Big Pharma's new landscape

What do the M&A deals mean for the drug industry's future?

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By Alyssa Abkowitz, Fortune reporter

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NEW YORK (Fortune) -- When Merck's $41 billion acquisition of Schering-Plough (SGP, Fortune 500) was announced Monday, it confirmed a major trend toward consolidation in Big Pharma.

The deal came only six weeks after the announcement of Pfizer's takeover of Wyeth for $68 billion and only three days before Roche inked a $47 billion deal with Genentech. Biotech heavyweight Gilead (GILD) also said Thursday it would pay $1.4 billion for CV Therapeutics (CVTX), showing that even smaller players are looking to diversify their portfolios.

Some analysts predicted these deals were coming, because many top pharmaceutical companies face a dearth in their pipelines and the U.S. Food and Drug Administration is taking a more conservative approach in approving new medicines.

"[We] continue to believe that tremendous value remains to be unlocked through radical restructuring approaches in Pharma," wrote Goldman Sachs analyst Jami Rubin.

The consolidation will make Big Pharma even bigger, adding up to more market share for the companies that survive, but not all purchases are seen as equally promising. Here's a look at what each deal would bring to the changing landscape of the pharma industry.

Merck and Schering-Plough: Merck's decision to go shopping marks an unusual move by the company that has always prided itself on strong in-house research. The transaction will bring Merck (MRK, Fortune 500) a pipeline that's filled with biologics and similar therapeutics, which complement Merck's products in way that Miller Tabak analyst Les Funtleyder calls "more obvious" than other mergers. Together, the pipeline will boast 18 drugs in Phase III, the last stage before a drug is sent to the FDA for review.

BMO Capital Markets analyst Robert Hazlett says the deal is better than Pfizer's purchase from a price standpoint.

"Merck bought a robust pipeline, one of the best in the industry, and kept its dividend intact," Hazlett says. "My preference is for a company to buy a pipeline and buy it cheaply. Merck has done that."

Pfizer and Wyeth: As the biggest pharma acquisition in almost a decade, many analysts were concerned about the deal. Part of the negativity surrounding the purchase involved Pfizer's 50% dividend slash that, as Deutsche Bank analyst Barbara Ryan put it, "clearly angered some investors."

But Rubin, of Goldman Sachs, recently upgraded Pfizer's position to buy, saying the stock has been severely undervalued. "PFE is very attractive, without including major pipeline assumptions," Rubin wrote in a note. "The patent hole is filled and future earnings now appear stable."

Wyeth (WYE, Fortune 500) brings Pfizer (PFE, Fortune 500) a slew of biologics and vaccines, including Enbrel, a biologic for treatment of rheumatoid arthritis, and Prevnar, a pneumonia vaccine. In addition, Wyeth adds a consumer health products business, an area Pfizer lost when it sold its consumer health unit to Johnson & Johnson in 2006.

Roche and Genentech: Roche, the Swiss drug giant, has been in hot pursuit of the innovative darling of the industry since July 2008. On Thursday, Genentech (DNA) agreed to let Roche take over the other 44% of the company it doesn't already own for $95 a share. The combined business will be the seventh-largest pharma company in the world.

Roche's interests primarily lie in Genentech's successful cancer meds and its entrepreneurial approach to in-house research. "Genentech has the best R&D out of anyone," Funtleyder says. "They give their scientists a lot of latitude."

As for who's next? Analysts say Bristol Myers Squibb (BMY, Fortune 500), AstraZeneca (AZN) and Sanofi-Aventis (SNY) might join in the deal-making line before long. To top of page

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