Survival of the fittest creates a frenzy: Nigel Cope examines the reasons for the rash of mergers in pharmaceuticals

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The Independent Online
'SURVIVAL of the fittest' is a phrase that is gaining common parlance in the highly active pharmaceuticals sector.

Squeezed by lower prices and regulatory changes, the world's largest drugs companies have been stalking the sector in search of tasty morsels, and perhaps rather larger prey, to beef themselves up for the coming changes.

In an industry once renowned for its highly fragmented nature, size and consolidation seem to have become all-important.

SmithKline Beechams's takeover of Sterling Winthrop yesterday is just the latest in a series of deals. Earlier this month SKB failed to buy Cyanamid, the American medical products group, when its deal was trumped by the dollars 9.7bn paid by American Home Products, a pharmaceuticals and medicals supplies company. In May, the hyper-active SKB paid pounds 2.3bn for Diversified Pharmaceutical Products.

What is the driving the merger and acquisitions frenzy? One thing is pressure on prices. As drugs companies find it harder to push through price increases they look instead to gain economies of scale through takeovers.

A second is that as patents on prescription drugs run out, some companies are seeking ways to balance their businesses by moving into the over-the counter drugs sector.

'All the companies are looking at reasonably dull sales growth in pharmaceuticals,' Kevin Scotcher, an analyst at Kleinwort Benson, said. 'They are looking at other ways to increase earnings.'

Perhaps more important is that companies such as SKB and Glaxo are having to make decisions on what kind of companies they want to be.

Glaxo has decided to remain a research-driven producer of prescription drugs. But SKB has moved to become a multi-faceted, diversified drugs group with footholds in prescription and over-the-counter drugs and the fast changing distribution chain.

'It helps to be a large diversified group,' Peter Glynn Jones, SKB's managing director of strategic development, said. 'It means a company can support brands with strong promotion, create a low manufacturing base and develop stronger links with retailers.'

Glaxo has remained silent so far on its future strategy though it was known to be in the market for a pharmacy benefit manager - which manages the purchase of pills, especially for managed- care groups - in the US.

Hemant Shah, an independent pharmaceuticals analyst in the United States, said: 'Glaxo has to do something. One company in the UK is doing everything. The other is just sitting by.'

Some will ask if SKB is doing too much. In May it paid dollars 2.3bn for Diversified Pharmaceutical Services, an acquisition that positions the company in the fastest-growing part of the distribution network. Then just weeks after being gazumped in a multi- billion-dollar battle for Cyanamid, it has opened its cheque book again to swallow Sterling.

SKB says it has been talking to Sterling for more than four years and feels it is the perfect fit.

'Sterling was the best company SmithKline could have bought,' Gordon Duncan, of Kleinwort Benson, said. 'They have been talking to them for years and it was just fortuitous that Kodak put it up for sale in April.'

However, with the present whirlwind of takeover activity, it may be only a matter of time before someone buys an ill-researched dud.

The question now is who might be gobbled up next. Potential targets could include Upjohn or Schering-Plough, or even Britain's Wellcome or Zeneca. But as Kevin Scotcher, at Kleinwort Benson, said: 'Most people look at Wellcome as a potential target but it could be a predator.'

In this industry, anything is possible.

----------------------------------------------------------------- BIGGEST DRUG COMPANY TAKEOVERS ----------------------------------------------------------------- Deal Price Date 1 American Home Products buys Cyanamid dollars 9.7bn Aug '94 2 Merck buys Medco dollars 6bn July '93 3 Roche buys Syntex dollars 5.3bn May '94 4 Eli Lilly buys PCS dollars 4bn July '94 5 Sandoz buys Gerber dollars 3.7bn May '94 6 SKB buys Sterling Winthrop dollars 3bn Aug '94 7 SKB buys Diversified Pharmaceuticals dollars 2.3bn May '94 -----------------------------------------------------------------

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