European Pharma M&A: Sidelong Glances
On Sept. 25, Belgium's UCB Pharmaceuticals announced a $5.6 billion takeover of Germany's Schwarz Pharma. The cash and shares deal will transform the second-tier drugmakers into a leading European biotech focused on neurology, inflammation, and oncology with annual sales of more than $4.2 billion.
UCB, which is about to lose patent protection on two of its best-selling drugs (see BusinessWeek.com, 3/22/06, (see BusinessWeek.com, 3/22/06, "Anti-Inflammatory Blockbuster?"), gains access to three potential blockbusters while Schwarz will benefit from the Belgian company's stronger marketing capabilities, especially in the U.S.
The deal marks the third takeover of a family-controlled European pharmaceutical player in less than a week. On Sept. 21, Germany's Merck snapped up the founding Bertarelli family's 64.5% stake in Swiss biotech Serono (SRA) for $13.5 billion, to create Merck-Serono Biopharmaceuticals, with combined annual sales of nearly $10 billion.
That same day, German chemical and pharmaceutical company Altana (AAA), owned by the billionaire Quandt family, announced plans to sell its drug business to Denmark's Nycomed Holding for $5.7 billion. And analysts reckon there are more deals to come. "For midsize European players it's a matter of survival," says Sho Matubara, pharmaceuticals analyst at Standard & Poor's (which like Business Week is owned by the McGraw-Hill Companies) in London.
That's because the economics of the drug industry are changing. The cost of developing new medicines has skyrocketed while pricing pressure on drugs that are already on the market has intensified. Until recently, Big Pharma companies routinely posted double-digit sales growth. Those days are over. Most of those gains came from price increases, which are now under threat worldwide as governments and insurers seek to rein in spending.
At the same time, pharmaceutical productivity is waning, leading the world's drugmakers to turn to biotech companies for innovative new drugs to fill their pipelines. And midsize players, without the financial muscle of giants such as Pfizer (PFE) or Britain's GlaxoSmithKline (GLAXF) are at a disadvantage.
That's why some, such as Dutch chemical and pharma conglomerate Akzo Nobel (AKZOY), are choosing to move out of the drug business entirely.
European second-tier players, many of which are family controlled, have been slower to respond to the changes underway in the industry. And now many are discovering that if they don't bulk up they'll need to sell out. So they are increasingly turning to one another to gain the scale and breadth needed to compete. The current spate of deals is driven by access to promising new medicines, entrée into new businesses such as generics or biotech drugs, or simply the ability to cut costs.
"An acquisition can be value-creating even if there is really nothing in the pipeline," notes Tero Weckroth, pharmaceuticals analyst at Dresdner Kleinwort in London in a recent report. "R&D cost cuts could well generate enough profits to serve the debt and create profit."
For other companies such as Merck, a merger offers a chance to get into a potentially lucrative new business. Although it is the world's third largest maker of generic drugs, its prescription drug business is relatively weak. (see BusinessWeek.com 3/14/06, "German Pharma Powerhouse Potential"). But the acquisition of Serono, Europe's largest biotech company, coupled with Merck's expertise in generics offers access to a potentially lucrative new market: biogenerics.
These generic versions of biotech drugs are incredibly difficult to manufacture as they are based on complex biological organisms instead of simple molecular compounds as are more traditional pharmaceutical drugs. They are also incredibly expensive: Patented biotech drugs now account for 12% of the $240 billion U.S. drug costs. And with an estimated $20 billion worth of these drugs set to lose patent protection by the end of the decade, the market represents a potential cash cow for generic makers with biotech expertise.
Moreover, European regulators are the only ones in the world to have developed guidelines for approval of these drugs, increasing the likelihood that the first biogenerics will be approved in Europe. "This is the next big frontier in Europe for pharmaceutical companies," says David Seemungal, pharmaceuticals analyst at Standard & Poor's in London.
And Merck isn't the only midsize player to have spotted its potential. U.S. generic drug giant Barr Pharmaceuticals (BARR) is in a bidding war with Icelandic generic maker Actavis to acquire Croatian generic drugmaker Pliva. Barr recently upped its offer from $2.3 billion to $2.5 billion.
With the generics market in general estimated to grow rapidly in Europe, many firms such as Pliva are expected to lead the next round of consolidation in Europe. Some of the companies analysts say are currently undervalued and likely takeover targets include Norway's Alpharma (ALO) and Hungary's Gedeon Richter and Egis Pharmaceuticals.