Drug mergers: Abandoned at the altar

Having missed out on Aventis, what next for Novartis?

IT IS rare for Daniel Vasella, the ambitious and inexhaustible boss of Novartis, to lose a fight. So was he really defeated by the mighty French establishment in the recent bidding war for Aventis?

For years, Mr Vasella has been advocating consolidation in the drug industry as loudly as France's nationalists have shouted about the need to maintain a distinguished pharmaceutical tradition dating back to Louis Pasteur. In the end, the nationalists secured their prize, as Aventis agreed to be bought by another French firm, Sanofi-Synthelabo.

The case for marrying Aventis to Novartis was much clearer than that for pairing it with Sanofi. Novartis has superior distribution to doctors in America, the world's most valuable market. Novartis also gets better results than Sanofi or Aventis from its research labs. It boasts that some 25% of its sales come from products less than five years old, including 11 drugs approved by America's Food and Drug Administration (FDA) since January 2000 - a bigger percentage than Sanofi. Some 40% of Sanofi's sales are exposed to patent expiration as early as 2006, compared with 17% for Novartis. There would have been lots of potential synergies, including trimming the combined workforce (trickier in an all-French merger). Lower Swiss corporate-tax rates - 18% compared with 34% in France - would have saved $100m a year, according to Lehman Brothers.

No wonder that even French business leaders were openly critical of their government's interference. For instance, Ernest Antoine Seilliere, boss of the French employers' association, MEDEF, said that in future the government should not express its view of a takeover bid in public.

So, did Mr Vasella, recently declared the “most influential European business leader of the last 25 years” by the Financial Times, overestimate his powers? Maybe. On the other hand, he was invited to bid as a “white knight” by Aventis, and, for all his flirtation, he never actually did - though he probably gained valuable market data from Aventis in the process. Meanwhile, Aventis shareholders benefited from his flirtations - Sanofi had to raise its offer.

Mr Vasella's interest in Aventis has prompted some observers to ask where Novartis is now heading. Might his flirting with Aventis, however half-hearted, be evidence that he is finally giving up his dream of buying Roche, a significantly more compelling fit located in his own Basel backyard? Novartis has built up a stake in Roche of close to 33.3%, the level at which it would have to tender to buy the remaining shares. The two firms have extremely complementary pipelines and distribution channels, Novartis doing well with general practitioners, Roche with more specialist doctors.

True, it was never clear precisely how Novartis could acquire Roche, even back in 2001 when Roche was struggling. A company formed by the founding Oeri and Hoffmann families has a controlling stake in Roche, and its shareholder agreement, which precludes selling the stake, does not expire until 2009, a year after Novartis is likely to require Mr Vasella to retire. And although in the drug industry there is probably no share-ownership structure too complicated to unravel for the sake of an acquisition, especially between two Swiss firms, why would the family shareholders support a sale now, when Roche is performing so well?

Having embraced the cause of consolidation, Mr Vasella may end up left on the sidelines. With Aventis tying the knot, and Roche a committed spinster, there is no obvious spouse. More worrying for such a crusader for shareholder value, Novartis shares have languished since 1997 - though it is unclear whether this reflects his failure to merge, or his desire to do so.

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