What Biotech Wants From Big Pharma Partners: Survey Says!?

With Big Pharma's internal R&D productivity in the proverbial toilet, business development plays a critical role in securing drugmakers' future wellspring of innovation. Thus, what biotechs think of pharma as partners matters, perhaps more than it ever has before.

Two companies that can pat themselves on the back? Roche and Merck & Co., who took home top honors as best partners in a recent survey of biotech execs published by the Boston Consulting Group.

GSK, Novartis, Eli Lilly and Pfizer also scored well, with one biotech – Celgene – sneaking onto the leader board with the third-highest proportion of respondents having a favorable impression of the company’s partnering capabilities. (Celgene's appearance shouldn't surprise our blog readers; in our 2010 Deals of the Year competition, the biotech, whose deal making prowess will be analyzed more completely in an upcoming IN VIVO feature, chalked up wins in two different categories.)

The BCG survey is the fourth in a series, following similar efforts in 2003, 2006 and 2008. The goal, says BCG partner Simon Goodall, is to determine the key characteristics companies are looking for in a partner, and which buy-siders are best fulfilling those wishes.

The survey was sent to about 500 heads of business development and chief executives during the summer of 2010, and the results are based on approximately 100 responses. Interestingly, BCG found that changes in Big Pharma corporate leadership could impact the perceptions of potential biotech partners quite quickly; despite Chris Viehbacher’s short tenure at Sanofi-Aventis, for instance, biotechs believe the French pharma is a more attractive partner because of its more outward-looking focus.

Moreover, views of Roche and Merck were not hurt by their respective mega-acquisitions of Genentech and Schering-Plough. And Japanese companies – which scored poorly in earlier surveys and were largely indistinguishable in potential partners’ view of their characteristics – have made great strides both as a group and individually. Several now score above the average overall.

“In 2003 the results told us that everyone was awful,” recalls Goodall. Less than one in three companies received a positive overall response from BCG’s list of biotech partners. Those results improved in 2006, and again in 2008, with nearly half garnering positive responses. At the same time the list of biotech ‘wants’ shifted from solid commercial capabilities to a willingness to allow biotechs to retain control over their assets. At last reckoning, in 2008, the full impact of the financial crisis was yet to be felt by the biotech community, says Goodall. “They felt they wouldn’t be as badly affected as pharma,” he says.

The financial meltdown and its impact on the biotech financing climate have helped to shape biotechs’ current wish list of important partner characteristics. In 2010, practical considerations like clinical and sales/marketing capabilities, alongside a partner’s ability to add value to a biotech’s compound, rose to the top of the list. Fuzzier characteristics, including ‘responsiveness during the deal negotiation process’, ‘fit with corporate culture,’ and ‘alliance management capability’ faded in importance. Even so, “organizations are thinking more carefully about how they project a partnership image,” says Goodall. “There’s a careful orchestration and coordination and companies are recognizing they need to make decisions more quickly, and be more efficient.”

BCG has not divulged the “losers” in its survey (feel free to ruminate in the comments below), and so we’ll have to make do with analyzing which pharma companies performed the best against key characteristics in the eyes of the respondents.

Ranked as a percentage of responders that agreed a company exhibited particular criteria, Roche struck gold in four categories, as the company is most associated with deal structure flexibility, executive leadership, alliance management, and manufacturing expertise. Merck led in five categories: responsiveness, BD/licensing group access, therapeutic areas of interest (tied with Novartis), control over development, and ‘develop and prosper,’ a metric related to post-deal success.

Pfizer and Novartis took honors in three categories apiece. Novartis took the prize for TAs of interest, regulatory capability, and research expertise. Pfizer excelled in global reach and access/reimbursement, as well as in an area it would perhaps rather forget: ‘pay highest price.’

Price tags aside, on the whole it appears that industry is moving in the right direction -- and when business development is companies' best hope at securing the next generation of important, valuable drug candidates, that's good news for everyone.

UPDATE: you can request a copy of the survey here.

Pfizer Channels Economist E.F. Schumacher

Okay so how 'bout that for an esoteric title?

Permit IN VIVO to flash back to the 1970s for a few minutes. In 1973, British economist EF Schumacher published his landmark series of essays Small Is Beautiful during the midst of an energy crisis and a raging debate about the risks of nuclear power. Among the many notable passages in the treatise is this gem:

“Even today, we are generally told that gigantic organizations are inescapably necessary; but when we look closely we can notice that as soon as great size has been created there is often a strenuous attempt to attain smallness within bigness.”

Schumacher, who worked with John Maynard Keynes and John Kenneth Galbraith, didn’t aim his book specifically at biopharma, but it’s striking how relevant the concepts proposed – especially the notion that “the fundamental task is to achieve smallness within the large organization” – are to our industry. As it faces its great R&D stagnation, Big Pharma is on the undeniable quest to manage size, creating smallness within the bigness in hopes of improving upon its innovation track record.

In their R&D strategies, GlaxoSmithKline, AstraZeneca, and Sanofi Aventis are all at different places in terms of promoting the small is the new big concept, with GSK leading the charge. Years into a radical R&D reorg, Glaxo continues to evolve its model, with the goal of integrating its biotech-like drug units with the respective downstream medicines development centers to create end-to-end business groups.

Beyond R&D, there’s also the raging “focus versus diversification” debate, which gained new significance after Bernstein Research’s Tim Anderson published a March 14 note suggesting the world’s biggest pharma was mulling the heretofore unthinkable: shrinking from its outsize $67 billion revenue base to a much more modest—and manageable—base of $35 to $40 billion. ( For those keeping score –and since March Madness has begun who isn’t?—it’s a question IN VIVO explicitly raised two years ago in “Why Doesn’t Pharma Get Smaller?”)

Say what? Didn’t Pfizer buy Wyeth after jettisoning its own consumer health program in part to lessen its exposure to high risk-- and expensive to develop--innovative therapeutics. Given Pfizer’s lack of immediate success, do we now throw the idea of the industrial pharma out the window?

Maybe not. Just days after the Bernstein note came news that Eli Lilly wanted to bulk up its own animal health division via the acquisition of J&J’s Janssen Animal Health group. And there’s no doubt GSK, Sanofi, and Novartis remain enamored with the diversified approach: each has formidable consumer health care operations and emerging markets strategies relying on selling branded generics. Novartis has of course pushed into commodity generics as well, through Sandoz, and still manages to notch innovative R&D successes: If the launch of the first-in-class oral multiple sclerosis drug Gilenya wasn’t proof enough, look at last week’s announcement that the pharma’s Phase III Janus kinase inhibitor INC424, partnered with Incyte, has wrapped a second pivotal trial and is on track for EU and US regulatory filings by Q2 2011.

Make no mistake. Pfizer’s ruminations on the spin-offs of its four non-traditional pharma businesses – as well as its Established Products Unit – seem unlikely to spark an “hey everybody, let’s get small” moment. That’s because there’s still plenty of risk in the high flying R&D model espoused by companies like BMS (and Amgen). One only has to look at new mechanisms like UnitedHealthcare’s Cancer Care pathway program, which bundles payments to doctors using evidenced-based medicine guidelines, to see how changing reimbursement practices could make new product launches tougher.

So maybe the lesson isn’t that everybody should get small, but some companies definitely ought to get smaller. If the words of one of Pfizer’s top executives, head of R&D Mikael Dolsten are any guide, the big pharma’s management is coming ‘round to this way of thinking. Speaking at Barclay’s Capital investor conference March 17, Dolsten emphasized: “We need...to understand what is the maximum value for those businesses, which of them actually have a higher value by being inside Pfizer…and which would...create more value for shareholders outside the company."

Let’s suppose Schumacher is right and “the large-scale organization is here to stay.” As he points out in Small Is Beautiful that also means “the stronger the current, the greater the need for skillful navigation.” For biopharma this entails managing size appropriately to restore R&D productivity but in such a way that it is possible to mitigate the risks associated with health care reform and payor decisions.

At the end of the day, a behemoth the size of Pfizer may just be too damn big to be flexible enough to pivot in a rapidly changing health care environment.

M&A Predictions! Fortune Tellers -- They Are Not

Even though the New Year has come and gone, analysts are still making their predictions about what 2011 will bring for the pharma and biotech industries. (Admittedly, it is still early enough to do so, but March would have been pushing it.)

The latest endeavor to predict the future comes from the fine analysts at Morningstar, who released their “2011 M&A Outlook for Healthcare” report this week. The report includes some sound, albeit a little obvious, deductions on what will be moving M&A in 2011 – a move into emerging markets, slowing R&D productivity, and (cue ominous music) the upcoming patent cliff.

Morningstar experts expect further consolidation in Big Pharma; and say Eli Lilly & Co., as well as Bristol-Myers Squibb will be ripe for the picking as the patents on their lead drugs reach their expiration date – but, honestly, who would buy them?

Merck & Co. (Schering-Plough), Pfizer Inc. (Wyeth), Roche (Genentech), and Novartis (Alcon)have all made major acquisitions in the past two years that have added significantly to their debt situations and are unlikely to dump the burden of a major restructuring on top of the issues they’ve already had to bear while trying to make these puzzle pieces fit.

Morningstar analyst Damien Conover suggests Abbott Laboratories could handle acquiring either Lilly or Bristol. He also thinks Sanofi-Aventis and GlaxoSmithKline could benefit from an acquisition of Bristol as well. This sounds all well and good, but Glaxo has made it pretty clear that it is not interested in any large acquisitions and Sanofi has its hands full already with that little Genzyme deal it has been drawing out for months. And let’s be honest, if the past has taught us anything, it’s that bigger is not always better.

So moving on to more realistic prospects for mash-ups in 2011 – let’s take a look at what biotechs Morningstar thinks will offer the best bang for the buck.

They list Biogen-Idec, Seattle Genetics, Human Genome Sciences, Dendreon, and Actelion as their top five take-out targets this year. The reasoning is complex but the basic insight is that these companies have strong pipelines or technology in really HOT therapeutic areas like neurology, orphan drugs, and cancer. Yet, Biogen, Celgene, Gilead, and Merck KGaA will offer an acquirer the most immediate and gratifying (think mid-to single-digit billions) boost to earnings – something every Big Pharma could use right now. These companies also have the nice bonus of having a lot of cash on hand and fairly low burn rates.

While all of these companies have their positives and negatives, it’s important to keep in mind that just because they can be acquired doesn’t mean that they will be. Take the #1 takeout target this year for example, Biogen; it’s been on Morningstar’s take-out list for three years now despite plenty attempts by billionaire shareholder Carl Icahn to get the company on the market.

That said; Morningstar hasn’t done abysmally in its predictions over the last two years. Three companies from the 2009 list were acquired – Trubion, CV Therapeutics, and Medarex, but none of these companies were in the top 15 that year. Another seven got picked up from its 2010 list – Crucell, ZymoGenetics, Talecris, King Pharmaceuticals, OSI Pharmaceuticals, Biovail and Genzyme – with three of these companies being in their top 15 picks.

So what do you think – will this be Biogen’s year to find a suitor or will the Massachusetts biotech continue to dance alone?

Image from flickr user What Makes The Pie Shops Tick? used under a creative commons license

Pfizer vs. Merck and the Future of R&D: Deja Vu All Over Again

Pfizer and Merck begin 2011 with brand new CEOs and not a whole lot else in common.

Merck's new CEO, Ken Frazier, took over the reins as part of a planned succession on January 1. Ian Read took over as CEO of Pfizer much more suddenly, when Jeff Kindler resigned abruptly in December.

Both faced essentially the same challenge as 2011 began: how to deal with unrealistic expectations for growth in 2012.

By now you know the story. Pfizer's Read responded by acknowledging that revenues would not meet expectations, but pledged that earnings would, thanks primarily to some deep cuts in R&D. Frazier, in contrast, said simply that Merck would no longer stand by its guidance, taking the position of defending R&D spending rather than sacrifice new opportunities for relatively short term earnings targets.

Ah, its good to have Merck and Pfizer posing a strategic dichotomy in R&D again!

A dozen years ago, Pfizer (under CEO Hank McKinnell) and Merck (under Ray Gilmartin) waged a similar battle for the hearts and minds of investors during an earlier (and much, much smaller) patent cliff period.

Remember when Pfizer swooped in to buy Warner-Lambert away from American Home Products? Though Pfizer wasn't the loudest advocate of the view, the acquisition put the company in the camp of those who argued that the future of R&D depended on "critical mass"--building the scale to allow huge investments across a range of therapeutic areas and targets to drive growth for the decade ahead. Pfizer followed the Warner-Lambert deal with the acquisition of Pharmacia, and built its position as the biggest of Big Pharma in that era.

Merck, on the other hand, declared its intention to eschew big mergers, with Gilmartin saying any mega-deal would be a "distraction" from the core business of delivering organic growth from internal R&D supplemented by licensing or small, targeted acquisitions. And Merck stood by its guns, become the first Big Pharma to weather a genuine patent cliff (Zocor, primarily) without making a big acquisition (or being bought up itself).

So who was right?

Well, its hard to argue that "critical mass" was such a great idea, what with Pfizer's Read taking the scissors to his company's bloated R&D budget. On the other hand, it isn't like Merck did so well with that organic growth thing either; the company's acquisition of Schering-Plough two years ago, was if nothing else a repudiation of the "distraction" argument.

The fact is that neither company succeeded in delivering a sustainable product flow over the decade that followed the strategic divergence. That is why both are in the pickle they are in today.

Read and Frazier are now charting different paths. It seems unlikely that both are right. But history says both could well be wrong.

image from flickr user mtsofan used under a creative commons license

New Pfizer BD Chief Peck Talks Consumer Health

Checking in from the Burrill Consumer Digital Health conference near San Francisco this week: Pfizer's new head of worldwide business development Kristin Peck (pictured) was on a panel Monday, which piqued our curiosity: Is this a signal from Pfizer (also a sponsor of the show) that it doesn't want to be left off the Pharma 3.0 map?

You might remember that at our PSO conference in February, Ernst & Young's Carolyn Buck-Luce talked up her firm's vision of Pharma 3.0, complete with a Sims-ish schema of a happy, busy neighborhood of interlinked businesses and organizations. Or, as we're all called these days, "stakeholders."

Microsoft was there. Patient organizations, hospitals, doctors, and insurance companies were there. Drug companies were not there.

Which, perhaps, is why Peck was there, on stage in a hotel under the SFO flight path, before the forever-pink-shirted Steve Burrill, talking about the so-called Pharma 3.0 world and Pfizer's place in it. Through a spokeswoman, Peck declined an interview, so we had to gather our first impressions of her from the fifth row of the ballroom.

Here's one: If Pfizer does deals as fast as Peck talks, there will be little rest for those who write about them. Peck also had a bushelful to say on every topic of the panel, which thankfully was structured as a conversation, not a series of PowerPoint talks. A few of her points:

* The health care reform bill wasn't comprehensive. It was just a step to improve Americans' access to health care, but it doesn't address how to reorganize care or reduce costs.

* Reform was only one step, but adding 30-million-plus Americans to the ranks of the insured might be enough of a shock to the system to prod innovation. The big question: Will the millions of new customers force doctors to embrace innovative changes? Doctors are "a large part of the problem" if they're not driving the change, she said. When a top pharma exec accuses another group of being slow to change, you can't help but raise an eyebrow and jot in the notebook "pot-kettle-black." That said, Peck isn't a pharma lifer. She joined Pfizer in 2004 after a consulting career -- and not just on pharma issues. She has real estate and financial services on her resume, too. In other words, a big change from her predecessor, Bill Ringo, who was at Pfizer only a couple years after nearly three decades at Eli Lilly.

* When fellow panelist and Wellpoint chief technology officer Carl Dumont mentioned an online tool available to Wellpoint customers to help them make health-care decisions, Peck said that if patients can't get access to the tool at the point-of-care -- when doctors are advising (or telling) them what kind of procedures they need -- what good will it do?

* Concentric rings of "community" will drive a lot of consumer adoption of health-related technology. When a person receives a disease diagnosis, for example, which community will he or she share it with? Family? Friends? Bosses and workmates? Other health care providers? How about yoga teachers, acupuncturists, and therapists?

We're watching Pfizer keenly post-Wyeth absorption to see how much of its business development shifts from traditional M&A and licensing to the network of providers, tech firms, patient advocates, and others making patient (or, if you prefer, "consumer") connections. One such deal Pfizer recently struck was with Keas, a provider of online care-plan templates.

No doubt we'll continue to have our hands full with Pfizer's takeovers, buyouts, and Phase II license deals ornamented with upfronts and milestones, but Peck's presence at today's conference could mean we'll soon see a lot more diversity among its BD targets.

Musings on Commando Teva: Besting Big Pharma?

In recent investor forums, Teva executives have sounded like Big Pharma of the old days-- strong and bullish--while Big Pharma execs now sound more like old-time generics companies-- vulnerable and rather defensive.

The contrast was glaring when top Teva execs at their annual investor meeting earlier this month formed a wall of unremitting optimism, embracing both the vast opportunities before them and extolling what they see as their company’s equally vibrant ability to exploit them. The commandos appeared uncharacteristically giddy – using words like "unbelievable," "fantastic," and "flawless" to describe their numbers.

Only the day before, Pfizer CEO Jeff Kindler had spent his time at a Goldman Sachs analyst forum soberly doing a mea culpa on Pfizer's previous inability to control itself (spending) and emphasizing how they – Kindler, his CFO Frank D'Amelio and the rest of the Pfizer team – have learned from their past mistakes. We promise, people, that it won't happen again because Pfizer is taking steps to change (Are mea culpas a business fashion?).

Certainly Teva does have a track record of meeting its long-term targets – even if that means aggressive M&A, heavy-hitting patent challenges in the US, and even tougher at-risk launches and pull backs. All of these the executives mentioned only in passing, however, by-and-large avoiding any discussion of the messy details of their day-to-day work in the generics trenches. Pfizer and its brethren, in contrast, can't avoid mention of their troubled realities and steps they're taking to respond.

To take these observations a step further, in an exercise done perhaps largely for our own amusement--and admittedly crude given the vast differences in business models--we compared Teva's key financial ratios to those of Big Pharma to see ultimately if Teva's hybrid approach warrants such high-minded arrogance. Obviously, top-line growth rates are driving the executives' attitudes—Teva's is jumping, while Big Pharma is generally stagnating.

In general, the fundamental ratios of Teva and Big Pharma diverge significantly, especially for key figures like gross margins, SG&A and R&D to sales – hardly a surprise. Teva's gross margins hover in the high 50s percentile (forecasts have them climbing, however), while Big Pharmas are in the 70s and low 80s. R&D obviously isn't comparable – Big Pharma's R&D-to-sales ratio tends to be more than double that of Teva's, which its executives say should stay in the mid-single-digits.

Some of Teva's other ratios, however, are converging with Big Pharmas'. Its operating margins hover between 25 percent and 30 percent—within the lower range of normal for Big Pharma. And that range has been trending up, even as analysts expect most Big Pharmas' generally to stay flat (Glaxo, Pfizer) or decline (Sanofi, Lilly, AstraZeneca, and it's a toss-up for Bristol-Myers).

Teva's net margins, however, currently exceed those of Bristol and Roche and are comparable with Lilly (although they trail Pfizer and Merck), points out Standard & Poor's healthcare analyst Herman Saftlas. But Saftlas projects Teva's adjusted net margin should expand from the 22 percent range it falls into today to close to 30 percent over the next few years, powered by its top-line growth, cost cutting efforts, and M&A. That would put its net margins smack in line with Big Pharma's, and way above the rest of the generics industry, giving it more room to maneuver.

Despite all the challenges facing Big Pharma, its business model still has tremendous advantages over most generics companies—higher gross margins, stronger cash flow, and stronger balance sheets, as Moody's pharma analyst Michael Levesque points out. But he notes, Teva is indeed in a unique position, given its success in both generics and branded businesses, which generate lots of cash flows and profits, its leading market share, and its product and geographic diversity. So maybe diversity can pay off – if other parts of the equation, like Teva's military-like discipline at integrating new acquisitions and careful deployment of resources, are aligned. That's a message Big Pharma should take note of as it tries out its own new playbook.

image by flikrer Thorsten Becker used under a creative commons license

And the Big Pharma Deal of the Year Nominees Are ...

OK readers, it's time to have your say! This year we've set up a special IVBDOTY web page where you can vote in all three categories. CLICK HERE TO GO TO THE VOTING BOOTH.

And so here, in no particular order, are your IN VIVO Blog 2009 Big Pharma Deal of the Year nominees. Please do comment on this post about any and all of these deals, and why you voted the way you did.


Dollars for Donuts: Is the biggest deal for Big Pharma in 2009 the $80 billion deal struck by the brand name trade association PhRMA as its contribution to health care reform? We call it "Dollars for Donuts" because a key element of the deal is the industry's commitment to offer a 50% discount on drugs purchased by Medicare beneficiaries in the Part D coverage gap, a.k.a. the "donut hole" in the prescription drug benefit for seniors and the disabled. It's not a traditional biz dev opportunity, we admit. But if Big Pharma dealmaking is about anything, it is about paying up front for access to new commercial opportunities downstream. And this deal fits that model perfectly.

Pfizer/Wyeth: This is the deal that marked the beginning of a new kind of Big Pharma. For better or for worse, it turns Pfizer from an R&D-focused, high-risk, high-reward company into a diversified, industrialized group whose investment appeal is less about growth than about dividends, efficiency and value. In its scale, the transaction symbolized the scope of Pfizer's--and other Big Pharma's--challenges, and in its content, it captured--in one fell swoop--many of the individual strategies drug firms are pursuing in order to escape from their R&D productivity problems.

Pfizer/DOJ Bexxtra Settlement: Pfizer’s September settlement is by far the biggest in the wave of industry prosecutions that defined the decade of the 2000s. But these settlements have always been more important than the dollars. Each case—and the headlines it generates—marks another step down in the reputation of the industry. They have helped stoke a puritanical fire in the medical establishment, one that aims to root out all industry influence over clinical research, medical education, and clinical practice standards, a movement that could, taken to extremes, jeopardize the entire private sector biomedical model.

Merck/Schering-Plough: Merck might've only been buying time through this deal--time to figure out what on Earth to do about a $4 billion patent-expiry problem--and will be doing the usual, un-prize-worthy cost-slashing (the deal's synergies represent a whopping 40% of sales). But what it lacks in headliners it makes up for, we argue, in behind-the-scenes cleverness.

GSK/Pfizer ViiV Healthcare JV: It's not every day that Big Pharmas join forces in an important way. The HIV joint venture between Pfizer and GSK, announced in April, and later labeled ViiV, may be industry's biggest exception. The company combines GSK's and Pfizer's marketed HIV portfolios and pipelines into a standalone with more clout than either party would have individually, helping reduce both sides' cost, and infusing accountability and productivity in a way that only a smaller outfit can. Negotiating the terms wasn't easy, but if this tie-up works, it might not be the last. "If there's another opportunity to do the same thing again with GSK, we'd do it," said Bill Ringo, SVP BD at Pfizer.

Roche/Genentech: With its landmark agreement with Genentech already nearing a sunset, Roche made a preemptive strike, betting it would gain more by owning 100% of sales juggernauts such as Avastin and the ability to slash duplicative infrastructure than it stood to lose if the top talent at Genentech hung up their lab coats. This tie-up isn't about innovation, it's about efficiency. And the acquisition's final price tag--$95-a-share, while certainly a great deal more than the intitial $89-a-share bid price, is more than matched by the likely earnings potential of Genentech's already marketed products. Furthermore, analysts estimate the biotech's mid- to late-stage pipeline more than adequately supplies Roche with a pipeline reservoir through 2016.

DOTY 2009 Big Pharma Nominee: Roche/Genentech

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

Last but most definitely not least, the biopharma voting public would be crazy not to consider the Roche/Genentech tie-up as the Big Pharma Deal of the Year. After all, it's Roche's surprise hostile offer for Genenetech in the summer of 2008 that sparked the mega-merger madness that eventually resulted in Pfizer and Merck's respective take-outs of Wyeth and Schering-Plough. In case you quibble about its eligibility: the deal may have been hatched in 2008, but the wheeling and dealing lasted well into 2009.

True, the deal value isn't as eye-popping as Pfieth. And it doesn't have as much cleverly worded legalese as the Merck/Schering agreement. But the Roche/Genentech deal seems most likely--of the big three mergers at least--to actually work as advertised. And we'd note that up till now the track record on mega-mergers isn't even up for debate. It's been abysmal.

Already heavily diversified into specialty biotech products thanks to its long-time partial ownership of Genentech, Roche doesn't need a transformative deal to move the company to the next level. Nor does it need to buy time a la Merck as it bolsters its pipeline, thanks to ex-US revenues on Genentech products. But it also can't afford to leave 100% of the US oncology market on the table anymore either and the opportunity to take Genentech private allows the company to build itself into a power-house of personalized medicine.

Thus, with its landmark agreement with Genentech already nearing a sunset, Roche made a preemptive strike, betting it would gain more by owning 100% of sales juggernauts such as Avastin and the ability to slash duplicative infrastructure than it stood to lose if the top talent at Genentech hung up their lab coats and gave up their iPhones. (And there’s no doubt some have, including David Schenkhein, Susan Desmond-Hellman, and Art Levinson.)

Is there hope that by acquiring Genentech the Big Biotech's drug hunting prowess will spill over to the Rochies? Undoubtedly. But it's a nice-to-have NOT a need-to-have part of the deal. Despite the clever and very public lexical contortions Roche CEO Severin Schwan gave in discussing this deal--especially in the early and very hostile days of negotiating--this tie-up isn't about innovation. It's about efficiency. Even as FIGs (friends of an independent Genentech) get out their voodoo dolls in protest, we'll state again that the Genentech of 2009 was a far cry from the discovery-oriented scrappy biotech with high growth prospects of yesteryear.

And the acquisition's final price tag--$95-a-share, while certainly a great deal more than the intitial $89-a-share bid price, is more than matched by the likely earnings potential of Genentech's already marketed products. Furthermore, analysts estimate the biotech's mid- to late-stage pipeline adequately supplies Roche with a pipeline reservoir through 2016.

Moreover, it's not as if Schwan and co. haven't worked overtime to preserve the semblance of Genentech's autonomy. The DNA ticker symbol may be gone, but the early R&D group still has a biz dev unit, despite the seeming overlaps that come from having two such organizations under the Roche roof. Thanks to a restructuring of the executive committee that has Genentech's head of R&D Richard Scheller reporting directly to Schwan, Genentech also has extraordinary visibility within the new organization.

So vote for Roche/Genentech for Big Pharma deal of the year. It's a transaction that's got it all: drama (the hostile-then-ultimately-friendly (sort of) offer); high stakes months-long brinkmanship (a lower than expected offer followed by an even lower offer price); and ultimately, a chance of being successful.

2009 Big Pharma DOTY Nominee: Pfizer/Wyeth

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.
This, surely, is The One. Whether or not you agree with Jeff Kindler's strategy for Pfizer (plenty don't), the $68 billion Wyeth acquisition, announced on January 26, has to be the most obvious candidate for Big Pharma Deal of the Year.

Are we saying it's 2009's "most interesting and creative" deal making solution, in line with what these illustrious award nominations are supposedly rooting out? Creative, no. It was another, even-more-mega, mega-merger that cynics saw as a means to mitigate the impact of Lipitor's genericization. Solution? Too early to say. But what the deal perhaps lacked in creativity--at least, at first sight--it surely made up for in interest.

For this is the deal that marked the beginning of a new kind of Big Pharma. For better or for worse, it turns Pfizer from an R&D-focused, high-risk, high-reward company into a diversified, industrialized group whose investment appeal is less about growth than about dividends, efficiency and value.

In its scale, the transaction symbolized the scope of Pfizer's--and other Big Pharma's--challenges, and in its content, it captured--in one fell swoop--many of the individual strategies drug firms are pursuing in order to escape from their R&D productivity problems. The deal furnished Pfizer with biologicals--supposedly faster-to-develop, easier-to-protect than small molecules--and thus with a chance to compete in the much-vaunted biosimilars opportunity, too, which management is beginning to talk up. The deal also provided vaccines, once a dowdy corner of health care but now Big Pharmas' ticket to good government relations, emerging market access and--exemplified by the ongoing swine 'flu outbreak--pumped up revenues.

And Wyeth brought to Pfizer a significant consumer business (not as big as the one Pfizer sold to J&J only a few years ago, but still ...) thereby offering access to non-Western markets, and, as importantly, to a new, lower-cost range of products.

And that's the point: Pfizer has decided its only way to survive is by providing a far wider range of medicines, at a range of price-points, across a range of markets. What it sorely lacks in innovative R&D output it will make up in breadth-of-offering, economies of scale and lower costs. As a senior Pfizer source was quoted in this IN VIVO feature:

"The way to deliver earnings growth isn't what we did in the go-go days of the '90s, but rather, it's emulating what the consumer package goods companies, Coke, Pepsi, Procter & Gamble did. There was never great top-line growth there--3-8%. But if you grow your expense line at a much slower rate you can still achieve double-digit bottom-line growth--a predictable 10-13%."

All that makes sense, surely, in a payer-constrained world with increasing generics and where most future growth is predicted to come from generic- and OTC-dominated developing markets like China.

Maybe. But, you ask, isn't Pfizer chickening out of blue-sky R&D? If it's not the end of the story it's certainly the end of the chapter on blockbuster, primary care drugs. Pfizer isn't giving up internal R&D, but it's definitely demoting it, betting that purchases can fill the gaps. And it's betting, too, that it can create the kind of small-unit creativity within its far-larger walls that GlaxoSmithKline has so vocally advocated.

The deal's critics say Pfizer should have gotten smaller, not larger. It should have followed Bristol. Pfizer considered shrinking, and spin-offs, according to strategy SVP Bill Ringo. Too complicated and risky, he and his colleagues concluded.

But far from choosing the easy option, it's arguable that buying Wyeth was equally, if not more, risky. Even following the R&D re-org, headcount cuts and a 35% reduction in global R&D square-footage, questions remain. The Big Pharma-turned-GE hasn't yet proven that it has a new, sustainable lease of life, far from. But that it's daring to try--well, that deserves a gold-plated* DOTY award, surely? (*not really)

2009 Big Pharma DOTY Nominee: Dollars for Donuts

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.
This is a no-brainer. The biggest deal for Big Pharma hands down in 2009 is the $80 billion deal struck by the brand name trade association PhRMA as its contribution to health care reform.

We call it "Dollars for Donuts" because a key element of the deal is the industry's commitment to offer a 50% discount on drugs purchased by Medicare beneficiaries in the Part D coverage gap, a.k.a. the "donut hole" in the prescription drug benefit for seniors and the disabled.

Okay, okay, its not a traditional biz dev opportunity, we admit. But if Big Pharma dealmaking is about anything, it is about paying up front for access to new commercial opportunities downstream. And this deal fits that model perfectly.

We've covered the deal itself extensively in The RPM Report, but in a nutshell, PhRMA agreed to the donut hole discount, to pay bigger rebates on drugs purchased by the Medicaid program for low-income families, to accept a pathway for follow-on biologics and to an excise tax on prescription drugs dispensed in the US. That is the $80 billion.

Of course, like any good deal, that top number includes a lot of biobucks. The $80 billion is tied to how the Congressional Budget Office scores the legislation, and includes some creative accounting. So the donut hole discount is scored as saving money for the government (even though it directly saves money for Part D beneficiaries). And PhRMA gets credit for the savings from follow-on biologics, even as its members salivate over using the new process to jump start their investments in biologics.

This also counts as an options-based deal, since Congress will have the final say on exactly what ends up in the legislation--and we figure that $80 billion price tag will go up to at least $100 billion when all is said and done. But, despite what you read, this really is part of the deal. PhRMA may hope to hold the line at $80 billion, but knew darn well that there would be pressure to add more. And, assuming the extra money comes in the form of rebates on Part D to help close the donut hole altogether, it only means that industry will end up paying more to get more.

And what did PhRMA buy? A bigger market in the US.

First off, filling in the donut hole is good for business. Generic drug dispensing in Medicare Part D is running above 70%, and manufacturers at least are convinced that they are losing business because of the real or perceived impact of the coverage gap. Obviously PhRMA would prefer not to pay rebates or offer deep discounts, but eliminating that gap is worth paying for. That's why we're convinced that dollars-for-donuts will happen even if health care reform itself collapses.

But for now at least health care reform looks inevitable. And health care reform means more people will have insurance (like 30 million more) and those with insurance will have better insurance (no more lifetime caps, more predictable copays, better coverage for products like vaccines). And companies don't need much of a boost from that coverage to recoup their investment in support: by our math, it will only take four new monthly prescriptions a year per newly insured life to make up the entire price. (Read our analysis here: it's hot off the presses.)

But like any classic drug development deal, the payoff is a few years away. The new coverage doesn't kick in until 2014--just when Big Pharma will be coming out the other side of the patent cliff. So think of this like the Pfizer/Wyeth deal: a big upfront investment that helps to position Pfizer for life after Lipitor. Only this investment will help position the entire industry for life after reform.

So Dollars for Donuts is a very big deal--and a very good one to boot.

Musings on Payer-Pharma Relations

This fall’s Academy of Managed Care Pharmacy’s meeting, which took place in San Antonio last week, seemed subdued, with fewer programs and attendees than in the past, likely a byproduct of the weak economy.

Lack of buzz didn’t change the AMCP’s penchant for showcasing the tense, yet symbiotic dynamics between payers and pharmaceutical manufacturers, however. It’s a meeting where pharma manufacturers sponsor satellite sessions and symposia led by top clinicians on new and evolving biologics, even as managed-care thought leaders, speaking in neighboring rooms, educate rapt pharmacists and managed care professionals on how to limit or control use of brand-name drugs.

The juxtaposition, although not new, continues to fascinate. The crux of managed care’s position was summed up in a session, “Value Analysis of New Medications – 2009 Update,” which is this year’s take on the value of the scientific data supporting newly approved NMEs. Its presenters’ conclusions: hardly any drugs came to market in 2009 with acceptably reliable data to back their clinical efficacy or safety claims.

RegenceRx, which did the analysis, is the technology assessment arm of The Regence Group, an affiliation of five Western health plans. Overall, less than 10% of studies submitted to Regence for formulary decision making are what the group defines as “reliable,” said Helen Sherman, RegenceRx’ Chief Pharmacy Officer, who, along with Laurie Wesolowicz, a director of pharmacy clinical services at Blue Cross Blue Shield of Michigan, has been enlightening AMCP members on the data surrounding the latest new drugs for several years. And only about 10% of new drugs make it onto Regence formularies, she observed.

Among the most common flaws in pharma studies: lack of blinding, small sample size, high drop-out rates, and endpoints with uncertain or unknown clinical meaning, Sherman pointed out. The findings weren’t shattering—RegenceRx has been delivering a similar message for several years now. But the build up, now, just as in years past, was a stark reminder of how big the gap is between what payers want and what pharmaceutical manufacturers provide.

To be sure, drug companies are starting—ever so slowly--to change their approach, and Sherman points out that several have asked RegenceRx to provide feedback on clinical trial design – for a reality check, not an assessment of the cost benefit ratio. But the results of their latest efforts won’t be seen in the market for at least five years. Read: Don’t expect much substantial change in data quality in the near term.

Now, RegenceRx is to managed care what a key opinion leader is among physician groups: it leads the way, while the rest of the flock follows. That is, most managed care organizations rely on much less sophisticated supporting analysis when they make formulary decisions. Still, in general, plans are getting better: if interest in particular AMCP sessions is any indication, the managed care industry is training a new generation of pharmacists who are also seasoned evaluators of clinical trial data.

Drug makers are fighting back, of course: they’ve got rebates, patient assistance programs and, perhaps, are taking hesitant steps toward pay-for-performance contracts. The latter would be a particularly big step because it is defined by collaborations among historically mistrustful parties, which share few goals. After all, only last fall at AMCP, the chief medical officer of Express Scripts, when asked, dismissed emphatically the idea of a role for pharma in his company’s fine-tuned efforts to improve patient compliance with medication regimens.

This year, in what may or may not signal a subtle change in tone, AMCP featured two panels focusing on payer-pharma partnerships. One was a case study of a coordinated effort by AstraZeneca and Molina Healthcare to improve appropriate use of PPIs. The second was a more general view of the promise and pitfalls of such relationships. Both ended on a straightforward message that more of these types of activities are coming. (For a discussion of how pharma-payer relationships are evolving in Europe, see July IN VIVO Pricing Experiments: Pharmas Get Creative in Germany) and also see (The RPM Report's Feb. 2009 issue, The Cost Sharing Solution: The New NICE Ticket.)

Plenty of challenges linger before such agreements become common, if ever. Without truly innovative, effective new drugs, pharma’s hands are somewhat tied. And payers, for their part, are concerned that, even as they use more generics for basics, the prices of proprietary drugs they need – and their medical costs overall – will go through the roof. But at the moment, both sides seem to agree the current pricing structure has to change. What that change involves and who gives and gets what is up in the air.

image by flickr user jvverde used under a creative commons license.

Big Pharma, Polar Bears, and the Need to Specialize

For at least a decade, biotechs have been perceived by many observers as the likely evolutionary winners in the race for survival and prosperity in the drug industry. The credit crunch has drastically altered the environment in which companies operate and the biotech business model now looks much less likely to supply the fat returns on capital, and the price/earnings ratios, that have historically been associated with companies supplying novel medicines.

So, who will the new winners be, and what strategies must they employ to thrive in these challenging times? Scisive Consulting chairman Robert Easton, partner Catharine Staughton and consultant Matt Young weigh in with a naturalist analogy.

Granted historically lousy P/Es, growth, R&D productivity – pick your measure -- Big Pharma has one thing going for it. The current financial crisis has, at least in the short term, reversed the fortunes for still cash-rich pharmaceutical companies and the biotech upstarts that have been—for oh, about 25 years—inexorably learning to beat pharma at its own game.

The financial collapse seems itself to have been a sort of bailout for Big Pharma. Now they are able to buy novel compounds cheaply from smaller companies who are dying to sell them.

The 20 largest pharmaceutical own a combined war chest of over $100 billion. If current projections hold, their cash and cash equivalents will rise to more than $500 billion by 2014. With these funds on hand, Big Pharma could buy up not only enough candidates to replenish their pipelines, but the majority of the biotechnology industry itself.

On the other hand, according to Burrill & Co, one third of publicly traded biotechs have less than six months’ worth of operating cash.

The outcome of the financial collapse will be that Big Pharma will remain pre-eminent, at least while the capital crunch lasts, albeit with more modest P/E valuations. As a consequence, biotech companies, which had attracted investors with the long-term hope of valuations based on the high P/Es of Big Pharma, are struggling to fund their pipelines and must focus on - and perfect - their business development strategies just to stay viable.

So can Big Pharma do something to make its new lease of life more than temporary?

Superficially, the recipe for evolutionary success seems obvious: the Big Pharma companies use their enormous cash reserves to acquire cash-strapped biotechnology companies. But before launching into the fray with an open checkbook companies need to consider the attractions of the approach, in the light of their own specific situation.

Scisive Consulting has defined drug companies according to six types of animal: those that have adapted to a narrow evolutionary niche, and those that are more flexible inhabitants of their environment.

Consider the polar bear. These beasts are powerful and can move quickly – challenge them at your peril. Nevertheless they must adapt to a shrinking environment, thanks to global warming, in order to survive and flourish. Not a bad analogy, we believe, for Big Pharma.

At the other end of the spectrum, biotechs are rabbits. They eat a lot of green. And their population varies widely according to the availability of food. When rabbits are stressed by predators or lack of resources, they eat their own young. (It’s true, you can look it up!)

Like polar bears, Big Pharma are the top predators in their shrinking world. To stay relevant, however, they need to either figure out how to live in their shrinking environment – or find and adapt to new territories.

In industrial terms, such an imperative translates to the need for a wholesale change in the drug industry’s business model. When this industry began, it was built on a rather simple model. Science created a pill which was manufactured cheaply and marketed by sales forces to a large group of patients. This model led to profit margins that are almost unthinkable today.

The model also allowed all of the Big Pharmas to evolve in very similar looking creatures. For example, AstraZeneca, Novartis, and Bristol-Myers, all operate in the fields of neuroscience, oncology, and cardiovascular health. While some pharmas involve themselves in nutritionals, animal health, infectious disease, and other fields, all of these companies also engage with a mixing pot of therapeutic areas.

The relative strategic uniformity isn’t generally the case with the leading companies in other industries. In the high-tech industry, for example, there is a much higher level of specialization. Google is mainly in the advertising business; Microsoft, software; Research in Motion, in wireless solutions. You aren’t likely to see Facebook manufacturing semiconductors any time soon. (Yes we are aware of Microsoft’s Bing search engine and the new Google Chrome OS, but still.)

It is likely that health care businesses will evolve in a similar fashion. The leaders of the future will be those with unique and complex models which sub-speciate into differentiated forms. Companies will focus nearly all of their efforts on a single therapeutic area, becoming “immunology companies” or “cancer companies”. These companies will also become more integrated across sectors. A cardiology company will sell diagnostics, devices, and therapeutics pertaining to cardiovascular health.

Such a transformation will involve radical changes to their structures. Fortunately, pharmas have a great deal of cash now, which gives them the resources to undergo such a transformation. The winners, ultimately, will be those who recognize this need to adapt, specialize, and develop more complex business models, and subsequently capitalize on their first-mover advantage.

A good example of this can be seen in Astellas’ determination to acquire CV Therapeutics. Although CV’s board rejected the offer numerous times, ultimately fleeing into the arms of Gilead, the attempted acquisition has marked a watershed event in how Japanese companies operate with respect to their American counterparts. Typically Japanese companies have refrained from hostile corporate activity and this fundamental change in Astellas’ strategy shows its willingness to adapt and its understanding of the new reality in the pharmaceutical market.

Secondly, Pharma’s polar bears must acquire the best candidates from their prey, the cash-strapped biotech rabbits of the world. However, there is an issue of timing at play here. Although biotech assets are cheaper than ever before, they have probably not yet hit rock bottom. It is clear that these cash-eating biotechs will get more desperate as this crisis wears on and hence the pickings for the polar bears will get better.

The astute will watch and wait, and the true art will be in knowing when to pounce: before competitors do and the opportunity passes.

For the full article, including the likely fate of the duck-billed platypuses and other animals of the pharmaceutical world, see www.scisive.com.

Has PE-Backed Pharma R&D Risk Hedging Fizzled?

This morning we learned that former AstraZeneca CFO and current Goldman Sachs partner Jon Symonds (right) is leaving that bank to join Novartis as CFO-designate. Symonds will take the financial reins at the Swiss pharma next April, when current CFO Raymond Breu retires. Novartis' release is here.

Before joining Goldman in 2007, Symonds had been CFO at AZ for more than eight years and departed not long after AZ's acquisition of MedImmune. At the time it was considered tough luck for AZ, where Symonds had been passed over for the CEO role in favor of David Brennan. The FT said at the time:

His resignation was a blow to the company, because Mr Symonds was respected in the financial community for driving down costs – helping to maintain earnings at a time of setbacks in the company’s pipeline of new drugs – and for communicating effectively with investors.

In the two years since then the word on the street was that Symonds was working on an oft-discussed but rarely implemented model in which a private equity player would take a big financing role in a Big Pharma's development program--something they've done in small and mid-sized companies. Like TPG/Lilly/NovaQuest's Alzheimer's asset financing arrangement (one of our Deals of the Year! candidates), only on a grander scale.

Symonds was supposedly putting together a pool of PE capital for developing Phase I and II Big Pharma (and maybe other) compounds, which could be pulled together. The structure would have addressed one of the big problems for PE players--can you access enough projects to effectively hedge the intrinsic risk of drug development? (Let's face it--not every compound that Big Pharma is willing to part with is going to be a winner, right? There are only so many ... iloperidones?)

There's a fundamental tug of war here: Pharma co's, despite their recent rhetorical embrace of all things out-partnering, don't like giving up control of multiple assets en masse--Pfizer's recent HIV deal with GSK notwithstanding. For PE backers, though, the more the merrier.

Symonds--and others have hinted to us about these kinds of funds too--was allegedly going to pull something like this together, according to remarks he made at last year's FT Pharma conference, essentially creating a new hybrid model of R&D.

Only it hasn't happened.

So what might have impeded, if not specifically the Goldman project, then the model more generally? Why hasn't private equity found a way to play nice with Big Pharma, in an everybody-plays-everybody-wins kind of way? We noted in our January 2009 look back at last year in IN VIVO that this kind of risk mitigation might lose its sheen because a lot of people who are supposed to be the experts in this kind of thing are bankrupt, unemployed--or begging the taxpayers for assistance.

Or perhaps the sticking point has been the Big Pharmas themselves. Haggling over valuations and downstream rights and clawbacks has to be expected, and maybe for now these issues are insurmountable. Or maybe the deal is still in the works, but delayed. And for Symonds, the opportunity to become Novartis CFO doesn't come around every day. Banking is so ...well, passe.

According to the FT's description of Symonds' strengths, above, Novartis watchers have fiscal discipline and good communication to look forward to. Should we also be expecting some innovative or experimental R&D financing strategies?

Merck and Schering-Plough: Vive La Difference?

So Merck has overcome its institutional reluctance to commit to large-scale M&A and pulled the trigger on a $41 billion Made-in-New Jersey-deal with Schering-Plough.

Unlike a lot of observers who can lay claim to predicting this one, we counted ourselves among the skeptics that Merck would make this kind of move. That said, it's hardly a shocker, replete with cost-savings, synergies and other happy buzzwords that consolidation-hungry folks bandy about in discussing who's gonna pair up with whom. On to the highlight reel.

The deal specs:

• Values SGP at $41.1 billion in cash and Merck stock, a 34% premium to SGP's Friday close; Merck will borrow $8.5bb from JPMorgan to finance the deal.
• Allows Merck to get in on some of the diversity action Pfizer is after in its takeout of Wyeth. Merck gets Schering's animal health biz as well as its consumer unit, and bulks up its overseas presence (53% of the combined company's revenue will come from ex-US, 12% from emerging markets).
• Streamlines the firms' commercial activities and will account for $3.5 billion in annual cost savings by 2011 on top of what the two companies promised individually up until now.
• Gives Merck what it deems the necessary "critical mass" to absorb economic- and health-reform-driven shocks to the system, not to mention some interesting projects in a much deeper late-stage pipeline (like boceprevir in HCV and TRA in cardiovascular disease)
• And consolidates the operations and decision making from the two companies' cholesterol JV.

It also raises some interesting questions, including:

• Just how will Johnson & Johnson react to the quirky structure of the transaction, seemingly designed to allow "a new Merck" to hang on to the J&J-partnered rheumatoid artritis drugs Remicade and golimumab?
• Is the premium high enough?
• Despite being able to describe in detail earnings per share guidance for the combined company, why couldn't CFO Peter Kellogg break out the revenue numbers?
• For all the talk about very little overlap in the two firms' pipelines in terms of their molecules' mechanisms of action there's certainly plenty of therapeutic area overlap. Will this raise regulatory concerns?
• And how will adding sunscreen and dog-trackers to the famously science-driven Merck affect the company's DNA? And what was up with that spike in SGP trading volume and price last Friday?

We'll be all over this deal in the Pink Sheet Daily, the Pink Sheet and IN VIVO, tomorrow and in the days and weeks ahead, and of course we'll have some treats for you here on the blog too. Stay tuned!

Sticker Shock May Open Innovation in Pharma

Proposals advocating “open” or “collaborative” innovation in pharma R&D are suddenly cropping up throughout the pharma industry in a variety of forums and iterations. J&J’s head of global R&D Paul Stoffels talks about it, as does GlaxoSmithKline’s Andrew Witty. Not that collaboration itself is news – business development is a mainstay of pharma strategy.

These new ideas, however, refer to collaborations in areas where pharma previously feared to tread--at the earliest stages of research, across several companies--and involve sharing of intellectual property. In the past, such ideas were unthinkable, but pharma companies are well aware their R&D models need an overhaul, if for no other reason than sticker shock: Innovator companies spend $90 billion a year on global R&D, but stand to lose $32 billion in cash flow over the next five years as key products go generic. No one expects that they’ll be able to compensate for that loss – which means less money for R&D.

Enter the management consulting firm Bain & Co., which also strongly advocates moving the industry toward more collaborative research in this article just published in the most recent issue of IN VIVO. Recently the head of Bain’s North American healthcare practice, Chuck Farkas, spoke to IN VIVO Blog about his group’s thoughts.

In one of Bain’s models, groups of companies would “pool” research and development assets within a disease area or class of compounds, sharing in some manner in the commercial success of any compounds that emerge from the collaboration. Another very different model calls for sharing IP, resources, and talent to identify the best mechanism of action to tackle a particular disease, after which each company would compete separately in the marketplace.

That latter kind of open innovation wouldn’t necessarily limit the number of companies pursuing particular molecules and therefore wouldn’t create systemic efficiency, but it could eliminate duplicate investment in early-stage work and improve productivity by enabling scientists who would normally compete to work together, Farkas explains.

Especially in the latter model, commercial execution would be paramount. Competitors would win on the merits of their science—but the balance of power would likely shift to those with the most cunning in the market. That’s what happened in the consumer goods and certain sub-sets of the IT industries, where R&D pooling became a norm.

Today’s pharmaceutical R&D model, which industry is gradually restructuring, was formed around a bubble that has burst, Farkas observes. Companies are "asking how to share more of the R&D" he says. "There is massive pressure to be far more rational in R&D.”

Bain's ideas are part of a trend, of course, at least rhetorically. In a February 13 speech at Harvard Medical School, GSK’s Witty advocated patent pooling—that is when patent owners agree to license their patents to others—and said GSK is doing just that with assets aimed at treating certain neglected tropical diseases.

The head of global R&D at J&J, Paul Stoffels, a Belgian physician, has also been writing about and speaking publicly on what he calls “open innovation,” in which pharma companies network “across internal organizational disciplines and geographies” and externally as well “to share in both the benefits and costs of innovation.”

The extent of their commitments isn’t clear, however. Witty’s remarks received considerable publicity—but GSK’s program is directed at markets that don’t generate much profit, for big pharma anyway. And J&J’s minimal efforts involve small steps in niche markets.

But Farkas and others are adamant: the pressure of driving earnings as revenues fall “will force companies to look at dramatically different R&D models." And as they do, commercial competence--itself evolving in response to external pressure--will take on a whole new meaning.--Wendy Diller

image from flickr user benlyon used under a creative commons license.

The IN VIVO Blog Podcast: Thoughts on Pfizer-Wyeth

Why is Pfizer buying Wyeth? Will the Big Pharma of the future look like General Electric? Is there a good reason to relocate to Indiana? Answers to all these questions and more on this week's installment of The IN VIVO Blog Podcast.

Just click the image below to get started. Oh, and we're on iTunes now as well, so please subscribe to that (it's free).

Burst Bubbles and Bailouts: Big Pharma and the Financial Mess

In Washington, there is a distinct undercurrent of gloating when it comes to the Panic of 2008.

No one is happy, exactly, about the incredible turmoil in the financial markets, nor can anyone be said to be thrilled that taxpayers will be putting up something like $700 billion to rescue Wall Street.

But in a town filled with people who work for the federal government, there is an undeniable sense of vindication. See, we are needed after all. Free markets don't take care of themselves. Sometimes you just have to turn to Uncle Sam to see you through.

Or, as Washington Post columnist Steve Perlstein puts it, "It will no longer be an easy applause line for a politician to declare that government is the problem and that markets always know better than regulators and politicians."

We've already pointed out that it may be naive of industry to think that the financial storm will spare it any damage, since the biotech industry is, in a sense, nothing more than an amazingly complex form of derivative finanicial instrument: a way for investors to tap indirectly into the immense profits of Big Pharma blockbusters.

We've also written about Big Pharma's own bubble problem: the fact that the industry is built to support an unprecedented--and apparently unsustainable--spike in approval of large, primary care brands in the mid-1990s, generating a need for infrastructure--and expectations for growth--that now present a terrifying cliff at the end of this decade. If Merrill Lynch can vanish, why can't Pfizer?

But it is not just loss of confidence in creative financing or in the stability of mega-cap companies that is a threat: there is also the renewed confidence in central government interventions in the economy to think about.

If the government must intervene to save Wall Street itself, then why can't it intervene elsewhere in the economy--like, for instance, in setting the price of life saving medicines?

As tough as it has been to be a Big Pharma company the last three years, it would have been even tougher without the Medicare Part D program, a massive new insurance program to subsidize the purchase of those previously mentioned blockbusters--and one that relies on the principle that free market competition is the ultimate path to efficient, economically effective health care.

This is the program that famously prohibits the federal government from "interfering" in the negotiation of prices between the private drug companies and the private drug insurance plans--and at the same time commits the public to pay whatever the price ends up being.

Its fair to say that the events of the past week will strengthen the hand of those who don't like the Part D model. After all, if the free markets don't work for mutual funds, will anyone believe that they work for Medicare?

Count both Presidential candidates among those with strong misgivings about the Part D program, albeit from very different perspectives. Democrat Barack Obama thinks it relies too much on private contractors, and favors given the government more power to act--especially when it comes to the price paid for medicines. Republican John McCain objects to the program for the opposite reason, saying that taxpayer funding shouldn't be commited to a new healthcare entitlement. But he too wants the government to get a better deal on any medicines it ends up paying for.

Obama has already begun hammering McCain for his free market approach to health care in general. Expect that to continue until election day.

But no matter who is victorious in November, the events of September will ripple into the pharmaceutical sector. After all, if Washington can set the price for AIG or Fannie Mae, surely it can decide how much Avastin is worth...

Is Big Pharma Ready For Minibusters?

Some things are easier said than done.

That’s the opinion of one biotech CEO commenting on claims by some large drug companies that they are moving towards smaller, more targeted drug products. While the strategy may sound good, they can’t do it, he says.

“Once you’re invested in a big model, you’re invested in it,” the biotech CEO maintains. The biotech CEO based his arguments on two key points:

1) The enormous scale of large pharmaceutical companies invested in R&D through to sales and marketing dictates they must sell large products aimed at broad patient populations.

2) The long and established blockbuster culture of large pharmaceutical companies creates an imposing hurdle to retooling business strategy to focus on smaller, niche products.

On the first point, the biotech CEO compared the total size of an average biotech company to just one product sales force of a big pharma company. On the second point, he said size impedes agility. “Big companies move slowly.”

In addition, he says a culture of assumed successorship—“my father worked there, I work there, my son will work there”—is a challenge to creative thinking and leads to complacency.

We’ve argued that the creation and implementation of FDA’s postmarket powers in the form of risk evaluation and mitigation strategies (REMS) means companies will be pushed more towards well-defined, marketable populations as a result of tighter controls. To read more, click here.

It’s not that the blockbuster drug, one with a billion dollars in annual sales, is dead, but those products will become increasingly rare and will be found in more specialty markets as opposed to primary care.

That means more products with annual sales in the $200 million to $500 million range, or minibusters.

So who is ready for the move towards more targeted, minibuster products? Well, biotech, of course.

The biotech CEO says the size and culture of biotech companies allow them to be more focused and reshape their strategies without scrapping the overall framework of their businesses. In other words, more agile and less exposed to complacency.

That leaves a conundrum for large pharmaceutical companies. It’s not enough to downsize and shed jobs, he maintains. That just reduces your size and cuts costs. The expectations from shareholders will remain the same. The question, he says, is “now what do you do?”

He highlighted blockbuster products as the great “gift” and “curse” of Big Pharma. It brings great long-term success to a company but also conditions management to overly rely on that product, focusing little attention anywhere else.

Can pharma companies make the minibuster model work? The jury is still out, and will be for quite some time. But at least one executive is skeptical.