M&A may be best medicine for mid-sized pharma groups

If once is happenstance and twice is coincidence, the third pharmaceuticals deal in a week begins to look like a clear trend towards accelerated industry consolidation.
Belgian UCB yesterday announced a €4.4bn ($5.6bn) takeover of Germany's Schwarz Pharma; Merck of Germany last week acquired Serono of Switzerland for €10.6bn; and Nycomed of Denmark swiftly followed with a €4.5bn agreed purchase of the drugs division of Altana of Germany.
In a related sector, the bidding war for Pliva, a Croatian generics company, separately reached a turning point when Actavis of Iceland stood aside after Barr Laboratories of the US raised its offer to $2.5bn.
Some factors are common between all the transactions, and point to the likelihood of further consolidation among Europe's mid-sized pharma companies.
But analysts and bankers were cautious yesterday to stress the differences between the deals and some element of chance in the close timing of the transactions.
The clearest connection is the German market, which has long supported domestic pharmaceuticals companies with attractive drug prices, but which has begun health reforms - putting greater pressure on those businesses that had not sufficiently diversified their sales base abroad.
"Over the last few years there have been some concerted efforts to cut healthcare bills and one of the key areas of focus has been pharmaceuticals," says Alex Grosvenor, senior analyst with Wood Mackenzie, a specialist consultancy.
The tensions have increased as deregulation has reduced the need for international companies to seek local partners in each European nation as a precondition for local market access for their products.
Another common denominator has been the struggle to research and develop new products.
While the large pharmaceuticals groups have tried to reinvent themselves in an effort to boost innovation with mixed results, the challenge has been even greater for smaller companies with fewer resources and a more limited pipeline.
"If you don't have a product pipeline, you are in the mergers and acquisitions business," says one medium-sized pharmaceuticals company.
A final factor driving the recent deals has been tight family ownership, which can make building the necessary relationships and assurances for a deal more fraught. Serono was controlled by the Bertarelli family; Schwarz by the eponymous family; and Altana by the Quandt family.
"You can make a case for any pharma to merge with any other, but where they are privately held, consolidation is not only inevitable - it is taking a long time," says Martyn Postle, director of Cambridge Healthcare & Biotech, a consultancy. "If they sell, they risk their place in society and ask whether they have sold their family's heritage."
Not all the companies involved in the recent spate of deals - or other potential contenders - are in the same situation.
While Altana and Serono's deals smacked of desperation after failed auctions, advisers to UCB and Schwarz stress this was a strategic deal.
Meanwhile, some other mid-sized companies are confident they can remain independent.
The UK's Shire Pharmaceuticals has argued it has long adopted a "speciality model", aiming to be a leader in a narrow range of therapies. Its executives have repeatedly stressed their confidence in their independence, boosted by both a strong medium-term pipeline focused on speciality drugs that do not require an extensive primary care sales network, and a robust international distribution network.
Boehringer Ingelheim of Germany, although family controlled, has also followed a similar model, and ensured it has a sales and marketing infrastructure to support its medicines worldwide.
But others may well follow the consolidation trend.
Lundbeck of Denmark, controlled by a family trust, is in talks.
The combination of family stakes, small scale and a limited long-term pipeline suggest the pressure on several other companies in southern Europe in the coming months will only increase.

By Andrew Jack, Published September 26 2006, Copyright The Financial Times Limited 2006