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Part of Gerson Lehrman Group, Inc.
Tip sheet:
M&A: A Strategy for Focused Growth in the
Pharmaceutical Industry During Uncertain Times
Big pharma is approaching a perfect storm. As the blockbuster drugs of the past decade drop over the patent cliff, major drug players confront their own shrinking pipelines and increasing scrutiny by the Food and Drug Administration. Small biotech companies developing the next generation of therapeutics are promising growth opportunities. Gerson Lehrman Group, Inc. convened a panel of experts to discuss the perils and opportunities in the coming wave of pharma consolidation: David Sheehy, Global Lead, Life Sciences Strategy at Accenture, Martyn Postle, Director and Founder of Cambridge Healthcare & Biotech, and David Gryska, former Senior Vice-President and Chief Financial Officer, Celgene.
1. Not all diversification is smart diversification.For pharma players looking for new revenue streams, medical technology (often devices) and diagnostics present two of the more enticing opportunities; both offer lower failure rates and shorter timeframes than developing new pharmaceuticals. But as it stands now, companies often see diagnostics as a giveaway or loss leader used to sell drugs. "They need to move out of that mindset," Postle warned. It usually makes more sense to stay within a familiar therapeutic area and bundle drugs, devices and diagnostics together, he said.
It's trickier to diversify into new businesses. Pharma has an uninspired record in the pharmaceutical benefits management space. Likewise, at one point it was "trendy" for pharma companies to own a cosmetics house, rarely with shareholder pleasing results, Postle said.
2. P harma needs biotech.Big pharma is increasingly a business development and marketing engine that needs therapeutics developed by smaller biotech companies to fill its pipeline, Postle said. "It is increasingly difficult for a biotech company to grow into an integrated pharmaceutical company without being acquired."
3. Biotech can't do it alone either.With limited access to both public markets and venture funding, the current economic outlook isn't favorable to small, innovative biotech companies. Without anywhere else to go, biotech shops look to established pharma players for support not just during expensive Phase II and Phase III trials but also for Phase I trials and even "just to survive," Gryska said. Acquisitions, especially of private companies, are going to become the rule, he continued. "There is no other exit for them."
4. S mart deals sync with existing assets.Gryska said acquisitions can benefit shareholders if they leverage the buyer's existing assets. If you're in the U.S. and want to acquire a European or Japanese company with a new drug in your therapeutic area, that can make sense, he said. Moving into a new area "because you've failed at other acquisitions" probably doesn't. Why not use the resources for a share buyback?
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5. The generics reckoning.With their patents expiring, companies are entering the generics game. According to Postle, only Novartis has gone into small molecule generics intelligently, i.e. on the offensive. Generics can be thankless; they typically have very low margins. By Postle's calculations, tablets of generic diazepam - Valium- bought wholesale cost less than M&M's. Postle was more encouraging on generic biotech products, sometimes called biosimilars, which are a higher margin business.
6. All roads point to M&A.Following the gloom of the credit crunch, highly capitalized companies with cash and a revenue gap are looking for acquisitions. Good assets are being bid up, says Gryska. He recommended that pharma execs initiate relationships or licensing deals with target companies early. Otherwise they can expect multiple bidders at the table and no clear advantage.
7. Biotech could also turn to licensing.There's a palpable tension between independent-minded biotech companies and the big pharma players that are happy to gobble them up for a song. Look for the biotech firms to press for licensing deals to keep some of their value for themselves. They don't just want to be "purveyors of programs to bigger companies," Gryska said.
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