Mega Mergers Are they turning pharma companies into zombies by wuyunqing


									                                                                               ISSUE 10     2009   £12 €18 $25 Rs.300

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     Mega Mergers         New Patents for Old Drugs          Preclinical Research                     Accelerating
Are they turning pharma   Label-based strategies in the          in Big Biotech               Central Nervous System Trials
companies into zombies?          United States            Vertical integration is the key      Neurophysiological approaches

                        MEGA MERGERS

                               Biotech consolidation through acquisition was the primary

                        crisis in 2008 has driven the pharmaceutical industry towards
                        adopting a short-term myopic M&A approach. The Innovation
                             Gap for new drugs has widened to a cavern. In 2009, the
                           industry has some interesting questions to answer. How to
                         close this innovation cavern and how will the pharmaceutical

                                    of long-term woes in building sustainable drug pipelines?
                                                               Neil J Campbell, CEO, Mosaigen, Inc. and

  8   P H ARM A F O C U S A S I A    ISSUE - 10 2009

           ver the past two years, big        great value that this upcoming Pfizer-
           pharma has strived to achieve      Wyeth mega merger would provide.
           revenue growth and pipeline        What is interesting here is that in all
stocking through M&A. In 2007, the            his interviews Jeffrey Kindler was overtly
pharma industry mainly targeted late-         promising that the past failures to inte-
stage biotechnology acquisitions to           grate value into the past M&A would
consolidate some drug development             not be repeated. As a result, many large
platforms, namely those with disease          pharma companies are still going for
franchises and drug class expansion.          mega mergers. e latest being Pfizer-
   en came the ever-worsening financial        Wyeth mega merger for about US$ 68
crisis during 2008 that rapidly spread        billion in stock and cash.
to become a global recession. is has                  e Pfizer-Wyeth deal, if consum-
put many big pharma companies into a          mated, would be the fourth largest
holding pattern exacerbated by difficul-        M&A deal ever and would give Pfizer
ties of accessing finance and the need to      the distinction of having made the first,
satisfy investors for the short-term.         fourth and fifth largest pharmaceutical
     One interesting observation is that at   deals in history. Pfizer is still trying to
the time of writing this article, more than   integrate the Pharmacia acquisition of
40 per cent of the biotech companies          2000 which was the fourth and now
in the US had less than a year of cash        is the fifth largest deal ever (Table 2).
on hand. Does this serve as a once-in-           e deal will merge two major pipelines
a-lifetime-opportunity to build value by      with patent expiry falling in the period
rapid M&A of biotech companies that           2011-2013. Lipitor alone constitutes 35
could stock various stages of develop-        per cent of Pfizer’s annual sales accord-
ment for big pharma?                          ing to the latest IMS studies and Pfizer
                                              press reports.
The latest pharma rage –                          Putting two anaemic pipelines
Mega mergers                                  together with no innovative system in
   e forcible merger of two big compa-        place doesn’t make one great pipeline for
nies that lack innovation doesn’t             future growth. In fact, Jeffrey Kindler
necessarily result in forming a good          repeatedly stated on news interviews that
company. ere have been academic               this deal would unlock value for both
and industry studies that have shown          companies and solve the short-term prob-
that this strategy had failed time            lems facing Pfizer. He repeatedly stated
and again to create any value for             that past M&A mistakes that destroyed
shareholders, drug pipelines and ulti-        value will this time provide value. Time
mately patients beyond a few years. e         alone will reveal the truth, but the analy-
past 12 months have witnessed many            sis of the combined pipelines seems to
such deals in the pharma industry.            be making a bigger issue and is expected
(Table 1).                                    to affect investors and value.
       e mega merger of Pfizer and                  It can take years to integrate the
Pharmacia in 2000 illustrates how a           R&D and corporate cultures following
merger, which lacks long-term value, has      these mega mergers—business develop-
huge dilution and which is not properly       ment groups can be taken off task for
integrated, fails. e Pfizer CEO, Jeffrey        up to two years while trying to manage
Kindler, was on the airwaves touting the      the integration. Big pharma companies


                                                                  Biggest health care buys – The last 12 months
                                                                                                                                  Deal Size (US$
                  Buyer                    Buyer Home City                     Acquiree                 Acquiree Home City                           Deal Announced
        AstraZeneca PLC               London                          MedImmune                      Gaithersburg, Md.                 13.8              April 24, 2007

        Novartis AG                   Basel, Switzerland              Alcon                          Vevey, Switzerland                10.5               April 8, 2008

        Takeda                        Osaka                           Millennium Pharmaceuticals     Cambridge, Mass.                   8.8              April 10, 2008

        Hologic                       Bedford, Mass.                  Cytyc                          Marlborough, Mass.                 6.3               May 21, 2007

        Siemens AG                    Munich                          Dade Behring Holdings          Deerfield, Ill.                    6.2               July 26, 2007

        Warburg Pincus                New York                        Bausch & Lomb                  Rochester, N.Y.                    3.6               May 17, 2007

        Eisai Co., Ltd.               Tokyo                           MGI Pharma                     Bloomington, Minn.                 3.3          December 11, 2007

        Medtronic                     Minneapolis                     Kyphon                         Sunnyvale, Calif.                  3.3               July 28, 2007

        Roche Holding                 Basel, Switzerland              Ventana Medical Systems        Tucson, Ariz.                      3.1              June 26, 2007

        Celgene                       Summit, N.J.                    Pharmion                       Boulder, Co.                       2.5          November 19, 2007

        Source: Mergerstat via Factset Systems
        • The top 10 acquisitions of life science firms over the past 12 months came at a total purchase price of US$ 48 billion.
        • Five of the acquisitions were of U.S.-based companies by bigger companies in Europe or Asia.
        • These buyers spent US$ 35 billion, or 73% of the total.                                                                                               Table 1

                                                                                                                             are scared and have started reacting to
                                                Largest pharma M&A deals                                                     the industry woes. ese woes are being
                                                                                                                             driven by a slowdown in growth as reve-
                       Target                              Acquirer                   Deal Value (US$ bn)                    nues come under threat from expiry of
        Warner-Lambert                           Pfizer                                   111.8
                                                                                                                             patents of blockbuster drugs, shrinking
                                                                                                                             pipelines from original science
        SmithKline Beecham                       Glaxo Wellcome                               79.6                           programmes and the ever-increasing
                                                                                                                             reach and breadth of generic drug
        Aventis                                  Sanofi-Synthelabo                            71.3                           competition. Are there alternatives to
        Wyeth                                    Pfizer                                       68.3 (Pending)
                                                                                                                             this mega merger mania? Well, you have
                                                                                                                             Astellas, the Japanese Pharma (Fugisawa
        Pharmacia                                Pfizer                                       59.8                           and Yamanouchi consolidation) moving
                                                                                                                             towards acquiring Small to Mid-size
        Genentech                                Roche                                        42.6 (44.1% Stake)
                                                                                                                             Biotech (SMBs); could this be a better
        Astra                                    Zeneca                                       39.9                           place to put money, time and longer-
                                                                                                                             term focus? (Table 1).
        Hoechst                                  Rhone-Poulenc                                33.8
                                                                                                                             Global financial credit crisis –
        Pharmacia & Upjohn                       Monsanto                                     31.9                           A silver lining for the big pharma?
        Ciba-Geigy                               Sandoz                                       27.0                           With so many biotech companies short
                                                                                                                             of cash and in mid to later stages of
        Schering                                 Bayer                                        19.3 (92.4% Stake)             clinical development, does this provide
                                                                                                                             a buying opportunity for low-cost drug
        Sources: Dealogic, Company News
                                                                                                                             pipeline stocking? It sure seems that way.
                                                                                                                  Table 2

  10   P H ARM A F O C U S A S I A   ISSUE - 10 2009

       If big pharma can muster a strong busi-
                                                                            Industry trends driving the mega mergers bandwagon
       ness development and licensing effort,
       they can merge or acquire a succession               Industry Trends Driving Mega-Mergers                      Effect on Growth Strategies
       of smaller biotech companies and fill the
                                                        Big Pharma focus is on sales and marketing       No drug pipeline development, push limited life
       gaps in drug pipelines from late preclini-
                                                                                                         to secure sales at longer term benefits of building
       cal / pre-IND to phase III / NDA. is                                                              sustainable businesses
       thought is probably causing big pharma
       heartburn, but what are the alternatives:        Big Pharma spending more on marketing than       Misaligned priorities to innovation, reward now, not
                                                        R&D for new drugs                                later, bad trend to start
       mega mergers? ere are many prob-
       lems that mega mergers won’t address             Consolidate with like-minded large companies     Mind-set to find other Big Pharma, Stunt long-term
       (Table 3). ree interesting deals at the                                                           growth potential, missed opportunities with smaller
       moment are the GSK-Attack Strategy,
       the continuing saga of Roche’s attempt to        Blockbuster legacy drug patent expiry in next    Short-term stocking M&A at risk of finding medium
       buy the remaining shares in Genentech            several years                                    and longer term synergies
       and the Astellas-CV erapeutics replay            Cost to development increasing-failure rates     Regulatory shift since Vioxx to safety over efficacy,
       from the fall of 2008.                           increasing                                       need better balance reviews
              ere are many benefits to an aggres-
                                                        Generic drug growth / biogenerics coming         For smart companies, this is portfolio
       sive biotech M&A roll-up approach. Let’s         Other drug strategies such as Nutriceuticals,    management; for myopic ones, knee-jerk reactions
       look at the three scenarios in reverse           Cosmeceuticals, Therapeutic medical devices      to save businesses, currently mega merger mania
       order.                                                                                                                                              Table 3

       Astellas and CV Therapeutics –                                             Potential benefits that biotech M&A provide
       Hostile takeover attempt
       Astellas is moving in on a hostile take-         Aspects of Biotech M&A                           Potential Benefits to Big Pharma
       over with a second attempt at CV                                                                  Could pull M&A together quicker for impact to
           erapeutics. e first attempt was in the        Short of cash, less than year
                                                                                                         short to medium term
       fall of 2008 with CV erapeutics turn-
                                                        Lowest company valuations in 25 years            Ability to "shop" and buy many ones
       ing away from any deal. As the market
       has moved downwards and cash reserves                                                             Build medium to longer term value for drug portfolio,
                                                        Biotechs, historically, have science platforms
       dwindled, Astellas feels that the addi-          that built their drug portfolios
                                                                                                         have potential revenues, but platforms for innovative
       tion of CV erapeutics would provide                                                               development
       growth into new areas and potential                                                               Big Pharma add-ons could be diseases, drug
       revenue paths for the medium future.             Some biotechs could provide new franchises
                                                                                                         classes, or operational capabilities
       Being a Japanese pharma company and
       concerned with long-term growth pros-                                                             If selected properly, big pharmas could stock
                                                        More biotechs have Big Pharma partnerships-      pipelines and force big pharma to big pharma
       pects along with a willingness to build          drive interesting options                        collaborations / M&A with the biotechs who have
       out new franchises in both diseases and                                                           big pharma partnerships
       drug classes and shouldering some of
       the risk, Astellas is bucking the trend of       Provides many more variables for deal-making     Financial crisis has tightened up credit, this could
                                                        and out-licensing monetisation strategies        allow for more original deal-making
       Wall Street pressures, quarter-to-quar-
       ter financial performance and western                                                                                                                Table 4
       big pharma.         e deal that formed
       Astellas—putting together Yamanouchi            Roche and Genentech –                                 drug pipelines. The first deal acquired
       and Fujisawa—built a sustainable foun-          Remaining share buyout                                a 44.1 per cent stake in Genentech at
       dation to grow from. It is predicted that       Another interesting potential trend-                  a cost of US$ 42.6 billion making it
       Astellas will make more smart acquisi-          setting deal involves the buyout of                   the sixth largest deal to date (Table 2).
       tions in the next couple of years and           remaining Genentech shares by Roche.                  This time around, it could cost Roche
       take advantage of the current financial          Roche is driving hard to purchase the                 double that sum. Genentech, one of
       crisis. Table 4 presents a summary of           remaining stake of Genentech to form                  the two largest biotechs in the world,
       drivers providing advantages to larger          the largest biopharmaceutical company                 could very well rebuff the Roche deal
       pharmaceutical companies with their             with broad research platforms, core                   and start its own biotech M&A strat-
       biotech brethren.                               capabilities, preclinical and clinical                egy. An approach that can be more

  12   P H ARM A F O C U S A S I A   ISSUE - 10 2009

                                                                                                                                       make a difference in how they build
                                                    Strategies for drug development
                                                                                                                                       value into their drug pipelines. The
                                                                                                                                       crisis has plummeted company valu-
                                                                                                                                       ations to their lowest level in 25 years
                                  Drug Development & Approval Process
                                                                                                                                       (the life of the biotech industry is almost
                                                                                                                                       that old) and it is estimated that more
                                          Postmarketing - Phase IV                 “Co-Promote” Approaches                             than a third of the over 3,500 biotech
                                          Preregistration - FDA/EMEA
                                                                                                                                       companies that exist in the US have
                                                                                   “Co-Development” Approaches
                                                                                                                                       less than a year of cash on hand. With
   File NDA at FDA                                                                 “PDC” Development Approaches                        most pundits predicting that financial
                                          Clinical Trial - Phase III                                                                   problems would continue till mid-
                                                                                                                                       2010, you have a lot of companies with
                                          Clinical Trial - Phase II                                                                    potentially great science and pipelines
                                                                                   “Foster” Development Approaches
                                          Clinical Trial - Phase I
                                                                                                                                       in clinical development on the verge
                                                                                   “Sponsored” Research Approaches                     of extinction.
   File IDA at FDA                                                                                                                         Enter GSK. Although some are
                                          Preclincal Testing                                                                           predicting the Pfizer-Wyeth deal could
                                                                                                                                       help Pfizer with short-term revenues
                                                                                                                                       and give a little breadth from the Wyeth
                                                                                                                  Figure 1             pipeline, most are pointing towards
                                                                                                                                       GSK as the company and M&A trend
                                                     The pharma innovation gap –                                                       to watch more closely. To date, GSK
                                         Increased R&D spending yielding lesser drug approvals                                         has avoided any mega merger in favour
                                                                                                                                       of mobilising its cash on smaller, more
                                                                                                                                       asset-building type of deals. The goal is
                            $60                                                                                                        an obvious one: to address long-term
                                                                                                                                       problems instead of adopting a myopic
                            $50                                                                                                        blockbuster-drug-only strategy and build
   Pharma R&D ($Billions)

                                                                                                                  New Drug Approvals

                                                                                                                                       both drug classes and drug portfolios
                            $40                                                                   Pharma
                                                                                                                                       in focussed disease franchises. Over the
                                                                                                   Gap                                 past 24 months, GSK has aggressively
                                                                                                                                       bought an accretive, sustainable and
                            $20                                                                                                        potentially expansive diverse set of drug
                                                                                                                                       assets—such as UCB’s late-stage drug
                            $10                                                                                                        assets and Biotene’s dry mouth drug
                                                                                                                                       treatment—in both established and
                             $0                                                                              0
                                  1992 ‘96      2000 ‘01         ‘02   ‘03   ‘04    ‘05   ‘06      ‘07
                                                                                                                                       emerging markets. It is also rumoured
                                                                                                                                       that GSK is looking at more targeted
                            Pharma R&D Investment      BioPharm R&D Investment     New Drug Approvals by US FDA                        diversified healthcare companies and
                                                                                                                                       this approach could provide for more
                                                                                                                                       portfolio management across healthcare
Sources: Pharmaceutical Research and Manufacturers (PhRMA) Annual Report 2007; Burill & Company                   Figure 2
Report 2003; PhRMA Annual Member Survey, 2007: US Food & Drug Administration Databases.                                                systems.

                                                                                                                                       Adopting new development
accretive for Genentech shareholders and                                ily a bad thing. We would like to see                          strategies
a better fit with the corporate culture                                 him in a more expansive role helping                           Johnson & Johnson, Abbott Laboratories
in California. A Roche takeover could                                   more biotechs grow to become future                            and Novartis are just a few to deploy
kill the remaining innovative juices that                               Genentechs.                                                    this approach with repeated success.
Genentech has. One thing is probably                                                                                                   Companies like OSI Pharma, Celgene,
for sure, the co-founder and current                                    Aggressive M&A strategies of GSK                               Amylin are just a few who are still inde-
CEO, Levinson may leave his position                                    The global financial crisis has provided                       pendent and could provide great buys
if the deal goes through; not necessar-                                 an opportunity for big pharma to really                        for big pharma. Combine one of these


       companies with smaller biotechs and you                   Predictions for 2009 and 2010
       could build a strategy around developing                  GSK, Roche and Novartis represent
       some drugs yourself, co-developing with                   some of the best possible examples of
       other partners (possible future acquisi-                  building a diversified and scientifically-
       tion targets), co-promoting late-stage                    rich big pharma and could very well use
       assets to free up resources for creative                  the multiple biotech M&A model. As
       development strategies like fostering                     Roche eventually acquires the remain-
       drug programmes. AstraZeneca is                           ing shares of Genentech it will have a
       very good at this. License a drug to a                    fairly balanced small molecule portfolio
       company, have that company develop                        / pipeline with advanced biopharma
       the asset in close ties with it and at some               capabilities. Genentech, one of the two
       pre-determined point in the future, it                    largest biotech leaders worldwide, has
       gets the rights back if requested. If not,                both short-term goals combined with
       the biotech / pharma partner has rights                   long-term visions. Amgen should be
       to development or share a range of busi-                  seeking targets for M&A, not being
       ness development options.                                 acquired. Astellas might lose out on this
           Another        approach       is     the              bid with CV Therapeutics, but they can
       Pharmaceutical Development Company                        have a short list for M&A. Companies
       (PDC) option. One of the best compa-                      like Abbott Labs and Celgene provide
       nies to create and lead with great success                great add-on revenues, deep pipelines
       using the PDC model is DeBiopharm,                        and sound scientific platforms.
       S.A in Lausanne, Switzerland. In the                           Those companies seeking growth
       PDC model, a company acquires the                         only through the mega merger approach
       drug asset which is generally at a Pre-                   will have limited success, take them-
       IND or phase I stage and takes owner-                     selves out of contention during one of
       ship. It then develops it through phase                   the most opportunistic times we’ve seen
       II, phase III or NDA. In return, the                      in decades and could spell potential
       PDC gives milestone payment, royalties                    disaster for the big pharma seeking to
       and / or sales kickers to the original                    grow revenues in the medium to long
       source of the drug asset. Most PDCs                       term.
       don’t promote the products, they usually                       Pfizer-Wyeth in the end won’t be any
       sell or out-license the asset to a larger                 better than its previous mega merger
       company. The PDC and fostering                            deals and hopefully they will see this
       models are great strategies for shar-                     and push along with vetting and closing
       ing resources, risk and allowing larger                   a few biotech M&A deals before the
       companies to leverage a stockpile of                      good ones are gone. In the end, these
       drug candidates on their shelves that                     purge cycles are good because they force
       may never be developed. Figure 2                          the crème de la crème to the top and
       depicts the overall strategic approach                    this is what we need to bridge the gap
       to drug portfolio development and                         in innovation among the Big Pharma
       management.                                               companies.

                                           Neil J Campbell is currently Chairman & CEO for Mosaigen®,
                                           Inc., a global Life Science development corporation, and Partner
                                           with Endeavour Capital Ltd., An Asian Venture Capital Fund.

                                           During his career, he has successfully developed and introduced
                                           over 200 products in healthcare, life sciences and information
                                           technologies. He earned his MBA and MA in Management
                                           Systems from Webster University, MO and his BS-BA from
                                           Norwich University. He is also Adjunct Professor at Carey
                                           Graduate School of Business – Johns Hopkins University.

  14   P H ARM A F O C U S A S I A   ISSUE - 10 2009

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