Pfizer/Pharmacia: Moving the goalposts

The proposed merger between Pfizer and Pharmacia will create a company with total ethical sales twice those of its nearest competitor. Declining R&D productivity, and a flood of patent expirations have provided the incentive to consolidate, as companies that perceive themselves as strong seek to separate themselves from the weak. Datamonitor examines the potential implications of the Pfizer and Pharmacia's merger. The brief Pharmaceuticals:"Survival of the Fittest" analyses the potential of five key big pharma players - AstraZeneca, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline and Wyeth - to maintain growth over the next six years. Datamonitor compares each company by strategic, financial and therapeutic measures to determine their potential future as independent entities. This is followed by analysis of potential partnerships for the next round of mergers and acquisitions, focusing primarily on the potential for GlaxoSmithKline. The combined Pfizer - Pharmacia company will lead the cardiovascular, CNS and inflammatory disease markets, and will move from fourth place to first in Europe, from third to first in Japan, from fifth to first in Latin America, and will reinforce its number one position in the US pharmaceutical market. The proposed merger has set a new level for big pharmas to aspire to, with combined pro-forma ethical sales expected to top $40 billion in 2002. Costly implications What is certain is that Pfizer's move will spark a round of consolidation within the pharmaceutical industry. GSK is expected to be the next merger candidate, as it must take action to close the gap that will open up between it and Pfizer as a result of the Pharmacia merger. Merck & Co. will be particularly hard hit by the pairing up of Pfizer and Pharmacia, since it is expected to strengthen the marketing effort of Celebrex and Bextra, which compete with Merck's Vioxx. Although Merck has said it wants to remain independent and focus on organic growth by innovation, it has recently fallen in the industry rankings, and the planned spin-off of Medco Health Solutions (formerly Merck Medco) may be a sign that Merck is preparing itself for M&A activity. As the industry prepares for a new round of mergers and acquisitions, patent expiry of blockbuster drugs should become a factor. The potential for generic competition to decimate revenues is perhaps the key factor influencing Pfizer's decision to merge with Pharmacia. Companies with a high dependence on drugs that have lost patent protection are forced to devote resources to safeguarding these revenue streams. Protective strategies For many companies, one solution to the short- to mid-term revenue gaps is to acquire another company, maximize the opportunities presented by the marketed portfolio and hopefully strip out some costs to keep the bottom line growing healthily. This was, for example, one of the key drivers behind BMS's decision to acquire the pharmaceutical business of DuPont in mid 2001. The deal saw BMS gain control of Sustiva, a key drug destined to boost BMS's HIV portfolio, while it also inherited a US-based operational network which could be consolidated into its own with significant opportunities for cost savings. As such, BMS hoped to cover the gap in its revenue stream that would be created by the loss of patent protection for Glucophage. A number of recent mergers, including Pfizer's tie-ups with Warner Lambert and Pharmacia have been concerned with gaining full control of key partnered drugs. The Pfizer/Warner Lambert deal gave the combined company full control of the Lipitor product line, now the company's number one drug. Meanwhile the Pfizer/Pharmacia deal is set to bring the COX-2 franchise of Celebrex, Bextra and Dynastat under one roof. Under pressure Finally, and perhaps most pertinent in the current market, the need to maintain a competitive edge is a key driver for M&A. This may involve acquiring new technologies to promote innovation or acquiring sales and marketing expertise to boost share of voice. It may facilitate geographic expansion and aid new market penetration, such as that seen with the merger of Nippon Roche with Chugai. Following the merger of Pfizer and Pharmacia, the pressure is on companies like GSK to maintain its competitive edge and it looks likely that an M&A based expansion route is the only way to keep in touch. However, while the drivers are strong, there are also several resistors to further industry consolidation. Datamonitor's analysis of the relationship between size and return in the pharmaceutical industry suggest that, as yet, no company has managed to successfully improve ROI in sales and marketing or R&D by increasing size. Many companies claim that, by merging, they can strip out costs and improve the efficiency of there businesses. However, Datamonitor's analysis suggests that there is a linear relationship between revenues and sales force size and between R&D spend and R&D output. Indeed it often seems the case that small entrepreneurial biotech-like organizations have the most productive R&D and that increasing size is actually detrimental to productivity. No guarantee for success A second resistor to further industry consolidation is the potential for realizing only short term benefits but compounding long term problems. For example, GSK's formation from the merger of Glaxo Wellcome and SmithKline Beecham was completed in January 2001. Within less than two years of operation, rumors are already rife that the company needs to merge again. This suggests that the success of the merger in bringing long term benefits to the company are far from proven, and that all that has happened is that short term problems visible in the strategies of the two individual companies were masked by the merger, but are now becoming apparent. Datamonitor's analysis of the leading pharmaceutical players suggests that over the next six years, few will be able to match the growth rates of recent history. The announcement of the planned merger of Pfizer and Pharmacia has changed the competitive landscape, and has forced a number of other companies to re-evaluate their potential future as independent entities. It appears evident however that any of the other leading pharmaceutical companies will struggle to find a partner with which it can significantly challenge the dominance of Pfizer/Pharmacia. If you found this week's Expert View useful, you may be interested in Datamonitor's reports, all available from www.datamonitor.com/healthcare

· Pharmaceuticals: Survival of the 'Fittest' - Can Competitive Advantage be Sustained Without M&A in the Wake of Pfizer/Pharmacia? priced $1,500

· Maximizing Investment of Returns: Analysis of Ethical Sales Growth and Asset Allocation Trends Within the Leading US and EU Pharmaceutical Companies priced $1,500

· Specialty Pharma: Exploiting Growth Opportunities in the New Industry Space priced $6,100

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