Many acquisitive corporate executives in the marketing services industry will be familiar with the Pandora’s Box syndrome. You buy a company, open it up to have a good look at what’s inside and everything flies away, leaving only hope behind. And, often as not, precious little of that.
Consider some of the major US acquisitions made by the likes of Valin Pollen in the Eighties – though in that particular case the picture was complicated by a major conman. In other industries, the ill-conceived entry of the Japanese technocrats into the American movie industry springs to mind (Hollywood has yet to apologise or make any meaningful expression of remorse).
Despite such high-profile examples, it is unusual for manufacturing companies in industries with tangible assets – which marketing services companies notoriously are not – to suffer from the Pandora’s Box syndrome.
There is usually, in Sir James Goldsmith’s memorable phrase, something of value for the predator to “unbundle”. This may subsequently vaporise, but it is the perception of this value that is the parent of the takeover manoeuvre.
Which brings me to the latest spate of acquisitions in the world pharmaceuticals market. Monday brought news that Upjohn, of the US, and Sweden’s Pharmacia are to tie the knot in a $13bn (8.6bn) deal that will rocket the merged group into the big league of international pharmaceutical players.
There is, as others wiser than myself have written before, no such thing as a merger. Invariably there is a dominant partner and consequently, to one degree or another, a takeover. But Pharmacia & Upjohn, or whatever it will be called, comes close. These are equally sized companies, in common markets, which are going to establish a head office in relatively neutral territory – in this case, flatteringly, London.
That aspect alone sets the deal apart from recent ones such as Glaxo’s monumental 9.1bn takeover of Wellcome earlier this year and German company Bayer’s acquisition of Marion Merrell Dow in the US for 4.4bn. These deals followed Boots’ pharmaceuticals division being swallowed by German giant BASF and Beecham acquiring the over-the-counter interests of Sterling Health.
The principle behind this cosmopolitan consolidation has been that the terrible pressure on margins wrought by high research and development costs, expiry of patents and increasingly burdensome, complex and inconsistent regulatory demands means that economies of scale are the only logical way forward for the industry.
I now turn to the major pharmaceutical corporate play of the moment, namely RhÃÂ´ne-Poulenc Rorer’s (RPR) 1.7bn hostile bid for the incorrigible Fisons. I call it incorrigible because of Fisons’ chequered past.
Once an interest of ICI, the company departed from its fertiliser roots to become one of the world’s fastest-growing drugs companies. Then the dreaded American regulator, the Food and Drug Administration, struck by banning the hayfever treatment Opticrom. This was followed, in 1993, by the resignation of chief executive Cedric Scroggs after it was revealed that the company’s profits had been artificially inflated.
Fisons and its share price were left in a sorry state. New chief executive Stuart Wallis embarked upon an eccentric, but apparently successful, strategy of transformation. In a high-speed rationalisation, Wallis has cut the company’s head office sites from six to one. He has also scythed the number of manufacturing plants, sold the firm’s instruments division to Thermo-Electron of the US (subject to regulatory approval) and entertained offers for its laboratory supplies business.
But, most controversially of all, Fisons has sold its R&D arm to Astra of Sweden for 200m. This has defied a tenet of faith of the developing pharmaceutical industry’s creed. The whole point of the swathe of takeovers and “mergers” is that R&D is expensive and that there is consequently strength in numbers. But nobody had dared suggest that a company can do without R&D altogether.
Wallis’ idea, not entirely original, is that a pharmaceutical concern can prosper by producing other companies’ products under licence and by reaching marketing agreements with other majors.
I say the idea is not entirely original because rival firm Medeva, which until recently was in merger discussions with Fisons, has built its growth almost entirely on such a strategy.
The basis of the strategy is to cut the substantial cost-base which is causing companies the trouble in the first place, and to piggyback other firms’ expensively-bought market share by bringing a cracking distribution network to the party.
Little wonder that there was perceived to be logic to a merger with Medeva. If distribution is the selling point, companies will want to provide as much of it as possible.
The hostile approach by RPR is something else altogether. There may well be some attractions to Fisons’ products and there could be some distribution expertise that RPR covets, but it is hard to see what else RPR might get out of a merger.
In part, this is because of some weakness in Wallis’ rescue operation. It seems churlish to say so, considering that Wallis has practically doubled Fisons’ share price from little more than 100p at the start of the year, but his strategy has been about stabilisation rather than growth.
More than half of Fisons’ recent sales have been through its anti-asthma treatment Intal. This 27-year-old drug has not found a suitable successor in Fisons’ Tilade and has lost share to newer rivals. There are no new products on the horizon – a situation that is unlikely to change now that the firm’s R&D function has been discontinued. In other words, the cupboard is bare and the growth that Wallis is looking for depends largely on successful R&D development by other companies. That is a high-risk strategy in a highly competitive business.
All of which makes you question RPR’s motives. Chairman Robert Cawthorn is understood to have said that the alternative to collaboration with his company is a sure slide into oblivion for Fisons. He will have done his homework. We can only hope that Fisons does not turn out to be his Pandora’s Box.
Broadly speaking, there must be some tough lessons here for operators within the industry. R&D may be expensive, a wearisome drag on profits and take a long time to offer a return on investment, but it is the lifeblood of the market. When it comes right, it provides the industry with its essential nutrition.
And where are companies such as Fisons without it? You’re dead right they are.
George Pitcher is joint managing director of media consultancy Luther Pendragon.