Drug mergers: Patent nonsense

Date: 27/03/04

The bizarre tale of three drug firms and the French prime minister

THERE is capitalism, and then there is France. The latest example of l'exception française is a contorted takeover battle involving two French drug firms. In January, Sanofi-Synthélabo launched a hostile €46 billion ($55 billion) bid for Aventis, a bigger rival. Aventis rejected the offer, setting the stage, it seemed, for a classic bidding contest. The market soon valued Aventis at €4 billion above the original bid and, as expected, a white knight appeared in the shape of Novartis, a Swiss drug firm.

Alas, foreigners who enter a French bidding battle require a good command of semaphore, to understand the coded signals that start to fly around. No sooner had Novartis, pressed by French financial regulators, admitted that it was exploring the feasibility of a counter bid, than in stepped Jean-Pierre Raffarin, France's prime minister. Last week, he said that any bid would have to serve the French national interest. One concern was the country's ability to counter bio-terrorism, which seems to require national ownership of a vaccine producer. (Never mind that even America buys defensive vaccines from France.) This bizarre intervention was widely seen as a signal to the Swiss to back off.

Strictly, Mr Raffarin has no legal standing at all in the matter. But this is France. For Novartis to bid in the face of government opposition could be hazardous. After all, the government pays most of the country's medical bills. Novartis said this week that it will go ahead only if the government approves, and Aventis agrees to be bought. Don't hold your breath.

Still, to give Mr Raffarin pause for thought, Daniel Vasella, the boss of Novartis, also boldly set out this week his case for buying Aventis, pointing out that Novartis and Aventis have complementary drugs in important areas such as cardiovascular disease, diabetes and cancer.

Both firms are products of a previous round of European drug mergers. Novartis emerged from two Swiss firms, Sandoz and Ciba-Geigy, while Aventis is a combination of the drug businesses of France's Rhone-Poulenc and Germany's Hoechst. Since those pairings, however, the stakes have risen with the formation of Glaxo-SmithKline (from the merger of Glaxo Wellcome and SmithKlineBeecham), which created the world's second-biggest firm, behind America's Pfizer. A Novartis-Aventis pairing would surpass GSK in size.

In pharma, the trigger for such rounds of consolidation is usually worry about a weakening product portfolio, as drugs approach the end of their patent life. Sanofi faces an accelerated form of this risk. Its main product - generating one-third of revenues - is a blood-thinning drug, Plavix. All being well, its patent will last until 2011. But it is being challenged in American courts, and there is every chance it will be struck down. That may be why the firm is so keen to diversify by acquiring Aventis.

As for the prime minister, he is not only telling Novartis to clear off, but also telling Aventis that it should stop resisting the Sanofi bid. So there you have it: a company with problems should be free to take over a bigger, stronger rival, and no foreigner should be allowed to intervene. C'est peut-être bien du capitalisme, Jim, mais pas tel que nous le connaissons.

The bizarre tale of three pharmaceutical companies and the French Prime Minister.

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