[Ip-health] The Economist: Invent it, swap it or buy it

Thiru Balasubramaniam thiru at keionline.org
Fri Nov 14 09:53:15 PST 2014


http://www.economist.com/news/business/21632676-why-constant-dealmaking-among-drugmakers-inevitable-invent-it-swap-it-or-buy-it

<SNIP>

Besides asset-swapping with another big firm, the other obvious way for a
drugmaker to build on its areas of strength is to buy small, innovative
companies. For instance, in June Merck said it would buy Idenix, a
biotechnology firm, for $3.9 billion, to bolster its research pipeline for
hepatitis treatments. One of Merck’s main rivals in this area, Gilead, had
paid $11 billion for a smallish company, Pharmasset, in 2012. For some
years now, big drugmakers have been disappointed by the performance of
their in-house labs, and have increasingly looked outside for small firms
with promising ideas. Nils Behnke, a partner at Bain, says that over the
period covered by its study, the best-performing drug companies got more
than 70% of their revenues from products that were not developed in-house.

The smaller, younger drug firms being bought in such deals can often be
better than the pharma giants at thinking up new ways to attack a disease.
But they typically lack the expertise to organise clinical trials, deal
with regulators and get a drug successfully to market. These are the
strengths of the big pharma firms. So combining the two sets of skills
makes sense.

--
Pharmaceutical M&AInvent it, swap it or buy itWhy constant dealmaking among
drugmakers is inevitable



Nov 15th 2014 | From the print edition
<http://www.economist.com/printedition/2014-11-15>


FEW industries have been shaped more by mergers and takeovers than
pharmaceuticals. This is because developing drugs is such a high-risk
business. Most potential medicines either fail to reach the market, or fail
thereafter to recoup the cost of developing them. If a company does not
have enough promising drugs in its research pipeline, its most obvious
route to growth is to buy another firm. So, many of the world’s biggest
drugmakers, such as Pfizer, Merck and GlaxoSmithKline (GSK), have been
built through a succession of deals.

However, something has changed in the nature of drug firms’ dealmaking over
the years. It used to be all about achieving sheer scale, and building a
broad portfolio of potential treatments for a range of illnesses. Now it is
increasingly about drug companies concentrating on what they do best, and
getting out of areas in which they are weak. There is evidence that this is
a better route to success. A study by Bain & Company, a consulting firm, of
the most successful pharma companies over the past 20 years found that the
top ten, in terms of shareholder returns, all to some degree used mergers
and acquisitions to build strengths in a select number of areas.

   -

In the M&A wave that has risen since the end of the financial crisis, this
trend has been clearer. The most notable recent example is GSK’s agreement
with Novartis to swap assets so that GSK strengthens its lead in vaccines
and Novartis fortifies its position in cancer drugs. Last month Bayer, a
firm that made its name selling aspirins, bought the over-the-counter
medicines business of Merck, which includes such remedies as Claritin
allergy pills.

Besides asset-swapping with another big firm, the other obvious way for a
drugmaker to build on its areas of strength is to buy small, innovative
companies. For instance, in June Merck said it would buy Idenix, a
biotechnology firm, for $3.9 billion, to bolster its research pipeline for
hepatitis treatments. One of Merck’s main rivals in this area, Gilead, had
paid $11 billion for a smallish company, Pharmasset, in 2012. For some
years now, big drugmakers have been disappointed by the performance of
their in-house labs, and have increasingly looked outside for small firms
with promising ideas. Nils Behnke, a partner at Bain, says that over the
period covered by its study, the best-performing drug companies got more
than 70% of their revenues from products that were not developed in-house.

The smaller, younger drug firms being bought in such deals can often be
better than the pharma giants at thinking up new ways to attack a disease.
But they typically lack the expertise to organise clinical trials, deal
with regulators and get a drug successfully to market. These are the
strengths of the big pharma firms. So combining the two sets of skills
makes sense.

Not all of the recent rash of pharmaceuticals deals, however, were driven
by the quest for new cures for humankind’s ailments. Many have been
motivated by a baser desire to cut tax bills. Under certain conditions an
American firm buying a non-American one can switch its tax domicile to the
home country of its takeover target, which is why so many drugs firms based
in low-tax countries like Ireland have been bought up in the past few years.

In September the US Treasury brought in new rules to make such “inversions”
harder. A $43 billion deal in which Medtronic, a medical-device maker,
would buy Covidien of Ireland, will still go ahead; but the American buyer
has been forced to raise an additional $16 billion in debt to finance the
merger. An even bigger deal, in which AbbVie would have paid $54 billion
for Shire, a British firm, was scrapped. AbbVie had to pay Shire a break-up
fee of $1.6 billion, and criticised the Obama administration for the sudden
rule-change.

Another motivation for takeovers is to use them as a cover for slashing
research costs. Much of the opposition that made Pfizer halt its $120
billion bid for AstraZeneca, earlier this year, was because of such
worries. About $50 billion was spent on R&D in 2013 by members of America’s
pharmaceuticals lobby, PhRMA—as a proportion of their combined sales this
was a whopping 17.8%. Similar figures are found in Europe and Japan. Some
in Wall Street see pharma research as value-destroying and an obvious
target for cuts.

Valeant, a Canadian drugs firm, has grown fast by buying other companies
and cutting R&D spending in all but their most promising areas. It has been
keen to apply this formula to Allergan, the maker of Botox anti-wrinkle
treatments. But this week Allergan was said to be trying to evade Valeant’s
clutches by agreeing to a bid from Actavis for around $60 billion.

Mergers rarely produce significant advances in innovation or research
productivity, or so work by Carmine Ornaghi of the University of
Southampton in England suggests. That gives Cassandras grounds for worrying
that the current deals portend an innovation-free future. Optimists will
counter that innovation is poised to flourish, as scientists with good
ideas create startups, encouraged by the prospect of a lucrative buy-out by
a larger firm.



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