The global pharmaceutical industry is now navigating its way through very cautiously while negotiating an unprecedented ‘patent cliff’, simultaneously with gradually drying-up R&D pipelines. This unique situation has triggered off several global mega Mergers and Acquisitions (M&A) not only involving better protected biologic drugs business, but also in the large generic space mostly in the emerging markets of the world, which used to be ignored by many before the turn of the new century.
Patent Expiry in next 12 months:
According to an article published in the ‘FiercePharma’ dated October 24, 2011 titled, ‘10 largest U.S patent losses’, over the next 12 months the following best-selling drugs, ranked not by US sales volume but by their weight in each company’s US revenue stream, will face patent expiry:
| Company | Brand | |
| 1 | Forest Laboratories | Lexapro |
| 2 | Takeda Pharmaceuticals | Actos |
| 3 | Bristol-Myers Squibb | Plavix |
| 4 | AstraZeneca | Seroquel |
| 5 | Eli Lilly | Zyprexa |
| 6 | Pfizer | Lipitor* |
| 7 | Merck | Singulair |
| 8 | Novartis | Diovan |
| 9 | Teva Pharmaceuticals | Provigil |
| 10 | Abbott Laboratories | TriCor |
* Patent expired on November 30, 2011
Opening a new vista of opportunity:
In the midst of such a critical situation within the global pharmaceutical industry, application of biotechnology in the drug discovery process opened up a new vista of a broad range of new class of therapies. These include monoclonal antibodies, therapeutic protein hormones, cytokines tissue growth factors, cell or gene therapies and vaccines, just to name a few.
A recent report of the Organization for Economic Cooperation and Development (OECD) predicts that 80% of the total biotech products, which are expected to be commercialized by 2030, will be medicines and medical diagnostics.
Old business model signals a diminishing return:
Over a period of decades, the business model of small-molecule based blockbuster drugs has successfully catapulted the global pharmaceutical business to a high-margin, dynamic and vibrant industry. However, a time has now come when the golden path from the ‘mind to market’ of the drug discovery process is becoming increasingly arduous and prohibitively expensive.
Deploying expensive resources to discover a New Chemical Entity (NCE) with gradually diminishing returns in the milieu of ‘me too’ types of new drugs, does no longer promise a strong commercial incentive.
A shift in focus from ‘small molecules’ to ‘large molecules’:
Since last several years, the success of biologic drugs compared to conventional small-molecule chemical drugs, has been changing the area of focus of pharmaceutical R&D altogether, making the biotech companies interesting targets for M&A.
As per published data, although the market capitalization of the top ten large pharmaceutical companies dropped more than US$ 700 billion since 2001, the same for the biotech companies, on the other hand, has gone up by more than 50% during this period. This trend signifies proliferation of biotech drugs in the years ahead for meeting unmet needs of the patients.
To keep pace with the biotech led growth of the global pharmaceutical industry, many companies have started imbibing biotech-like R&D structure within their respective organizations. For examples, the pharmaceutical majors GsK and Pfizer have already articulated the strategic intent to restructure their respective large monolithic R&D set-ups to smaller independent drug discovery units.
Such restructuring is expected to foster ‘can do’ spirit of the biotech entrepreneurs within the recreated smaller units of large R&D setups to accelerate overall R&D productivity for enrichment of the new product pipelines. However, future will be the best judge to evaluate the success of this experiment.
As if to vindicate this emerging scenario, on November 30, 2011 Bloomberg reported, “U.K.’s largest drug maker has broken up research into competitive teams and put scientists back at the center of the process. But freedom carries a price: researchers who don’t adapt must go. Scientists now ‘live or die with their project.’ This month, Glaxo (GsK) completed the first appraisal of its new model. The company is now deciding which teams deserve more funding and which ones don’t. The conclusions will probably be made public in February when Glaxo (GsK) reports full-year earnings.”
Biologic drugs offer greater promise to meet more unmet needs:
Unlike conventional chemical drugs, most genetically modified biologic drugs work with a very high degree of precision and accuracy on the cells of the diseased organ. Many clinical studies have amply demonstrated that such drugs not only ensure faster recovery, but also help saving incremental treatment cost because of their excellent safety profile.
As we see today, more and more of those global pharmaceutical companies, who used to spend around 15% to 20% of their annual sales for R&D projects are channelizing a large part of the same to effectively compete in the fast evolving market of biologic drugs mainly through M&A. This strategy well justifies their strategic intent to make good the loss of income from the blockbuster drugs going off-patent quite in tandem with their fast dwindling R&D pipeline, as it were.
The bottom-line impact of a successful well targeted new biologic molecule to treat intractable ailments like, various types of cancer and blood disorders, auto-immune and Central Nervous System (CNS) related diseases, neurological disorders such as Parkinson’s, Myasthenia gravis, Multiple Sclerosis and Alzheimer’s disease, are expected to be huge.
Faster growth of biologic drugs:
Despite patent cliff, large molecule biologic drugs like Enbrel, Remicade, Avastin, Rituxan and Humira continue to contribute more than the small molecule drugs of chemical origin to overall growth of the large global pharmaceutical majors. Many of these drugs were sourced by them either through acquisitions or collaborative arrangements.
Cash strapped biotech companies with molecules ready for human clinical trials or with target molecules falling in the well sought after growth areas like, monoclonal antibodies, vaccines, cell or gene therapies, therapeutic protein hormones, cytokines and tissue growth factor are becoming attractive acquisition targets of the small molecules dominated large pharmaceutical companies having deep pockets.
Global Market Scenario:
According to IMS Health, biologics contribute around 17% of global pharmaceutical sales and generated a revenue of US$ 120 billion during MAT March 2009
In 2010 Biologic drugs increased their turnover to US$ 140 billion in the total market of US$ 850 billion. The sale of Biosimilar drugs outside USA exceeded US$ 1 billion.
Six biologic drugs featured in the top 12 and eight in the top 20 best selling global brands. Remicade emerged as the highest-selling biologics in 2010, ahead of Enbrel. Roche remained the top company by sales for biologics with anticancer and monoclonal antibodies. (source: Knol 2010)
Major acquisitions from 2005-2011 for Biologic drugs:
The opportunity of meeting the unmet needs of the patients with effective biologic drugs, especially in high-growth therapy areas, has given the M&A activities in the pharma-biotech space an unprecedented thrust in the recent times.
Following are the major acquisitions in the field of biologic drugs from 2005 to 2011:
|
Company |
Target company |
The deal: $billion |
Products |
| Roche | Genentech | 47 | Rituxan, Avastin, Herceptin, MoAbs, Oncology |
| Sanofi Aventis | Genzyme | 20 | Orphan biologicsCerezyme, Fabrazyme, Renagel, Synvisc |
| AstraZeneca | MedImmune | 15.6 | Monoclonal Antibodies |
| Merck | Serono | 13.5 | Biologics |
| Takeda | Millennium | 8.8 | Velcade, Oncology |
| Lilly | ImClone | 6.0 | Erbitux, Oncology |
| Novartis | Chiron | 5.8 | Vaccines |
| Teva | Cephalon | 6.2 | Nuvigil, Provigil, Treanda CNS, Oncology |
| Abraxis | American BioScience | 4.2 | Oncology |
| Astellas | OSI Pharma | 4.0 | Tarceva, oncology |
| Eisai | MGI Pharma | 3.9 | Aloxi, Salagen, Hexalen, Oncology |
| Celgene | Pharmion | 2.9 | Oncology |
| Celgene | Abraxis | 2.9 | Oncology |
| Gilead | Myogen | 2.5 | Biotechnology |
| BMS | Medarex | 2.4 | Monoclonal antibodies |
| J&J | Crucell | 2.3 | Vaccines |
| Amgen | Abgenix | 2.2 | Monoclonal antibodies |
| Boehringer Ingelheim | MacroGenics | 2.1 | Monoclonal antibodies |
| Gilead | CV Terapeutics | 1.4 | Cardiovascular |
| Genzyme | Osiris | 1.4 | Prochymal, Stem cells |
| GSK | ID Biomed | 1.3 | Biologics |
| AstraZeneca | Cambridge Antibody Technology | 1.3 | Monoclonal Antibodies |
| Merck | Sirna | 1.1 | RNAi |
| Amgen | BioVex | 1 | OncoVex |
(Source: Mergers and Acquisitions Review2005-2011 Pharma Biotech by Knol)
Why do so many companies want to enter into the biotech space?
The answer to the key question of why do so many companies want to enter into the biotech space of the business, in summary, could lie in the following:
- Truly innovative small molecule discovery is becoming more and more challenging and expensive with the low hanging fruits already being plucked.
- More predictable therapeutic activity of biologics with better safety profile.
- A higher percentage of biologic drugs have turned into blockbuster drugs in the recent past.
- Market entry barrier for biosimilar drugs, after patent expiry of the original molecule, is much tougher than small molecule generics.
- A diverse portfolio of both small and large molecules will reduce future business risks.
A recent study:
In one of their recent collaborative studies published in an article titled, “Is R&D Earning its Investment?” Deloitte and Thomson Reuters (2009) have reported that the top 12 global pharma majors have 21% to 66% biologic drugs in their late stage product pipeline with the average being at 39%.
Another interesting trend:
Besides mega acquisitions, relatively smaller pharmaceutical players have started acquiring venture-backed biotech companies to enrich their product pipelines with early-stage drugs at a much lesser cost. For example, with the acquisition of Calistoga for US $ 600 million and venture-backed Arresto Biosciences and CGI Pharmaceuticals, Gilead known for its HIV drugs, expanded into blood cancer, solid tumor and inflammatory disease segments. In 2009 the same Gilead acquired CV Therapeutics for US $1.4billion to build a portfolio for cardiovascular drugs. In November 2011, Gilead acquired ‘Pharmasset’ for US$ 11 billion to include in its product pipeline a future Hepatitis C drugs offering 95% cure rates.
Smaller biotech companies usually do not get engaged in very large deals unlike the top pharma players, but make quick, decisive and successful smaller deals more effectively.
Much less generic competition for biologic space:
After patent expiry of NCEs, innovators’ brands become extremely vulnerable to cut throat generic competition with as much as 90% price erosion. This happens as the small molecules are relatively easier to replicate by the generic manufacturers. Moreover, the process of getting regulatory approval of NCEs is also not as stringent as biosimilar drugs in most of the markets of the world.
On the other hand biosimilar drugs involving difficult, complex and expensive processes for development with stringent regulatory requirements for getting their marketing approval in the developed markets of the world like the EU and the USA, offer significant brand protection from generic competition for quite some time, even after the patent expiry.
Mainly due to this reason, brands like the following are expected to go strong for some more time without any significant competition from the biosimilar drugs:
| Brand | Company | Launch date |
| Rituxan | Roche/Biogen idec | 1997 |
| Herceptin | Roche | 1998 |
| Remicade | Centocor/J&J | 1998 |
| Enbrel | Amgen/Pfizer | 1998 |
Smaller biotech companies to be the prime targets:
In my view, the voracious appetite of large pharmaceutical companies for inorganic growth through mega M&A, will ultimately subside due to various compelling reasons. Instead, smaller biotech companies, especially with products in Phase I or II of clinical trials, without wherewithal to take them to subsequent stages of development, will be the prime targets for acquisition by the pharma majors at an attractive valuation.
Cost of treatment:
Despite so many positives, high priced biologic drugs do raise a critical concern about the incremental load on already ballooning healthcare costs to the patients.
The Wall Street Journal (WSJ) in its September 29, 2010 issue highlighted that biologic drugs can cost as much as $1.5 million annually to the user. Similarly Forbes.com on April 12, 2009 reported, “Biologic drugs can cost up to 22 times more than traditional medications – some as much as $400,000 a year”.
This is indeed a very serious issue that needs to be resolved sooner. Speedy entry of biosimilar drugs will partly address this critical issue.
Conclusion:
Although the large pharma majors have already started experimenting to work with the pure biotech companies in terms of M&A and strategic alliances, it will be interesting to watch the long term ‘DNA Compatibility’ of the business models, organization/ work/employee culture and market outlook of these two different types of organizations while improving the global business performance of the overall entity, significantly.
Only future will tell us whether or not just restructuring of the R&D set up of companies like, Pfizer, Merck, Roche and perhaps Sanofi at a later date, helps synergizing the overall R&D productivity of the merged entities.
Be that as it may, despite serious cost concern, experts still believe that biologic drugs have all the potential to deliver the ‘magic bullets’ in the fight against many intractable diseases of mankind in not too distant future.
Hence the hunt is on.
Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.