M&A is not the only way

OSI Pharmaceuticals' agreement to acquire Eyetech comes amid a spate of consolidation in the pharma sector. However, despite often stellar growth at first, mergers increasingly struggle to deliver sustainable long-term growth. Datamonitor's Mar Ferrero looks into M&A trends, alternative options, and what the future may hold for big pharma.

OSI Pharmaceuticals recently agreed to acquire Eyetech, in a $935 million deal expected to close by the end of 2005. Although OSI's shares have fallen following the news, and critics have dubbed the deal pricey to say the least, the buy will widen OSI's therapeutic focus in oncology, diabetes and ophthalmology.

The purpose of this acquisition, which will furnish OSI with Eyetech's age-related macular degeneration (AMD) drug Macugen, is to inflate OSI's profitability in the short term by gaining a new source of income. However, limited synergies among therapeutic foci and impending competition from larger players (Genentech's AMD drug Lucentis is expected to hit the market in 2006) can only be bad news in the long term. The buy risks limiting the combined company's scope and jeopardizing OSI's position.

Nevertheless, this is a common risk that many pharmaceutical players are willing to take in order to achieve short-term profitability, and provide investors with high returns on investment (ROI).

M&A activity on the rise

Gains in productivity and financial viability are key drivers of the consolidation wave seen in the last six years, from the formation of Aventis, AstraZeneca and GlaxoSmithKline to the merger of titans such as Pfizer and Pharmacia, Sanofi-Synthélabo and Aventis, and Yamanouchi and Fujisawa in Japan.

However, the level of pipeline success is not keeping up with the requirement for new products with high sales potential that can offset the impact of genericization. Increasing R&D and manufacturing costs, the risk of an unsuccessful launch, lengthy drug-development periods and pricing pressure on governments to contain healthcare expenditure make it difficult for the newly-formed companies to sustain growth rates after the first few years of business.

The result of Sanofi-Aventis's creation has been an ethical revenue increase of 4.6% in 2004, to $32 billion. However, the company's growth prospects to 2010 are represented by a compounded annual growth rate (CAGR) of just 1%, reflecting the level of maturity of the combined portfolio and anticipated poor long-term performance. The same applies for Pfizer, which, having merged with Pharmacia in 2003, achieved a 16.6% growth in ethical revenues in 2004 to reach $47 billion. As generic competition impacts several major products, this trend will not be sustainable, with future sales expected to fall at a 1.9% year-on-year from 2004 to 2010.

New M&A strategies needed?

For some, it seems that new M&A strategies need to be adopted. This applies particularly to western pharma players, among which speculation points to possible tie-ups between GSK and AstraZeneca, and Novartis and Schering AG.

The need for these companies to carefully consider M&A strategies is clear. For example, although GSK would benefit from AstraZeneca's strong cardiovascular and oncology portfolios, and AstraZeneca would gain from GSK's CNS, respiratory, HIV and infectious disease franchises, the high level of maturity of their combined product offerings, as well as poor pipeline performance, would ultimately impact upon sales.

In the case of Novartis and Schering AG, meanwhile, the level of synergies would be more limited still. Indeed, any potential tie-up looks less likely following the failure of their collaborative cancer candidate, PTK/ZK, to increase survival time in metastatic colorectal cancer in Phase III trials. Even so, Novartis could at least benefit from a wider women's health portfolio. In any case, obligatory drug divestments on competition grounds would jeopardize results.

What's next?

With M&A posing so many challenges, companies must ask what else they can do to ensure profitability and financial viability. One possible solution could be found in emerging markets, where key players have taken advantage of increasingly developed technology and skilful labor at lower costs. Major players are starting to look at these markets in order to create strategic links to outsource manufacturing and R&D. This would decrease the level of fixed-costs, leading to higher operating profit margins that can be sustained in the long term.

Brazil, Russia, India and China are the key manufacturing destinations, with India already receiving an estimated 10% of total global pharma outsourcing, according to data presented at the ninth annual Outsourcing of Pharmaceutical Chemistry, Pre-clinical Development and Contract Manufacturing meeting of the Strategic Research Institute. GSK, Sanofi-Aventis and Pfizer already have a presence in this market, competing against local generics manufacturers Ranbaxy and Dr Reddy's.

Bearing in mind the opportunities offered by emerging markets, strategic networking rather than outright M&A should be the key to future success within the pharmaceutical industry.

Related research:

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• Addressing Pharma's R&D Productivity Crisis: Technological and Strategic Initiatives to Improve Core Drug Discovery Capabilities priced $15,200
 

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