Aventis and Sanofi: Merger speculation continues

Industry speculation has this week centered on a possible merger between the top two French drug makers, Aventis and Sanofi-Synthelabo. After rumors prompted their shares to rise by about 5%, both companies issued press statements denying that they were in talks. Speculation surrounding such a deal has nevertheless remained in place. Analysts appear convinced that a merger is simply a matter of when, rather than if.

The potential compatibility of Aventis and Sanofi has left industry experts adamant that a merger would be good business for both companies. The condition of their respective product portfolios would suggest that a union would produce a strong strategic fit.

The market is also waiting for the next round of industry consolidation. Many of the leading pharmaceutical companies are under pressure to follow the example set by Pfizer after its acquisition of Pharmacia last year. A deal between Aventis and Sanofi could end up creating the world's second-biggest drugs group behind Pfizer.

Background to deal

The wave of market speculation surrounding a possible deal gathered momentum after Sanofi's main investors, cosmetics group L'Oréal and Total, the oil company, indicated that they would be looking to sell their combined 44% stake in the company by December 2004. With a link-up between the French pharmas being suggested as just a question of time, the perfect opportunity seemed to have presented itself.

However, with the shares of both companies rising on a tide on market speculation, the French stock market regulator requested Aventis and Sanofi to respond to the rumors. Each company issued a statement making it clear that they were not conducting negotiations.

Sanofi however, was arguably not as conclusive as it could have been. The Paris-based company stated that whilst discussions had not taken place it would continue to consider any deal that could strengthen its business.

Strategic fit

With a union between the two organizations appearing mutually beneficial, it is hardly surprising that the speculation has continued to mount throughout this week. The logic behind a merger was highlighted as early as last year in a 50-page report produced by brokerage Exane and Bionest Partners.

Even though each company boasts a market capitalization of around $53 billion, there would be relatively few areas of anti-competitive product overlap with the thrombosis business, one of the few units where disposals might be required.

In fact, with many of their most successful drugs facing patent expiry, a merger would help spread the risks created by future product challenges. The French government is also likely to support a merger. If Sanofi doesn't join with Aventis it could face takeover attempts from US rivals such as Bristol-Myers Squibb, which already markets two of Sanofi's biggest drugs in North America.

Industry consolidation

Following the merger of Pfizer and Pharmacia, the pressure is on companies like Aventis and Sanofi-Synthelabo to maintain their competitive edge. With declining R&D productivity, and a flood of patent expirations, an M&A based expansion route is arguably the only way to keep in touch.

However, while the drivers are strong, there are also several resistors to further industry consolidation. Datamonitor’s analysis of the relationship between size and return in the pharmaceutical industry suggest that, as yet, no company has managed to successfully improve return on investment (ROI) in sales and marketing or R&D by increasing size.

Sooner or later

A merger between Aventis and Sanofi would clearly have its own particular problems. The two firms are of equal size thereby creating conflict over jobs, even at the highest level. A deal could also be threatened by the legal challenges facing both companies. Whilst Sanofi is busy fighting to protect Plavix, the blood-thinning drug, Aventis is having to deal with competition to its two biggest-selling products, thrombosis drug Lovenox and allergy pill Allegra.

Whilst there is no guarantee that a merger would bring automatic success, investors have been almost universal in their approval of such a deal. Even with the official denials this particular piece of industry consolidation appears inevitable.

With suggestions that Sanofi is even considering launching a hostile takeover bid for Aventis, some kind of agreement is expected to be completed this year.

If you found this week's Expert View useful, you may be interested in Datamonitor's reports:

• Pharmaceuticals: Survival of the 'Fittest' - Can Competitive Advantage be Sustained Without M&A in the Wake of Pfizer/Pharmacia? - $1,500.00

• PharmaVitae 2003: Sanofi-Synthelabo - $2,600.00

• PharmaVitae 2003: Aventis - $2,600.00

To order these reports contact peter.barfoot@bioportfolio.com or telephone +44 1300 321501 or +1 415 680 2472 and a representative will get back to you.

You can also order on line at: http://www.bioportfolio.com/cgi-bin/acatalog/search.html