By Swetha Shantikumar

The biggest mergers and acquisitions witnessed so far in 2009 have been the Pfizer-Wyeth acquisition for $68 billion, Roche-Genentech $46.8 billion, Merck-Schering Plough $41B and Gilead Sciences-CV Therapeutics $1.4B. This accounted for a total of $157 billion dollars.

What has been the trend in the pharmaceutical industry so far in terms of their business models?

In 2007 the total value of M&A deals done in the pharma industry accounted to $80 billion while the biotech industry saw a meager $4 billion in such deals. Clearly this trend has dramatically changed in the last two years. Biotech companies are no longer viewed as minor targets of pharma companies. The therapeutic area which has the maximum number of drugs in the pipeline is cancer, followed by autoimmune disease, CNS, CVS and infectious disease (Fig 2). Overall, the total value of M&A deals rose by almost 8% percent in 2008 as compared to 2007 as pharma companies were busy acquiring entire biotech companies as opposed to licensing or buying out just a few established drugs. As of July 2009, the total value of M&A deals in 2009 touched close to $165

Billion*. Pharmaceutical companies today not only face threats of revenue reduction due to pending blockbuster patent expirations and shrinking product pipelines, but also from the rising cost of bringing a drug to the market to nearly $1 billion in 2008 from about $100 million in 1990! In the past decade, pharma mergers have faced a similar trend of short term benefits on their balance sheet statements and long term layoffs of many of their employees.

In what is the biggest acquisition the pharmaceutical industry has ever seen, Pfizer acquired Wyeth in 2009 for a $68 billion at a 30 percent premium. One prime reason Pfizer took this step was due to the impending patent expiry of its star drug Lipitor in 2011. Lipitor accounts for 28 percent ($12.4 billion) of Pfizer's total pharmaceutical sales revenue. It has been predicted that Pfizer will lose $21 billion due to patent expirations by 2013.

Some of the key implications of this merger are reduction of workforce in both companies and possible shutting down of some units. Pfizer has also said that it intends to stop working on its cardiovascular drug therapies and focus instead on six disease therapeutic areas: Alzheimer's, cancer, diabetes, inflammation, pain and schizophrenia. This might come as a shock to some as Pfizer's cardiovascular therapy division accounts for 27 percent of its total revenue. In addition, Pfizer intends to expand in the consumer health product market, in which Wyeth is a very strong player. This is somewhat paradoxical as Pfizer sold its consumer health division, which accounted to close for $4 billion in sales, to Johnson & Johnson in 2006 for $16.6 billion. Now however, Pfizer is back in the OTC market, but with a $500 million division.

What does Wyeth bring to the table?

Wyeth's strengths lie in its vaccines and biotherapeutics division. Its blockbuster drugs include Enbrel, Prevnar and Effexor. While Effexor and Protonix will lose patent protection in 2009, Enbrel and Prevnar are safe until proper regulatory guidance for generic biologics are established. The four drugs account for a quarter of Wyeth's total sales. In addition Wyeth's OTC and animal products division are very strong. Wyeth also has an interesting pipeline of CNS drugs and some oncology assets.

The company's depression treatment Effexor XR (venlafaxine) is due to lose patent exclusivity in 2009, gastrointestinal therapy Protonix (pantoprazole) will face generic competition from 2010 onwards and the antibacterial Tazocin (piperacillin) lost patent exclusivity in 2007. All of these products are forecast to act as key sales growth resistors within the Wyeth portfolio over the period 2008-13.

Pfizer has made some surprising merger choices in the past. In 2000 Pfizer acquired Warner Lambert for $90 billion and Pharmacia in 2003 for $60 billion. In both cases Pfizer capitalized on each merger by adding one blockbuster drug to its portfolio; Lipitor and Celebrex respectively. In this manner Pfizer seems to have acquired a strategy of buying out a company, and then axing most of its existing product lines while holding on to a few star drugs. Whether this trend will be continued with the Wyeth acquisition is yet to be seen.

As of now one key therapeutic area which looks promising to Pfizer is Alzheimer's disease. So far there are only five approved Alzheimer's drugs in the market with Pfizer's Aricept leading with annual sales of $3.14 billion. Together with Wyeth, Pfizer has two more drugs in the pipeline; Bapineuzumab (b-mab) and Dimebon, both in phase III clinical trials. B-mab so far has shown more promise than Dimebon, however these drugs are effective only in one third of the patient population who lack a specific gene mutation. In addition, while both drugs treat symptoms, none are even close to being a possible cure to Alzheimer's. This trend also points at another strategy that Pfizer has adopted; making money from acquisitions and not from in house research, as is evident from the sales of Lipitor, Celebrex and Viagra.

It is also interesting to note that from a financial standpoint, Pfizer does not have much to gain from the acquisition of Wyeth. Clearly this acquisition is aimed at just diluting its expiry threats and buying Pfizer some more time to remain at the top in the pharmaceutical industry. In addition, Pfizer has decided to come out with more than 15 new products with each having annual revenue of around $1 billion and to not let any-one drug account for more than 10 percent of its total annual sales (as Lipitor did in the past). This strategy is to diversify its portfolio and products and reduce future risks.

Given that Pfizer has current sales revenue of over $40 billion, organic growth is not likely to compensate for the revenue loss due to existing blockbuster drug patent expiry in the near future. Therefore acquisitions are being looked to as a pathway to maintain their growth and current revenue levels. A leaner and meaner Pfizer would also be an option; however this may not satisfy investors.

Eighteen years after acquiring 56 percent stakeholder-ship in Genentech, Roche decided to acquire the remaining 44 percent of the company for $43.7 billion. In what can only be called a hostile takeover, Genentech's board seemed a little bitter about the valuation of their company. Nonetheless, after a long series of negotiations and discussions, Roche finally ran out of patience and struck the deal. Experts claim that this integration will not be a tough one as both companies more or less share a common product portfolio. Roche has also made it apparent that it has no intentions of moving into the generic drug or consumer product business (as Pfizer and Novartis do) and plan to remain in the specialty business.

What does Genentech have to offer Roche?

Genentech is by far the leader in cancer therapeutics in the market with blockbuster drugs like Avastin for breast, lung and colon cancer, Rituxan (2014 patent expiry) for non-Hodgkin's Lymphoma and rheumatoid arthritis treatment and wonder drug Herceptin for breast cancer. Genentech's 2008 revenues were close to $13.5 billion, second largest for a biotech company globally, next to Amgen. Also, one third of Roche's revenue was already coming from Genentech's products. In a way integrating the whole company into itself would only increase Roche's revenues and save paying future royalties to Genentech. More importantly, Roche stood to lose its partial control over Genentech's product pipeline post 2015.

Interestingly, 55 percent of Roche's impending product pipeline in clinical trials comes from Genentech's labs with Omnitarg for metastatic lung cancer in phase III trials currently looking the most promising of the lot. The company cultures at both the companies are a stark contrast to each other. While Roche is Swiss and is a stickler to precision and time, Genentech, following a typical “Californian” attitude, is laid back and efficient in its work. There is also major speculation about the Genentech's scientists being bitter about this deal. The WSJ says “In the Roche deal, one big issue will be retaining top scientists, many of whom will be made rich by it. The Bay Area is rife with speculation that top scientists will depart.” Roche has had a history with hostile takeovers with Ventana Medical Solutions in 2007 being done in a similar fashion.

The first quarter sales of Roche in 2009 showed a healthy 7 percent increase, a positive indication post merger. Roche faces to lose more than 30 percent of its annual sales revenue and about $10 billion of its product portfolio due to patent expires in 2014. In the short run, Roche faces to lose 4 percent of its annual sales due to patent expiries in its Pharmaceuticals division. (CellCept, Xenical)

Along with Chugai, Genentech accounted for over 40 percent of Roche's net annual revenues prior to Genentech's complete acquisition. Roche faced a setback in early 2009 when Avastin failed to gain an approval to prevent the recurrence of colon cancer in patients. While Roche can still find solace in its blockbuster drug continuing to rake in the big bucks just by continuing to prevent advanced stage cancers, it is definitely a bonus to know that it does not lose patent protection for more than five years.

Merck has remained as one of the leading pharma companies in the world for over a century. It faced tough financial times when Vioxx (rofecoxib) was withdrawn in 2004 and it had to deal with corresponding litigation problems. In addition, Merck has been threatened by the impending loom of patent expires of some of its blockbuster drugs. These have possibly been prime reasons for Merck to look at mergers and acquisitions as a way out in these tough financial times.

Not only do the current products of both the companies complement each other, the products in each of their pipelines are also synergistic in nature. Merck's best selling bone drug Fosamax and blockbuster Zocor have already faced patent expiry and its other blockbuster drug Singulair faces a similar threat in the future. Merck and Schering Plough already market Zetia and Vytorin together. This merger will not only diversify Merck's portfolio and expand and strengthen its footing in newer therapeutic areas, but this deal will definitely dilute the effect of Merck's impending patent expiries.

Merck will also from this deal enter newer therapeutic areas such as women's health and animal health medications. In addition, Schering Plough earns over 70 percent of its revenue from outside-US markets and makes about $2 billion just from emerging markets. This will perfectly complement Merck's goal of expanding into newer markets. Together, Merck claims to have more than 18 drugs in late stage clinical trials thus painting a promising picture for Merck's future in the industry. The purchase of Schering-Plough will see Merck move higher in the global pharmaceutical company sales rankings.

It is evident that the pharma-biotech industry is looking to M&A strategies as one pathway to solve its problems. While the Merck-Schering Plough deal looks like the safest one, Pfizer-Wyeth merger has cemented Pfizer's position as the leading pharmaceutical company in the world for time to come. In terms of additional deals which could potentially occur, the merger of Eli Lilly and Bristol Myers Squibb might just be the next big one on the future horizon.