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Job Seekers Take Notice: Pharma Megamergers Could Be Back

4/28/2014 3:20:31 PM

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Job Seekers Take Notice: Pharma Megamergers Could Be Back

Jeffrey B. Kindler, former CEO of Pfizer, appeared at a news conference discussing the planned merger of Pfizer and Wyeth January 26, 2009 in New York City. Pfizer acquired Wyeth for $68 billion, creating the world's largest biopharmaceutical company. Photo Credit: Mario Tama

April 30, 2014

What megamergers mean to the biotech industry.

By Karl Thiel for

Is it better to be smaller or larger? The trend in Big Pharma over the past few years has definitely been toward staying small (Eli Lilly, which has publicly eschewed all merger talk), getting small (most recently Baxter, which just announced the spin-off of its bioscience division), or at least pretending to be small (GlaxoSmithKline, as we'll discuss later). But could the pendulum swing back the other way?

That question is front and center following Actavis' $25 billion agreement to acquire Forest Labs, Valeant's $47 billion hostile bid for Allergan, and even Zimmer's $13.4 billion take-out of Biomet. But these pale in comparison to just-confirmed news that Pfizer offered up $98.7 billion for AstraZeneca. That's a proposed megamerger reminiscent of years past...but bigger.

The combination has enough benefits on paper to at least make some sense—Pfizer could find a place for its rather large wad of overseas cash without worrying about repatriating, it could have a foreign base from which it could perhaps lower its comparatively high tax rate, and it could bolster its pipeline, particularly in oncology. And one could expect a lot of talk about synergies and cost-cutting, yadda yadda.

Still, it would be a 180 degree turn not just from the way the industry has been heading, but from the direction forged by Pfizer CEO Ian Read since he took over in 2011. He's spun off the nutrition and animal health units, and it's been less than a year since he announced plans to separate the company into three business units—two "innovative" groups focused respectively on immunology/metabolic disease and oncology/vaccines/consumer healthcare; and a "value" group focused on generics, biosimilars, and drugs about to go off patent. Indeed, with those changes just put in place this year, the company's upcoming first quarter report will be the first to break out financial metrics along these new segments.

So what makes this reversal worthwhile? After all, it's hard to view Pfizer's past history of large acquisitions—Wyeth, Pharmacia, Warner-Lambert—as especially positive. Interestingly, a article from February by consulting firm McKinsey & Co. argued in favor of "Why pharma megamergers work," principally using Pfizer as an example. It was for the most part a less-than-convincing piece (to me at least), but perhaps the authors had caught wind of the negotiations between Pfizer and AstraZeneca, which reportedly took place in January.

An interesting counterpoint to the Pfizer-AstraZeneca news is the recent asset-swap deal between GlaxoSmithKline and Novartis. GlaxoSmithKline will acquire Novartis' vaccine business for £6.5 billion and will in turn sell its oncology business, including rights to its ATK inhibitor, to Novartis for £16 billion. And, the companies will together create a consumer healthcare business (that one could imagine could perhaps be independently spun off some day). The companies get to refocus strategy this way without radically disrupting their organizations. (Although you can bet there is some nervousness about jobs—see Career Track below).

It's always possible that Pfizer's strategy isn't a simple reversal of its earlier strategy but rather the first part of a plan to gain some pipeline assets and then divide the company up. But that doesn't seem to wash, as AstraZeneca is a rather undiversified company—with no easy dividing points, like generic, consumer healthcare, or animal health business units. Moreover, its own patent problems mean it's unlikely to see revenue growth before 2018. This doesn't necessarily make it an undesirable target, but it seems like a less-than-perfect fit for Pfizer at a premium price.

Still, if you want to address emerging markets, it actually makes sense to be large and diversified. That's because the internal functions of a large company can make up for the lack of local infrastructure in the markets they serve. A company that has overcome all the challenges it takes to successfully deal with regulators and manufacture, distribute, and market a product in an emerging economy often finds it makes sense to use some of the same machinery for other lines of business. In that sense, AstraZeneca makes a little sense—it would approximately double Pfizer's footprint in China, for instance, including Guangdong BeiKang Pharmaceutical, the Chinese generics business that AstraZeneca acquired in 2011—but that doesn't seem like enough.

Of course, one of the biggest downsides of a megamerger is that employees become distracted, worrying about personal situations instead of the work at hand. Thanks to this news, that is happening already.

-Karl Thiel

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