Rx Battle

Drug makers are announcing a flury of deals that, to date, have generally been greeted with much fan appreciation. I’m not sure the enthusiasm is justified.

Novartis and GSK shuffled their decks, spending vast sums to acquire competing businesses from each other. Novartis spending $16B to strengthen their oncology position and GSK spending $7B to stoke up their vaccine properties. (Lily also got in the act, buying out Novartis’ animal Rx business to increase their lead in this field.)

To top it off, Novartis offloaded their OTC businesses to a joint venture with GSK, where they will be the minority stakeholder. (Yes, the same Novartis that has spent almost a decade investing heavily in talent, marketing and new item introductions on their OTC businesses.)

Yesterday Bayer AG announced it is spending at least 20 times earnings ($14 B) to acquire Merck’s OTC businesses.

Meanwhile, Pfizer continues to chase AstraZeneca like a love-struck teenager.

These moves have been justified and welcomed on the grounds that they “focus” these company’s portfolios, bringing more scale to bear on a narrower set of therapies. In OTC, it’s claimed that great synergies (i.e., cost savings) will fund the investments needed to “unlock the global potential” of the variety of well known brands.

Maybe.  Then again, maybe not.

My hunch is these are largely defensive moves … and very expensive and egocentric ones. History doesn’t look kindly on multi-billion dollar “focus” buys. Culture clash and savings requirements dominate the merged assets and actual cash flows rarely pay back the investment.

The OTC premise seems even more remote.

Reckitt Benckiser made the same promises when it jumped into the OTC arena by acquiring Boots, and later Adams Respiratory and SSL. To listen to Reckitt management, it was simply a matter of flipping a few switches and they could take their new OTC brands global, reaping billions in added revenue. Reckitt’s nearly 10 years into this adventure and has yet to prove the case.

Instead, I think we need to take these moves as consolidation plays:  Attempts to strengthen market scale in the face of less productive R&D pipelines, weaker economic prospects, and greater regulatory uncertainty. As such, they will likely be value “destructive” if anyone ever looks back and adds up the figures.

Do you see it differently?