German Drugmakers The Eternal Patient

From Big Pharma to bigger pharma? The global pharmaceuticals industry is in the midst of a consolidation wave, but Germany's once proud drugmakers are being left on the sidelines for lack of cash and ambition.
The cure for the industry's ills?

It's becoming routine: the announcement of another large takeover in the pharmaceuticals industry, but German companies aren't involved.

Israel's Teva, the world leader in generic drugs, offered a total of $40 billion, or €35.7 billion, for its U.S.-based competitor Mylan.

If the deal goes through, it would create the world’s largest generics giant with annual sales totaling almost $30 billion.

Mylan could once have been a great asset for the German company Ratiopharm. But such high-profile takeovers are the stuff of long gone dreams.

Instead, Ratiopharm was gobbled up by Teva five years ago. Adolf Merckle, the late owner of Ratiopharm, had trusted in the company’s strength to grow organically for years. But after he lost money from bad investments during the financial crisis, he committed suicide and the company was left to pay off his debts.

It might be a unique case, but in the end it’s somewhat typical for German drugmakers these days. No other industry is witnessing as many mergers and acquisitions as the pharmaceutical business is right now.

The first few months of 2015 alone saw 15 acquisitions valued at more than $1 billion.

And in no other industry are German companies more sidelined. The top deals are almost exclusively handled by American firms.

Boehringer has explicitly rejected the idea of larger acquisitions, instead betting on home-made medications.

Only one German firm has made a larger acquisition over the past year: Bayer bought its U.S. competitor Merck & Co.’s over-the-counter division for $14.2 billion.

The rest of Germany's old pharmaceutical industry is sitting on the sidelines. In their wake are newly formed players, while competitors are using acquisitions to get their hands on new top drugs and hedge against expiring patents and research flops.

Boehringer highlighted that decline once again last week. Germany’s second-largest drugmaker, based in Ingelheim in Rhineland-Palatinate,  announced a slump in pharmaceutical sales by seven percent to €10.1 billion, or $11.2 billion.

Just a couple of years ago, Boehringer used to grow faster than the market.

This has changed. A few months ago, CEO Andreas Barner dropped a new hepatitis medicine because U.S. competitor Gilead already has a stronghold on the market. The California-based firm absorbed biotech company Pharmasset for $11 billion three years ago, laying the cornerstone for its success with the new hepatitis C pill Sovaldi.

Boehringer has explicitly rejected the idea of larger acquisitions, instead betting on home-made medications like Spiriva for pulmonary diseases and Pradaxa to battle atrial fibrillation – and therefore had to give up the hepatitis drug market.

 

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German drugmakers’ exit from the world stage began with the breaking up of Frankfurt-based pharma giant Hoechst in the 1990s. Another blow to the industry was dealt by risk-averse investor Susanne Klatten when she decided to sell the chemicals division of Altana, once a member of Germany's blue-chip DAX stock exchange, in 2006.

The amount of local pill production has since been decimated. Bayer is leading the field, followed by the ailing family-run Boehringer as well Darmstadt-based Merck, a stock-exchange listed but family-dominated chemicals company (no relation to the U.S.-based Merck & Co) with annual drug sales of about €6 billion, or $6.7 billion.

Far behind the top three comes Merz, with its Alzheimer’s medicine Memantine, as well as Grünenthal based in Aachen. The latter's privately run business became infamous in the 1960s, when its sleeping pill Contergan, also known as Thalidomide, caused thousands of cases of birth defects. Today, the firm mostly makes painkillers. But with annual turnover of just over $1 billion, both Merz and Grünenthal are too small to play with the Big Pharma stars around the world.

The fact that the handful of remaining major German pill producers had no part in the recent round of takeovers originates both in a lack of funds and an unbroken faith in their own home-grown strength.

“The current wave of acquisitions in the pharmaceuticals industry doesn’t change the fact that we want to grow organically,” Karl-Ludwig Kley, head of Merck, said recently, adding “our drugs pipelines are full."

Where this unimpaired optimism comes from is unclear. Merck laboratories haven’t produced a single successful medication in almost three decades. The company purchased the current top sellers, Rebif against multiple sclerosis and the cancer medicine Erbitux, via acquisitions years ago.

The Darmstadt-based firm’s path into stagnation has been paved with failed drugs. In 2014, Merck’s pharmaceuticals division grew by a meager 1.7 percent.

“Merck’s internal research and development has been among the worst in the industry over the past decade,” according to the analysts of U.S. investment company Morningstar.

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Developing medication internally takes considerably longer than acquiring them through corporate takeovers. Only time will show whether or not the drugs currently in the pipeline, for example those against cancer, will work.

“The turnaround in pharma development will only be achieved when we have registered a new drug,” Merck's Mr. Kley admitted.

While Merck hasn't made any acquisitions, at least Mr. Kley has recently won a prestigious partner for cooperation. Together with U.S. pharma giant Pfizer, the inventor of Viagra, Merck wants to push a medication supposed to stimulate body defense systems to fight tumors.

If successful, Merck will receive a premium of up to €2.3 billion, or $2.5 billion. But the U.S. deal is no guarantee for success. “Pfizer hasn’t always had a sixth sense in the past either,” a long-time industry expert said.

Boehringer is similarly stubbornly banking on its own ability to innovate.

For a long time, the company from Rhineland-Palatinate served as a role model for Merck, representing solid growth and new successful drugs.

But that’s in the past. The success seems to have made Boehringer sloppy.

Sales are dropping, while profit is stagnating. The top pill Pradaxa to prevent strokes hasn’t lived up to expectations. To avoid costly lawsuits because of alleged side effects, such as increased bleeding, Boehringer had to accept an expensive settlement of $650 million in 2014.

Merz has spent several hundreds of millions of euros to turn itself into a specialist in the cosmetic medical sector.

But countering these developments by acquiring companies with medicines ready for licensing is not an option for Boehringer's boss, Mr. Barner.

“What counts is our own research,” he said. The trained physician is betting on organic growth and only wants to risk selected “targeted acquisitions.”

But that's a risky strategy: While sales of the firm’s most important products, like Spiriva, are cooling down, no new blockbusters – top-selling new drugs – seem to be on the horizon.

It can’t be the lack of money that’s keeping Mr. Barner from buying. While the family-run business doesn’t have access to the stock market for cash, its own reserves and bank loans amount to a sum in the lower two-digit billions, insiders said.

Financial limitations, however, are definitely curbing the growth ambitions of Germany's smaller players, Merz and Grünenthal.

Grünenthal could only afford the takeover of a small pill producer in South America in 2013, which was part of the reason for last year’s 28-percent increase in sales. But with total turnover amounting to just about $1 billion, Grünenthal can’t join the global takeover game.

Things aren’t looking any better at Germany’s smallest pharmaceuticals firm, Merz. Business is stagnating, patents for the Alzheimer’s drug Memantine, which most recently accounted for €400 million of the total €1 billion in sales, are running out.

Considering its limited finances, the company is trying to take the initiative. Over the past couple of years, Merz has spent several hundreds of millions of euros to turn itself into a specialist in the cosmetic medical sector.

But this strategy, too, isn’t a sure-fire success. With its beauty drugs, Merz is set to compete with the far larger U.S. competitor Actavis, which recently took over Allergan, the maker of Botox, for $65 billion.

 

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So the only German firm doing well at the moment is Bayer, with annual drug sales of €12 billion. Its five new top-sellers alone have brought in almost €3 billion in 2014. Analysts estimate that the five products could achieve double that in a couple of years.

Unlike its German competitors, Bayer at least has a little stake in the global takeover game. Besides the OTC business from Merck & Co., the company also purchased the Norwegian pharmaceuticals specialist Algeta, complete with the promising cancer treatment Xofigo.

And all of that after Bayer’s drug division was on the brink of collapse about a decade ago, after the withdrawal of a cholesterol-lowering medicine. Lipobay. because of its grave side effects.

To master the crisis, the Rhineland-based company reduced the number of research areas and became more focused. It later also turned to acquisitions, buying competitor Schering in 2006.

 

This article originally appeared in weekly business magazine WirtschaftsWoche. To contact the author: [email protected]