Can Mergers Really Help Drug Industry?
A new round of mergers in the pharmaceutical industry seems imminent in the wake of Pfizer’s $75-billion hostile takeover bid for Warner-Lambert.
At the same time, Monsanto faces breakup or buyout because of stock market impatience with Monsanto’s investments in agricultural biotechnology. Investors also are eager to see Monsanto’s drug division, G.D. Searle, spun off as a separate stock or sold to Pfizer.
All that merger speculation is causing excitement, to be sure. Drug stocks rise and fall, acquiring companies grow bigger in sale and market value.
But does it help the larger values of such a vital industry? Does a push for shareholder value foster the development of disease-fighting drugs or greater food production?
The answers, perhaps surprisingly, are often positive: Market pressures can indeed speed medicines to the prescription counter. But sometimes, inevitably, there are negative consequences.
The stories of Pfizer and Monsanto illustrate both. And, not incidentally, their stories underline the importance of the Food and Drug Administration to U.S. industry and scientific progress.
Pfizer, based in New York City, has been a top-performing drug company in the ‘90s, going from $7 billion in sales in 1991 to an estimated $16.2 billion this year, and from a stock price, adjusted for splits, of $7 a share in 1991 to a high of $50 this year--before it fell back to its current mid-$30 range.
Spurred by Chairman William Steere’s greatly expanded research spending, Pfizer produced such winning drugs as Viagra, the anti-impotence drug; Norvasc, a blood pressure medicine; and Zoloft, an antidepressant.
And Pfizer, which will spend $2.7 billion on research this year, has about 50 new drugs in testing that could win FDA approval in the next decade.
Big winners in the drug field--such as these, or the anti-cholesterol drug Lipitor, on which Pfizer shares marketing and profit with Warner-Lambert; or the arthritis remedy Celebrex, on which it has a similar deal with Monsanto--can produce annual sales of more than $1 billion per drug and generate long-term profits under patent protection that lasts 17 years.
But it’s a tough business. It costs about $300 million to develop a drug, and 70% of drugs that get FDA approval do not recover their development costs. Pfizer, for example, has suffered a few setbacks this year as the FDA placed restrictions on a new antibiotic and is asking for further tests on drugs for migraines and schizophrenia.
With those setbacks in mind, and fearing the loss of Pfizer’s stake in Lipitor, Steere moved in with a higher bid after Warner-Lambert agreed in early November to merge with American Home Products.
If Pfizer prevails, the combined company will be the world’s largest drug firm, with a market value of more than $200 billion.
That would give it additional financial power for expanding globally, analysts say. And the prospect has aroused speculation that other drug firms--such as Glaxo Wellcome and SmithKline Beecham of Britain, Novartis and Roche Holdings of Switzerland and Schering-Plough and Merck of the U.S.--will have to consider mergers and acquisitions too.
What does all that promise for research and new drugs? It may bode well, says analyst Sergio Traversa of Mehta Partners, a New York-based research firm specializing in pharmaceutical and biotech investments.
A focus on shareholder value does not preclude attention to other values, and getting products to market is also a virtue. Traversa explains: “European and Japanese drug firms used to be less shareholder-driven than U.S. companies. But also they didn’t produce new drugs at the rate U.S. industry has.
“Shareholder pressures can be a healthy discipline,” Traversa says.
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However, there can be a dark side to shareholder pressure. Monsanto’s failure to win public acceptance of agricultural biotechnology has aroused shareholder impatience and threatens the company’s independence.
The St. Louis-based company invested more than $2 billion over 15 years to transform itself from chemical firm into life sciences company. It now has more than $5.5 billion in sales of genetically enhanced agricultural and nutritional products and almost $3 billion in pharmaceuticals.
The company’s stock price also attained a new status, going from $12 a share in 1989 to $64 last year, before falling back to about $45 now.
That drop in stock price reflects worries about Monsanto’s ag biotech products, which are threatened by fears in Europe about genetically engineered foods.
Simply put, food scares in Europe that have nothing directly to do with Monsanto have led to widespread opposition to foods produced with the help of biogenetic nutrients or crop herbicides.
Europe has imposed restrictions on genetic research and on imports of genetically enhanced food from the U.S. even though such foods have passed stringent U.S. testing by the FDA.
The real problem is trust. In the fast-changing European Union, there is no FDA equivalent, no agency that enjoys the level of public trust accorded the FDA through decades of protecting Americans from thalidomide and other hazardous substances.
The furor has led to attacks on Monsanto, whose initial tendency was to dismiss the protests and carry on with business as usual.
But now Monsanto is being criticized, even by supporters of agricultural biotechnology such as the Rockefeller Foundation, for rushing to reap a return from biotech products without doing the slow work of educating and reassuring the public.
“The rush to get products to market has led to mistakes, misunderstanding and a backlash against plant technology,” Gordon Conway, president of the Rockefeller Foundation, complained in a meeting with Monsanto’s board of directors in June.
“Biotechnology could be one key to food security in the next century,” Conway told Monsanto. He cited Rockefeller Foundation-backed research that has produced rice with vitamin A and iron bred in, so it can alleviate disease and blindness in developing countries.
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But unless scientists and companies proceed at a gradual pace, Conway told Monsanto, such opportunities may be delayed or lost.
In fact that is already happening. The furor in Europe has caused Japanese brewers and U.S. baby-food makers to phase out biotech crops from their ingredients, noted investment analyst Mark Wiltamuth of Morgan Stanley.
As a consequence, Monsanto’s returns from investments in ag biotech products are being postponed for years.
Wall Street is impatient. Analysts are calling for Monsanto to sell itself to another company, or to at least break out the valuable Searle drug firm.
Monsanto won’t comment, but it is reported to be in merger talks with Novartis and with Bayer of Germany. And Steere of Pfizer has said his company is interested in acquiring Searle.
Clearly Monsanto was right to invest heavily in ag biotech, a certain growth field for the next century. Even now, the company has great products ready for the next decade that improve nutrition and control cholesterol.
But now because of ill-informed protests and its own impatience and that of the stock market, Monsanto may get swallowed up in the expanding merger derby.
Sometimes good work can get shunted aside amid pressures for shareholder value.
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Take Two and . . .
Many of these leading pharmaceutical companies will be involved in takeover activity in the near future, analysts predict, either as the acquirers or the acquired. Table shows companies’ estimated sales and earnings per share for 1999, and latest stock price.
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Estimated Estimated Friday 1999 sales ’99 earnings closing Company (billions) per share stock price Roche Holdings $40.5 $3.89 $119.25 Merck 32.2 2.45 75.94 Novartis 23.0 3.23 79.00 Pfizer 16.2 0.84 35.19 Glaxo Wellcome 13.8 1.77 61.00 SmithKline Beecham 13.5 1.88 70.19 American Home Products 13.4 1.77 55.94 Warner-Lambert 12.8 1.92 93.38
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Sources: Bloomberg, Bernstein Research, Value Line
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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
