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Big Pharma s Consolidation: Will It Help or Hurt Proteomics Companies?

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When Pfizer announced its intention earlier this month to acquire Pharmacia in a stock-for-stock deal valued at $60 billion, it became clear that the trend towards consolidation in big pharma is showing no signs of abating. In fact, although the combined company would become the largest pharmaceutical company in the world, with annual revenues of at least $48 billion and an R&D budget of over $7 billion, it is likely that the proposed merger will only increase the pressure on smaller competitors to bunch together and create an even larger pharma juggernaut.

To the general public, consolidation on this scale may raise fears of monopoly, but for proteomics industry watchers, the question is more complex: Does a shrinking number of big pharma players make it easier or more difficult to sell equipment and services in the field?

The answer, it seems, is that it depends. While some analysts say big pharma spending on cutting-edge technology will only increase as pressure mounts to fill drug development pipelines, or at the very least remain constant, others suggest that some consolidation of R&D efforts in newly combined companies will occur hand-in-hand with a greater desire to outsource early-stage discovery to smaller biotech companies, such as those involved in proteomics. In an added wrinkle, some say that the ballooning size of large pharma organizations is likely to increase the length of the selling cycle, and make negotiating purchases and R&D agreements even more complicated.

 

Penny Pinching, but not on Mass Specs

Those involved in high-end equipment sales and technology development deals may feel the effects of pharma M&A the least, industry watchers say. At least in the short term, R&D budgets are unlikely to diminish, as administrative personnel and middle management take the brunt of consolidation-related cuts.

The pressure to remain competitive, they say, means that big pharma laboratory managers will still get the green light to order high-end mass spectrometers and protein separation equipment deemed valuable for discovering new targets and drugs. The warnings from suppliers such as Qiagen and PerkinElmer that big pharma is reining in new purchases, according to analysts, only apply to low-end laboratory technology.

“Where pharma can save a dollar, and where they are not compelled to buy new equipment, I think they are telling their labs, ‘hold on to what you’ve got and make it work,’” said Ken Goldman, a Lehman Brothers analyst who covers mass spectrometry vendors such as Waters and Applied Biosystems. “[But] where they don’t want to have another company get a one-year leg up on proteomic research, they take the money that they are saving in [one] area, and they skew it towards life science enabling tools that they think one day will lead them out of the relatively dry pipeline area.”

Will Pharma Collapse Two Labs into One?

Increasing consolidation among big pharmas might also raise the specter of group purchases of equipment, in a manner analogous to that of health management organizations negotiating for the best deal on a particular drug or treatment plan. If a significant number of labs within a new Pfizer/Pharmacia conglomerate needed 2D gel separation equipment, one might ask, couldn’t pharma management squeeze out smaller players by negotiating only with the supplier who could afford the narrowest margins?

For a number of reasons, however, industry analysts suggest this is unlikely to happen. Pharmas that decide to merge are unlikely to pursue treatments for the same diseases, making it difficult to collapse labs from the two companies into one, said Goldman. In addition, most lab managers would be unwilling to view laboratory equipment for proteomics research as a pure commodity. “[Each lab manager] is in their own space, and [at least] with mass spec, it’s very application driven,” Goldman said. “It’d be nice if you could buy the whole shebang from beginning to end from ABI, but the reality is that a particular lab could really use a Bruker Daltonics ion trap, and the ABI [instrument] just doesn’t do it for them.”

On the other hand, suppliers of proteomics equipment might be able to use this consolidation wave to their advantage: a company collaborating with a group in one pharma company might be able to use its relationship to expand its influence in the newly merged entity. Compugen, which is collaborating with Ruth Van Bogelen’s 2D gel laboratory at Pfizer’s R&D center in Ann Arbor, Mich., hopes that a completed merger with Pharmacia would enable the company to license its 2D gel analysis and other bioinformatics software more widely throughout the combined entity.

“[Merging Pfizer with Pharmacia] could be very helpful, especially if you have collaborators and have proven that you have a successful product,” said Lior Ma’ayan, Compugen’s executive vice president for business development. “There’s a very good chance that this solution would be embraced by the newly established organization.” Ma’ayan cautioned, however, that he had no hint as to what a combined Pfizer/Pharmacia proteomics research program would entail.

 

Biotech: the New Pharma?

As pharmas consolidate, however, many industry watchers are noticing a concurrent trend towards outsourcing early-stage drug discovery to smaller and more nimble biotech companies. This trend may in the long run open up new opportunities for both proteomics research equipment suppliers, as well as companies offering proteomics research services for large pharma customers.

Ma’ayan pointed to a situation several years ago, during the merger of two large European pharmaceutical companies — he declined to which — that allowed his company the opportunity to present its technology to a joint committee of the two pharma’s scientists looking to streamline the combined company’s R&D operations. The merger “forced a more intense search for productivity gains and cost-cutting,” he said. “That opportunity would not have happened if the two companies had not had the motivation to change.”

Despite these opportunities, others in the field see the consolidation of big pharma as a potential inhibitor to closing deals. While pharma may be increasingly looking to outsource its early-stage drug discovery programs, selling technologies for in-house pharma research is becoming more difficult as the layers of bureaucracy within the organization grow, said Enal Razvi, vice president for business development at DiscoveRx, a Fremont, Calif.-based seller of research tools for proteomics and genomics applications.

Before the merger of Glaxo Wellcome and SmithKlineBeecham, Razvi said, his company had bids out to both organizations, but once the two companies began to consolidate “everything slowed down to a halt.” Lining up deals with huge pharma conglomerates takes at least 10 to 12 months, he added. “There’s a precedent, and it will get even more acute.”

With smaller biotech and pharmaceutical companies, “you don’t have to go through as many department heads,” he said. “[In big pharma], you have many more levels of evaluation and more negotiation time before you get your check.”

— JSM

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