Bristol Merger Talks Reflect Industry Ills

Bristol-Myers Squibb Co., a combination of two of the oldest names in American pharmaceuticals, has become a takeover target and the possible object of a multibillion-dollar bidding war in part because the drug industry faces unprecedented pressure to reduce prices at a time when the overall development of blockbuster drugs has slowed considerably.

At the top of the list of suitors is GlaxoSmithKline, Europe’s biggest drug maker and No. 2 in the world behind Pfizer Inc. Industry sources told The Times that GlaxoSmithKline executives already have met at Bristol-Myers Squibb offices to discuss a merger, which sources said could be valued at $62billion.

The on-again, off-again courtship apparently has generated interest from two other industry giants, Novartis and Pharmacia Corp.

Analysts say the huge profits that many drug makers have been enjoying for years may be harder to come by in the near future, and the industry is expected to respond with more mergers and partnerships.

“The pharmaceutical companies are smart enough to realize that there will have to be a payment mechanism for seniors involving reduced prices,” health-care expert Peter Boland said. “They may have hit the high point for realizing substantial profit margins, and there will be leaner times ahead.”

David Christopher, an analyst for Crowell, Weedon & Co., agreed, saying that pharmaceutical companies are facing lawsuits and “a tough FDA environment” in terms of gaining new drug approvals, increased plant inspections and big fines for quality-control problems.

A recent report by market analyst Datamonitor predicted that only four drug companies out of the 19 with patents on big-selling blockbuster drugs would continue to reap the double-digit growth demanded by investors. That, experts say, is forcing changes that include stronger patent defenses, finding other patentable uses for current drugs and “bulking up” of research and development through further acquisitions and partnerships.

Neither GlaxoSmithKline nor Bristol-Myers Squibb would comment on the merger speculation, but analysts said that both companies illustrate the high and low tides of the patent drug expiration pipeline.

Some analysts said that combining the two companies makes little sense because they both are facing generic competition targeting the best drugs.

Steve Gerber, an analyst for CIBC World Markets, said the biggest gain for GlaxoSmithKline might simply be short-term cost-cutting.

But the companies are in much different positions. Bristol-Myers Squibb, which as Bristol-Myers developed Ipana toothpaste in the early 1900s, has become takeover fodder because it has spent billions on research for new drugs that haven’t panned out, experts said.

The company also is still reeling from its ill-fated $2-billion purchase of the rights to market the anti-cancer drug Erbitux, made by ImClone Systems Inc. The Food and Drug Administration rejected the drug’s application in December. More recently, Merck & Co. refused to expand trials for the drug to help it gain approval.

Bristol-Myers Squibb also has lost substantial sales revenue to generic competition with three of its drugs.

Although GlaxoSmithKline is losing its battle to protect its patent on Augmentin, an antibiotic that generates $2 billion in annual sales, it still can reap current earnings on three drugs--Flovent for asthma, Flonase for allergies and the antidepressant drug Paxil--which together amount to more than $3.1 billion in annual sales. The Flonase and Flovent patents expire late this year, and Paxil’s basic patent runs until December 2006.

“Bristol-Myers Squibb’s basic problem is that it hasn’t had any hits on new drugs,” said health-care analyst Albert Lowey-Ball. “GlaxoSmithKline has had some hits, and they have a lot of cash.”

Gerber of CIBC World Markets said the companies each have a different portfolio of drugs and should not face much antitrust scrutiny. Bristol-Myers Squibb, Gerber said, touts its cancer and cardiovascular drugs, and GlaxoSmithKline is better known for its antibiotic, respiratory and diabetes medications.

But the goals of the merger deserve close scrutiny, said Arnie Milstein, a health-care analyst for Mercer Human Resource Consulting and medical director of the Pacific Business Group on Health. “If it helps put more emphasis on cost containment and lower prices, it’s good,” Milstein said. “If it’s to keep prices high, that will be another loss for consumers.”

The possible interest from Novartis and Pharmacia adds another twist to what might be the future of the pharmaceutical industry. Analysts, for example, still rated Bristol-Myers Squibb’s research and development team among the best in the industry. It is the marshaling of brainpower that is driving many industry leaders.

Novartis has announced plans to make the Boston area its new global hub for research. It hopes to snare some of the region’s well-known research and university talent, much as Pfizer hopes to capitalize on the talent in the La Jolla and San Diego region by building a biomedical research campus in La Jolla.

Health-care expert Boland said the big shift in intellectual capital has gone to biotech companies and to small pharmaceutical companies that act as incubators.

“Three or four years down the road, the next big breakthroughs in drug development will come from [those incubators], and you will see them involved in a lot more manufacturing and distribution agreements with major pharmaceutical companies.”