Tuesday, May 26, 2009

GSK and Pfizer's HIV Joint Venture: Why It’s a Path Forward

Real innovation in dealmaking, like pharma R&D, is a rare commodity. As with R&D, dealmaking innovation often gets blocked by entrenched interests or misunderstanding or simple inertia. There are lots of reasons not to repeat the single most innovative and successful transaction of all time – Genentech/Roche – but none of them outweigh the spectacular opportunity that deal created.

We’re not going to say that the GlaxoSmithKline/Pfizer joint venture in HIV is, itself, comparable to Genentech/Roche. (See some short reports with some additional transaction details on the JV here and here and a more in-depth analysis here). But it could solve a set of knotty problems that by and large companies have, for whatever reason, failed to address.

First, earnings-pressured pharmas need help financing their pipelines. One option seems to be disappearing – getting investors to directly fund development (like the Lilly/TPG/Novaquest arrangement on a group of Alzheimer’s projects). Besides the market meltdown, which has taken cash away from speculative, illiquid investments, the parties’ goals were, in the dealmaker’s parlance, unaligned. Investors want to cherry pick the pieces of the pipeline they’d most like to fund, Pfizer EVP and chief strategy officer Bill Ringo told us the other day, almost as if they wanted to guarantee themselves a return (which, in the good old days, was something they could pretty much get just by investing in Pharma). The more risk they run, of course, the more upside they want (ideally, to be able to sell successes to the highest bidder) – which naturally limits the upside, and strategic value of the asset, for the pharma partner.

Here’s another problem. Most Big Pharmas want to be big and diverse enough to balance out the risks of development – but also want to be small enough to encourage biotech-ish entrepreneurialism. Various companies are trying to have their cake and eat it too by splitting into divisional enterprises (specialty pharma, or primary care, or oncology) with their own CEOs and CSOs and P&Ls. But we remain firmly Missourian about the whole idea. Will the commercial groups be able to buy research wherever they want – or remain saddled with what’s provided internally? Will research be able to sell its best fruits to the highest bidder in order to maximize their value? And for all their divisionality, how much of the corporate infrastructure – IT, manufacturing, finance – will these divisions have to absorb?

The GSK/Pfizer HIV joint venture is an interesting solution to both problems – the big/small paradox and the funding troubles. The new company is relatively small (first year projected sales: $2.4 billion); it’s got its own managers; it makes its own R&D decisions. The research stays within the parent companies and the JV pays its expenses – but if the pipeline projects don’t work out, and the JV doesn’t like what GSK and Pfizer are producing, the JV can buy their research from wherever they want. “It puts pressure and accountability onto the scientists,” GSK’s chief strategy officer David Redfern told us, echoing a favorite theme of GSK’s R&D boss, Moncef Slaoui.

Meanwhile, Pfizer doesn’t have to pay for a new worldwide commercial HIV organization on the basis of its underperforming HIV assets (maybe underperforming because it doesn’t have the commercial group it needs); GSK gets the near-term HIV pipeline it had otherwise failed to deliver. Far as we can see, no cash changes hands.

The biggest negotiating obstacle, apparently, was the equity split (right now, 85% GSK, 15% Pfizer) – but according to Redfern, once they’d abandoned the attempt to price the pipelines, and instead started to adjust ownership based on cash flows, “the heat went out of the valuation debate.”

And then there’s the optionality of the thing – one of its main advantages, believes Redfern. The JV could fund its business development with its own equity rather than dipping into cash. When the financial markets get friendlier, the whole thing could be spun off. And presuming success even close to what Gilead has achieved, the JV owners would get big stakes in a growth company that would theoretically trade at a significantly higher PE.

And that same equity would reward the JV’s employees in a way Pfizer and GSK stock simply can’t. Not to mention the fact that it’s a lot easier for an employee to see his personal contribution to growing a company 1/29th the size of Pfizer.

And one other aspect of optionality, notes Bill Ringo: if this works, “it provides us a model we can duplicate elsewhere.” He hasn’t apparently talked to GSK yet about repeating the idea in another therapeutic area, “but if there were another opportunity to do the same thing again with GSK, we’d do it.”

We recognize that plenty can go wrong with this deal. GSK’s firmly in the driver’s seat, with seven members of the nine-person board. And Pfizer could get tired of that. We also sense that Pfizer and GSK are not on the same page when it comes to R&D accountability (we think GSK is going to be tougher on its researchers than Pfizer will –rewarding more and firing more).

But whether it works or not, the drug industry should be paying close attention to this deal. Even more attention than to the big mergers. All of those are one-time events; it’s hard to see that they’ll be in any significant way transformational. Mostly, they’re stop-gap measures. (OK, we did argue the opposite way around about Pfizer/Wyeth – though most of the reader response was pretty skeptical).

But the GSK/Pfizer JV is repeatable. And scalable. It moves the industry in the direction it needs to go: smaller, customer-focused, financeable. And it gets our vote for the most innovative deal we’ve seen so far this year.

Image from flickr user joefutrelle used under a creative commons license.


Anonymous said...

UK antitrust watchdog to investigate plans for Glaxo, Pfizer joint venture

The AP (5/28) reports, "Britain's competition watchdog said Wednesday that it will investigate plans by drugmaker GlaxoSmithKline PLC to pool resources with Pfizer Inc. to create a new company to develop and sell HIV medicines." The investigation will focus on "whether the joint venture can be considered to be a merger that will reduce competition in the UK." The Office of Fair Trading will also "decide whether to refer the case to the Competition Commission regulators, which have the power to block or put limits on the deal." According to Glaxo, the new company "will blend" its "portfolio of HIV drugs now on the market -- some with patents approaching expiration – with" Pfizer's "more robust pipeline of drugs in development." The joint venture is expected to "have a 19 percent market share, ranking it No. 2 behind sales leader Gillead Sciences Inc."

Anonymous said...

Methinks you are buying the spin from the brass at GSK and PFE too much. Heck "Our Path Forward" is a corporate euphemism/cliche inside PFE for Captain K's new strategies. Less stenography and more skepticism is needed from bloggers/journalists.