Tuesday, June 19, 2007

Bristol And Sanofi Still Shouldn't Merge

Matthew Herper (Reuters)

Peter Dolan, the disgraced former chief executive of Bristol-Myers Squibb, should have stuck to his guns.

Dolan was ousted after he botched negotiations with generic drug firm Apotex over the blood thinner Plavix, the second-biggest drug in the world, with annual sales of $6 billion. Even though Bristol (nyse: BMY - news - people ) splits profits for the $4-a-day pill with Sanofi-Aventis (nyse: SNY - news - people ), the drug is still a major source of earnings. To hold on to it, Dolan cut a deal meant to keep Apotex at bay. Instead, Apotex took advantage of the fine print to launch its generic anyway--without the threat of substantial penalties.

Today a federal New York judge ruled that the patent on Plavix is still valid and said Sanofi (Plavix's inventor) was entitled to an injunction to keep Apotex from launching a copycat. In other words, Dolan could have just dug in and waited for the ruling.

Now that it is clear that Bristol and Sanofi are going to keep the rights to their big seller, expect a new round of speculation that the two companies should merge. After all, Sanofi could use some help: its much-touted obesity pill Zimulti, once hyped as potentially the biggest drug ever, was unanimously panned by a panel of doctors advising the U.S. Food and Drug Administration, paving the way for an eventual rejection.

But such a deal didn't make sense when rumors of negotiations surfaced in February (see "Why Bristol and Sanofi Shouldn't Merge"), and it doesn't make sense now.

A sale by Bristol would run the risk of derailing the company's pipeline.

Bristol-Myers recently launched medicines for rheumatoid arthritis and leukemia, and just today it was granted a fast FDA review for a new chemotherapy for breast cancer. Treatments for diabetes and breast cancer are in development.

Sanofi-Aventis, by contrast, seems to be chronically overestimating its medicines. The failure of Zimulti (formerly known as Acomplia) resulted partly from the company's decision to study the drug mainly in obesity trials where many patients dropped out, making it more difficult to judge the drug's risks. Worse, Sanofi insisted that the side effects of depression and anxiety were manageable. Looking at the same data, the FDA saw a risk of suicidal thoughts. The FDA also rejected another medicine, for heart rhythm problems.

If Sanofi was going to buy Bristol, the time to do it was before the Plavix ruling and before Zimulti was deep-sixed. Now, Bristol could look attractive to other pharmaceutical companies, like AstraZeneca (nyse: AZN - news - people ), GlaxoSmithKline (nyse: GSK - news - people ) or Pfizer (nyse: PFE - news - people ), leading to a bidding war. Moreover, the company, under new chief James Cornelius, seems to be on a pretty even keel. It doesn't have to sell to anyone.

A deal might be bad for Sanofi too. Big drug company mergers have a lousy track record for creating value. Pfizer's mega-mergers haven't generated a steady stream of new blockbusters. In fact, that drug giant went nearly a decade between blockbuster drugs (see "Pfizer's New Blockbuster Drug"). Glaxo and Astra have experienced similar droughts.

There does seem to be a treatment for drug industry malaise: crisis. For a while, Bristol was the poster child of big patent expirations, bad behavior and failed potential blockbusters (before the failures of Zimulti or Pfizer's good cholesterol drug, torcetrapib, there was Bristol's unapprovable heart pill Vanlev.)

But those troubles led to a more spare company, focused on smaller but more lucrative markets like cancer and rheumatoid arthritis. Similarly, Merck (nyse: MRK - news - people ) has done well since the Vioxx debacle, launching big drugs like Januvia for diabetes and Gardasil to prevent strains of the virus that causes cervical cancer.

Before they look to dilute their shares through a desperate deal, Sanofi executives should take a good look in the mirror and figure out how to do better with the large company they created through a gigantic merger just three years ago, when Sanofi-Synthelabo bought Aventis for $64 billion.

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