Sanofi-BMS deal may revive urge to merge

Investors and analysts are split on whether talks between Bristol-Myers Squibb of the US and Sanofi-Aventis of France, which would create the biggest drug company in the world if a deal is reached, are likely to usher in a new round of consolidation among Big Pharma.

A wave of mega-mergers in the late Nineties and at the start of the decade gave way to a deep scepticism about whether bigger is really better in an industry which requires brilliant new scientific discoveries to thrive.

But after several years of disappointing output from the cash-rich research and development machines inside these giant companies, and with relentless downward pressure on drug prices, there is renewed chatter about whether executives will rediscover the "urge to merge".

Sanofi - created in 2004 by the merger of the two biggest French drug firms, Sanofi-Synthelabo and Aventis - is believed to be interested in buying Bristol-Myers Squibb, which is currently without a chief executive after a string of accounting and other scandals. The combined group would have a stock market value of $175bn (£89bn), leapfrogging Pfizer, the current No 1, and Britain's GlaxoSmithKline.

Barbara Ryan, analyst at Deutsche Bank, believes that even without a Franco-American deal that would rob it of its crown, Pfizer must resort to a large acquisition. It is looking for ways to boost profits to make up for the forthcoming loss of revenues from Lipitor, the best-selling cholesterol medicine which will lose patent protection at the end of the decade.

"People say that mergers don't work, but it depends on how you define working. If you are expecting them to generate top-line growth, or to generate some sort of epiphany in R&D, then they don't work, but I don't know why you would have those expectations," Ms Ryan said.

"We are in an environment where most companies are having difficulty growing the top line because of generic competition and a lack of new products, so they have to wring over-capacity out of the industry. Obviously companies can take costs out of their own businesses, but I have never seen one that would cut 50 per cent of its cost base, which is what happens in a merger. In a merger, one and one makes three."

GlaxoSmithKline held exploratory talks with Bristol-Myers Squibb in 2002, but the mooted merger went down like a lead balloon in the City. BMS is strong in cancer and cardiovascular medicine, both areas where GSK has been trying to extend its reach. In the event, Jean-Pierre Garnier, GSK's chief executive, decided that the company would be better off improving the productivity of its in-house research.

Jonathan Senior, who heads life sciences research at Evolution Securities, said that Big Pharma appeared increasingly willing to do deals to add to their portfolios of new products, but that mega-mergers were not the best way to do that. More likely are licensing deals on specific products - such as the one signed last week by AstraZeneca with Bristol-Myers Squibb - and acquisitions of smaller biotech companies.

"The view we have is that mega-mergers can only happen under special circumstances," said Mr Senior. "I am not convinced that investors look at the last round of mergers - Astra and Zeneca, Glaxo and SmithKline Beecham, Pfizer and Pharmacia - and think: 'They were fantastic, let's do it again'."