Impact on distributors uncertain

At press time, the veterinary industry could do little more than mull over the potential fallout of the announced mergers of Pfizer and Wyeth (with its Fort Dodge Animal Health division), and Merck and Schering-Plough (with its Intervet/Schering-Plough animal health business).

“Since these mergers involve four of the top 10 animal health companies, it’s of particular importance to distributors, employees and other manufacturers,” says Ron Brakke, Brakke Consulting, Dallas, Texas. Still, many questions remained. “What the [Federal Trade Commission] decides creates unreasonable market share or position is always negotiated,” he says.

What happened
To recap, on Jan. 26, 2009, Pfizer announced its intention to acquire Wyeth for $68 billion. The acquisition would involve Wyeth’s Fort Dodge Animal Health division, reportedly the No. 1 veterinary biological (vaccine) manufacturer in the world and No. 2 veterinary vaccine maker in North America.

Then, on March 9, Merck and Schering-Plough announced they had entered into a definitive merger agreement under which Merck would acquire Schering-Plough for about $41 billion. The transaction would give Merck another interest in the animal health market, which included Intervet/Schering-Plough, formed in 2007 with Schering-Plough’s acquisition of Organon BioSciences, and whose 2008 worldwide animal health sales were close to $3 billion; in addition to its 50 percent interest in Merial.

The announcements touched off a flurry of activity, as Pfizer and Merck worked to clear the decks in order to gain FTC approval of their proposed mergers. Not surprisingly, given the size of the companies, product overlaps were unavoidable. Pfizer and Fort Dodge, for example, have competing nonsteroidal anti-inflammatory medications, as well as parasiticides and preventatives. The two companies also compete in the area of vaccines. Their lineup of heartworm preventives and antibiotics were said to be more complementary. Indeed, when the European Commission approved the proposed merger in July, it did so with the stipulation that Pfizer divest certain animal health assets in the European Union.

Merck had some work to do as well. Soon after the merger with Schering-Plough was announced, for example, the company reportedly put some of its animal-health business on the market. Bayer AG, Novartis, Eli Lilly and Boehringer Ingelheim were said to be potential suitors.

Then, on July 30, Merck announced its intention to sell its interest in Merial to its joint venture partner, sanofi-aventis, for $4 billion. At the same time, Merck, sanofi-aventis and Schering-Plough announced they had agreed that following the closing of the Merck/Schering-Plough merger, sanofi-aventis would have an option to combine the Intervet/Schering-Plough Animal Health business with Merial to form an animal health joint venture owned equally by the new Merck and sanofi-aventis.

If that were to occur, it would create a $5.5+-billion business with broad coverage of product lines, says Brakke. “In some ways it makes sense from a species coverage point of view, but I’m not sure either company brings a pipeline of new products to the marketplace,” he adds.

“One of my concerns is that R&D budgets of combined companies generally never reach the level of the two companies separately,” he says. “However, in the current regulatory environment, it takes critical mass and deep pockets to research, develop and market new products that require FDA, USDA or EPA approval. Most innovation in the future will come from smaller companies or universities, and will be purchased by the larger companies after the technology has been proven to be viable.”

Impact on distributors
While the pharmaceutical companies were working out their issues, veterinary distributors were left to wonder - some with patience, others with trepidation - what the mergers would mean to their businesses.

In the case of Pfizer and Fort Dodge, for example, it is clear the FTC will require a divestiture of Fort Dodge companion animal products, perhaps the entire Fort Dodge companion-animal line, says Ken Williams, vice president and general manager, Henry Schein/NLS Animal Health, Owings Mills, Md. “This could have a negative impact on distribution, depending on which company buys the divested products and the distributor model and margins employed by that company.

“We are hopeful the successful bidder will be a distributor-friendly manufacturer who will keep the Fort Dodge vaccines, pharms, etc., in a buy/sell arrangement with margins that do not decrease,” he says. “So far as equine products are concerned, I would see Pfizer getting to keep most of those products, which would then be folded into the current Pfizer equine product offering.”

Williams sees potentially less fallout for distributors from the announced Merck-Intervet/Schering-Plough acquisition, though he warns there could be some surprises. “Should sanofi and Merck combine Intervet/SPAH with Merial in a 50/50 joint venture, similar to the Merial joint venture that was in place the last 12 years, there will tough decisions to be made,” he says. “First, the FTC might well require some divestiture of overlapping products that could be monopolistic. Even with the FTC requiring the sale of some products, this would still be the largest global animal health company by far. The leaders would be faced with go-to-market choices such as: 1) keeping exclusive contracts in place or opening up the entire product line to a more mass distribution model, 2) going direct with a combined sales force of over 400 field reps, 3) keeping Merial as is and keeping Intervet/SPAH as is with no distribution changes at all, or 4) agency model and buy/sell in some combination.

“I am cautiously optimistic,” Williams continues, “that when the dust settles, distribution will retain its leading position as the preferred go-to-market model and that there may even be more unit volume and margin dollars available from our manufacturing partners. It is clear that the vast majority of clinics prefer to deal with their local distributor reps due to long-term relationships and one-stop shopping. We believe the companies that are driving these mergers and acquisitions will recognize this fact and make wise channel decisions accordingly.”

Other distributors are not so confident, particularly about the proposed Pfizer deal. “The Pfizer/Fort Dodge merger would be terrible for the industry,” notes one distributor. “I don’t know if we could stay in business.” Pfizer’s terms are not as favorable to distributors, and if they are extended to Fort Dodge products, the impact on smaller distributors could be devastating, according to the distributor. An equally depressing scenario would be for Pfizer to pull back from some of its distributors, as it has done in the past, and focus its efforts on a select few.

The Merck/Schering-Plough deal is not so disconcerting, according to the distributor. “Those manufacturers understand distributors’ needs. They’re good to their partners.”

Concludes Brakke, “It will be an interesting next six months in animal health.”