Pharma set for Costly Shopping Spree

The existing drugs aren't working, so big pharmaceutical companies are set to step up the hunt for assets to buy in promising fields like biotechnology, as well as non-prescription areas of healthcare.

The risk is they could end up overpaying.

Screening for acquisitions will be high on the "to do" list of newly appointed Sanofi-Aventis chief executive Chris Viehbacher when he takes the helm at the French drugmaker on 1 December 2008, industry analysts and bankers say.

He is not alone. GlaxoSmithKline – the company Viehbacher is leaving – is also expected to strike one or more significant deals to boost its consumer health business as part of a new growth strategy.

Roche and Bristol-Myers Squibb, meanwhile, are locked in multibillion-dollar battles for two prime biotech assets, Genentech and ImClone Systems. News in early September 2008 of a second bid for ImClone, topping an earlier offer from Bristol, suggests competition is fierce.

The identity of the new bidder is unknown but analysts said ImClone could attract the likes of Pfizer, Novartis, Glaxo and Sanofi. However, it could be too big a bite for Merck KGaA, its partner on cancer drug Erbitux.

"I think it's the natural way of things that big pharma is going to take over the biotech world sooner or later," Carl Icahn, ImClone's billionaire chairman, told the company's annual shareholder meeting on 10 September.

Japanese companies are also flexing their muscles on the global scene, with Takeda splashing out for US biotech firm Millennium earlier in 2008 and Daiichi Sankyo buying India's Ranbaxy.

Shaking up Sanofi

"The large guys worldwide are looking really aggressively for assets wherever they can find them, and diversification is a strong theme," said one banker, speaking on condition of anonymity.

The ousting of Gerard Le Fur as Sanofi's CEO after less than two years in the job, and the appointment of an outsider, signals radical change inside a group that has suffered worse than most from an inability to get enough new drugs to market.

With shareholders demanding action, deal making is an obvious way forward.

"We see this option as a feasible way to shake things up quickly," says Morgan Stanley analyst, Andrew Baum.

Just what Viehbacher might decide to buy is less clear. A brief statement from Sanofi announcing his appointment on 10 September highlighted overhauling drug research, growth in emerging markets and diversification as key priorities.

The last two both imply acquisitions, according to Amit Roy and colleagues at Citigroup.

French financial daily Les Echos reported that Sanofi was planning to diversify even more widely than most of its peers into health foods, vitamins and mineral supplements.

Deutsche Bank analyst Michael Leuchten thinks a mega-merger could also be back on the cards for Sanofi, with its powerful chairman, Jean-Francois Dehecq, likely open to the idea.

Sanofi has long been tipped as a buyer for its US partner Bristol-Myers, which has a market value of around $4bn.

Risk for investors

The risk for investors in all these cases is that drug company executives, desperate to reinvigorate anaemic sales, may end up overpaying.

Roche stock has been capped in the last two months by worries it will have to offer substantially more than $44bn for the rest of Genentech, while Bristol-Myers fell in mid September on fears of a costly bidding war for ImClone.

In the case of Sanofi, Citi's Roy said likely competition for assets with other pharmaceutical or consumer companies clearly raised the risk of overpayment.

So far, the biggest player in the pharmaceutical industry has been surprisingly quiet. Pfizer's failure to buy another big rival has surprised many, given its need to find new products to offset the 2011 loss of US patent on its $13bn-a-year blockbuster Lipitor.

The combination of growing generic competition, major research problems for particular drugs, and fears of a tougher US regulatory and political climate mean drug stocks have been a poor investment overall this year.

Yet since June, the American Stock Exchange's pharmaceutical index, which includes leading US and European companies, has outperformed the broader market by some 13%. Fears for the global economy have fuelled demand for defensive stocks.