How a pharma megamerger could squelch R&D
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Big drug companies have been buying scrappy biotechs to expand their pipelines, but the potential megamerger between AstraZeneca and Bristol Myers Squibb could flip that script.
Why it matters: Combining two drug giants with overlapping portfolios could put cost efficiencies ahead of innovation.
- It could also revive the late 1990s/early 2000s belief that big mergers are the ticket to sustained earnings growth.
The big picture: A Sunday FT report that the companies were exploring a tie-up to create a $400 billion drug behemoth left a lot of unanswered questions about how they'll manage their overlapping pipelines and consolidate sprawling operations.
- The deal would combine U.K.-based AstraZeneca's powerhouse oncology portfolio with BMS' leading immunology franchise and other established medicines.
- But it could force difficult trade-offs as the companies combine pipelines and manufacturing while navigating possible antitrust concerns.
- "It reopens the door to those sort of scale-driven acquisitions that pharma doesn't really do that often," said Beth Snyder Bulik, senior analyst at eMarketer.
- If the potential deal doesn't go through, "then it reinforces the targeted strategy" of snapping up smaller biotechs, she added.
Between the lines: Megamergers promise billions in efficiencies — including the possibility of layoffs. One of the most recent was BMS' deal to buy Celgene in 2019.
- An AstraZeneca deal could force the combined companies to mash overlapping pipelines, kill off duplicative research or lower-priority projects and squeeze R&D in the name of cost savings.
- It could also shift interest away from acquiring smaller companies with one or two promising treatments in development, analysts said.
- "A deal of this size would significant[ly] limit additional near-term business development, which therefore can negatively impact the biotech ecosystem," said Matt Phipps, a partner with William Blair.
Wall Street generally reacted with skepticism, and AstraZeneca shares were down almost 7% Monday.
- "We don't see logic in combination of AZN and BMY," TD Cowen wrote in a note to investors. It's "more than a head scratcher," wrote Jefferies analyst Michael Leuchten.
- AstraZeneca is commonly seen as having one of the strongest pipelines in the industry.
- The deal could give it a bigger geographic footprint in the U.S. But the company already has a substantial presence and announced $50 billion in planned R&D and manufacturing investments in the U.S. in the last year.
- BMS, which faces major patent expirations, would have far more to gain from such a deal, analysts said.
- "It's why you don't see a lot of big deals," Snyder Bulik said.
What we're watching: Whether the Trump administration weighs in, given its past antipathy to Big Pharma. British regulators could also object to one of the biggest companies in the U.K. redomiciling operations.
- Antitrust scrutiny would likely require one or both companies to sell off some of their pipelines, or shelve some drug development.
- AstraZeneca declined to comment and BMS did not respond to a request for comment.
