Drug Mergers: Killers for Research

When big pharmaceutical companies merge, like Merck and Schering-Plough or Pfizer and Wyeth, R&D always seems to suffer

Merck's decision to acquire Schering-Plough (SGP) for $41 billion will improve its bottom line over the next two to three years, as the merged company cuts at least 16,000 staffers and streamlines its operating costs. Further out, however, Merck (MRK) may find itself in the same wobbly boat it's in now: No big drugs to replace the best sellers that are on the verge of losing patent protection.

That's because the one part of a drug company's operation that never seems to do well in a Big Pharma merger is research and development. Pfizer's long term R&D prospects aren't any better after it wrings all the efficiencies it can out of its $64 billion merger with Wyeth Labs, announced six weeks ago. "Making R&D bigger does not make it more efficient," says Dr. Joseph Schlessinger, chairman of the Department of Pharmacology at Yale's School of Medicine and the founder of three biotechnology companies. "On the contrary, it's very hard to manage science when you have huge teams of people."

With More Mergers, R&D Slows

The pharmaceutical industry has seen plenty of huge mergers over the last 15 years, including several by Pfizer (PFE), and Schering's $14 billion purchase of Organon, a Dutch company, two years ago. But the consolidation has not led to an upsurge of new drugs. Analysts estimate that pharma R&D productivity today is two-fifths of what it was 10 years ago.

Pfizer alone has spent more than $60 billion on R&D over the past eight years but has not produced one drug from its own labs with annual sales surpassing $1 billion. "These mergers tend to have a negative effect on R&D culture in general," says Ian Wilcox, global director of the pharmaceutical practice for Hay Group Consulting, particularly when scientists are jettisoned along with other staffers in the inevitable wave of layoffs following a takeover. "The jury is still very much out as to whether Merck's R&D engine will continue to function well after the deal is completed," he said.

Still, mergers do solve short-term problems, and industry analysts say the deals will keep coming as a result. Next up, Roche Holdings is expected to win its battle for the 40% of biotech powerhouse Genentech (DNA) that it doesn't already own. Genentech has been resisting Roche for months. If the deal goes through, many industry observers expect Genentech's distinguished scientist-CEO, Arthur Levinson, to leave. That might be devastating to other Genentech scientists.

Takeovers are a quick fix for Merck and Pfizer, both facing the loss of billions of dollars in revenues when their best-selling drugs lose patent protection over the next three years and face generic competition for the first time. The Merck-Schering and Pfizer-Wyeth deals, consequently, "are defensive acquisitions, not strategic," says Matt Gurin, senior consultant with Hay Group. "They are just filling the gaps in their existing product lines."

Merck Doubles Its Late-Stage Pipeline

Merck and Schering-Plough do complement each other's drug offerings. The two companies already co-market two cholesterol fighters, Vytorin and Zetia, although sales of both drugs have dropped in the past year over concerns about safety and effectiveness. Merck is strong in asthma drugs and vaccines, including the newly launched cervical cancer vaccine Gardasil, while Schering-Plough has expertise in biologic drugs. Merck will also gain a presence in nonprescription medicines and animal health product with the acquisition. The two companies said the merger will save $3.5 billion a year after 2011 and boost earnings per share in the first full year after the deal closes, thanks to efficiencies gained from layoffs and combining some operations.

Merck CEO Richard Clark also emphasized Schering-Plough's development pipeline when announcing the deal, saying "Schering-Plough employees have built an industry-leading R&D engine and late-stage pipeline that is complementary to our own." He says the merger will double the number of drugs the company has in late-stage development, to 18.

But the deal could also slow down progress on those drugs, warns Yale's Schlessinger. He speaks from experience, having sold one of his startups, Sugen, to Pharmacia in 1999, and then watched it become subsumed into an even larger entity when Pfizer bought Pharmacia in 2000. "Until the merger is completed, everyone in the labs of Wyeth and Pfizer and Merck and Schering-Plough will stop doing anything except talking about 'What is going to happen to me?' They are going to stop producing for a long, long time," he says.

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