Monday, December 14, 1998
OXFORD - Merger mania is still sweeping across Big Pharma in Europe despite the lack of compelling evidence that shareholders will enjoy anything more than transient benefits from such transactions. Britain's Zeneca plc and Sweden's Astra A/S last week unveiled their plans to create a $70 billion Anglo-Swedish joint venture company. The announcement was hot on the heels of the long-expected engagement of France's Rhone-Poulenc S.A. and Germany's Hoechst AG and the news that Sanofi and Synthelabo, France's second and third largest pharma companies, respectively, also would tie the knot.
As noted in previous Big Thinkers commentaries on mega-pharma combinations, there is good cause to be skeptical about the value created by these deals (see BioCentury, Feb. 9, June 15, and Oct. 19). While a new entity's cost structure can be ratcheted down in the near-term (about $1.2 billion in three years in the Rhone-Poulenc/Hoechst deal) this is mostly a onetime event, while the inefficiencies in integrating management and research efforts may prove to be much longer in duration.
More importantly, long-term shareholder value can only be created if the resulting company is able to get higher margin products into the marketplace more efficiently. The recent spate of proposed mergers has provided more rhetoric than substance on this score.
Indeed, while in two cases the shear size of the latest transactions allows the protagonists to claim that pharmaceutical R&D will be enhanced, a closer reading of these deals does nothing to assuage the doubts.
While the proposed Franco-German merger has been billed as a life sciences powerplay, the all-French and Anglo-Swedish announcements are fairly straightforward pharmaceuticals deals. In all cases, the deals are more about sales and marketing than strategic R&D plays. Indeed, all three transactions look fairly defensive, and highlight the uncertainties for Big Pharma going forward.
Although the announcement was widely forecast, the ramifications of the proposed merger of the Rhone-Poulenc and Hoechst life science activities may not have properly sunk in. In recent years, Jean-Rene Fourtou, Rhone-Poulenc's chairman, and Hoechst's Jurgen Dormann have presided over the dismantling of two of the world's most significant chemicals conglomerates as they attempted to move away from cyclical chemical businesses and instead focus on the higher margins offered by life science activities.