Strength in numbers

According to analysts, pharmas and biotechs are turning to M&As and collaboration deals to fix ‘bloated, untenable’ R&D paradigm

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LONDON—The news of Bayer HealthCare LLC's $1.1-billionacquisition of Conceptus Inc. that DDNEWSbrings you this month is the newest evidence that mergers and acquisitions(M&As) continue to grow in both volume and value, a trend that one marketresearch firm says is indicative that "the current R&D paradigm is bloated,duplicative, expensive and in the long run, untenable."
As ongoing challenges like the patent cliff and shakyresearch funding continue to morph the way pharmaceutical and biotechnologycompanies approach their R&D efforts, firms across the world are looking topair up and consolidate resources with other organizations as well ascollaborate with academic and nonprofit organizations, "which could rescue thepharmaceutical industry from the redundancy of an inefficient R&D model andplug the so-called innovation gap," states a new report from research andconsulting firm GlobalData.
"We're dealing with cost and time to market as two drivingfactors, but there is also regulatory uncertainty with the implementation ofthe Affordable Healthcare Act, issues with taxes and companies paying for thenew healthcare system and even the European debt crisis across the pond," saysAdam Dion, a GlobalData analyst. "Companies are looking more toward M&Asand collaborations to offset costs and share risks."
There is a growing consensus in the industry that thesechallenges must be met collectively by bringing together public, private andgovernment organizations to create multilateral collaborations to drive thenext wave of scientific discovery, Dion says.
"In the past, the big got bigger, as large pharmaceuticalcompanies like Pfizer, Merck, GSK and AstraZeneca relied on organic growth,getting fat and happy on the success of their respective blockbuster drugs,"says Dion. "However, many of the same companies did not put in place strategiesto drive innovation into the future or manage the consequences of the patentcliff. Many industry participants are now considering a move from an old andinflexible R&D paradigm to a more collaborative and open ecosystem thatfosters creativity and information sharing—a substantial cultural shift for anindustry with a high level of reluctance to share anything."
Greater cooperation between rival drug companies andnon-profit organizations may be a difficult pill for Big Pharma to swallow,Dion says, but he adds that this approach may ultimately prove advantageous inthe long run.
According to Dion, the U.S. Food and Drug Administration'srecent boast that it approved 39 new drugs in 2012 belies the innovation gapcurrently plaguing pharma.
"The dearth of innovative drugs on the currentpharmaceutical landscape is at least partly the result of wasteful R&Dactivity," Dion says. "A lot of these drugs are 'me-too' drugs—copycats ofdrugs that are already on the market that do not bring additional clinicalvalue to patients—and large therapeutic areas are not being attacked."
Another firm, PricewaterhouseCoopers, recently published areport which found that deal activity in the industry increased during thefirst quarter of 2013 relative to the same period last year. Pharma recordedthe largest gains in deal value during the quarter on the strength of severallarge transactions. Transactions should trend at an active pace during 2013,according to the firm.
"Global M&As are very much going to be the norm forcompanies in this space," says Dimitri Drone, leader of PricewaterhouseCoopers'Transaction Services Life Sciences sector. "Deal activity in these industriesare building up and gaining critical mass. More often than not, these deals arefocused on products, technologies or compounds in development. Smart people anda highly skilled workforce are of interest, but ultimately, you want the dealto generate cash for you."
That's because current estimates place the cost of bringinga drug to market at about $1.5 billion, Drone says.
"In this industry, the assets that generate revenue forcompanies have short life spans, so you are looking at what you are going tosell in the next decade, or sometimes, even sooner than that," he says. "Thesecompanies have to be in a continuous replenishment mode. More and morecompanies are coming to realize how significant this risk is, and that it's notthe case that it has to be made in their own labs anymore."
Interestingly, some companies are starting to blur the linesbetween generics and brands with these deals, says Drone.
"This is particularly noticeable when companies makeacquisitions abroad," he notes. "We expect to see continued interest in theUnited States, but we also expect that geographic expansion will become a focusof companies' agendas as well."
Pharmas and biotechs are also seeking acquisitions in selectasset classes, and medical device and diagnostics companies are also evaluatingnew growth strategies, says Drone.
"The medical device industry is one where the cost ofbringing a technology is not really significant, and you also have the abilityto leverage your distribution base," Drone says. "With regard to diagnostics,the United States' push toward personalized medicine is all about trying tofigure out how to deliver drugs that are more effective to a specific patient'sailment. The days of the blockbuster drug that can serve millions of people areprobably in the rearview mirror."
In comparison to pharma, biotech is in an especially goodspot, says Drone.
"People are looking to where the bucks are going to be,where the future frontier is—and the future frontier is biosimilars," he says."If you look at some of the larger biotech companies by market cap, they areapproaching the size of well-established, large pharma companies. At the sametime, their revenue base is lower, and they have fewer products and assetsselling in the market. They are a lot better at extracting profits from theassets they hold. Investors like that. Once their drug comes off patent, andpeople haven't yet figured out how to backwards-engineer a drug, they have moreleverage when their patent expires."
Both firms agree that we may see companies begin to focus onniche therapeutic areas or orphan diseases.
"It's great to be the only player in a market with 5,000patients," says Dion. "And if you can identify patients early in clinicaltrials who will respond to a therapy, data will be more powerful and more specificto patient subpopulations. This will help advance clinical trials faster.
"Sometimes there is a better risk-reward ratio for companiesif they ultimately get more of that small pie to themselves," says Drone."Although orphan drugs may help only a few thousand patients affected by somedebilitating disease, if you can potentially get a better path to getting itapproved, you will have more pricing power."

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