Wall Street is buzzing again on the news that two of the world's top pharmaceutical companies -- American Home Products Corp. and SmithKline Beecham plc -- are in merger talks. If the $60 billion-plus-deal is consummated, the result would create the world's largest pharmaceutical conglomerate. American Home Products (NYSE:AHP), located in Madison, N.J., reportedly had a market capitalization of nearly $50 billion at the end of 1997; SmithKline Beecham (NYSE:SBH), headquartered in London, came in last year even higher, at more than $56 billion. Taken together, these don't come close to matching leader Merck & Co. Inc.'s status, which apparently achieved a 1997 market cap of over $130 billion in 1997. But the two companies have critical mass working in their favor, and in that respect the trans-Atlantic marriage would create a giant among giants in the pharmaceutical world.

For the biotechnology companies that have ongoing research and development, licensing or marketing, sales and distribution arrangements with these two pharmaceutical powerhouses, the merger announcement conveys another message, as well. For, as recent history has already demonstrated, the joining of two big pharma outfits does not necessarily bode well for their biotech partners. In the inevitable realignment and priority shifting that results from the attempt to mix two huge companies -- each with their own agendas -- into one that 's even more massive -- but streamlined to increase profits -- some external collaborations are bound to get eliminated in the process.

Other mergers in the pharmaceutical industry could impact biotech companies, too. These include the still-to-be-consummated acquisition by Swiss giant Roche Holding Ltd. of the German diagnostics outfit Boehringer Mannheim GmbH's parent company, Corange Ltd. of Bermuda, announced in May 1997. The marriage, once approved by various regulatory authorities, is predicted to create a true behemoth in the diagnostics arena. Biotech has already begun to see the possible repercussions of this one: In December 1997, Boehringer Mannheim returned products rights to two monoclonal antibody-based drugs in development to its long-time biotech partner Protein Design Labs Inc. (NASDAQ:PDLI) of Mountain View, Calif. At the same time, the German company kept the rights to two other potential drugs -- both of them humanized monoclonal antibodies. (For details of the modified and terminated agreements between biotech companies and big pharma for the fourth quarter, see the chart on p. 3.)

It's been several years now since the last wave of mergers and acquisitions hit the global pharmaceutical industry. Then, it was the Swiss giants Ciba-Geigy AG and Sandoz AG that united to form Novartis AG, which deal was announced in March 1996 and consummated in December. Novartis' 1997 market cap, at $112 billion, placed it second only to Merck & Co. as the world leader in the pharmaceutical industry. That merger caused some realignment of partnering priorities, too. (See the March 17, 1997 issue of BioWorld Financial Watch for details.)

In 1995, two London-based pharmaceutical companies, Glaxo Holdings plc and Wellcome plc, came together to form Glaxo Wellcome plc (NYSE:GLX), which reached a market cap of about $84 billion in 1997, placing it seventh among the giants. Also merging in 1995 were The Upjohn Co., of Kalamazoo, Mich., and Swedish firm Pharmacia AB to form Pharmacia & Upjohn Inc. (NYSE:PNU). That company, which has had its troubles integrating two very different cultures, did not earn a place among 1997's top 10 drug companies. Neither did Hoechst Marion Roussel Inc., of Kansas City, Mo., which was created in 1995 by combining Germany's Hoechst AG, France's Roussel Uclaf SA and U.S.-based Marion Merrell Dow Inc.

All of these pharmaceutical houses had already established collaborations with biotech companies when they started their negotiations; all of the new corporate entities that emerged went through a biotech collaboration sorting process. And for some of those strategic alignments, the repercussions are still being felt. (See the March 18, 1996 issue of BioWorld Financial Watch for details of the Hoechst Marion Roussel shake-out .)

The Latest Mega-Merger

Both of the big pharma players in this latest mega-merger proposal have long histories of partnering with biotech firms. In 1997 alone, American Home Products and its pharmaceuticals division Wyeth-Ayerst Laboratories, based in Radnor, Pa., have inked 11 new agreements with biotech firms. Most of those are drug discovery collaborations, but at least four are marketing agreements. Seattle-based Immunex Corp.'s majority owner American Home, through Wyeth-Ayerst, is shelling out $100 million for the North American marketing rights to Immunex's (NASDAQ:IMNX) promising rheumatoid arthritis drug, Enbrel (a tumor necrosis factor receptor). As well, the big pharma has arrangements with The Liposome Co. Inc. (NASDAQ:LIPO) of Princeton, N.J. to market Abelcet (amphotericin B lipid complex) for treating severe systemic fungal infections in the Nordic countries as well as Italy and France. It also will market Ridgefield, N.J.-based Biomatrix Inc.'s (NASDAQ:BIOX) hyaluronic acid-based product Synvisc for treating osteoarthritis of the knee in the U.S., Europe and the Middle East. (For details of the marketing, manufacturing and distribution agreements struck between biotech companies and big pharmas in the fourth quarter of 1997, see the chart on p. 9. For details of the new research-based collaborations for the fourth quarter, see the Jan. 19, 1998 edition of BioWorld Financial Watch. Charts encompassing the entire year will be printed in BioWorld's Biotechnology State Of The Industry Report 1998.)

SmithKline Beecham, too, has been an active biotech partner. Its foremost alliance was struck back in 1993, when it took the bold step of pledging $125 million to Human Genome Sciences Inc. (NASDAQ:HGSI) of Rockville, Md. to tap into its genomics research and a burgeoning DNA sequence database. But there have been plenty of deals since then. In 1997, for instance, SmithKline Beecham inked a total of 16 new alliances of various sorts. Again, the majority of these are research-based ventures, but a few are focused on marketing. For instance, it signed an agreement in August to market Texas Biotechnology Corp.'s Novastan, a small molecule inhibitor of thrombin, as an anticoagulant therapy in patients with heparin-induced thrombocytopenia. The deal, which gives SmithKline marketing rights in the U.S. and Canada, is worth about $32 million to Houston-based Texas Biotechnology (AMEX:TXB). Among others, SmithKline also has various arrangements with Alza Corp. (NYSE:AZA) of Palo Alto, Calif., to market the latter's transdermal nicotine patch Nicoderm for smoking cessation.

The Global Community

In recent years, U.S.-based big pharmaceutical houses have been less aggressive in their biotech partnering arrangements than have been their European counterparts. But the balance shifted back across the Atlantic in 1997. In 1994, U.S.-based pharmaceutical giants accounted for 52 percent of all new research and development-based partnerships with biotech firms. For the following two years, however, that number dropped to about 37 percent. But in 1997, the U.S. companies had regained their predominance in the partnering field, accounting for 47 percent of all new deals signed. The performance of the European companies, on the other hand, is almost the inverse. Here, the Europeans dominated the partnering scene in 1995 and 1996 -- forging 37 percent and 41 percent of all new alliances -- but have now dropped back to 29 percent. (See the graph on p. 2.)

And as the years go by, the number of new partnerships keeps on rising -- even though the number of potential big pharma partners keeps on falling. Counting new arrangements that concern agricultural or animal health product development, there were 240 new research and development-based collaborations inked in 1997, up significantly from the 180 new deals struck in 1996. Another 79 ongoing collaborations were expanded, extended, renewed or otherwise modified during the course of the year -- up from 56 in 1996. As well, 26 collaborations were terminated in 1997 whereas in 1996, 21 deals were ended. That means about 11 percent of all collaborations come to an untimely end -- usually at the hand of the big pharma partner. There were more marketing alliances in 1997, also, with biotechs signing 91 marketing agreements for products either recently approved for sale or in late stages of development, up only slightly from the 89 new deals signed in 1996. *