Money burns a hole in the pocket, the adage goes. To squeeze a fistful of fivers, a roll of red fifties, is to be enticed into spending them.
So imagine the temptation surrounding the Matterhorn-sized cash mountain which Novartis, the Swiss-based drugs company, had run up by the end of last year. The company boasted $14 billion in liquid assets of which some $7 billion was in cash.
This in the trembling hands of a company run by a former medical doctor, Daniel Vasella, who has prescribed takeovers as a cure for most ills of the global pharmaceutical industry.
When Aventis came up for sale last year, it was Novartis which unveiled an interest, even at the risk of angering French ministers who backed the merger with Sanofi-Synthelabo which, with a raised bid, succeeded. Aventis bought Lek, a Slovenian manufacturer of generic drugs, in 2002, Canadian-based Sabex last year and has also built a large stake in Roche.
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Novartis’s £3.89 billion takeovers announced today of Hexal, the German generic drugs company, and of a majority stake in its American peer Eon Labs, with perhaps a further £500 million to be directed at gaining complete control, has all the symptoms of compulsive spending. Of expenditure which appears an end in itself rather than designed to meet strategic needs.
After failing to buy Aventis, a standard pharmaceuticals developer, the purchase of two generic drug makers appears as rational as buying two handbags because Gucci had run out of shoes.
Dr Vasella hardly eased concerns over wayward largesse by, in replying to questions on further acquisitions, following a commitment not to “overdo things” with the codicil “if a jewel does become available we would remain open” to bidding.
Result: shares in just about every drugs company in Europe, however sparkling their performance, rose this morning.
Nonetheless, Dr Vasella has a case. The making of generic drugs, like any other type of bulk manufacturing, is open to the kinds of cost savings which by tweaking margins can make a huge difference to profits.
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With moral issues lowering the prospect of huge profits from drug sales in developing nations, and the bill for treating ageing populations forcing Western states to demand better drug supply deals, it is from cutting factory costs rather than raising prices that generic manufacturers’ best hopes lie.
There is also hope for more consolidation. Novartis predicts that by 2010, even after prodigious growth, it will claim only 10 per cent of the generics market.
Furthermore, generic drugs can be the kind of specialist, high-tech products which are difficult for factories in low-cost countries to replicate.
Currently, at least. The success of companies such as India’s Dr Reddy, which GlaxoSmithKline has unveiled a partnership with, reveals the prospects for drug manufacturing to to be shipped abroad, just as ship building has moved east to Korea and call centres to Bangalore.
The future of Novartis’s generics business could rely, ironically, on the innovation of its research arm in developing the kind of pills which after patent expiry are beyond the manufacturing capability of all but the best-equipped of factories.