Abbott’s Acquisition Spree: Is Less More?

Solvay, the Belgian conglomerate that makes drugs, chemicals and plastics, announced on Monday that it plans to sell its pharmaceutical business for $6.6 billion to Abbott Laboratories, located near Chicago. Abbott, whose 2008 revenues were nearly $29 billion, is more than twice the size of the Belgian firm whose sales last year were $13 billion. Still, according a Reuters report, the deal allows Abbott to “bolster its flagging prescription drug business by giving it a number of new medicines in late stages of testing.”

More immediately, notes The New York Times, Abbott Laboratories will “take sole possession of the TriCor cholesterol pill, which it was sharing with Solvay and [which] had more than $1.3 billion in sales for Abbott last year. Abbott will also acquire sole rights to Trilipix, a new cholesterol treatment approved by the Food and Drug Administration last December and marketed as TriCor’s successor.”

Solvay’s sale of its drug unit comes as no surprise. The Wall Street Journal writes that the company had announced in April that it was “reviewing options” for its pharmaceutical business as “research, development, production and approval of new drugs becomes more complicated and expensive.” Christian Jourquin, Solvay’s CEO, says the company plans to concentrate on its chemicals and plastics operations, which have been hit harder by the global slowdown than pharmaceuticals. In fact, last year, growth in drug sales helped Solvay offset declines in other lines of business.

Abbott lately has been on an acquisition spree; the Solvay transaction is the largest among its recent deals. In January, the company took over Advanced Medical Optics for $2.8 billion and earlier this month it bought Visiogen for $400 million, according to the Times. Abbott this year also took over Evalve, a cardiovascular technology company, and the nutrition business of Wockhardt in India.

Still, these deals pale in contrast with this year’s mega mergers in the pharmaceutical industry: Pfizer’s purchase of Wyeth for $68 billion in January; Merck’s $41 billion deal for Schering Plough and Roche’s Genentech deal for $47 billion, both in March. Harbir Singh, a professor of management strategy at Wharton and vice dean of global initiatives, says many of these large mergers in the pharmaceutical industry have been prompted by the desire “to fill gaps in product pipelines or products that are complementary.”

How effective has this strategy proved for large pharma companies? According to Singh, the results have been mixed. “The pipeline issues the pharma companies face are symptoms of the challenge of earning consistent returns through the drug development process,” he explains. “These mergers can be fraught with difficulties because you are buying a whole company, though you are essentially interested in a few individual products in its pipeline.”

An alternative approach, according to Singh, would involve identifying the potential drugs themselves and negotiating an agreement covering these “focused assets.” Such transactions are much more complicated because the seller may not be interested in selling just these drugs. “This is a longer-term, less newsworthy approach,” Singh says. “Many of these deals are done privately and under the radar screen.”

Singh points out that the narrow-focused, low-key approach can yield a financial advantage. When one pharma giant buys another for billions of dollars, future profits from the drug pipeline are already captured by the selling price. This increases the financial pressure on the merged entity and makes it more challenging for it to succeed. “I don’t say that large mergers never work,” says Singh. “But they do have unintended consequences.”