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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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In the Pipeline

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March 14, 2007

Schering-Plough Goes Shopping

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Posted by Derek

Schering-Plough woke everyone up with a large surprise bid for Organon, the long-suffering pharmaceutical arm of Akzo Nobel. Many people are spinning this as a good deal for everyone involved, and that may be. But then again, people always seem to say that about mergers and buyouts, and they're not always right, are they?

Organon has strengths in endocrinology and CNS, two areas where Schering-Plough has never had much of a presence (despite a number of shots on goal in the latter one). The problem is, even the companies that have had success in CNS have had to take a lot of shots, because it's that kind of field. No one really understands antipsychotic and antidepressant drugs, for example, and thinking that you do has been a recipe for trouble. The biggest prospect in Organon's portfolio is asenapine, an antipsychotic, which Schering-Plough seems to have their eye on. But that's a drug that Pfizer walked away from last year, citing "a commercial analysis of the compound". It was my impression that that commercial analysis took place after Pfizer got a look at some of the clinical data, though, and I see that I'm not alone in thinking that way (nor alone in my worries about betting big money on drugs in this area).

There's also the question of how much Schering-Plough is paying. When Bayer bought up German Schering (no relation!), they paid around eight times earnings (and that was already more than they wanted to spend, thanks to Merck-Darmstadt). Schering-Plough is paying around 14 times earnings for Organon. As pointed out here, Akzo Nobel was hoping to raise 9 billion by spinning Organon off, and estimates were that an outside buyer might be willing to go as high as 10. Schering-Plough offered 14.5, which news seems to have been greeting by incredulous delight over in Holland, as well it might. Words like "phenomenal" have been used.

There's no word yet (that I've seen) on what will happen to various sites and divisions of the two companies after the buyout goes through. You'd have to assume that there will be some real cuts - that's the only way to make that price work out - and I'd guess that it'll be more on the Organon side. Most of the press coverage has been about how Schering-Plough is picking up all these late-stage drugs, with nothing about the earlier research at all. (Of course, my assumptions about where a drug company will make cuts in research has already been shown to be imperfect, so keep that in mind. . .)

Well, Fred Hassan is a dealmaker, no doubt about it. And it's true that you have to take risks to make it in the drug industry. As (disclosure!) someone who still holds a reasonable amount of Schering-Plough stock, I hope this one works out for him. It'll be interesting to watch.

Comments (18) + TrackBacks (0) | Category: Business and Markets | The Central Nervous System


COMMENTS

1. Marie on March 14, 2007 12:18 PM writes...

Derek,

You failed to accurately portray Organon's portfolio. The company's strongest presence is in the area of women's health. Organon has the market leading gonadotropin used in IVF fertility treatment. They also market NuvaRing and Implanon, two extremely novel approaches to contraception. And, the company has a very strong presence in Anesthesia - including a late stage pipeline reversal agent that many experts are saying will revolutionize the therapeutic area.

Maybe you're right that SP is paying a bit much to acquire the company, but it is a strong mid-sized pharma that will allow Schering Plough to expand into new therapies.

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2. befuddled on March 14, 2007 2:16 PM writes...

Never have understood why someone would want to buy a company and then lay off many of the people who made it worth buying. But this seems to be the way it goes.

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3. daen on March 14, 2007 6:31 PM writes...

befuddled, at some point if you're paying $14.5bn for something, you're going to have to raise money through the corporate markets by issuing bonds. Schering-Plough have $5.93bn in cash and liquid market instruments, so they'll be issuing about $8.5bn in new bonds - that's a *lot* of debt, which means you have to make "savings" elsewhere to service that debt. S&P (the credit rating agency) have already reacted by putting Schering-Plough on their CreditWatch, although they also optimistically remark that Schering-Plough's management has "a demonstrated history of conservative financial policies and actions" (translation: S&P expect Schering-Plough management to fire a bunch of people and shut down some sites if Schering-Plough want their bonds off the watchlist).

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4. befuddled on March 14, 2007 10:36 PM writes...

daen,

To be sure, Schering Plough is taking on a lot of debt to buy Organon. But if they're going to dismantle the organization that created the pipeline they're buying, is it worth it?

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5. Egon Willighagen on March 15, 2007 3:34 AM writes...

Living quite close to the Organon sites in NL, I heard in the Dutch news that SP plan to reduce costs in the next few years by 500 million. Assuming that one FTE costs about 100 thousand dollar, even if SP is able to get 80% of this reduction from expenses other than human resources, it will still mean layoffs of around 1000 workers. And as it normally means cuts in R&D which Organon has seen several of in the past years, I fear unpleasant times :( The fact that chemoinformatics education in NL has dropped significantly in the last years, I have some feeling where most R&D costs reduction will be.

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6. Derek Lowe on March 15, 2007 10:43 AM writes...

Be, I know what you're asking, but I think that you're not cold-hearted enough to realize what the answer is.

Schering-Plough wants the development pipeline of Organon. What the organization might discover in the future is not what they're buying, and if everyone who discovered the current drugs has to be let go to make the deal work, then they've still bought exactly what they were shopping for.

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7. Hap on March 15, 2007 12:50 PM writes...

Why couldn't SP have simply offered that money to Organon/AN for the exclusve and irrevocable rights to that research - if that's all they wanted, they could have had it, and probably had the production facilities thrown in. Organon would then have the money to support their research pipeline or to make themselves worthwhile to AN, and SP wouldn't have the employment liabilities associated with owning the company.

This purchase seems like an argument for getting out of research altogether anyway - if you can't generate products (or trust others to generate them for you - if you thought Organon would generate more products, it would be worth it to run them rather than nuke them and take the pipeline), then being in the business seems like a waste of money. It might be better simply to develop and market others' products and not worry about making them yourselves. What that implies for the future of drug people isn't really rosy, though.

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8. GA on March 15, 2007 1:05 PM writes...

I think y'all are a little quick to jump on the gun here with the dire predictions. There doesn't seem to be much of an overlap between SGP and OGS in terms of therapeutic areas. I tend to look at this as adding two new therapeutic areas and a few advanced drug candidates.

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9. Jimbo on March 15, 2007 3:13 PM writes...

"I hope this one works out for him"

It always works out for Fred Hassan and his bank account. The question is, whether it will work out for the shareholders.

And I'm sure it is not gonna work out for the employees.

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10. befuddled on March 16, 2007 6:13 PM writes...

Derek,

I know what you're saying, and it's true that I'm a bit of a softy when it comes to people's jobs. But there's also a more economically rational case to be made against slash-n-burn acquisitions. First, as Hap points out, there is more than one way of acquiring a pipeline.

Second, in my point of view, a pipeline sans people only makes sense if you 1) are just trying to placate Wall Street or 2) expect everything in the pipeline to work without more creative input from the people who developed it in the first place.

Neither seems like a good way to run a railroad (or wonder drug factory).

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11. Derek Lowe on March 16, 2007 7:26 PM writes...

Unfortunately, I think that your first possibility obtains here. Your second point is a good one, though, and my own situation is giving me a chance to watch the same situation from a distance.

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12. fred on March 18, 2007 4:07 AM writes...

Fred Hassan has made a number of statements in the press claiming that there will be minimum job losses due to the complementary research profiles of both companies. These guys have also mentioned their excitement at gaining a number of european research sites that they have mentioned as having a role in the future of the company. Wouldn't they look a little silly if they did a u turn on this or am I just being naive.

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13. Organees on March 18, 2007 10:10 AM writes...

Hassan and AKZO are shouting loudly: 'Do not worry, carry on with your work!'. They shout it as loud as AKZO used to shout: 'Selling Organon is not preferred!'. Selling Organon for 11 billion euro is preferred obviously.

I do not know how things will go, but U-turns have been more a rule than exception here lately.

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14. Eric on March 19, 2007 1:00 AM writes...

Really pathetic for the employees that have been employed by a company cheating them while keep telling them everything will be OKay, they just want cash in the pocket

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15. burt on March 19, 2007 7:41 AM writes...

"Fred Hassan has made a number of statements in the press claiming that there will be minimum job losses due to the complementary research profiles of both companies." That's what he told us when he sold us to PFE. Lying weasel. I think the phrase he used was "most of you should move on to the new company" In fact, I think something like 80% of PHA was pushed unceremoniously out the door.

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16. PKmike on March 20, 2007 10:05 AM writes...

Buying a company and firing everyone does not make sense to the average scientist -BUT, business is not science. When BMS paid 6.5 billion for DuPOnt Pharma, they assured us the job loss would be minimal. Guess what actually happened?

The point is, these mergers and acquisitions are done to make money - pure and simple.

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17. Hap on March 20, 2007 1:37 PM writes...

They'll make money doing this - but slash-and-burn farmers can make lots of money too, so long as there are more forests left for them to plow under. When they run out of land, however, they rather quickly cease to exist (along with a substantial part of the population, if slash-and-burn is how you grow your food).

Of course, when you've outsourced your research either to low-paying jobs in country (startups hoping to make money in equity) or out-of-country, and you don't do your own research anymore, it might be harder to argue to the government why it's not in their (or their constituents') best interest to collectively bargain with (or actively "manage") the pharmaceutical industry. (an argument against my 2nd suggestion above) If you can avoid that pitfall, there is of course the problem of where your next drugs will come from, because if there aren't people doing the research, there won't be any drugs for the larger companies to market. (It's hard to see how lots of people will be clamoring to spend ten years of their lives in school for low-paying, uncertain jobs with long hours in the presence of more lucrative alternatives.)

In addition, if you depend on other people to generate the drugs you market, the companies that make them for you might at some point decide it's cheaper and more profitable to market it themselves, particularly if they're big enough to eat the initial costs of doing so (Dr. Reddy's, etc.).

I don't doubt that someone is making money, and there isn't a good reason to expect that the companies involved would not act in this way. If acting in the short-term interest extinguishes the opportunity for the long-term survival of the industry, however, then making money in this way is the financial and moral equivalent of "smash-and-grab" robbery, with similar consequences to all involved.

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18. Joy on June 6, 2007 12:48 PM writes...

I have consulted for several pharmas in NJ including Organon, Novartis, BMS, and I'm currently at Pfizer in Manhattan. These pharmas are examples of the changes that are almost automatically made when companies are acquired and 'merged.' Job loss is unavoidable. The purchasing comapny is convinced that they don't need two of the same kind of employees, so they get rid of one and it's almost always the one that was acquired, not the one acquiring. To make up for the money you spent to acquire the company, you cut corners by getting rid of what most believe to be the 'fat' and work as lean as possible for maximum financial gain. The saying is true 'the more money you make, the more money you want.'

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