Eager to Buy, Eager to Sell
September 28, 2006
It's as though the whole sector has been overcome by the need to consolidate.
As predicted some time ago, the European pharmaceutical sector has woken up to the fact that the amount of companies within the industry makes it unsustainable. Rising research costs have been hitting the smaller companies hard and the larger firms have been swooping to absorb them into their empires.
The rate of consolidation has speeded up since May this year, when Schering was taken over by Bayer in a 17-billion-euro ($21.7-billion) tie-up.
Last week, Merck, which also bid unsuccessfully for Berlin-based Schering earlier this year, announced that it was buying Switzerland's Serono for 16.6 billion Swiss francs (10.5 billion euros, $13.4 billion). In the same week, Altana last week signed off on a 4.5 billion euro deal to sell its drug business to Danish pharma group Nycomed.
Then Monday saw Belgian biopharmaceutical company UCB make a definite play for the Monheim-based family group Schwarz Pharma.
A landscape dominated by conglomerates
The speed at which the consolidation has picked up in recent weeks has taken the industry be surprise despite past forecasts that the pharmaceutical industry was looking at a future landscape dominated by conglomerates.
"Many enterprises are under a great deal of cost pressure because the buyers, under their own pressure from health insurers, want to pay less and less for drugs," said Karl-Heinz Schünemann, a chemical and pharmaceutical analyst at Frankfurt banking house. "At the same time the cost of drug development goes up because of more austere safety measures."
According to the German Federation of the Pharmaceutical Industry, German pharmaceutical firms have spent 4.5 billion euros on research purposes only last year.
The fact that the sector carries huge investments without solid guarantees is one not lost on Altana. Researchers at the German firm have failed in developing any successful drugs for the market in the past few years and the patent for the company's best selling product, stomach drug Pantoprazol, also ran out leaving Altana with no other choice but to sell its pharma business to Nycomed.
Big companies reaping the benefits
Only companies with research budgets large enough to invest in long term development, and secure enough to absorb failures and expand in the long term are likely to survive as stand alone concerns as the consolidation continues.
As they absorb other companies, these pharma empires can also look forward to what Schünemann calls "soft synergy effects." These are the benefits gained from taking over a firm which struggles enough in one field to precipitate a sale but is strong enough in others to benefit the buyer.
Last year, Schwarz put a lot of investment in the construction of its own drug distribution team. Now UCB will profit from that, just as Merck hopes to profit with the takeover of Serono, Europe's biggest biotech firm.
The consolidation of the pharmaceutical industry in Germany and Europe is just one facet of a global trend. The top 10 pharma companies in the world control 50 percent of the global market. While that gives more weight to the forecast of a future industry run by a powerful few, it also shows that there are still a lot of smaller companies out there ripe for picking. The consolidation race is far from over.