Frenetic activity won't fix the pharmaceutical industry's problems


Outlook The pharmaceutical sector is creating more excitement in the world's financial centres than the opening of a warehouse full of free Viagra in a retirement community.

That drug's American maker, Pfizer, is said to have played footsie with AstraZeneca over the possibility of a blockbuster bid. At the same time European rivals Glaxo and Novartis are hoping to cure what ails them by playing a game of billion-dollar swapsies.

Both appear to make sense, at least on the face of it.

It's not warehouses full of its signature drug that Pfizer needs to dispose of so much as it is the warehouses full of cash that the company has stashed overseas.

Spending that money outside the US is logical because of the cut Uncle Sam would take were it to flow back home. Hence the news of an approach to Astra. It helps that some analysts feel Astra is a prime target on account of its being under-valued by European investors, who, let's face it, are probably feeling more than a little bruised by the company's hugely disappointing recent history combined with the prospect of five years of falling revenues.

Astra's shareholders might be very interested in hearing what Pfizer has to say. But what about Pfizer's shareholders? Their company's market capitalisation is now less than the amount of their money it used to pay for three previous mega-deals. Blockbuster drugs might generate shareholder value but, as a rule, blockbuster deals don't.

Which brings us to Glaxo and Novartis. Bribery allegations have left the former, once the bluest of blue chips, looking a bit grey of late. Promising shareholders a $4bn (£2.37bn) bung as a result of it shaking its portfolio up should at least stop them from fretting too much in the short term.

So Glaxo is selling its subscale cancer drugs business to Norvartis for what looks like a tasty price. The latter, meanwhile, is sending its vaccines business (minus 'flu) in the opposite direction, while the two are combining their consumer-products operations with Glaxo in the driving seat. Glaxo also gets a transfer fee as a result of the swap, some of which is earmarked for the shareholder largesse I mentioned. Phew!

This is about both focusing on what they're really good at, an eminently sensible strategy, and both could ultimately emerge as winners from the deal.

But none of this frenetic activity fixes the industry's core problems. They are its continuing struggles to replace one-time blockbuster drugs whose patents are expiring with similarly lucrative new treatments combined with the harsh spotlight that is being shone on industry practices.

All this pharma M&A could easily be compared to Tamiflu, the controversial 'flu drug made by Roche: It only treats symptoms, and even its effectiveness against them is questionable. Plus it's expensive, and there are side effects that can make the patient feel worse than the illness.

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