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Doing the pharmaceutical tango

The tango is an elaborate, elegant, and emotional Argentine dance that embodies a combination of rapid and slow movements. The word tango has worked its way into our vocabulary: "It takes two to tango" means that one person doesn't make a major mistake or screw-up, it usually requires the work of two.

The tango often seems like a battle of two people trying to impose their will on their counterpart, or partner, until they finally meld together to form this closely balanced couple performing in unison. To me, it always has seemed like two strong individuals fighting for control until they eventually synchronize. Hence, the metaphor to pharma M&A seems appropriate.

Every year, a number of pharma companies step up to do the tango and either succeed or fail miserably. The reasons for performing this dance include:

• The need for new products and an improved product pipeline.

• Stronger regional (U.S., Japan, or Europe) or global presence.
• CEO and management team access for succession planning.

• Access to key assets (plants, sales force/distribution system, R&D facilities).

This pharma tango is both a jockeying for improved positioning in the $600-plus billion world Pharma market and the $200 billion medical device market, as well as a need to replace aging or patent-expiring products.

Although the need for products can be quenched via aggressive licensing, this action doesn't necessarily provide presence in key markets.

When I was in Japan at Bio-Japan 2006, I sat through an interesting presentation by U.S. Merck's head of worldwide licensing. Until recently, this presentation would have almost been considered heresy within Merck, which historically relied solely on internal R&D, and would rarely "in-license its products." But even venerable Merck has seen fit to change its business model. According to the presentation, 44 percent of Merck's 2005 worldwide sales - totaling $22 billion - were from in-licensed products.

This number is actually even higher as it doesn't reflect the co-marketing deal with Schering-Plough for the cholesterol drug Zetia, which Merck doesn't reflect as sales, but does have an important income impact. This product is approaching $2 billion in annual sales.

This past week saw two pharma tangos, resulting in new mergers. According to an article in the September 22, 2006 edition of the Wall St. Journal, Merck KGaA (the German Merck) is acquiring Swiss biotech giant Serono for $10.6 billion euros, or about $13.6 billion U.S. dollars. The same day Danish drug company Nycomed announced its plans to acquire Germany's Altana AG's pharmaceutical business (formerly known as Byk Gulden and more recently as Altana Pharmaceuticals) for $4.5 billion euros, or about $5.8 billion U.S. dollars.

You may remember earlier in the year that Serono had put itself on the market for a lofty price, but had few takers and had recently announced that it would go it alone. German Merck made an unsuccessful bid to acquire Schering AG and lost out to Bayer (Bayer acquired Schering AG for $21.3 billion), but this time was successful in its bid for Serono.

Kodak moment

Nycomed, most notably a company known for its imaging agent products, had not done any major deals in a while. Perhaps its last major deal was when Kodak decided to chop up its pharma business, which consisted of some Kodak product lines and the former Sterling Drug/Winthrop Co. Nycomed acquired the imaging agent part of this business.

According to the WSJ article, the combination of German Merck/Serono will be known as Merck-Serono Biopharmaceuticals for the prescription drug part of the business, with its headquarters in Geneva and Boston (both Serono operations). It also will have combined annual pharma sales of about $4.6 billion, an annual R&D budget of about $1.3 billion, and a worldwide sales force of 7,000.

More than this, Merck gets a somewhat stronger U.S. sales presence. The U.S. has traditionally been a weak point for German Merck; it now adds almost $800 million in U.S. sales and 500 sales and marketing personnel.

Merck KGaA also has other businesses, including generic and consumer pharma businesses, and a chemicals business.

The initial reaction to the Merck-Serono merger, according to the WSJ article, seems to be tepid because there is little synergy: both companies have very different product lines and there is no critical mass being being generated in a given therapeutic area. On the other hand, the combined company has 28 products in development.

The Nycomed-Altana deal also is an interesting one. Altana is owned by the same family that controls car maker BMW: the Quandt family. Altana had put its pharma business on the market at a higher price and apparently had few takers.

The hottest news today is that of yet another European-to-European acquisition: Belgium's UCB acquiring Germany's Schwarz Pharma for about $5.6 billion, according to Fierce Biotech's daily newsletter. The combination of the two will yield annual pharma sales of about $4.2 billion, and an R&D budget of approximately $1 billion. This acquisition clearly beefs up UCB's U.S. business as Schwarz Pharma has operations here in the Midwest in both Milwaukee (U.S. HQ) and Indianapolis (U.S. manufacturing).

None of these three mergers will put the combined companies into the top tier ranks of pharma companies. The 10th-ranked big pharma company, Wyeth, had 2005 sales of almost $19 billion. In fact, Merck KGaA, Nycomed, and UCB probably will not even crack the list of the top 20 big pharmas. Still, these acquisitions probably were what they could afford, and at least temporarily will allow them to avoid being bought out by larger companies.

Recent Major Life Science Company M&A

Acquiring CompanyAcquired CompanyDateTransaction Value ($ B)
Boston ScientificGuidant1/06$27.0
BayerSchering AG3/06$21.3
Johnson & JohnsonPfizer Consumer Products Division5/06$17.0
Merck KGaASerono9/06$13.6
NycomedAltana Pharmaceuticals9/06$5.8
UCBSchwarz Pharma9/06$5.6
AbbottGuidant (vascular intervention and endovascular business) from Boston Scientific1/06$4.1
FreseniusRenal Care3/05$3.5
Da VitaGambro (renal care clinics business)12/04$3.0
Watson PharmaceuticalsAndrx4/06$1.9
Siemens Medical SolutionsDiagnostic Products Corp.4/06$1.86
AstraZenecaCambridge Antibody5/06$1.03


Blue color= 2006 transactions

I think there are still some potential transactions that will take place before the end of the year. Two companies that have been in the target list are Bristol-Myers Squibb and Schering-Plough.

Bristol-Myers Squibb currently has a market valuation of about $49.3 billion, while Schering-Plough's is $31.7 billion. Neither makes the cut of the top 10 Big Pharma companies. BMS has seen its stock price erode from about $60/share back in January 2002 to the current level of $25/share, a drop of about 58 percent. Former Bristol-Myers CEO Peter Dolan made a series of strategic mistakes during this period, which led to his ouster.

In the case of Schering-Plough, the company has been revived from the dead by former Pharmacia CEO Fred Hassan. Schering-Plough, likewise, has seen its stock tumble from about $40/share in January 2002 to about $21/share today, although in defense of Mr. Hassan, the stock had dipped to lower than $15/share before he joined.

Changing of the pharma guard

I've already mentioned the sudden ousting of Peter Dolan at BMS, but many in the industry are surprised he has lasted so long due to the number of key strategic mistakes he made. (BMS is an amalgamation of companies, including Mead Johnson, Squibb, and DuPont Pharmaceuticals).

Another recent major change was the departure of Pfizer's CEO Hank McKinnell, who will be replaced by a relative newcomer, former Pfizer general counsel Jeffrey Kindler. Kindler is the first CEO to come from outside of the company, having previously been at GE.

Under McKinnell, Pfizer did acquire Warner-Lambert and Pharmacia, boosting its position in the marketplace to number one around the world. However, Pfizer's stock price has languished, with a price of about $44/share in 2002 compared to about $28/share today, or a drop of 36 percent.

This drop has rankled Pfizer shareholders as McKinnell is walking off with a potential $83 billion lump sum payment, according to BioPharm International. Additionally, McKinnell has departed at a time when several Pfizer blockbusters are losing patent protection.

Soon after the announcement of Kindler as the new CEO, several Pfizer top execs announced their departure, including longtime Pfizer Pharma chief marketing exec and former vice-chairperson, Karen Katen. She still is young enough at 58 to play a CEO role at another Big Pharma company, and is rumored as a potential candidate for the CEO slot at BMS, as is former BMS executive and current J&J vice-chairwoman Christine Poon.

It will be interesting to see what happens to both BMS and Schering-Plough in the coming months as they prepare to dance their own tango.

See you soon!

Recent articles by Michael Rosen

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Michael Rosen: Midwest shines among best hospitals in U.S.

Michael Rosen: The world of in-vitro diagnostics is another Midwest success story

Michael S. Rosen is president of Rosen Bioscience Management, a company that provides CEO services including financing, business and corporate development to start-up and early stage life science companies such as Renovar and Immune Cell Therapy. Rosen is also a founder and board member of the Illinois Biotechnology Industry Organization. He can be reached at

The opinions expressed herein or statements made in the above column are solely those of the author and do not necessarily reflect the views of The Wisconsin Technology Network, LLC. (WTN). WTN, LLC, accepts no legal liability or responsibility for any claims made or opinions expressed herein.

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