The Urge to Merge

Global changes in the pharmaceutical industry can produce mixed results on the individual researcher's level

By Arielle Emmet

SmithKline Beecham and Glaxo Wellcome; Pfizer and Warner-Lambert; Pharmacia & Upjohn and Monsanto; PE Biosystems and Third Wave; Astra and Zeneca. In the last year, many top-tier biotech and pharmaceutical giants have reached definitive agreements to merge. The unions are touted as hostile or friendly, strategic or tactical, market driven, Machiavellian, culturally astute, even desperate. Competition has forced drug companies to up the ante for blockbuster development and broaden the pipeline for new drugs and instruments. Further, Big Pharma is gobbling up high-energy biotech start-ups with breakthrough technology, allowing the combined companies to jump into whole new therapeutic arenas--and profit centers.

"The drug industry has become a victim of its own success," says Kevin Lewis, an equities analyst for pharmaceutical and biotech with William Blair & Co., Chicago. "Just five years ago, companies like Merck and Pfizer were relying on their own internal R&D to develop new products. But now, with the advent of billion-dollar-plus drugs, it's such a hard act to follow that the companies are looking outward [to keep their pipelines open]. Growth is coming from partnering with other pharmaceutical companies and copromoting their drugs. That's good for biotech because it's on the cutting edge of science, and working in areas that Big Pharma has shunned. The genomics companies are good examples. Big Pharma is knocking on the doors of everybody in genomics to find new stuff."

Historically, mergers have been less profitable than executives originally anticipated. "Benefits [such as cost cutting and eliminating duplicative operations] have been in terms of short-term advantage vs. the long term," says Steven B. Gerber, a senior pharmaceutical analyst with CIBC World Markets Corp., Los Angeles. "However, the pace of technological change is very rapid now, and companies are being forced to merge because they missed some of the fundamental developments in biotechnology and need to make a bigger investment in that now."

The size and scope of mergers, however, is unprecedented in drug company history, putting a new level of pressure on market participants. Gerber contends that merger mania is partially emotional. "There's a herd instinct in the pharma industry, a strong bias that bigger is better." Pharmaceutical giants tend to make merger moves when drug stock prices are high and interest rates are comparatively low. "There is also a sense today that Big Pharma is facing a lackluster period of innovation; these companies feel they have to do something as opposed to nothing [to stay competitive]."

Survival in the Drug Wars

To companies as large as Pfizer, Pharmacia & Upjohn, and Glaxo-SmithKline, that something involves an international gamble: merging often disparate corporate cultures; inviting some executives to stay or leave (some of Warner-Lambert's top executives will go, for example); streamlining global operations and eliminating redundant facilities; modifying R&D efforts; and making hard choices about staffing and research direction. Pfizer, for example, has closed 20 of its manufacturing facilities in recent years, yet its research effort to find new drugs is aggressively growing. The combined research budget for the Pfizer-Warner-Lambert entity will increase from $4 billion (of which Pfizer will contribute $3.2 billion) to $4.7 billion this year, representing growth in the mid-teens, one of the fastest growth rates in the industry, a Pfizer source contends--a figure that actually exceeds the reported $4 billion Glaxo-SmithKline R&D budget by $700 million. "Glaxo-SmithKline's actual R&D spending in 1999 was $3.6 billion, and is apt to grow much slower than Pfizer-Warner-Lambert's R&D spending in 2000," the Pfizer source asserts. "In other words, the initial gap of $400 million in 1999 is apt to widen in 2000."

Analysts predict Pfizer-Warner-Lambert will remain a strong number two in worldwide pharmaceutical sales behind Glaxo-SmithKline, which will continue to dominate the world market for drugs with 7.3 percent market share, according to published analyst reports from financial company Bear-Sterns. By contrast, the combined Pfizer-Warner-Lambert behemoth is projected to control 6.7 percent of the worldwide market, with such blockbuster drugs as Lipitor, Zoloft, Viagra, and Zithromax earning billions in revenues. Pfizer, however, could play catch-up very quickly with Glaxo-SmithKline. The number-one company's "sales lead over Pfizer-Warner-Lambert will be eroded very quickly by the faster-growing U.S. company [Pfizer]," according to a published report from Morgan Stanley & Co. Pfizer says it will shave off $1.6 billion in cost savings and efficiencies in the merger while enhancing its global reach for all major medical markets.

"The combination would create the strongest, most dynamic pharmaceutical company in the world," claims William C. Steere Jr., Pfizer's chairman and CEO. However, some analysts believe that Pfizer's hostile bid for Warner-Lambert could affect morale--especially as top Warner-Lambert executives leave, including chairman/CEO Lodewijk de Vink and head of pharmaceuticals Anthony Wild. "This was an unfriendly transaction, and Warner-Lambert's research effort has not been the industry's most effective," notes Gerber. "The advantage for Pfizer is that it now has control of Lipitor, potentially a $9 billion drug," explains Lewis. "Pfizer had a comarketing agreement for Lipitor with Warner-Lambert [which developed the drug]. The agreement was driving Pfizer in a significant way, and when Pfizer was threatened by the American Home Products [merger bid], it decided to step in [and make the $82.5 billion merger offer]." Clearly, the "Pfizer-Warner-Lambert union won't be a merger of equals," says Ronald Krall, senior vice president of clinical development and medical affairs, AstraZeneca. "The benefit of the merger of equals is the opportunity to create something new and different, but it's a tremendous amount of work; in an acquisition, you don't have the same kind of change."

Glaxo-SmithKline, for example, is a merger of roughly equal British pharma giants--with U.K. R&D facilities located close to each other. The combined company will hold key franchises in respiratory, infectious disease, and central nervous system drugs. Accounting for as much as 15 percent earnings growth will be strong growth in existing products (e.g., Paxil, Augmentin, and Zantac) and new drugs, including Avandia (an oral diabetes drug copromoted with partner Bristol-Myers Squibb), Lotronex for irritable bowel syndrome, and Advair for asthma. The company will concentrate at least 10 percent of R&D resources into genomics and combinatorial chemistry, according to analyst sources, and may leverage an opportunity to increase funding for clinical trials, which should quicken the pace of new-drug development. Globally, Glaxo-SmithKline claims pharmaceutical sales of $23 billion for 1999, with a sales force of 40,000 people. The company says it will reinvest 25 percent of its anticipated cost savings of $1 billion over a three-year period into R&D growth--a figure listed as "disappointing" in financial markets. "We would expect rather more of the $1 billion in gross savings to be reinvested than 25 percent," says one analyst. "Even if $750 million were saved in 2003, the ... growth rate [1999-2003] would be no more than 15 percent a year," which is the average for the U.S. pharmaceutical sector.

Glaxo-SmithKline is undaunted, however. According to microbiologist John Keller, vice president and director of the alliance and technology group at SmithKline Beecham, "although there is still a lot to be determined in terms of the drug pipeline, one of the things of particular importance to us is genomic drug discovery. In this context, our goal is to move from genes to target drugs and to make the merged company a haven for scientists, to make resources available for a vast array of interesting work." Keller was sketchy on details. However, he says the merged company will place more emphasis on fundamental genomic science because "you can't predetermine that a gene product will be more relevant in one therapeutic area than another." SmithKline Beecham's first efforts in genomics were achieved in collaboration with Human Genome Sciences of Rockville, Md.

"Genomics is driving us away from specialization," Keller says. "There will be a greater variety and flexibility of science under one roof than there used to be. The outcome of genomics forces more of what we might consider early-stage research. A lot of work will be carried out in partnership with academia."

Keeping the Best Scientists

Behind the astonishing growth, however, is an unwritten challenge. Merging stubborn equals is not an easy job; ultrahyphenated companies often struggle to maintain the separate identities and entrepreneurial spirit that come with independence.

"History has shown that it's difficult to maintain large numbers of scientists in merged companies," Gerber observes. "Scientific entrepreneurs have been paid handsomely in the past; and an increasing amount of innovation in Big Pharma is coming from the smaller entrepreneurial companies." He cites Merck's acquisition of Sibia in 1999 to boost involvement in neuroscience drug discovery; Merck also acquired Biogen to boost product research in allergy and inflammation. (Merck had been a notorious naysayer of outside acquisitions.) Johnson & Johnson last year acquired Centocore for $5 billion, and Warner-Lambert acquired Agouron, an AIDS drug company doing research in antiviral areas. The bow to biotech has "given scientists the confidence to make the big leap [out of a large pharmaceutical environment]," Gerber continues. "Although we're seeing some changes in job function and atmosphere in big companies, Big Pharma can't match the financial appeal of smaller, younger companies, where the rewards for successful innovation and execution will continue to look more and more attractive."

In fact, merger mania seems to be having a dual effect on the career paths of many scientists, says Chris Pak, a biochemist and president of Molecular Targeting Technology Inc., West Chester, Pa., a radioactive imaging entrepreneurship funded in part by Draxis Health in Toronto. "On one hand, mergers are creating more entrepreneurial opportunities for scientists like me," he says. "Because the Internet is saturated, there will be more [venture] money going into biotech. Big Pharma has to turn out drugs faster; it now has the opportunity to buy into smaller niche areas to help bring products more quickly to the marketplace."

As drug companies absorb smaller "fish," many independent scientists will be reabsorbed into larger corporate systems. In many instances it is actually deemed more cost effective to buy a whole company (and the technology it develops) than to license or comarket technology for limited uses. "It's also much quicker for the drug companies to buy the technology than develop it on their own," says Pak. The great success stories of biotech entrepreneurship--Genentech, acquired by Roche, is an example--have encouraged scientists like Pak to break away and start their own ventures. Further, some large drug companies have wisely taken a "hands-off" attitude toward biotech stars. "Roche, for example, was wise enough to maintain Genentech as an independent entity and a financial entity; and their efforts are being rewarded," Gerber says. This may in fact be a model for biotech organizations in years to come; rather than being gobbled up, they can be smoothly integrated into a larger organization while maintaining a high degree of entrepreneurship, thus encouraging top R&D talent to stay on.

But not everyone agrees that merged companies mean less opportunity for scientists. According to Krall, AstraZeneca, a $15.8 billion company that merged in early 1999 from Sweden's Astra AB and the U.K.'s Zeneca PLC, is more attractive to scientific candidates and physicians. "We now have seven different therapeutic areas, whereas we probably had three at Zeneca before," he says. "The merger has given us 50,000 employees and a concentration of scientific and laboratory talent. Though we've had some people leave the organization, we find it comforting that it's a small number, and we've been able to attract new talent. In fact, in the last two months we've recruited 15 new physicians within the company, and it's been a remarkably different experience in recruiting. Researchers are more interested in a company with more breadth and depth."

AstraZeneca's combined strengths now include several partnerships (including one with Incyte Pharmaceuticals of Palo Alto, Calif., on genome libraries and chemical targets) and "critical mass" research strength in gastrointestinal diseases, oncology, respiratory, cardiovascular, central nervous system (CNS), and pain and infection. The company has established a new infection and oncology research capability in Boston while concentrating CNS research in Wilmington, Del. "We're growing our U.S.-based drug development organization by 15 percent," Krall says. "The budget of $2.4 billion for R&D has grown commensurately with sales and profits." He adds, "Ours is a true merger of equals. The merger allows us to create a market presence in the United States that neither company can do alone." The challenge is to create an environment that actually can generate real novelty and invention, he adds. "The difficulty is that you have to go through a change process that's very expensive. You have to invest in an understanding of your [mutual] direction and target goals for increasing drug production--and work together to make those decisions."

Divesting Agribusiness

In some cases the decisions will be painful. For example, in Monsanto's agreement to merge with Pharmacia & Upjohn, the combined company boasting $17 billion in estimated 1999 sales will require deep cuts in "non-core businesses" and expenditures. Non-core includes agrobiotech. "Our view is that Pharmacia has the best near-term opportunity to substantially cut excess costs out of the Monsanto organization, which frankly has been a nightmare," says Gerber. "However, it's tough to get excited about this merger because of Monsanto's expenditure on agribusiness." The agricultural/biotech business in the United States has lost serious momentum because of growing domestic and international opposition to genetically modified foods, seeds, and other products, he continues. Consequently, Monsanto-Pharmacia & Upjohn may go the way of AstraZeneca and Novartis, which spun off their agrobiotech divisions into a new company, Syngenta, last year. (At press time, Monsanto and Pharmacia spokespeople were not available for comment.)

"In conjunction with the creation of the new company, it is expected that up to 19.9 percent of the agricultural business will be offered in an Initial Public Offering (IPO)," read a Monsanto-Pharmacia & Upjohn release. "The agricultural business will become a separate legal entity, with a stand-alone board of directors and its own publicly traded stock." Monsanto-Pharmacia & Upjohn's pharmaceutical headquarters will be in Peapack, N.J., while agribusiness will be headquartered in St. Louis. The drug company entity will look for synergies to boost a pipeline for new drugs, spending $2 billion on R&D each year, with $1.4 billion in sales of the arthritis drug Celebrex (produced by Searle, Monsanto's drug company) leading the pack. "Monsanto has done some work with cancer, and Pharmacia's cancer drugs include adriamycin and aromasin; Celebrex has now been approved for a precancerous condition of the colon, and so that's a big reason for the combination, the synergies between the companies," says Lewis.

Another type of activity that will likely become more common is the strategic merger between larger and smaller biotech/genomics companies. An example is Third Wave, a Madison, Wisc.-based genomics company that provides new, non-PCR-based DNA analysis for genome research and clinical applications. The company, a $330 million boutique, is being acquired by PE Biosystems, a $24 billion company, in a $450 million stock deal.

Rather than licensing Third Wave's proprietary Invader technology, a series of high-throughput assays for genotyping and gene expression applications, PE Biosystems wants control of the technology, says Winton Gibbons, a senior analyst at William Blair & Co. "[PE] acquired Third Wave rather than licensing its technology because of PE's interest in medical diagnostic systems," he says. "Though I don't believe PE Biosystems will be in the medical diagnostic arena beyond HIV genotyping, they have reason to believe that the Invader platform from Third Wave will be the 'next gen' technology after PCR, so they want to own the technology rather than licensing it. This is a fundamental technology play; it's really an acquisition."

With the Invader platform, the company can develop tools on the pharmaceutical discovery side of the business and the medical diagnostic side, Gibbons contends. Further, "PE Biosystems has two basic opportunities," says Lance Fors, a microbiologist and Third Wave's CEO. He founded the company in 1993. "If you look at what the Invader chemistry can do in high-throughput genomics, one area is in SNPs [single nucleotide polymorphisms], i.e., direct detection and analysis of DNA and RNA, including [SNPs]. The second area is in gene expression analysis." This will help PE Biosystems play catch-up in the area of DNA diagnostics, he adds.

"PE Biosystems feels really good about [our technology], and there are a lot of natural synergies," Fors says. "PE has existing instrumentation and software lines they've developed for the [PCR] market that they can now sell for our Invader chemistry." Moreover, Third Wave, which has 25 patents on the technology, has a great setup: It will remain a separate operating division of PE Biosystems, and Fors expects the scientific operations to continue intact in Wisconsin. "Our focus will be on providing chemistry for the Applied Biosystems Division to sell into the research market. Secondly, PE will become a major player in DNA diagnostics. We're trying to make the process as short as possible and achieve maximum profitability in the shortest period of time."

Naturally, merger and acquisition activity does result in individual dislocations and, in some instances, a reduction of opportunities. Jeff Mattis, a former vice president of pharmaceutical development at Centocore, left the company after an 18-year career there--just prior to the Johnson & Johnson acquisition. He became an independent consultant. "I looked for other jobs for about a year, but even though some were a good fit, they were going to more junior people, so I decided to offer my skills through consulting," Mattis says. "The best opportunities have come through small entrepreneurial businesses seeking expertise. With biotech companies, the option for experienced consultants is always open." Not so for big organizations, he adds.

Despite the pain and dislocations, most observers believe that mergers are basically positive for the drug industry at large. "Companies are looking for the next big thing; they realize they have to spend more on basic research and push the scientific envelope rather than coming up with the next 'me, too' drug," Lewis says. Globalization is a major factor pushing megamergers forward, argues Erik Lahti, marketing manager for pharmaceutical products at PerkinElmer's bioanalytic business unit in Wilton, Conn. "The companies are now international in scope and go to wherever the right products and intelligence exist. Rather than seeing mergers as a negative, it's an alternative way to achieve success."

Will Big Pharma turn the drug industry into Big Brother--the enemy of consumers and scientists alike? Lahti says no. "I don't see drug companies turning into Big Brother; there will probably be more niche drugs for smaller, neglected drug markets and more genomic research which will benefit selected patient groups. That's a desired trend and outcome."

"Wherever there's a merger, there are always heads rolling," acknowledges Lewis. "But for scientists with an eye toward the market, not so much academic scientists but entrepreneurial types, those heads will roll and go to the next tier of companies." In other words, "Scientists with really good experience in the pharmaceutical industry can take that and go straight out into the biotech world. I would say you'll see an increase in biotech ventures. Naturally, there will be dislocations of individual scientists, and some people will just no longer be around."

Arielle Emmett (ArielleEm@aol.com) is a contributing editor for The Scientist.