It's testimony to the high anxiety—and hectic activity—in the industry that the merger of German chemicals-to-pharmaceuticals
firm Merck KGaA and Swiss biotech Serono elicited only faint fanfare. Both family-owned drugmakers boast an illustrious heritage,
but their union garnered none of the pomp and circumstance befitting a marriage of European royalty.
"German Merck" traces its roots back to a mid–17th century apothecary in Darmstadt owned by Friederich Jacob Merck. His descendant,
Emmanuel, discovered alkaloids in 1816 and began manufacturing them in bulk, thereby launching what is now the $600 billion
drug industry. Serono, founded in 1906 in Italy, created the fertility market, helped produce the first test-tube baby, and
was the world's third-largest biotech at the time of its centennial.
Yet late September 2006 was a bizarre time for privately owned midsize European pharma mergers. In addition to the Merck-and-Serono
match, UCB Pharma bought Schwartz Pharma AG, and Nycomed snatched Altana's pharmaceutical division. "Europe's family-owned
drug companies are fast becoming an endangered species, struggling to survive in an increasingly challenging regulatory and
competitive environment," wrote the Wall Street Journal—as if penning an obituary.
IMS Health's Murray Aitken was more sanguine, aptly naming the sudden trend self-defense. In his firm's annual report, he
wrote, "Call it the price of independence or the cost of sustainability. By merging, these companies have become more difficult
for the giants to swallow whole."
Elmar Schnee, the new CEO of Merck Serono SA, agrees. "In terms of research and innovation, Merck KGaA's R&D investment on
its own fell too short to really be competitive in today's environment," he says plainly. Discussing the merger in the press,
he was at pains to emphasize that it delivered a $1.3 billion investment in R&D—that all-important "critical mass." He also
trumpeted its best-of-both-worlds biotech–pharma versatility: A Merck–Serono team could go bio a bio with giants like Amgen
and Roche as well as compete in the small-molecule arena with the likes of Sanofi-Aventis and Schering-Plough. The new entity
had combined 2006 pharma sales of $5.3 billion, a total of 28 pipeline compounds, and a global sales fleet of 7,000. By most
metrics, it has vaulted into the Big Pharma Top 20.
But even German analysts were playing it cool. "This isn't an act of desperation," said Karl Heinz Scheunemann, of Bankhaus
Metzler. "It's a fit, but no bargain," said Union Investment's Markus Manns. In fact, at the news that Merck KGaA had ponied
up $13.3 billion, its shares fell as much as 6.5 percent.
A case of damning with faint praise? Not really. Analysts increasingly describe Big Pharma M&As in terms of "desperation"
and driven by "product panic." And while no one would call Merck KGaA's branded pharmaceuticals dynamic, the company's deep
pockets—its generics division earned $2.5 billion last year; its chemicals division, $2.8 billion—and reputation for discipline
have earned it respect.
"It's a Rip Van Winkle story," says Jeff Moe, who heads the Duke University Fuqua School of Business's Health Sector Management.
"Here you had a sleeping pharma division at an otherwise successful company that finally woke up, took stock of the new reality,
and made some decisive moves."
Still, Merck KGaA's behavior leading up to the merger had seemed uncharacteristically erratic. Its future had darkened a bit
when saritozan went bust in Phase III; the company was developing the novel treatment for Parkinson's disease as a follow-up
blockbuster to Erbitux, the EGFR-inhibitor Merck KGaA markets outside North America. That's when the firm decided to hit
the acquisition trail with a vengeance.