Producing more and better drugs
Trends like slow sales growth, decreasing research and development, and increased patent expirations will need to be overcome to match demand
By Kleanthis G. Xanthopoulos, President and Chief Executive Officer Anadys Pharmaceuticals.
January 19, 2006
In recent years, large pharmaceutical companies have been experiencing slowing sales growth, decreasing research and development productivity and increasing patent expirations.
Most big pharmaceutical companies, referred here as Big Pharma, are struggling as a number of their leading products are in decline owing to concerns over safety and stiff competition from lower-cost generic drugs. For example, approximately 30 brand-name drugs, including Merck's Zocor and Bristol Myer's Pravachol, will lose their patents this year, resulting in a total loss of $20 billion in sales to Big Pharma, according to IMS Health. This comes at the worst possible time because Big Pharma is at a 25-year low in new drug approvals.
These trends, which are expected to continue in 2006 and beyond, will impact favorably selected small-and mid-sized biotech companies. Likely in the year ahead Big Pharma will seek to stabilize volatile earnings streams by pursuing aggressive merger and acquisition activities and in-licensing deals, based on strong, underlying fundamentals and promising product pipelines from a number of biotech companies. Finally, the initial public offerings environment will remain selective, with perhaps a couple of dozen biotech companies going public.
Global merger and acquisition activity in biotech has been red hot for the past four years. According to Securities Data Corp., there were approximately 35 mergers or acquisitions, totaling $19.8 billion in 2005, up from $11.0 billion in 2004, $14.8 billion in 2003, but lagging 2002 when mergers and acquisition activity hit a record $25.5 billion.
Last year, two of the biggest acquisition deals were Novartis' takeover of Chiron for $5.55 billion in cash, pending shareholder approval, and Pfizer's purchase of Vicuron for $1.91 billion in cash. Big Pharma has amassed "war chests," to finance merger and acquisition deals and in-licensing activities, further enhanced by $30 billion in repatriated tax money, which is overseas profits of multinational drug companies taxed at a lower rate in the United States.
Increasingly, Big Pharma is required to pay more for biotech opportunities than in the past. Small and mid-sized biotech companies on average are better financed than in the past and therefore less dependent on Big Pharma for funding, expertise and infrastructure. In other words, the leverage in the negotiations has shifted toward biotech.
Equally important, biotech companies are driving the majority of innovation in health care today. And this innovation and productivity, both in biologics and small-molecule therapeutics, should continue for years to come. According to Nature Biotechnology magazine, biotech companies increasingly dominate drug development, accounting for more than 40 percent of all discovery-stage candidates.
In addition to merger and acquisition activity, Big Pharma will continue to increase in-licensing deals with small-and mid-sized biotech companies. In-licensed products are expected to shoot up to 40 percent of revenue at the top 20 drug companies by 2007, up from 16 percent to 20 percent of revenue in 2001, according to IMS Health. One company that has taken to licensing in a big way is Merck, the No. 3 U.S. drugmaker. In 2004, it signed approximately 30 new research and development collaborations, up from 10 in 1999.
The trend in licensing has changed perceptively. Gone are the days when Big Pharma had the upper hand. Today, small-and mid-sized biotech companies are negotiating and signing complex in-licensing deals with significant upfront payments, frequent milestone payments, royalty payments from sales outside the U.S., co-development cost sharing, and co-promotional and co-marketing rights.
While cash is a significant consideration in deal-making, it's not the only consideration. In fact, more small-and mid-sized biotechs are seeking companies with a passion for their molecule, the know-how to help develop it, the expertise to help manufacture and market it, and the willingness to share development costs and expected revenue. In a word, they are looking for a partner, not an overseer.
Another recurring trend in 2006 is a continuing tepid IPO market in biotechnology. Last year about 15 biotechs went public, an anemic performance compared to the 25 public offerings in 2004. Currently, there is a backlog of approximately 12 biotechs that have filed registration documents with the Securities and Exchange Commission to go public in 2006, seeking to raise a total of $1.3 billion. If the life sciences sector has a positive tone for much of the year, these 12 and possibly more biotechs will have successful public offerings in 2006.
One interesting trend emerging among some companies seeking to go public is to simultaneously put out "feelers" through their investment bankers that they might welcome a merger or acquisition. Some executives feel if they must reveal risks and uncertainties associated with drug discovery and development in their SEC filing document and jeopardize a successful public offering, they might well explore all their options, including a merger or acquisition.
If these trends play out as I've speculated, we will see a number of significant mergers and acquisitions initiated by Big Pharma, increasingly more in-licensing agreements between them and small-and mid-sized biotech, and two dozen new biotech IPOs.
Ultimately, these corporate activities in the years ahead will produce a new, healthier environment for the discovery and development of powerful novel therapies in multiple disease categories for million of patients with high, unmet medical needs.
