European drugmakers wary of mega-mergers

LONDON (Reuters) - European drugmakers may sit out this dance.

Merck & Co Inc's move to buy Schering-Plough Corp for $41 billion just six weeks after Pfizer Inc's $68 billion purchase of Wyeth signals a new round of consolidation in the global industry.

For now though, European giants like GlaxoSmithKline Plc, Novartis AG, and Sanofi-Aventis SA show no sign of joining in -- notwithstanding that all three were themselves created by such mega-mergers.

"U.S. consolidation is technically easier to do," Jeffrey Holford of stockbroker Jefferies said. "In Europe, it is a lot more difficult and we don't see the same degree of consolidation, if any."

Any cross-border bid consisting largely of foreign shares would be risky as investors in the target company may not want to hold onto them and could sell them back into the market, creating a so-called flowback problem.

The problems of slowing drug sales, looming patent expiries and sliding prices, as politicians ratchet up pressure on the industry, are the same on both sides of the Atlantic.

But leaders of Europe's big drugmakers have been vocal in airing doubts about large-scale deals since Pfizer shocked the industry with its move on Wyeth in January.

They say mega-mergers may bring a short-term earnings boost, but do not usually fix the long-term issue of inadequate pipelines of new drugs.

Andrew Witty, chief executive of Glaxo, the world's second largest drugmaker by sales after Pfizer, has said he is not interested in large-scale M&A. [ID:nL5712089]

Novartis CEO Daniel Vasella also said he has no further plans for big transactions because Novartis was committed to buying U.S. eyecare group Alcon.

Sanofi's new CEO Chris Viehbacher does not rule out a big deal completely but made clear last week it was not on his agenda for now.

Instead, Viehbacher will focus on deals below $15 billion.

Roche, meanwhile, said it was not interested in mega-mergers and is pre-occupied with its planned $46 billion buyout of minorities in Genentech -- a deal which may be "mega" in cash terms but which Mirabaud Securities analyst Nick Turner says actually resembles a share buyback.

"As far as European consolidation goes, we see any deals as unlikely," said Simon Mather, an analyst with WestLB.

ASLEEP AT THE WHEEL?

Not everyone is convinced the Europeans have got it right.

"The Europeans are asleep at the wheel -- they need to react to this. They cannot allow the U.S. peer group to consolidate and effectively take market share away from them," said Navid Malik, an analyst at Matrix Corporate Capital.

Market share is important because drugmakers need dominance in their selected therapeutic areas so they can better pitch for business with insurance companies and governments.

Both the Merck/Schering and Pfizer/Wyeth deals were driven by a desire to cut costs and take capacity out of an over-supplied industry.

Similar overcapacity also exist among European companies, with AstraZeneca Plc and Sanofi the most obvious examples, according to UBS analyst Gbola Amusa.

"Sanofi and AstraZeneca still have a lot of excess capacity and I would expect that at some stage in the future we would see somewhat sizeable deals from both of them," he said.

But investors hoping AstraZeneca -- a perennial rumored takeover target -- will be sold at a juicy premium may be disappointed as long as uncertainty remains over patent protection for its key cholesterol drug Crestor.

"Any CEO who bought AstraZeneca and later lost Crestor in 2010 would also probably lose their job, and that is enough of a poison pill to prevent Astra from being bought," Amusa said.

Instead, he saw AstraZeneca itself moving to do an acquisition, with mid-sized specialty drugmaker Shire Plc a possible target.

One obvious takeover candidate left on the shelf by the latest deal-making is Bristol-Myers Squibb Co, probably the subject of more takeover rumors in recent years than any other drug company.

It has deals with both AstraZeneca, on two experimental diabetes drugs, and Sanofi, on blood thinner Plavix. But it could well prove too big a bite for similar-sized AstraZeneca, while Sanofi has made clear its partnership is sufficient for now.

(Editing by Dan Lalor)