Pfizer remains likely candidate to strike mega-merger

Analysis

In the face of overwhelming evidence that mega-mergers between big pharma companies tend to erode rather than create value, the appetite among senior executives and investors for further large-scale consolidation is unsurprisingly low.

A review of the latest net cash balances of the global pharma giants reveals that overall debt exceeds combined cash to the tune of $43.9bn, with a majority of companies still servicing massive debts from recent acquisitions and therefore unlikely to make a move for a peer any time soon. Of the companies with a healthy net cash position, only Pfizer has yet to exploit its strength with a major deal, and despite recent assurances from the company to the contrary, still looks likeliest to attempt another ill-fated mega-merger.

The table below summarises the top five pharma companies with the strongest and weakest net cash positions, using EvaluatePharma’s Peer Group Analyzer.

    Net Debt & Cash - latest ($m) Total Debt ($m) Cash ($m) Enterprise Value ($m) Comment
  Strong net cash          
1  Roche 9,834 (5,435) 15,268 147,517 Ongoing bid to acquire remaining 44% of Genentech for $43.7bn, likely to rise to around $56bn
2  Pfizer 9,485 (16,694) 26,179 120,481  
3  Takeda 5,792 (737) 6,529 37,215 Already used cash for $8.8bn acquisition of Millennium Pharmaceuticals
4  Novartis 5,467 (10,731) 16,198 116,298 Ongoing bid to acquire a 77% stake in Alcon for $39bn
5  Daiichi Sankyo 4,874 (0) 4,874 16,853 Ongoing bid to acquire a controlling stake in Ranbaxy Laboratories for $4.6bn
             
  Weak net cash          
1  Bayer AG (19,525) (23,530) 4,005 83,540 Servicing debt from $21.3bn Schering AG acquisition (Jun 06)
2  GlaxoSmithKline (16,209) (27,562) 11,353 148,250 Raised debt to cover $24bn share repurchase programme between 2007 - 2009
3  AstraZeneca (10,359) (14,873) 4,514 81,103 Servicing debt from $15.6bn MedImmune acquisition (Jun 07)
4  Abbott Laboratories (9,823) (15,002) 5,178 98,570 Servicing debt from $4.1bn acquisition of Guidant (Apr 06) and $3.7bn acquisition of Kos Pharmaceuticals (Dec 06)
5  Sanofi-Aventis (8,812) (10,302) 1,490 107,057 Servicing debt from $63bn Aventis acquisition (Aug 2004)

Strong position

Excluding Pfizer, all of the companies with a relatively healthy net cash position have recently utilised their strength and have made, or are in the process of making, a significant acquisition.

The appearance of two Japanese companies within the top five, Takeda and Daiichi Sankyo, is not that surprising given the huge cash piles companies based in Japan tend to accumulate, but what is more relevant is that at long last these companies have decided to act and dip into their deep pockets to increase their geographical reach.

In addition, two more Japanese groups, Astellas Pharma and Otsuka Pharmaceutical, feature just outside the top five companies listed here. Further acquisition-driven forays by Japanese companies into foreign markets can therefore be expected over the next year.

Weak hand

Conversely, a number of European pharma giants still appear saddled with significant levels of debt following major deals over the last few years, with Sanofi-Synthelabo’s acquisition of Aventis in 2004 representing the last real mega-merger among big pharma.

Although GlaxoSmithKline is sitting on a decent cash pile of around $11.4bn, a significant portion of this is required to meet its massive $24bn share repurchase programme, running from 2007 to 2009. The burden of meeting this target appears to have become a bit too onerous, with Glaxo’s new chief executive Andrew Witty recently announcing a suspension of the remaining $13bn in repurchases due, in order to release some cash for more strategic investments. (New Glaxo CEO making presence felt with revised strategic vision, July 23, 2008)

Mega-merger prospects?

Many observers will claim that Roche’s bid to acquire Genentech, which could end up costing the Swiss group around $56bn and which would value the US biotech giant at $126.7bn, should be classified as a mega-merger and purely on the scale of the deal these claims may be correct.

However, given the long history between the two companies, it is not such a mega-merger in the classical sense.

Although Pfizer has recently been keen to stress its preference to avoid a large-scale tie up (Small could be beautiful for Pfizer, March 6, 2008), given its status as the industry’s serial acquirer and its massive loss in revenues upon patent expiry for Lipitor in 2011, many still believe the US pharma giant will simply revert to what it knows best and strikes a mega-merger deal to try and preserve its current top spot ranking by pharmaceutical revenues.

Sitting on a whopping cash pile of $26.2bn, the temptation for Pfizer to buy its way out of trouble may be too much to resist.

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