Consolidation in the Pharma industry continues unabated

Posted on May 6, 2014 by Alexander Szewczak

As large assets swaps, mergers and acquisitions continue in the Pharma industry, Merck has announced it is selling its Consumer Care division to Bayer for $14B. The transaction will move Bayer into second place in consumer care, behind J&J. Merck will in turn will net about $8-9B in after-tax proceeds, and become more focused on innovative medicines. Speculation among analysts now turns to Merck’s animal health unit.

Industry-wide, several firms are pursuing a more consumer care-focused (and lower margin) diversified products business strategy, and others, the opposite. The recent flurry of transactions reflects that re-alignment of strategies.

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Pfizer won’t take no for an answer

Posted on May 5, 2014 by Alexander Szewczak

Amidst several indications that Pfizer will launch a hostile bid for AstraZeneca if necessary, this quote stands out:

Asked whether hostile moves could hurt integration of the two companies, Chief Executive Ian Read said, “No, in my opinion, all it does is delay the planning.”

Well, it might also raise the price tag a bit.  The U.K. government (after some backpedaling) and labor unions are not sounding too enthusiastic, either.  It will take some serious job guarantees to get them behind the deal.  Pfizer’s revenue and profits were down significantly in today’s earnings report, which may add to their determination to do a deal.  Stay tuned…

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Pharma companies consider selling off mature drug portfolios

Posted on May 5, 2014 by Alexander Szewczak

As big shifts in the Pharmaceutical industry continue, Reuters is reporting that several large pharma companies, including Abbott, Merck and Sanofi, are considering selling off their portfolios of compounds that have lost patent protection.  From a pharma company’s perspective, branded generics can still be quite lucrative, especially in developing markets, but they are turning out to be a slow-growth business.  So it kind of makes sense to sell them off and focus on high-growth products, if that’s your strategy.  However, think about what these companies are actually selling.  Drugs that have gone off patent are already sold by multiple generics companies world-wide, and for significantly lower prices.  What a branded generic has going for it is, well, the brand name, and its reputation for quality.

You might expect that selling a branded generic franchise from the original big pharma owner to a generics company (or to a firm like Valeant) would undermine its reputation value to consumers.  Kind of like selling the BMW 3 series brand to Fiat when several other low-cost auto manufacturers already make exactly the same car.  How much would Fiat pay for that?

What these proposed transactions imply is that the brand is independent enough that consumers will not care who makes or markets the pills (of course many drugs are actually made by third-party contract manufacturers anyway).  On the one hand, Bayer Aspirin still commands a higher price than dozens of generic versions of aspirin, over a hundred years after its invention.  On the other hand, Bayer hasn’t tried to sell its aspirin brand to Teva.

 

 

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Tidal Basin, Washington DC

Posted on May 4, 2014 by Alexander Szewczak

Early evening at the Tidal Basin, Washington DC

Alas, I arrived after the cherry blossoms, but the professionals caught some spectacular images a few weeks earlier.  And check out this humorous — and beautiful — look at the blossom paparazzi!

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Not just Microsoft: All companies need a data culture

Posted on May 4, 2014 by Alexander Szewczak

What Microsoft needs is a “data culture”, according to Satya Nadella, their new CEO and former head of the Cloud and Enterprise group.  As reported by Adam Lashinsky:

In Nadella’s world view, data generated by, living on, and enhanced by Microsoft’s software is the company’s future. He said the company needs a “data culture where every engineer, every day, is looking at the usage data, learning from that usage data, questioning what new things to test out with our products, and being on that improvement cycle which is the lifeblood of Microsoft.” He talked about “data exhaust,” such as server logs, social-media streams, and transaction data that is meaningless unless it can be turned into “data fuel” for something he called “ambient intelligence.” Getting this right will lead to a “data dividend” for Microsoft’s customers.

I’ll defer on the question of whether or not Microsoft’s products are necessarily the best tools to use.  But I will say that all companies need to develop a data culture.  Never before have firms been able to generate or harvest as much useful information as today:  consumer data, operational data, financial data, social media data, you name it.  Summarizing, abstracting, and analyzing that data has never been easier or cheaper.  Those who extract value from their data will gain a competitive advantage.  Those who do not, will fall behind.

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Profusion of greenhouse flowers – tended by mechanized intelligence

Posted on May 3, 2014 by Alexander Szewczak

Volante Farms Greenhouse

Volante Farms of Needham, Massachusetts has a state-of-the-art energy efficient greenhouse.  The ventilation, light level and watering are all controlled by computer algorithms.

The computer monitors weather conditions inside and outside, including sunlight, temperature, wind, and humidity and then adjusts how the greenhouse responds accordingly. Different zones can call for heat as needed or vent extra heat through the articulating roof vents. It can recognize that a cloudy day may not provide enough sunlight to help plants grow and therefore keep a heat curtain closed to conserve the ambient heat. It can recognize whether precipitation falling is snow or rain and turn on roof level radiator fins to aid rapid snow melt and prevent potential roof collapse.

Mechanized intelligence in action — enabling the greenhouse to use a fraction of the labor and resources it otherwise would consume.  You can read more about all the technology on the Volante Farms greenhouse page.

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Pfizer’s real strategy is (mostly) tax-minimization

Posted on April 29, 2014 by Alexander Szewczak

Image  Image

Many observers were initially left scratching their heads over Pfizer’s pursuit of AstraZeneca, a company that has had major pipeline troubles of its own.  As more information has come out, Pfizer’s strategy is beginning to make sense.  They aren’t pursuing an old-style mega merger (click here to see the WSJ’s take on the Pfizer family tree).  Instead, Pfizer is looking to take advantage of some enticing tax-minimizing strategies that include using overseas cash to finance the acquisition and locating the merged corporation in the United Kingdom.

Company executives were outspoken about how their attempted takeover of AstraZeneca, which was confirmed early Monday, would help Pfizer slash its tax bill, saving $1 billion or more each year by one estimate.

Indeed, the U.K. offers a lower corporate tax rate, enhanced credits for R&D, and is considering taxing income from patents at a rate of only 10%. According to the Wall Street Journal, Pfizer’s effective tax rate was 27% last year, compared to 21% for AstraZeneca.

In terms of existing products and pipeline impact, the deal is also more focused than you might think.  Pfizer has outlined exactly where AstraZeneca’s compounds would go, and they do fit quite nicely into the existing categories that comprise Pfizer’s current divisions: (1) Global Innovative Pharma (including Immunology and Cardiovascular/Metabolics), (2) Vaccines, Oncology, Consumer Health, and (3) Established Products (mostly generics, and other off-patent products).  That three-way divisional structure, incidentally, prepares the company for a potential value-maximizing breakup down the road.

Forbes’ Matt Herper has the details on merged pipeline implications, and the Financial Times has a big roundup from the U.K. perspective.  Pharma M&A activity is heating up, and it sure looks more focused than in years past.  Stay tuned…

 

 

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Undeterred, Pfizer continues its mega merger strategy

Posted on April 28, 2014 by Alexander Szewczak

Pfizer continues to stalk AstraZeneca, even as other firms abandon mega mergers.

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A new tool for measuring National economic output

Posted on April 24, 2014 by Alexander Szewczak

Starting April 25, the Bureau of Economic Analysis will begin reporting quarterly measurements of gross output.

Gross output represents, roughly speaking, the total value of sales by producing enterprises (their turnover) in an accounting period (e.g. a quarter or a year), before subtracting the value of intermediate goods used up in production.

Gross output calculations have been done for decades, but primarily for individual economic sectors or as a relatively infrequent (and rather out of date) computation for the entire economy.  That will change in April.  In a WSJ Op-Ed, Mark Skousen writes:

Steven Landsfeld, director of the BEA, says this new macroeconomic tool offers a “unique perspective” and a “powerful new set of tools of analysis.” Gross output is an attempt to measure what the BEA calls the “make” economy—the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. Valued at more than $30 trillion at the end of 2013, it’s almost twice the size of gross domestic product, and far more volatile.

Skousen (who wrote a more extensive article for Forbes last year) goes on to describe the advantages of gross output, claiming that it better represents supply side-driven economic improvements in living standards, rather than the GDP use economy.  It is also more sensitive to business cycle changes.

Gross output measures spending in both the “make” economy (intermediate production), and the “use” economy (final output). It is a better, more comprehensive measure of the nation’s economic activity than GDP, and a better indication of the economy’s growth prospects.

Skousen claims that while GDP adequately represents a country’s standard of living and economic growth, it underestimates the larger total economic activity, including intermediate production, and it overestimates the role of consumer spending.  I don’t believe that gross output is “better” than GDP, nor do I think it will necessarily upend the belief that consumer and government spending drive the economy.  Nevertheless, I’m curious why the BEA is now starting to report the measurement quarterly.  Has it become a more important metric for analyzing the health of the economy (I can imagine that it might help measure the effects of outsourcing more accurately, for example)?  If so, why?

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Pharma megamergers — against the spirit of the times?

Posted on April 23, 2014 by Alexander Szewczak

Here’s more on the Novartis-GSK-Lilly three way deal announced Tuesday.  As WSJ journalist Helen Thomas writes, the megamerger chill of dread felt when rumors of Pfizer’s stalking of AZ came to light last weekend may well be exorcized by this radically different strategy:

Novartis and peers have taken a surgical approach. The Swiss company will, as promised, get out of businesses where it isn’t big enough to compete. Eli Lilly will buy Novartis’s animal-health division for $5.4 billion. Meanwhile, an asset swap with Glaxo will see Novartis largely shed its troubled vaccines unit and take over the U.K. company’s portfolio of approved cancer treatments. The pair will also form a joint venture in consumer health care, creating the second-largest business globally with $10 billion in sales.

All three companies are plausibly improving their focus, building up core areas and shedding less relevant businesses. Unlike the typical megamerger which disrupts R&D pipelines, distracts employees, and often results in a larger, but less focused company, these three firms may well emerge in a much more competitive position.

The combination certainly looks complex. But each company is making a targeted bet on areas where it can justifiably claim management expertise. While some multiples paid might raise fears that frothiness in biotechnology stocks has spread, the businesses being bought aren’t binary bets on a few potential wonder drugs. Each company can promise cost savings from their enlarged businesses. Novartis and Glaxo could also both pledge higher earnings per share from the get-go, albeit helped in the latter’s case by a £4 billion share buyback.

Pfizer take note. Megamergers just aren’t in the spirit of the times.

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