Pharma transformers: Big Pharma into biotech or into bigger pharma?

Pharma transformers: Big Pharma into biotech or into bigger pharma?

CHICAGO – It becomes obvious that the tectonic plates of the pharma industry have radically shifted when Pfizer, which is the world’s largest pharma company (in global drug revenue), was surpassed in market value by biotech company Genentech.
This amazing event took place last week when Genentech’s worth soared in excess of $90 billion and Pfizer’s value dropped below $90 billion.
It was said some five to seven years ago that the entire worth of the biotech industry was less than that of Merck, which was then supplanted by Pfizer as Merck began to fade. This statement changed a few years ago to say that the entire value of the biotech industry was less than that of the top two to three Big Pharma companies.
Genentech alone has now taken the progression of biotech even further by surpassing Pfizer. As this is written, Genentech itself is fighting for survival and is trying to fend off hostile suitor Roche, which already owns more than 50 percent of the company.
Comparison of Pfizer and Genentech

Key Parameters Pfizer Genentech
Market Value (3/9/09) $85.5 billion $94.9 billion
Annual Sales – 2008 $48.3 billion $13.4 billion
Annual Income – 2008 $8.0 billion $3.4 billion
Income as % of Sales 16.6% 25.4%
Annual R&D Expense $7.9 billion $ 2.8 billion
R&D as % of Sales 16.4% 20.9%
Number of Employees 81,900 11,186
Cash $26.0 billion $6.2 billion
Sales Per Employee* $590,000 $1,198,000
Income per Employee* $98,000 $304,000

Source: Yahoo Financial Page, 3/09/09;;
*rounded to nearest thousand
It’s interesting that a company with 3.6 times the amount of sales and 2.8 times the amount of income has 10 percent less in market value. Note the above analysis does not include the impact of the Wyeth acquisition by Pfizer. If you look at the average revenue and income generated per employee, in terms of a productivity index Genentech employees almost double the revenue produced by Pfizer employees and more than triple the income.
The days in which Genentech will be independent are counted, though, as Roche last week upped its offer to $6.50 a share (from $86.50 to $93 a share).
Roche already owns approximately 56 percent of Genentech and is trying to acquire the 44 percent it doesn’t control. Genentech’s board, according to the San Francisco Business Times last week, believes the value of the company is still somewhat higher at $112 to $115 a share. At the time of this writing, Genentech is currently trading at $90 a share.
With all of the above going on, yet another major merger hit the news this morning: Merck’s offer to acquire Schering-Plough for $41.1 billion, which is a 34 percent premium to the value of this company.
Comparison of Merck and Schering-Plough

Key Parameter Merck Schering-Plough
Market Value $43.1 billion $32.9 billion
Annual Sales – 2008 $23.9 billion $18.5 billion
Annual Income – 2008 $7.8 billion $1.65 billion
Income as % of Sales 32.6 % 8.9%
Annual R&D $4.8 billion $3.5 billion
R&D as % of Sales 20.0% 18.9%
Number of Employees 55,200 55,000
Cash $6.8 billion $3.2 billion

Sources: Yahoo Financial Page 3/09/09;;
Much like the proposed Pfizer acquisition of Wyeth, this new merger (which consists of two traditional pharma companies) doesn’t seem to make sense in the long haul. It does little to get Merck into the strategically important and fast-growth biotech business.
The merger does make sense in a couple ways as Merck and Schering-Plough have in place a lucrative cardiovascular joint venture using combinations of key drugs from both companies. This joint venture in 2008 produced $4.6 billion in annual revenue but also declined 12 percent (26 percent in the fourth quarter) due to 2008 data that demonstrated little added therapeutic value of combining these drugs (two cholesterol drugs with different mechanisms of action).
Both companies also have animal health businesses. Schering-Plough has increased its bulk by acquiring Dutch company Organon in 2008. As Merck has traditionally not grown by large company acquisitions, this strategy represents a departure from known territory for Merck. Both companies have key products that will lose patent exclusivity in the near future.
Looking at the combined number of employees (well in excess of 100,000), you can bet that massive layoffs will be in the works around the world. This will add to the increasing levels of unemployment. Additionally, an equally large divestiture of facilities will also take place as there is a lot of geographic overlap between the companies (starting in New Jersey).
While the Merck and Schering-Plough merger has actually been rumored a year or so ago as a possibility, the big question is how this positions the combined company in the world of biotech, which is where all the action and value is today and tomorrow. The combined company will still have a market value less than Genentech, which is where we started in this column.
A lesson to be learned for other pharma companies looking to merge in 2009 is that the real value seems to come through not into Bigger Pharma (a failed business model based on traditional culture and small-molecule drugs) but into Big Biotech (with a success business model on more open and innovative culture and large-molecule drugs that have both improved efficacy and have had lesser side effects).
The need for Merck – which faces a huge patent cliff (some $10 billion in the next few years) that Pfizer faces – to fill this large gap in sales and earnings becomes a matter of survival. A recently announced pharma-to-pharma merger that does make sense is the acquisition by Danish pharma company Lundbeck of Chicago’s Ovation Pharma for $900 million.
While Lundbeck had a minute direct presence in the U.S., its blockbuster drug Lexapro has been successfully marketed by Forest Labs. Both Ovation and Lundbeck are in the neuroscience space and Lundbeck gets its own U.S. sales and marketing presence as well as some additional pipeline drugs. This merger does make good sense even though it’s not about biotech.
Let’s hope the serial entrepreneur team that started Ovation (Bill Gantz and Jeff Aronin) take their well-earned income from this deal and plow it back into starting other new life sciences firms in Chicago. See you soon!
Recent columns by Michael Rosen

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