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Strength in numbers
LONDON—The news of Bayer HealthCare LLC's $1.1-billion acquisition of Conceptus Inc. that DDNEWS brings 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 market research 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 shaky research funding continue to morph the way pharmaceutical and biotechnology companies approach their R&D efforts, firms across the world are looking to pair up and consolidate resources with other organizations as well as collaborate with academic and nonprofit organizations, "which could rescue the pharmaceutical industry from the redundancy of an inefficient R&D model and plug the so-called innovation gap," states a new report from research and consulting firm GlobalData.
"We're dealing with cost and time to market as two driving factors, but there is also regulatory uncertainty with the implementation of the Affordable Healthcare Act, issues with taxes and companies paying for the new healthcare system and even the European debt crisis across the pond," says Adam Dion, a GlobalData analyst. "Companies are looking more toward M&As and collaborations to offset costs and share risks."
There is a growing consensus in the industry that these challenges must be met collectively by bringing together public, private and government organizations to create multilateral collaborations to drive the next wave of scientific discovery, Dion says.
"In the past, the big got bigger, as large pharmaceutical companies 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 strategies to drive innovation into the future or manage the consequences of the patent cliff. Many industry participants are now considering a move from an old and inflexible R&D paradigm to a more collaborative and open ecosystem that fosters creativity and information sharing—a substantial cultural shift for an industry with a high level of reluctance to share anything."
Greater cooperation between rival drug companies and non-profit organizations may be a difficult pill for Big Pharma to swallow, Dion says, but he adds that this approach may ultimately prove advantageous in the long run.
According to Dion, the U.S. Food and Drug Administration's recent boast that it approved 39 new drugs in 2012 belies the innovation gap currently plaguing pharma.
"The dearth of innovative drugs on the current pharmaceutical landscape is at least partly the result of wasteful R&D activity," Dion says. "A lot of these drugs are 'me-too' drugs—copycats of drugs that are already on the market that do not bring additional clinical value to patients—and large therapeutic areas are not being attacked."
Another firm, PricewaterhouseCoopers, recently published a report which found that deal activity in the industry increased during the first quarter of 2013 relative to the same period last year. Pharma recorded the largest gains in deal value during the quarter on the strength of several large 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 for companies in this space," says Dimitri Drone, leader of PricewaterhouseCoopers' Transaction Services Life Sciences sector. "Deal activity in these industries are building up and gaining critical mass. More often than not, these deals are focused on products, technologies or compounds in development. Smart people and a highly skilled workforce are of interest, but ultimately, you want the deal to generate cash for you."
That's because current estimates place the cost of bringing a drug to market at about $1.5 billion, Drone says.
"In this industry, the assets that generate revenue for companies have short life spans, so you are looking at what you are going to sell in the next decade, or sometimes, even sooner than that," he says. "These companies have to be in a continuous replenishment mode. More and more companies are coming to realize how significant this risk is, and that it's not the case that it has to be made in their own labs anymore."
Interestingly, some companies are starting to blur the lines between generics and brands with these deals, says Drone.
"This is particularly noticeable when companies make acquisitions abroad," he notes. "We expect to see continued interest in the United States, but we also expect that geographic expansion will become a focus of companies' agendas as well."
Pharmas and biotechs are also seeking acquisitions in select asset classes, and medical device and diagnostics companies are also evaluating new growth strategies, says Drone.
"The medical device industry is one where the cost of bringing a technology is not really significant, and you also have the ability to leverage your distribution base," Drone says. "With regard to diagnostics, the United States' push toward personalized medicine is all about trying to figure out how to deliver drugs that are more effective to a specific patient's ailment. The days of the blockbuster drug that can serve millions of people are probably in the rearview mirror."
In comparison to pharma, biotech is in an especially good spot, 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 are approaching the size of well-established, large pharma companies. At the same time, their revenue base is lower, and they have fewer products and assets selling in the market. They are a lot better at extracting profits from the assets they hold. Investors like that. Once their drug comes off patent, and people haven't yet figured out how to backwards-engineer a drug, they have more leverage when their patent expires."
Both firms agree that we may see companies begin to focus on niche therapeutic areas or orphan diseases.
"It's great to be the only player in a market with 5,000 patients," says Dion. "And if you can identify patients early in clinical trials who will respond to a therapy, data will be more powerful and more specific to patient subpopulations. This will help advance clinical trials faster.
"Sometimes there is a better risk-reward ratio for companies if they ultimately get more of that small pie to themselves," says Drone. "Although orphan drugs may help only a few thousand patients affected by some debilitating disease, if you can potentially get a better path to getting it approved, you will have more pricing power."