Despite a decade of mega-mergers in the pharma industry, a significant productivity gap and a paucity of new blockbuster drugs has fueled a rapid contraction in growth in the sector from double to single digits.
Not only has it become evident that size alone may not be the remedy that fills an empty pipeline, but it might even create new pressures for companies to grow at huge rates. Whereas turnover volumes for megabrands are enormous today and demand the launch of three to four new billion-dollar chemical entities each year in order to maintain and secure double-digit growth rates, one NCE per year for a smaller company, by comparison, may be enough to increase sales by more than 10 percent.
Bigger not always better
Let us take a closer look at why mega-mergers are not beneficial when it comes to accelerating and intensifying the drug-discovery process. First of all consider this question: What are the core competencies of big pharma? In general these corporations are very efficient in marketing, especially when dealing with a blockbuster product since the key factors for its success are sufficient budgets, manpower, and well-structured sales and marketing organizations.
Megabrands are also good at clinical development. It works according to standardized processes, is extremely expensive, and you need vast experience, a good reputation, and a lot of contacts in the medical community in order to achieve efficient and results-oriented clinical studies. These, after all, represent the cornerstone of a valid and unique marketing claim and a fast-track entree to the market.
But what about drug discovery? The facts speak for themselves: even though internal research spending has risen disproportionately, and therefore have led to an immediate slowdown in profits, the outcome industrywide is not enough to drive sales growth at the desired levels.
Why is size not necessarily an advantage in research? The answer is simple: Even if you invest $1 billion dollars in research it may well be that you don’t get any outcome in the form of an approved drug. This is a significant difference from other industries, where you also invest into so-called research.
Therefore the actual merger and acquisition scene is driven by the need by big pharma managers to add quality and not quantity to their drug-discovery programs. More flexibility and more projects that minimize the risks involved are wanted in M&A deals. This can be reached by outsourcing part of the research process and sharing the responsibility via an M&A deal with an -omics company.
Costs of scale
But today this strategy has its price. Whereas the biggest pharma-biotech deal in 1998 only cost Bayer $465 million to acquire 225 confirmed assays in a few defined indications from Millennium, just one year later saw the deal between Novartis and Vertex cost $800 million, which was topped after two more years by Bristol-Myers Squibb’s $2 billion acquisition of just one phase II/III product from Imclone.
Let us systematically review the most common deal options:
Technology Deals —From big pharma’s perspective this does not make very much sense in the early drug-discovery stages since technologies tend to become outdated in extremely short periods of time. In order not to take this risk on board it makes sense for firms to look for technologies that support the key success processes of drug discovery, which mainly materialize after the high-throughput screening phase.
Supply Deals —Deals with defined deliverables such as targets, assays, or libraries. This is very interesting for the pharma industry since the outcome is clearly measurable, a higher investment means more deliverables and therefore the risk is minimized.
Pipeline Deals —Today it seems to be almost impossible to make a bargain with regard to potential blockbuster candidates that are already in clinical development. Take the Imclone/BMS deal as an example: BMS had to pay $1 billion plus $1 billion in equity in order to acquire the marketing rights for just one product that it could use only in North America. Not only did the deal carry an outrageous price, it was also extremely high risk when you consider that the US Food and Drug Administration has yet to approve the drug. It is probably cheaper today to buy a whole company in view of the actual low market cap levels.
Integrated Process Deals —Two partners have highly integrated and cooperative research processes in the end. This is extremely valuable for the learning curves of both companies involved, but in this case it is important to rely on just a few big deals since the management effort to run such projects is enormous.
So when does it make sense for a pharma company to go for an M&A option in order to close its existing productivity gap?
Actually it is probably most advisable to buy a company in the research arena since a lot of candidates are looking for further funding and might be forced to sell a majority stake at a reasonable price.
With regard to phase II/III products, one would certainly prefer just to buy the single project, but must ask if the product it on the market yet and is it still affordable. If the answer is no, one has to consider buying the whole company, and again one must ask the same questions, and also expect a high premium price.
In my opinion it is imperative to buy a whole company if a serious shortfall in one of the strategic key processes—sales and marketing, clinical development, HTS—has been identified and should be resolved. The reason is that I believe the company should have control over their key processes when there are too many interfaces with external partners.
That said, a successful M&A strategy not only relies on the identification of an appropriate acquisition target but most of all on the proper execution of the deal—even though we all know that most deals never even reach their intended strategic goals.
Gunnar Weikert is the CEO of Inventage, a venture capital fund based in Dusseldorf, Germany. Until recently he was global head of physiomics at Bayer, where he negotiated deals with Millennium, Lion Bioscience, and CuraGen. You can e-mail him at [email protected]
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