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Breakingviews: Where drugs fail, M&A might prove a healthy course

Source: www.breakingviews.comis Europe's leading financial commentary service Sanofi's attempted e48 billion takeover of Aventis is just the latest in a string of merger moves in the drugs sector over the past decade. To get an idea of the scale of the activity, consider that the market share of the top 10 companies has risen from 25% in 1988 to around 50% today. And there is much further to go, as pill-making is still a highly fragmented activity compared with other sectors of the economy.

Furthermore, mergers would appear to make sense for financial reasons. Drugs companies have high fixed costs. GlaxoSmithKline, for example, has over 100 manufacturing sites and a sales force of 8,000 – a figure typical for a company of its size. Combine two big firms and one can eliminate many factories and multiple salesmen calling on the same doctors.

But while mergers might appear sensible on financial grounds, their ability to create wealth is unproven. Over the short run, it is clear they can boost earnings as costs are cut. But pharmaceutical companies live and die over the longer run by developing new drugs. And there is no evidence that combining firms increases research productivity.

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