Merger fever has finally reached Germany's drug firms. But can it cure the industry's woes? Alison Abbott reports.
Despite boasting an impressive historical heritage, Germany's once powerful pharmaceutical industry is now heavily fragmented. But the company that produced the world's first blockbuster drug is making a bid to reclaim some lost ground.
On 23 March, Bayer made an offer to buy Berlin-based Schering, quashing a hostile takeover bid from German rival Merck KGaA. Schering's board immediately announced its support for Bayer's €16.3-billion (US$19.6-billion) offer. Darmstadt-based Merck, which is not linked to the New Jersey firm of the same name, withdrew its own offer of €14.6 billion for Schering the following day.
Bayer's chairman, Werner Wenning, describes the proposed merger as “the best way of reasserting the importance of Germany as a pharmaceutical industry base”. But analysts are less convinced that the move will solve the problems faced by the companies.
The flurry of activity in Germany reflects the pressing need for mid-sized drug firms to attain critical mass, say analysts. None of the three companies involved is large enough to succeed in the current business climate, says Alexander Groschke, a pharmaceuticals analyst at Landesbank Rheinland-Pfalz in Mainz.
If Schering's shareholders accept the bid, as expected, then Bayer says it plans to axe 6,000 of the companies' combined workforce of just under 60,000. About a third of the losses are likely to be in research and development, it says.
Günter Stock, president of the Berlin Brandenburg Academy of Sciences and a former head of research at Schering, criticizes the planned job cuts. “There have to be some financial savings accompanying the merger,” he says. “But I cannot imagine that there will be as many as 6,000 jobs lost. Big cuts in the core business of Schering would endanger the future of Bayer.”
Germany's drug sector was mostly bypassed by the merging frenzy of the 1990s that created the likes of AstraZeneca and GlaxoSmithKline. Today, the country has to compete with the resultant global entities. Bayer says that the merger will “create a healthcare heavyweight of international standing”. But analysts say that mid-sized companies such as Schering, Merck and Bayer face immense challenges in keeping up with the increasingly global pharmaceuticals business.
This month, for example, consultants Wood Mackenzie of Edinburgh published a report warning such companies to act swiftly to protect themselves. As pipelines of potential drugs dry up, the pressure to license new products from small biotechnology companies is increasing, the report notes, which is pushing the price of such deals to levels that only the larger firms can afford. In the past five years, Wood Mackenzie says, the typical cost of such a deal has increased sevenfold.
Mid-sized companies have only three ways to respond, says the report: they can increase in size, specialize geographically or concentrate in a particular therapeutic area.
Schering is a world leader in contraceptives and other women's health products, and has enjoyed considerable success with Betaferon, its drug for multiple sclerosis. But last year alone it lost four major drug candidates during the final phase of clinical trials. It recently shut down its cardiovascular research and restricted its brain research programme to multiple sclerosis and Parkinson's disease. And it has said that, apart from hormone therapies, the main focus of its research will be finding cancer therapies.
Leverkusen-based Bayer is probably best known as the company that produced aspirin, the first blockbuster drug. It has more diverse interests than Schering — only half of its activities are in pharmaceuticals; one-third is agricultural products and the rest is materials. Although it is strong in over-the-counter therapies, Bayer's healthcare business took a major hit in 2001 when its cholesterol-lowering drug Lipobay (or Baycol) was withdrawn after it was linked to patient deaths. Nevertheless, the company has had some recent success with cancer treatments, and last December US regulators approved its drug Nexavar (sorafenib) for treating kidney cancer.
If the merger goes ahead, the new company, Bayer-Schering Pharmaceuticals, will be based in Berlin and will rank as the world's 12th-largest pharmaceutical company. But Groschke argues that the price Bayer is paying for Schering is on the high side, and may reflect the company's fear of being left behind in a consolidation rush.
“With a €9-billion turnover, it would be at the high end of what is viewed as a mid-sized company,” says Patrik Frei, chief executive of Venture Valuation in Zurich. “It would have more purchasing power to compete for biotech licensing deals.” Shares in Bayer rose modestly on news of the merger.
Bayer-Schering Pharmaceuticals would have a reasonably strong focus on cancer. Across the board, it would have 50 or so drugs in the pipeline — with 19 in the last phases of clinical testing.
The firm would also have a strong geographical focus: Europe accounts for half the sales of both Bayer and Schering. This could be a mixed blessing, however, as Europe's price controls and diffuse healthcare systems make it a tough market for drug companies.
Frei says that the new company would have to invest smartly with biotech partners — perhaps even before a product enters clinical trials — in order to prosper. “It's a hard time for mid-sized pharmaceutical companies,” he says.