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Monday, 7 February, 2000, 16:24 GMT
Drug mergers: the right medicine?
National governments want to control the cost of prescription drugs
The pharmaceutical industry is racing to consolidate, joining the merger wave which is also sweeping the worlds of finance, telecommunications and the media.

The mergers of Glaxo Wellcome with SmithKline Beecham and Pfizer with Warner-Lambert follow a series of major drug company consolidations in the United States and in Europe.

Already the past year has seen the tie-up of two of America's biggest drug companies, the biggest European merger, and now the industry's biggest mergers ever.

Mergers of drug companies are expected to accelerate in 2000.
Major drug mergers
1995: Glaxo-Wellcome
1996: Sandoz-Ciba Geigy (Novartis)
1998:Hoescht-Rhone Poulenc (Aventis)
1999: Monsanto - Upjohn & Pharmacia
1999:Warner Lambert-Pfizer
2000: Glaxo SmithKline
Some of the factors likely to speed the global merger wave are the expiring of patents on top-selling drugs, the need for companies to cut overall costs in order to put more money into research, and pressure from governments and the public to cut the cost of prescription drugs.

Good for the public?

But will the new merger wave be good for the public, the ultimate consumer of medicines?

The merger wave will give the drug companies more clout when negotiating over prices with governments - but even after the current merger wave, no company will have more than a 7% market share.

And governments have been trying to drive down the price of medicines, which have been rising faster than inflation.

As the cost of healthcare escalates, and as more drugs become available, pressure on national health budgets to restrict drug use has intensified.

Drug costs (% of total health spending)
USA: 10%
UK: 15.9%
France: 17.2%
Japan: 21.2%
Source: OECD (1997)
In the UK, this has meant restrictions on which drugs can be prescribed on the NHS. To the fury of Glaxo, over the summer this meant its new anti-flu drug Relenza was not generally available to NHS patients.

In the US, where prescription drugs are not covered by government health insurance, the cost of medicines is rapidly becoming a political issue in the 2000 election.

In France and Japan, where physicians are generally free to prescribe as many drugs as they like, rising costs are threatening to bankrupt health care systems.

More regulation

But while governments and consumers are fighting to contain the growing cost of new drugs, there are also growing concerns about drug safety.

The controversies over GM foods and BSE in British beef have increased the scepticism of the general public about all scientific advice.

In this climate, many governments feel they must insist on ever more detailed clinical trials before approving a new medicine for use.

That delay, however, makes the cost of developing new drugs much more expensive.

It is estimated that it takes about $1bn to develop a new drug.

The cost of such investment - and the potential for cost savings by combining research - is a key driving force in the merger wave.

With patents expiring soon on many key drugs like Prozac (made by Eli Lilly), Claritin (made by Schering-Plough), Glaxo's Zantac and SmithKline's antibiotic Augmentin, the incentive to merge is even stronger.

Who's next?

The consolidation in the drug industry puts pressure on some of the other big players.

US drug giant Merck, up to now the largest firm in the industry, with a 4% market share, may be forced to look for a merger partner.

Spurned merger partners American Home Products and Bristol-Myers Squibb, which was rumoured to be in talks with Glaxo, may also be vulnerable.

"Bristol-Myers has always striven to be a leading company, but might not stay there for long with everyone else leaping ahead of them with merger deals," said Jeffrey Chaffkin of PaineWebber in New York.

Sir Richard Sykes, chairman of the newly merged Glaxo SmithKline company, the largest in the world, says that he may be interested in forming even more combinations.

There have been suggestions that drug companies might want to make acquisitions in Japan, the world's second biggest pharmaceuticals market.

"Japan is where (Glaxo) is weakest, and it's the second biggest market, so maybe that's an area they will look at," said Max Herrmann of Alex Sutherlands in London.

Retirements the key

Finally, many of the key figures in the industry are planning to retire soon, opening the way for more mergers.

Chief executives who have already signalled interest in retiring in the next few years include Pfizer's William Steere, SmithKline's Jan Leschly, Glaxo's Richard Sykes, Bristol-Myers' Charles Heimbold, American Home Products' John Stafford and Monsanto's Robert Shapiro.

"I expect we'll see 5 to 10 merger deals globally this year," said Stephen Tang, healthcare consultant for A.T. Kearney Inc.

"Retirements will be the overriding factor triggering them because so many top executives will be looking to leave legacies of having created bigger and better companies."

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See also:

27 Sep 99 | The Company File
The UK's biggest takeovers
17 Jan 00 | Business
Do mergers ever work?
15 Nov 99 | The Company File
Celltech and Medeva merge
05 Nov 99 | The Company File
Three way drugs merger fight
10 Dec 98 | The Company File
Zeneca and Astra merge to form drug giant
01 Dec 98 | The Company File
Europe's blockbuster drug deal
09 Dec 98 | The Company File
Europe's giant drug merger explained
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