12:00 AM
Sep 25, 2006
 |  BioCentury  |  Strategy

Midcap wake-up call

For years, it has been an open secret that many of Europe's family-owned mid-cap pharmas have been lost at sea, unable to adapt to the new world of innovative in-house R&D and aggressive in-licensing. Merck KGaA and Nycomed Group A/S took some dramatic steps to remedy the situation last week, announcing plans to acquire Serono S.A. and Altana AG's pharma businesses, respectively.

Merck (FSE:MRK, Darmstadt, Germany) already had started playing catch-up several years ago with the acquisition of European rights to ImClone Systems Inc.'s Erbitux cetuximab anti-EGFR antibody, but has had a couple of visible stumbles since then. Other mid-cap players have simply been out of the loop.

With last week's deals, both acquirers are looking to expand both their R&D capabilities and geographic marketing reach. While the benefits of lashing together these commercially minded infrastructures are apparent, the payback from the product development aspirations will take more time to become visible.

Merck's 5 boxes

It was no secret that the targets had put up for sale signs in the past year. Nevertheless, the news that MRK was to pay CHF1,100 ($875) a share - a 20% premium to the previous day's close of CHF915 - for the Bertarelli family's 64.5% stake in Serono (SWX:SEO; SRA, Geneva, Switzerland) and make a public tender offer for the rest of the shares starting in November, caught both the market and SEO's management, employees and partners off guard. The offer values SEO at CHF16.6 billion ($13.2 billion).

Only Ernesto Bertarelli, CEO, deputy chairman, and leading shareholder, was present at the announcement. In Geneva, SEO's headquarters staff deflected requests for interviews.

SEO put itself up for sale last November, hiring Goldman Sachs to help find a buyer. But the plans apparently were abandoned in March, amid rumors that the asking price, north of CHF1250, was more than any of the contenders was willing to pay.

At that point, the market concluded SEO had ambitions to become a predator itself. Indeed, at its 2Q results in July, SEO said it was looking to make acquisitions in the half-billon dollar to $5 billion range to increase topline growth in the short to medium term while expanding its product portfolio.

That plan had the backing of SEO's shareholders, who had approved the issuance of up to 7.6 million new bearer shares if and when needed. At last Wednesday's closing price that would have provided a war chest of some CHF7 billion ($5.6 billion). But it was never clear that Bertarelli - whose main passion is competitive sailing - still had his heart in the game.

Speaking at a press conference last Thursday, Bertarelli conceded that SEO's options to attain growth are limited beyond that currently being delivered by its multiple sclerosis franchise. SEO has relied heavily on the performance of Rebif beta interferon to treat MS, which in 2005 achieved sales topping E1 billion ($1.3 billion), grew 16% over the previous year, and represented more than 50% of revenues.

The concern is that Rebif faces competition from treatments in development at several companies, including teriflunomide oral pyrimidine synthesis inhibitor from sanofi-aventis (Euronext:SAN; SNY, Paris, France) which is in Phase III trials. SEO does have its Mylinax oral cladribine, an MS candidate in-licensed from Ivax Corp., in Phase III trials. But it would only be a partial hedge against the risk, because market growth is likely to be small relative to the increase in the number of marketed drugs.

Meanwhile, SEO's reproductive health franchise is mature. It represents about a quarter of total product sales, but is growing at only 1-2% a year. Gonal-f recombinant human follicle stimulating hormone for infertility, which accounts for more than 80% of the franchise, posted sales of E434 ($549 million) million in 2005, a 4% decline on the previous year.

Moreover, SEO's efforts to reduce its reliance on Rebif and find a significant new growth engine by moving into other CNS indications and oncology - either through internal efforts or in-licensing - were unlikely to make a...

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