American Drugs Sector On The Boil

The forces for consolidation are well known. The cost of developing enough big-selling drugs to replace those that go off-patent means companies are constantly running to stand still, let alone produce the double-digit earnings growth demanded by Wall Street. And despite the latest mega-merger, even the biggest companies still have single-digit market share.

But some analysts say a rush of mega-mergers is unlikely. ''I don't think you'll see another three or four deals this year,'' says Steve Lisi of Mehta Partners, a healthcare research firm. Consolidation ''may take another five years''. Several of the biggest US companies have stated their reluctance to make big acquisitions. Both Merck and Pfizer have indicated they do not want to merge, and analysts tend to take the view they don't need to.

 

''Merck and Pfizer have the strongest pipelines and the biggest drugs,'' says Alex Zisson, pharmaceuticals analyst at Hambrecht & Quist.

Although patents on two big Merck drugs, Vasotec for heart disease and Prilosec for ulcers, expire after 2000, it has some promising drugs coming onto the market, including Propecia, for male pattern baldness. Pfizer and Merck ''don't really need any help'', says Lisi. ''If they do a deal it will be from a position of power.''

Similarly, Abbott Laboratories has said that mega-mergers waste too much time and energy. It is itself somewhat on the periphery of the sector - only a third of its business is drugs. It needs to develop its new products pipeline, although it has new epilepsy and oral asthma drugs coming on line.

But its lower reliance on drugs also gives it more leeway to produce top-line growth from other businesses, such as diagnostics. Johnson & Johnson, another more diversified healthcare company, has been an active acquirer in areas such as medical devices and professional products, but not in pharmaceuticals, say analysts.

However, mid-sized Schering-Plough has been widely tipped as a merger candidate. It is ''on the borderline between being an acquirer and an acquiree'', says Zisson.

Recent successes include Claritin, the world's leading antihistamine with sales up 50 per cent to $1.7 billion last year. Warner-Lambert would also be an attractive merger partner, after a good year for cholesterol-lowering Lipitor and diabetes treatment Rezulin - although an acquirer might want to spin off its lower-growth confectionery and consumer health units.

Eli Lilly has not made a big acquisition since its disastrous purchase of PCS, a pharmacy benefit manager, which it wrote down last year.

''But I'm not sure they've soured on acquisitions,'' says Zisson. After a turnround in the mid-1990s, Lilly has scored some recent successes, such as Zyprexa, which treats manic depression.

Evista, its new osteoporosis drug, should help drive this year's profits. Bristol-Myers Squibb, another successful turnround, may also be a merger candidate.

Although it has successfully bought in late-stage drugs like anticoagulant Plavex, it has to deal with the patent expiry of Taxol and the revamping of its research effort will take time to bear fruit.

Then there is American Home Products, which was in merger talks with SmithKline prior to the announcement of the deal with Glaxo.

Most analysts believe AHP will ultimately do a deal. Even though its medium-term pipeline is looking strong, according to analysts, there will be a time lag before new products build up critical mass. It also faces potential multi-billion liabilities following litigation over its anti-obesity drugs, Redux and Pondimin, which were withdrawn from the market last year. Even more important, there is no obvious successor to its current chief, John Stafford, so a deal would ''fill the management void'', according to analysts.

Because most companies concentrate on a few therapeutic areas, many mergers are feasible without much cannibalisation. Companies with strong pipelines, such as Astra and Zeneca, could be appealing to companies with strong sales forces, like AHP, or good marketing like Schering-Plough. ''There are so many pieces to the puzzle,'' says Zisson.