Cash-Rich Drugmakers Eye Mergers or Acquisitions

GlaxoSmithKline, Pfizer, and Sanofi-Aventis are likely buyers. Wyeth, Bristol-Myers Squibb, Eli Lilly, and a host of biotech companies could be targets

By Arlene Weintraub

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CEO Poussot has built up Wyeth's R&D muscle, which may make it a target Jordan Hollender

Andrew Witty, the new chief executive of giant GlaxoSmithKline (GSK), surveys the wreckage of the global financial meltdown and sees an upside. With pharmaceutical stocks at record lows, it's a good time to acquire biotech companies and other assets that could drive Glaxo's growth for years. Its midsize rival Wyeth (WYE) is also on the prowl—but there's a difference. Faced with a shrinking market valuation, new CEO Bernard Poussot may have to bulk up to ward off larger predators.

Witty and Poussot are two of seven new faces who have taken over at major pharmaceutical companies since 2006. It's a massive changing of the guard, and it comes at a time of both huge risks and irresistible opportunities. Drug companies have amassed astonishing hoards of cash, which places them in an enviable position as the world slides into recession. But they will have to dig deep into their stashes to buy the growth that has eluded them for the past decade. That means choosing targets that are most likely to create blockbuster drugs and to open up whole new areas of disease treatment.

How the coming shakeout transforms the pharmaceutical landscape is of intense interest to policymakers and investors—and that includes just about anyone with a mutual fund. These are some of the world's most widely held stocks, yet chronic lack of innovation has caused drug company sales and profits to stagnate. Drugmakers are rich—U.S. companies alone are sitting on $113 billion in cash. But the dividends they pay have done little to offset disappointing performances. "Look at the overall value of the top 20 drug companies—they're worth nearly a trillion dollars less than they were in the year 2000," says Peter Tollman, senior partner at Boston Consulting Group.

There's another reason the industry's struggles are attracting such scrutiny. It has to do with the critical role drugmakers play in society. The industry burned through a record $59 billion in research and development money in 2007, according to the Pharmaceutical Research & Manufacturers of America. It has spent $213 billion since 2004, making it among the most profligate industries when it comes to R&D. The payoff for society was supposed to be a steady flow of products that would improve people's lives and reduce the government's health-care expenses. Instead, drug research productivity has been declining. Last year only 19 new drugs were approved in the U.S., and few of them were true breakthroughs.

SHOTGUN MARRIAGES

Will consolidation improve this dismal performance? The track record for pharma and biotech mergers is mixed at best, but that's not quelling the enthusiasm. Drug companies have announced more than $142 billion worth of mergers and acquisitions so far this year, 18% more than they spent in all of 2007. The dealmaking could take a breather while the financial chaos sorts itself out, but many analysts expect to see a slew of shotgun marriages soon, including some megamergers. The first sign of that came on July 21, when Roche (RHHBY) offered $43.7 billion to buy the 44% of biotech bigwig Genentech (DNA) that it didn't already own. Genentech's executives turned down Roche's offer of 89 per share, saying it was too low. But Roche's new CEO, Severin Schwan, says he's certain there will be a deal.