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With Big Pharma In Retreat, Ackman And Novartis Try A New Blueprint For Drug Companies

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Yesterday in a move that returned attention to healthcare takeovers, Bill Ackman, CEO of the hedge fund Pershing Square Capital, announced a bold and unusual move by partnering with pharmaceutical company, Valeant Pharmaceuticals International , Inc. to acquire a major stake in another biotech.  In this case it is  Allergan , Inc., the makers of the injectable wrinkle-remover BOTOX, and several ophthalmic treatments.

This morning the healthcare landscape restructures further as Novartis AG  announced that it will purchase GlaxoSmithKline plc’s  cancer-drug business for $14.5 billion and will sell most of its vaccine business to GSK for $7.1 billion plus royalties. Simultaneously, Novartis announced the sale of its animal health division to Eli Lilly and Co. (LLY) for nearly $5.4 billion. Together Novartis and GSK will also create a joint venture in consumer healthcare, focusing on consumer healthcare with significant cash flow potential.

Last month I wrote about Carl Icahn’s active participation in the acquisition of Forest Laboratories, Inc. (FRX) by Actavis , plc for $25 billion.  All of these moves have a great deal in common, in that they challenge the pharma status quo. They are reflective of a new pharmaceutical model for the 21st Century.

Icahn and Ackman, have of late been better known for their diametrically opposed views of Herbalife Ltd. and their vocal opinions and positions on the franchise’s value or the lack thereof. However, in this instance it is easier to describe what both investors are seeking to achieve. To start, both are no strangers to takeovers and they have shown adroit understanding of how to maneuver in the capital markets. In Ackman’s recent case, Pershing Square is said to have acquired nearly a 10% stake in Allergan with effective privacy and speed that confirm the seriousness of his intentions.

Ackman, as CEO of Pershing Square, has gained control of a wide range of companies, from the fast-food chain, Wendy’s Company (WEN), to Target Corporation (TGT),  and most recently Canadian Pacific Railway , Ltd (CP). The Valeant strategy if completed however, will be the largest single investment completed by Pershing Square as a percentage of assets.

What the Icahn and Ackman moves have in common is the formation of an alternative to the giant pharmaceutical model.  Those “big pharma” companies are so large, bureaucratic and slow-moving that they are unsustainable.

The Novartis agreements appear to be a serious attempt to slim down a huge company, to make it more manageable and responsive.  In effect, Novartis is trying to transform itself into a company similar to those being built by Ackman and Icahn.  They are reflective of a new pharmaceutical model for the 21st Century.

But too small is no good either.  When a pharmaceutical company doesn’t have the requisite mass, it doesn’t have the resources to see it through both good times and bad.

The Actavis/Forest merger and the proposed Valeant/Allergan merger bring together companies with complementary resources and double digit profits.  They constitute a warning to large pharmaceutical companies that as they engage in layoffs, downsizings, contractions and divestiture, other, more nimble companies, are acquiring, merging and growing to take over leadership in the drug and medical device industries.

Since late February, the biotech markets have retreated from their highs by almost 20 percent.  Some people may ascribe this retreat to news surrounding pricing of Solvaldi by Gilead Science Inc. (GILD).  But, as a rejoinder to Gilead’s moves, it must be remembered its product was also obtained by acquisition.  The acquisition represented a pathway not lost on those seeking a different corporate healthcare model.

Both Ackman and Icahn understand that big pharma is in retreat.  The evidence for this is in the news daily.  Downsizing, consolidation of multiple business entities, blockbuster drugs losing exclusivity and stock buybacks, are all signs of a business segment that is facing mortal threats.  It is reasonable to expect that Ackman and Icahn both will continue to be major participants in this realignment.  They exemplify money managers with foresight who recognize the benefits of realigning the drug and medical device arena.

I believe that Icahn’s previous announcement, Ackman’s announcement yesterday, and today’s announcements by Novartis, GSK and Lilly herald positive potential paths for the global pharmaceutical industry.

The beauty of healthcare is that the story is never over. If the IPO market shuts down, the focus is on M&A. If there’s a rapid rise in stock prices in the sector, there’s a correction and it becomes a buying opportunity. If there’s general weakness in biotech, consolidators roll in. It’s a constant cycle of narrative and counter narrative. The fact that it’s an industry fraught with high risk/reward makes it all the more alluring for some investors. In this case you have mega-combinations occurring as personalities and cultures drive M&A activity that could lead to the next clash of the titans.