M&A Trends in Pharma-Biotech: An Analysis of a Business Model
According to Frost & Sullivan, the pharmaceutical industry had witnessed a huge wave of mergers and acquisitions’ activities in the past decade. Recently, there has been a surge in M&A activities, especially mega-M&As. Clearly, the current economic downturn, compounded by the credit crunch, has had an impact. However, this factor alone cannot be attributed to the recent M&A mania which includes four mega M&As in the first half of 2009. Big pharma historically has been fighting with little success, on various issues like patent expiry of blockbuster molecules, regulatory hurdles, generics competition, under utilization of resources, declining product pipeline due to a low R&D 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 M&A’s. Large pharmaceutical companies with strong drug development pipelines a nd low exposure to patent expiries are the most attractive M&A targets. For instance, Schering-Plough's 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 & Co.
However, the real intention behind these mergers remains a question as the past mergers have not yielded substantial value additions in terms of R&D productivity. Also, these mega M&As would lead to further M&A 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-à-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 M&As. Future, large-sized M&A deals may be driven by BMS, AstraZeneca, Sanofi-Aventis, GSK, Novartis and J&J due to their strong cash positions, further consolidating the industry.
Biologic Blockbuster Model
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 which has made the pharmaceutical sector, a high profit margin industry. Blockbusters have contributed a very significant share both in top line & bottom-line growth of big pharma & its unlikely this model would change in the near future. What is more likely is the shift from a small-molecule based blockbuster model to a biologics based blockbuster. Biologics like Rituxan, Avastin, Enbrel, etc. have already proved the blockbuster potential of biologics. Having realised the tremendous opportunity in biologics especially in high growth therapeutics like oncology, auto-immune, CNS, etc, there has been a surge in M&A activities in the pharma-biotech space. Also, manufacturing and commercialisation of biosimilars is challenging compared to small molecule generic drugs. This ensures a lower generics threat for biologics. Recently, the pharma-biotech space has witnessed M&A activities of all sizes. A shift from ‘big pharma’ to ‘big biopharma’ is evident. The recent acquisition of MedImmune by AstraZeneca, Organon Biosciences by Schering-Plough, Scios by Johnson & Johnson, Serenex & CovX by Pfizer, Domantis by GSK, NovaCardia, Abmaxis, GlycoFi & Sirna Therapeutics by Merck & Co., Mirus Bio Corporation & remaining 44% stake in Genentech by Roche, emphasizes the interest of big pharma towards biotech.
Furthermore, a key trend in the pharma-biotech space is that the past partnerships & alliances with biotech companies are being cemented through outright acquisitions by big pharma. For instance, Merck & Co. had a partnership with GlycoFi prior to its acquisition. Genzyme had co-developed the oncology product, Clofarabine with Bioenvision, prior to its acquisition. AstraZeneca & Pfizer had licensing deals with Cambridge Antibody & 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 & 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 brightens the likelihood of being acquired but also provides revenue source to sustain their 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 M&A 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 & medium sized biotech companies being easy targets for acquisition.
Apart from M&A activities in the Pharma-biotech space, a substantial number of biotech with biotech M&A deals are expected due to possible entry of biogenerics/ biosimilars in the next few years. Also, large biotech companies need to add new product portfolio 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 & 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 $1.40 billion displays the appetite for mega M&As by large biotech firms. However, there is a high possibility for large biotech companies like Gilead Sciences, Biogen-Idec, Celgene, Genzyme, in turn, becoming potential targets for big pharma.
Sustainable Business Model for Biotech
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, etc. Also, venture capitalists who fund most up-start 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 & medium sized biotech companies possess the management expertise to find an exit at the right time. For instance, Immunex could not capatalise 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 & Co. Recent examples of successful exits are MedImmune and CV Therapeutics which were acquired by AstraZeneca & Gilead Sciences for $15.6 billion & $1.4 bi llion, 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 its 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 whilst, big pharma focus on commercialisation. In addition, there will be an increased M&A activity across industry verticals. For instance, M&A activity involving diagnostic companies, targeting molecular biomarkers and genomics would increase due to a shift towards personalized medicine.
The pharma industry should seize this opportunity to acquire more small & medium sized biotech companies rather than focusing on high profile mega M&As. This would save not only the struggling biotech industry but also the pharmaceutical industry in the long run.
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