Alan Williams Consolidation revisited is the founder of Managing Resources, a Date received *in revised form) 8th October, 2001 consultancy focused on the life science industries. The Alan Williams company undertakes strategic assignments and also assists public and private sector clients with regulatory affairs, investor Abstract In 1998, the author produced two papers that argued that consolidation was relations and human a necessary activity for biotechnology companies to pay greater attention to. Three resources development. years later a further consideration of the subject seems worthwhile. Examples of Alan has also been an investment manager in successful consolidators are reviewed. a venture capital company, and held Keywords: consolidation, mergers, acquisitions marketing and licensing positions in Fisons. Introduction drink, vaccines and animal health but there is now greater focus on the highest In the early/mid-1970s, the pharmaceutical pro®tability sector, human pharmaceuticals. industry consisted of more than 100 At the time of writing, GSK is rumoured to research-based businesses of some be a possible purchaser of Bayer's signi®cant size, although none of them pharmaceutical business, the future of could convincingly claim a global presence. which has been questioned after the Typically, a leading company had a strong withdrawal of cerivastatin. position in its local market "examples Aventis, the eighth largest pharmaceutical included Merck and P®zer in the USA, company by sales in 2000,1 includes the Bayer in Germany, Beecham in the UK, operations of 1970s companies such as Roussel-Uclaf in France and Fujisawa in Rhone-Poulenc, Rorer, Fisons, Hoechst, Japan) and possibly some other Marion, Richardson Merrell, and some neighbouring countries "US companies in smaller companies. Moreover, Aventis is Canada, German companies in France and currently spinning out its agrochemical UK companies in the Commonwealth), interests, via a sale to Bayer, to focus on supported by a network of licensing pharmaceuticals, and vaccines "as an aside arrangements with peers in the other major we may note that Aventis's agrochemical markets. part, accounting for about 25 per cent of Since then, there has been a sustained revenue and 21 per cent of pro®t in 1999, agglomeration of the leading companies to encompasses the 1970 interests of at least create the behemoths that bestride the sector nine companies: Aagrunol, Boots, Fisons, at the beginning of the 21st century. Hoechst, May & Baker, Roussel-Uclaf, GlaxoSmithKline "GSK), which is the second Rhone-Poulenc, Schering and Union largest pharmaceutical company as ranked Carbide). by sales in 2000,1 includes the operations The consequence is that there are now Alan Williams and products of what were in 1970 at least only about 15 major pharmaceutical Managing Resources Ltd, 18Topcliffe Way, four separate companies "Glaxo, Wellcome/ companies and they would all claim to have Cambridge CB1 8SH, UK Burroughs Wellcome, Beecham, more-or-less global presences. Their number Tel: 44 *0) 1223 566158 SmithKline&French) and also some smaller may decrease further, as a result of the Fax: 44 *0) 1223 566159 ones. GSK's predecessor companies Bayer situation and some resolution of the E-mail: alan@managingresources. operated in ethical pharmaceuticals, over- Novartis minority holding "a 20 per cent com the-counter "OTC) medicines, food and stake) in its neighbour Roche. It is, however, 130 Journal of Commercial Biotechnology & Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Consolidation revisited noteworthy that few of them have a biotechnology companies without any dominant position in the large Japanese notable scienti®c input by the leading market and that no Japanese company is pharmaceutical companies. Nevertheless, represented among this `elite'. the latter have recognised the power of During the same period, say 1975±2000, these new technologies, most of which there has been an extraordinary creation of appeared only in the last decade, and have new companies with considerable scienti®c bought into them "by acquisition or by capability. Biotechnology, essentially a new licensing deals) and are in the process of set of enabling tools discovered in the past reducing the platform technologies, 30 years, has been the source of some 4,000 especially CC and HTS, to commodity status companies2 which are carrying out research that are obligatory requirements for all the in the life sciences and predominantly, but major players. Speci®c platform acquisitions not exclusively, with the aim of developing included Affymax "bought by Glaxo)4 and drugs for human healthcare. Sphinx bought by Lilly. Examples of other To date "mid-2001), few of these biotechnology purchases by majors include biotechnology companies have attained Agouron by Warner-Lambert, Sugen by suf®cient size and product density to be able Pharmacia, Chiron by Ciba-Geigy "now to challenge the pharmaceutical majors in Novartis) and Genentech by Roche, though their sales and distribution activities in some of these cases the acquiring although, arguably, many challenge them in company has contented itself with a research creativity and capability. Even the majority stake rather than 100 per cent largest of the `new' companies, Amgen, ownership. which has a market capitalisation in the The rapid consolidation of the order of US$70bn does not maintain a sales/ pharmaceutical sector "which is always distribution network which would enable it explained by the management to be justi®ed to reach the full GP market. In contrast, GSK by signi®cant cost savings) has not been boasts a US salesforce in the order of 8,000 observed to make a signi®cant difference to and a worldwide sales operation of some the R&D capability of the larger 40,000; no biotechnology company comes pharmaceutical companies; indeed, it is even remotely close to this scale of possible that the increasing size and the operation. With a total revenue of some regular "seemingly once every two or three US$3.6b,3 Amgen is dependent partly on years) uncertainty of incumbent employees fees/royalties from partners supplementing about their job prospects have even reduced the efforts of its own relatively small sales the productivity of the majors. Indeed, the and marketing operation of about 1,500 motivation of the staff of American Home which is focused mostly on specialist units Products was unlikely to have increased as in major centres. the management engaged in three successive attempted, but ultimately Partnering abortive, deals. Nevertheless, there can be no doubt that pharmaceutical consolidation There is no doubt that biotechnology has increased the marketing, sales and companies, individually and as a set, have distribution power of the survivors, by force developed an astonishingly creative R&D of numbers if for no other reason. capability. Protein engineering, The dichotomy between relatively combinatorial chemistry, high-throughput sclerotic R&D organisations in large screening, chip diagnostics, antibody pharmaceutical companies and the creative humanisation, genomics and proteomics energy of small biotechnology companies "examples of companies in each area being has led to a perception of a natural Genentech, Affymax, Pharmacopeia, symbiosis between the two groups with one Affymetrix, Cambridge Antibody side having money "large pharmaceutical Technology, Millenium and OGS companies are usually highly cash respectively) have all been developed by generative) but needing products to feed & Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Journal of Commercial Biotechnology 131 Williams into its sales operations and the other side available' to devote its scarce clinical having product candidates and, usually, not development resources to, possibly in a the wherewithal to develop them "a cash different therapeutic area but not always. shortage and sometimes a clinical and Indeed, the current style of partnering regulatory skills shortage) or the marketing renders this a signi®cant risk to most deals. power to sell them. The large company always has the right to Most biotechnology companies respond proceed but not the obligation and the logical to questions about strategy by stating thing for it to do is to take lots of relatively something like `we aim to partner our cheap options but to keep expenditure low products as soon as possible with a leading until all the candidates have been pharmaceutical company'. There is an thoroughly evaluated and have progressed irresistible analogy with the answer given satisfactorily for a year or two. by a bank robber as to why he kept robbing It is noteworthy that even a company as banks `that's where the money is'. The large as Alza felt exposed in its dealings validation by a scienti®cally knowledgeable with large pharmaceutical companies. In unit can of course also support a further commenting on the deal under which approach to the public markets. Johnson & Johnson "J&J) acquired Alza for Partnering arrangements "involving some an announced price of US$12.2bn, Ernest or all of equity investment, up-front fees Mario, Alza's CEO, said `Alza was at the and potential royalty payments) have whim of its clients. If they developed generally been characterised by large another product which did not use Alza's pharmaceutical companies offering to technology, they could just stop marketing biotechnology companies what are to our technology. Alza was not the master of themselves small amounts of money "but,