Sanofi-Myers-Squibb and Novartis-Bayer - a Reality Check on the Rumour Mill

October 28, 2008 Sanofi-Myers-Squibb and Novartis-Bayer - a reality check on the rumour mill

Evaluate Vantage

Among the M&A rumours doing the rounds recently, perennial talk of a potential tie-up between Sanofi-Aventis and Bristol-Myers Squibb has resurfaced, in light of renewed focus on the cash-rich nature of big pharma.

Alongside speculation that serial M&A target Bayer may be acquired by any number of pharma giants, with Pfizer and Novartis top of the list, the current landscape of big pharma could be set for a dramatic change. If any appetite remains within senior executives at these companies for a mega-merger, and it is still a big IF, EvaluatePharma’s ‘merge companies’ tool reveals that the top three companies ranked by pharmaceutical sales in 2014 could be: Novartis-Bayer, Sanofi-Myers-Squibb and Roche.

Novartis already rising to No.1 with Alcon

Interestingly, the latest analyst consensus forecasts from EvaluatePharma show Novartis surging beyond Roche and into top spot by 2014, on the assumption that the Swiss group will exercise its right to acquire a further 52% share of Alcon, starting in 2010.

This means Novartis would own a 77% stake in the Swiss eye healthcare company and would therefore start to consolidate 100% of Alcon’s pharmaceutical and OTC sales, in a similar manner to Roche’s consolidation of sales by Genentech.

Total Rx & OTC pharma sales CAGR (08 - Market Market

($m) 14) Share Rank

2008 2014 2008 2014 2008 2014

Novartis-Bayer 56,597 71,665 4% 8.8% 9.0% 1 1

Sanofi-Myers- 56,854 56,366 (0%) 8.8% 7.1% 2 2 Squibb

Novartis 38,353 51,534 5% 5.9% 6.5% - -

Roche 33,271 45,387 5% 5.2% 5.7% 5 3

Sanofi-Aventis 42,569 41,647 (0%) 6.6% 5.2% - -

GlaxoSmithKline 39,599 41,052 1% 6.1% 5.1% 4 4

Johnson & Johnson 27,246 31,664 3% 4.2% 4.0% 7 5

Pfizer 42,094 29,683 (6%) 6.5% 3.7% 3 6

Merck & Co 26,349 26,926 0% 4.1% 3.4% 8 7

Abbott 16,769 23,890 6% 2.6% 3.0% 13 8 Laboratories

AstraZeneca 30,357 23,639 (4%) 4.7% 3.0% 6 9

Schering-Plough 16,974 21,739 4% 2.6% 2.7% 12 10

Novartis-Bayer, not Pfizer-Bayer

No M&A speculation is complete without Pfizer being linked to any number of big or small pharma companies, as some observers still expect the US pharma giant to buy itself out of the trouble it faces with patent expiries for key drugs, which drops the company from top spot last year to sixth position by 2014.

As such, recent rumours have linked Pfizer with Bayer, the German group which has one of the most diverse range of businesses within its peer group, including healthcare, diagnostics, agrochemicals and industrial chemicals. Prescription and OTC sales of $16.3bn last year represented just 37% of total group sales at $44.4bn.

Many in the industry have assumed that a key barrier to buying Bayer is the time and cost involved in splitting up the group once acquired to retain only the healthcare business, a move that the company itself has so far resisted and has probably kept potential suitors at bay.

However, in today’s increasingly risky patent protection and regulatory environment, the diverse nature of Bayer’s operations could start to be seen as positive and attractive. As such, Novartis, also strongly linked to Bayer on the rumour mill, with its history of running a range of businesses would appear best suited to managing such a takeover. In contrast, Pfizer’s desire to focus almost exclusively on pharmaceutical operations, witnessed by the $16.6bn disposal of their consumer healthcare business to Johnson & Johnson last year, suggests a move for Bayer would represent a massive U-turn for the US pharma giant, and be hard to sell to shareholders.

A Novartis-Bayer tie up could also be set to capture a staggering 9% share of the global pharmaceutical market by 2014, significantly ahead of the 7.5% market share that Pfizer secured last year.

Sanofi-Myers-Squibb

A move by Sanofi-Aventis for key US partner Bristol-Myers Squibb has been touted around for many years now. The two companies collaborate on the development and promotion of two blockbuster products; blood-thinning agent Plavix and hypertension drug Avapro. The problem facing BMS is that these two drugs, the group’s best- selling products last year, are set to lose patent protection in 2011 and 2012, respectively.

Given BMS’s failed attempt to acquire ImClone, Sanofi-Aventis takeover rumours have increased recently, focusing on the fact the $1bn that BMS is due to receive from selling its 17% stake in ImClone to Eli Lilly means the group will automatically become $1bn cheaper on an enterprise value basis.

Shareholders in BMS may welcome a bid premium to help perk up the share price which is currently at a 13- year low of $18.50. Becoming part of Sanofi-Aventis would propel BMS from a lowly ranking of 14th by sales in 2014, to top spot; assuming a Novartis-Bayer combination never materialises.

Some have pointed to the recent appointment of Chris Viehbacher as chief executive officer at Sanofi-Aventis as increasing the likelihood of a tie-up with BMS, although any move within 12 months would seem unlikely and may appear rash to investors.

Appetite still low

In the absence of a mega-merger within big pharma since 2004 when Sanofi-Synthelabo acquired Aventis for $63bn, it is understandable to some extent why these M&A rumours should intensify now, with big pharma facing the most challenging environment the industry has experienced. The comfort that may come from securing a mega-merger to retain a company’s position in the industry could hold some attraction. Not to mention that in the current dire financing climate, the pharmaceutical industry is probably the only sector in which such rumours are likely to take hold; Pfizer for example is sitting on a $26bn war chest.

However, the overwhelming consensus amongst senior executives within big pharma seems to be against any more mega-mergers, supported by a decent weight of evidence that these deals only end up eroding value, suggesting the rumours may remain just that for a while yet.