FandS considers merger trends in pharma-biotech

Ranjith Gopinathan, senior research analyst - pharmaceuticals and biotech at Frost and Sullivan (FandS), has looked at merger-and-acquisition (MandA) activity in pharma-biotech.

The pharmaceutical industry has witnessed a huge wave of MandA activities in the past decade.

Recently, there has been a surge in MandA activities, especially mega-MandA.

Clearly, the current economic downturn, compounded by the credit crunch, has had an impact.

However, this factor alone cannot be attributed to the recent MandA mania, which included four mega MandAs, in the first half of 2009.

Big pharma historically has been fighting with little success, on various issues such as patent expiry of blockbuster molecules, regulatory hurdles, generics competition, under-utilisation of resources, declining product pipeline due to a low RandD productivity, and so on.

All these factors have undoubtedly led to lower valuations of their stock value.

Moreover, the current economic climate has further lowered their value.

Consequently, this has created a climate for large-scale MandA.

Large pharmaceutical companies with strong drug-development pipelines and low exposure to patent expiries are the most attractive MandA targets.

For instance, the Schering-Plough pipeline, consisting mainly of biologics, with about 18 drugs in Phase III and its relative low exposure to patent expiries are the key reasons for its acquisition by Merck.

However, the real intention behind these mergers remains a question as the past mergers have not yielded substantial value additions in terms of research-and-development (RandD) productivity.

Also, these mega MandAs would lead to further MandA activities, since, some of the non-core units of the acquired or merged companies would need to be divested.

For example, Sanofi sold its Campto drug to Pfizer and its Arixtra and Fraxiparine drugs to GSK following its merger with Aventis.

One clear outcome of the rapid consolidation of the pharmaceutical industry would be the augmented bargaining power of big pharma vis-a-vis payors and the government.

Consequently, we may assume that any further consolidation (very likely) would lead to a further strengthening of the big pharma cartel, which may not necessarily provide benefits to the patients.

Cash-rich big pharma are leveraging their financial strength for these mega MandAs.

Future, large-sized MandA deals may be driven by BMS, Astrazeneca, Sanofi-Aventis, GSK, Novartis and JandJ due to their strong cash positions, further consolidating the industry.

Another notable trend is the steady shift of big pharma towards biotech.

Much has been written about the changing revenue model of big pharma and 'niche busters' replacing the current blockbuster model.

However, one must note that it was the blockbuster model that has made the pharmaceutical sector, a high profit margin industry.

Blockbusters have contributed a very significant share both in top-line and bottom-line growth of big pharma and it is unlikely this model would change in the near future.

What's more likely is the shift from a small-molecule based blockbuster model to a biologics-based blockbuster.

Biologics like Rituxan, Avastin, Enbrel, and so on have already proved the blockbuster potential of biologics.

Having realised the opportunity in biologics - especially in high-growth therapeutics such as oncology, auto-immune, CNS, and so on - there has been a surge in MandA activities in the pharma-biotech space.

Also, manufacturing and commercialisation of biosimilars is challenging compared with small-molecule generic drugs.

This ensures a lower generics threat for biologics.

Recently, the pharma-biotech space has witnessed MandA activities of all sizes.

A shift from 'big pharma' to 'big biopharma' is evident.

The recent acquisitions of Medimmune by Astrazeneca, Organon Biosciences by Schering-Plough, Scios by Johnson and Johnson, Serenex and CovX by Pfizer, Domantis by GSK, Novacardia, Abmaxis, Glycofi and Sirna Therapeutics by Merck, and Mirus Bio Corporation and remaining 44 per cent stake in Genentech by Roche, emphasises the interest of big pharma towards biotech.

Furthermore, a key trend in the pharma-biotech space is that the past partnerships and alliances with biotech companies are being cemented through outright acquisitions by big pharma.

For instance, Merck had a partnership with Glycofi prior to its acquisition.

Genzyme had co-developed the oncology product, Clofarabine with Bioenvision, prior to its acquisition.

Astrazeneca and Pfizer had licensing deals with Cambridge Antibody and Meridica respectively prior to their acquisitions.

Similarly, most of the recently acquired biotech companies had partnered with their acquirer in the past.

Existing alliances with biotech companies helps easier acquisition due to cultural compatibility and knowledge of the acquiring company.

Hence, we could infer that biotech companies with existing alliances and licensing deals would be key acquisition targets.

Licensing deals not only brighten the likelihood of being acquired but also provide revenue source to sustain business activity.

This factor gains importance, especially during these times of funding scarcity.

Value additions in terms of novel technology, biologics product portfolio, scientific talent are some of the factors contributing towards the heightened MandA activity in pharma-biotech space.

In addition, the credit crunch has led to about 30 per cent decline in valuation of many biotech companies.

Hence, it's currently more attractive to acquire them rather than negotiate complex licensing deals.

Also, declining funding source due to the credit crunch, lack of IPOs and debt burden have led small- and medium-sized biotech companies being easy targets for acquisition.

Apart from MandA activities in the pharma-biotech space, a substantial number of biotech with biotech MandA deals are expected due to possible entry of biogenerics/biosimilars in the next few years.

Also, large biotech companies need to add new product portfolios and expand their existing product lines to remain competitive.

For instance, Genzyme acquired AnorMED, thereby gaining access to the late-stage stem-cell transplantation product, Mozobil.

Amgen acquired Ilypsa and Alantos Pharmaceuticals, thereby expanding its portfolio into segments like renal disorder, diabetes and inflammatory diseases.

Gilead Sciences acquired Myogen to gain access to its anti-hypertension products.

Recent acquisition of CV Therapeutics by Gilead Sciences for USD1.40bn (GBP861m) displays the appetite for mega MandAs by large biotech firms.

However, there is a high possibility for large biotech companies such as Gilead Sciences, Biogen-Idec, Celgene and Genzyme in turn becoming potential targets for big pharma.

With the ever-increasing acquisition of biotech companies (with late or early stage clinical products), it seems unlikely for these small-medium biotech companies to become fully integrated players like Amgen, Biogen-Idec, and so on.

Also, venture capitalists that fund most upstart biotech companies usually choose a profitable exit strategy through acquisition.

Ironically, the management of many biotech companies fails to make a profitable exit.

Hence, it is imperative that small- and medium-sized biotech companies possess the management expertise to find an exit at the right time.

For instance, Immunex could not capitalise on Enbrel due to manufacturing difficulties.

Finally, it was sold-off to Amgen, which had the manufacturing expertise.

Similarly, ICOS, which developed Cialis, did not possess the marketing expertise of Eli Lilly.

Recent examples of successful exits are Medimmune and CV Therapeutics, which were acquired by Astrazeneca and Gilead Sciences respectively.

The management of small biotech companies should perhaps follow the business strategy of Medimmune and CV Therapeutics rather than that of Amgen or Genzyme.

Nevertheless, one must realise that the small research-based biotech firms are able to attract the cream of scientific talent primarily due to a flexible and entrepreneurial work culture.

Hence, any attempt to forcefully integrate workforce with the bottom-line focused MNC pharma companies would certainly demoralise them.

Instead, big pharma should keep the acquired biotech firms as independent business units.

They should be retained as separate research entities while big pharma focus on commercialisation.

In addition, there will be an increased MandA activity across industry verticals.

For instance, MandA activity involving diagnostic companies, targeting molecular biomarkers and genomics would increase due to a shift towards personalised medicine.

The pharma industry should seize this opportunity to acquire more small- and medium-sized biotech companies rather than focusing on high-profile mega MandA.

This would save not only the struggling biotech industry but also the pharmaceutical industry in the long run.

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