March 10, 2009
Sad to see M&A?
I never thought the day would come when I would be sad to see a big corporate takeover. It generally brings out my inner Schumpeter. Especially in this economy, we need deals, deals, and deals.
Two great articles, however, have ruined my enthusiasm for Merck - Schering Plough. Derek Lowe, blogging at the Atlantic, doesn't see the move as friendly to R&D:
I have to say, I'm sorry to see the end of both. Drug discovery is risky and complicated, and it needs as many different viewpoints and shots on goal as possible. Big mergers like this don't help the industry's ecology much. Today's merger isn't as disturbing as the Blob-like growth of Pfizer, but it's still not happy news.
Even worse is the WSJ Ed Page's clear refutation of animal spirits in the deal. They see it as Big Pharma (boo! hiss! bastards!!!) retrenching in advance of a bad government climate disfavoring innovation.
These deals are good short-term news for shareholders of the target companies, some of whom have been beaten down for years. Merck's offer for Schering-Plough, for example, is a 34% premium over Friday's close. But the deals also come amid a worsening political (and hence economic) climate for drug makers and health-care stocks generally. Aside from the merger premiums of recent few days, health stocks have been hammered in 2009.Health Care Posted by John Kranz at March 10, 2009 12:53 PM
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So it's no wonder that, this time, drug companies are looking to diversify both geographically and into biotechnology. Yet neither one is all that safe a haven. The U.S. is the last major pharmaceutical market without universal price controls, and as such has been the world's main financier of new drug discoveries. In a world of government-run and -priced health care, biotech innovation will also be as much at risk as traditional drug development. The biggest price we may pay for a health-care system run from Washington are the therapies we never get as a result.For investors and the economy, the recent rout in health stocks is a case of wealth destruction. For the rest of us, it's also a sign of the health destruction that will result if Washington's current policy trajectory becomes law.
Yeah. Try explaining that last bit to even an above average Obama voter.
Posted by: johngalt at March 10, 2009 3:04 PMAgreed that Big Pharma is hunkering down and that removal of the profit motive will kill innovation and therefore new therapies. Assuming we avoid that pitfall (here's hoping), the consolidation is not a bad thing. Truth is, large companies, as a breed, are terrible at ground-breaking innovation. They tend to pursue low-risk courses and have bureaucratic proceeds that stifle rapid movement. Thus, Big Pharma tends to partner with Little Pharma. The little guys develop the promising compounds, but don't have the money to get them to market. Big Pharma has the ~$1 billion that it takes to bring a drug to market and that's where they step. Schumpeter lives, unless Obama kills him.
Posted by: Boulder Refugee at March 11, 2009 12:15 PMNormally, I'm with you, br, but this wave doesn't smell right. M&A activity in a less distorted market would do everything you say. I think Lowe and Gigot have valid concerns that these deals are only good in a distorted market and would not necessarily make sense without the shadow of government takeover.
My tireless (perhaps tiresome) drumbeat is that government controls scare private investment out of the sector (you gonna buy pharma today?) That being the case (how's my subjunctive, Keith?) the smaller, efficient, innovative firms will be starved of capital and will have to hide out as divisions of big firms.
Full disclosure: my current drug trial is a Genetech-developed compound but the trial is done by Roche. I guess their relationship is a little more formal now.
Posted by: jk at March 11, 2009 12:36 PM | What do you think? [3]