The drug formula that didn’t work

Matthew Lynn

Matthew Lynn says the mega-mergers that reshaped the global pharmaceutical industry over the past decade have delivered little of what they promised

Eight years later, it hasn’t been demonstrated at all. For evidence, just look at the way the shares have performed. Soon after the merger, GSK’s shares traded as high as £21. Eight years later, they trade at less than £11. Its market capitalisation is £56 billion, not much more than Glaxo by itself at the time of the merger. In effect, the deal took the entire value of SmithKline Beecham, a top five player in the global industry at the time of the deal, and turned it into thin air. AstraZeneca hasn’t performed much better. Its shares were trading above £36 way back in 2000. Now they are at £22. Pfizer’s shares were at $49 in 2000, and have fallen to $16: indeed, the whole company is valued at only $109 billion, rather less than the combined $150 billion it paid for Warner Lambert and then Pharmacia. Sanofi-Aventis hit a peak of €80 a share soon after the 2003 merger, but has since fallen back to €40. True, stock markets have been volatile over that period, but it is impossible to find a single major merger within the drugs industry that has created value for shareholders.

Nor can that just be judged by share prices. A study of more than 50 mergers in the industry by Professor Mahmud Hassan of Rutgers University in the US reached much the same conclusion. ‘Despite the attractiveness of mergers in the pharmaceutical industry, we find no abnormal returns from mergers for acquiring companies,’ argued Hassan. ‘This holds true both for US pharmaceutical acquirers that merge with other US-based companies and for those that merge with foreign-based targets. In both cases, the overwhelming evidence is that mergers do not give rise to either short- or long-term profits for the pharmaceutical industry.’