control of Sanofi is officially locked up until the end of 2004 by French conglomerates TotalFinaElf SA and L'Oreal SA, which created the drug maker by merging their pharmaceuticals interests in 1999. But Sanofi's ambitious CEO, Jean-Francois Dehecq, is eager to make the company bigger, and analysts say that could steer him toward lining up a deal while he can do so from a position of strength, protected by big shareholders, rather than out of defensiveness.

Some have speculated even a bid for Bristol-Myers, which markets Plavix for Sanofi in the U.S. But Mr. Dehecq has said he isn't interested in deals that could crimp Sanofi's profitability in the short-term, as a deal with BMS most likely would. Another possibility is Aventis SA, a Franco-German drug maker that has been building up its U.S. sales force. Sanofi has said recently it isn't in any talks.

Hours after news of the Pfizer-Pharmacia deal, Roche Holding AG promptly said -- again -- it isn't interested in a merger with rival Swiss maker Novartis or any other company.

One lesson the drug industry may draw is to eschew the mergers of equals that Glaxo largely has pursued. These types of deals can result in months of musical chairs as the companies try to figure out which executive will head up which unit. Such games can paralyze important projects and cause deadly delays in fast-moving scientific fields.

Pfizer, on the other hand, has only undergone takeovers in which Pfizer's dominant role is understood from the beginning. This clarity of leadership may account for why Pfizer's takeover of Warner-Lambert is widely seen as successful.

"It's clear that doing these deals with one person on top removes many of the hurdles to effective execution of them," says Joseph Zammit-Lucia, president of Cambridge Pharma Consultancy.

Write to Gardiner Harris at gardiner.harris@wsj.com⁵ and Vanessa Fuhrmans at vanessa.fuhrmans@wsj.com⁶

Updated July 16, 2002