09 Feb The Industry Impact of Two Big Pharmas Mating
CHICAGO – Early this year, the ongoing saga of the consolidating pharmaceutical industry began. For those of you who haven’t been following the news over the last two weeks, we’re talking about the “hostile” bid by French pharmaceutical giant Sanofi-Synthelabo to take over French-German pharmaceutical giant Aventis.
This would create a “real” major pharma player in France. If it happens, the combined company would create the world’s third-largest pharmaceutical company after No. 1 Pfizer and No. 2 GlaxoSmithKline. This would leave longtime industry leader Merck to a lowly fourth place.
As a student of the pharmaceutical and biotech industries, I love to watch these mating dances. It gets more and more interesting every year because of the amalgamation of companies and trying to figure out the original genealogical tree. You have to have been in this industry for at least 20 years to make sense of it. Case in point:
1) Pfizer is an amalgamation of several companies that it has acquired over the last few years: Warner-Lambert and more recently Pharmacia, which itself is an amalgamation of several companies including Carlo Erba/Farmitalia, Upjohn and Searle. To be fair, Pfizer has spun off its non-pharmaceutical businesses over the years, which included Coty Cosmetics, Howmedica (its orthopedics business) and more recently Warner-Lambert’s razor business.
2) GlaxoSmithKline is also an amalgamation (which is reflected in its name) that includes a number of companies such as the former Wellcome company (which no longer even figures in the name), Beecham (which also no longer figures in the name) and of course the venerable SmithKline, which once owned Beckman (a device and diagnostics business) that was also spun off.
This rejiggering of companies can be confusing. During the 1970s, almost all major pharmaceutical companies had cosmetic divisions:
1) Pfizer had Coty.
2) Squibb had Charles of the Ritz, which included Yves St. Laurent, Jean Nate, Bain de Soleil and other prestigious French lines.
3) Bristol-Myers had Clairol.
Schering-Plough still is tangentially in this business with its Plough line of quasi-cosmetics products.
During the 1980s, these companies jettisoned their cosmetic businesses. During the 1990s, the trend was to divest the orthopedic divisions (hence Pfizer jettisoning Howmedica and Bristol-Myers doing the same with Zimmer). Only Johnson & Johnson has continued to remain as a health-care conglomerate. The rationale was that to be a true pharmaceutical player, you’d need to focus all R&D dollars on true pharmaceutical research.
Now let’s get back to the French debacle and why it should interest us. Let’s start with Sanofi-Synthelabo.
It had 2002 sales of about $9 billion, which has some strong U.S. roots despite its French origin. Sanofi began its process of building a global pharmaceutical business during the early 1990s with the acquisition of Kodak pharmaceutical business Sterling-Winthrop, which is an old and venerable pharmaceutical firm that went international in the early 1950s.
In fact, the former Sterling Drug was one of the first American companies to set up extensive operations in Latin America. When I started as a sales representative for Pfizer in Colombia in 1974, the name Sterling-Winthrop was still golden in drug stores and the offices of doctors (as good if not better than Pfizer’s). This company had as good a presence in Latin America as did both Pfizer and Merck.
While this gave Sanofi some U.S. presence (as opposed to no U.S. presence previously), Kodak had never really figured out how to fix an ailing and underfunded Sterling Drug. This, by the way, was the company that launched analgesic acetaminophen overseas much before Johnson and Johnson’s McNeil launched and made Tylenol successful (except overseas, it was known as paracetamol).
While Sanofi gained a U.S. and Latin American presence and some other international locations, Sterling’s product line was somewhat “tired” and Sanofi divested the profitable Winthrop medical imaging business to Nycomed. Still, Sanofi’s new R&D never really produced blockbuster products to take advantage of this new U.S. distribution system.
Realizing that it needed to bulk up further, Sanofi linked up with French company Synthelabo, which had key shareholders such as L’Oreal (the cosmetic division of Nestle) and Elf Aquitaine, the French oil company. Synthelabo had set up a U.S. joint venture with Searle in the 1980s known as Searle-Synthelabo to develop a series of promising Synthelabo central nervous system (CNS) drugs (of which the forerunner was Ambien, a new sleep inducer).
Though this joint venture actually extended to a number of Latin American and European countries for a number of years, it worked best in the U.S. where Searle had great success with Ambien. As a result of the merger with Sanofi, this combination clearly became the largest French company and certainly a strong European presence.
The U.S. organization finally had a pipeline as the combined company took over the joint venture with Searle. Still, it had a relatively small U.S. presence. Even today, U.S. sales represent only about 20 percent of total company sales while Europe represents more than 60 percent of sales.
The creation of an oncology business through some key in-licensed products (called Oxaliplatin, which is from the Swiss company Debiopharm) and a new injectable form of Leuprolide (the prostrate cancer drug marketed principally by TAP Pharmaceuticals) from Atrix Labs became a new direction for the combined company.
Enter Aventis, which also is an amalgamation of companies from a number of mergers.
Ostensibly, Aventis is a French company with headquarters in Strasbourg, France (versus Sanofi-Synthelabo in Paris). However, its roots are also strongly German and descending from the German chemical-pharmaceutical giant Hoechst. Now this gets tricky and confusing: the two main pieces of Aventis come from two companies:
1) Rhone-Poulenc Rorer, a French-American pharmaceutical company.
2) Hoechst-Marion-Roussel, a German-American-French pharmaceutical company.
Is this incestuous or what? It’s sounding like some of the European royal families. In actuality, though, Rhone-Poulenc was a venerable and old French chemical and pharmaceutical company that shed its chemical piece, bought Pasteur-Merrieux (the vaccine company) and then later Connaught Labs (another vaccine company) in Canada, which became Pasteur-Merrierx Connaught.
During the 1980s, Rhone Poulenc was looking to build up its U.S. business (sound familiar?) and acquired Rorer (itself a small amalgamation of Armour Labs and U.S. Vitamins during the 1970s). You may remember Rorer as the company that marketed Maalox (the original gastric acid product). Beside vaccines and blood-related products, the new company (Rhone Poulenc Rorer) also initiated a promising oncology business with the launch of the taxane-derivative Taxotere.
The Hoechst-Marion-Roussel saga is another complexity. Historically one of the strongest German chemical and pharmaceutical companies, Hoechst in the 1980s acquired French pharmaceutical company Roussel and had established a strong European presence but little U.S. presence. The Marion part of the story originates in two separate pieces:
1) Marion Labs, a successful U.S. pharmaceutical company built on Japanese in-licensed products with its headquarters in Kansas City and no international business.
2) Merrell Dow, the merger of Dow Chemical’s small pharmaceutical business with the pharmaceutical part of consumer products and pharmaceutical company Richardson-Merrell.
Marion Merrell Dow (as it was known in the 1980s) became Dow Chemical’s attempt to build a successful pharmaceutical company. It had a limited international business, not much internal R&D and a solid U.S. base. Still, this wasn’t enough to survive for long. Dow Chemical decided to bail out of pharmaceuticals by merging the company into Hoechst-Roussel.
For a while, the new HMR seemed to be a perfect fit as Hoechst needed a strong U.S. arm and MMD needed a strong international arm. Unfortunately, R&D was still too weak to feed into this new global pharmaceutical network. The was a need for further “bulking up” (hence the merger in the 1990s with Rhone-Poulenc Rorer).
One trend that emerged during the 1980s and 1990s was the increase in R&D budgets to attain critical mass. Pharmaceutical companies upped the R&D ante from 8 percent of net sales to almost double this level (15 percent of net sales). Few other industries in the world invest this kind of money in R&D.
Both HMR and RPR realized that they were falling behind the market leaders as pharmaceutical mergers took place during the 1990s with Pfizer and Glaxo (not to mention the merger of the Swiss Ciba-Geigy and Sandoz into Novartis). With so many pharmaceutical pieces, the combination of these companies was impossible to reflect in a new combined name.
Hence the creation of a totally new name: Aventis (without any of the baggage of all the other names).
While Aventis is certainly a much stronger company around the world these days and has a worldwide marketing presence, its product pipeline has been weak and its stock has suffered. Nevertheless, global sales in 2002 topped $21 million (at today’s Euro exchange rates), which makes it almost twice the size of Sanofi-Synthelabo.
On Jan. 26, an aggressive Sanofi-Synthelabo made a “hostile” overture to buy Aventis (the larger company) for about $60 billion to create the largest pharmaceutical company in Europe and the No. 3 pharmaceutical company in the world with the third-largest R&D budget in the world. It would have nine products with annual sales of more than $500 million each.
Sanofi-Synthelabo also argued that the merger would create 1.6 billion Euros a year in annual savings for both companies. Sanofi-Synthelabo offered a 15 percent price premium on Aventis sales. Aventis management has reacted very negatively to this overture as they feel the valuation by Sanofi –Synthelabo is much too low.
Already spurred by this action, Aventis management is looking to raise its stock price and value by divesting of non-strategic assets and offering to buy back its shares on the public equity markets. They have also replied that this merger makes no sense as strategically it doesn’t increase the presence of the companies in the largest market in the world (the U.S.) and it creates an overdependence on a massive European presence.
This may not (and probably won’t) be enough. So what will we see? I think one of the following:
1) Sanofi-Synthelabo will up the ante and increase the value of its offer.
2) GlaxoSmithKline and Novartis are rumored to be sought out as “white knights”. Even Roche was mentioned. While Roche management has said it will stay out of the merger frenzy, remember that Novartis owns about 33 percent of Roche.
3) Another company may be sought out as a merger partner (ailing Schering-Plough in the U.S. has a strong U.S. presence but relatively weak presence in Europe) by Aventis (Schering-Plough also has an attractive oncology portfolio).
Bristol-Myers Squibb – itself in troubles and traditionally a company built on acquisitions (Squibb and Dupont Pharmaceuticals in recent years) – might be another candidate. Thus far, Merck has stayed out of the merger frenzy and has relied on internal growth. Still, even the venerable Merck may change its mind.
Regardless of what happens, Aventis as we know it today is history. It will now be forced to change or be changed. This in turn will drive other pharmaceutical companies to take action during the year. And it’s only early February!
Early Stage Funding in Illinois
The Illinois Biotechnology Industry Organization (IBIO) is on Feb. 13 organizing a panel breakfast on early stage funding in Illinois for biotech companies in the area (disclosure: I’m involved with IBIO). This meeting will take place at the Molecular Biology Building Auditorium of the University of Illinois at Chicago at 8:30 to 10 a.m.
Participating on the panel will be representatives from various state and university organizations involved in funding and helping develop early stage companies. They include:
1) Illinois Ventures, the venture capital arm of the University of Illinois.
2) The Illinois Coalition.
3) The Illinois Technology Enterprise Centers of Chicago and Evanston.
4) Chicago Community Ventures.
As most Illinois biotech companies are early stage, this forum should be useful to companies as they look to raise their first few hundred thousand dollars to get up and organized. See you next week!
Michael S. Rosen is president and CEO of Barbeau Pharma and a founder and board member of the Illinois Biotechnology Industry Organization (IBIO). He can be reached at firstname.lastname@example.org. This article has been syndicated on the Wisconsin Technology Network courtesy of ePrairie, a user-driven business and technology news community distributed via the Web, the wireless Web and free daily e-mail newsletters. They can be found at www.eprairie.com.
The opinions expressed herein or statements made in the above column are solely those of the author, & 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.