Tunnah’s musings: pharma deals with the January pipeline blues

Paul Tunnah

pharmaphorum

Whilst most of us are tightening our belts after another festive season, it seems like big pharma is in the mood for even more shopping in January.

In the last few days alone we’ve heard Pfizer’s Ian Read talk about no more mega-mergers but instead a renewed focus on smaller investments, Sanofi’s Chris Viehbacher proudly boast a $2.6bn piggy bank for acquisitions and even generics giant Teva doing some deal sabre-rattling over a multitude of possible Asian generics targets.

However, it’s Bristol-Myers Squibb (BMS) that’s really put its money where its mouth is, investing $2.5bn in the acquisition of US biopharmaceutical company Inhibitex, which focusses on development of novel treatments for infectious disease. The lead asset in development by Inhibitex is a nucleotide polymerase inhibitor in development for the treatment of hepatitis C, a class BMS sees as important, but it’s only in phase II and key results are not due until later this year. Squibb’s CEO Lamberto Andreotti has labelled the acquisition as “an important investment in the long-term growth of the company” and whilst some investors have speculated the price paid by BMS is too high, some Inhibitex shareholders have suggested it’s way too low, so what’s going on?

"…there does seem to be a renewed appetite for spending and perhaps even a major bidding war kicking off..."

Well, aside from it being J.P. Morgan Healthcare conference time (which is behind many of the announcements) there does seem to be a renewed appetite for spending and perhaps even a major bidding war kicking off as big pharma realises there are simply not enough valuable drug assets around to keep everyone in business.

So is all this spending going to cheer up the big pharma shareholders?

Well, yes, in the short-term it probably will. Whether you agree with the price paid for individual deals or not, when you stack up multiple deals for a single big pharma company they do bolster the pipeline numbers, introduce new innovation and spread the risk, at least in the near future.

However, I’m slightly sceptical about the long-term value of individual acquisitions and it all comes down to understanding what the drug company is really buying. I’m not talking about the mathematical accounting of the due diligence process, which in itself is as much an art as a science, but instead about understanding what the acquisition of a small company or biotech really delivers in the longer term.

The messages to shareholders are often around how the new acquisition has a promising pipeline, but even more excitingly a proven track record of delivering new assets that will continue to bolster the acquiring company’s portfolio for many years to come. In effect, that a major part of the acquisition value is the bought-in knowledge and expertise in a certain specialist area, as well as the current pipeline assets. In effect, that a valuable innovative drug-producing machine has been bolted on.

"…these components of value are not patent protected, difficult to control and highly mobile – because they’re people."

My concern with this is that these components of value are not patent protected, difficult to control and highly mobile – because they’re people. And very often, the very reason why these people are working in a small company environment is that they don’t want to work in big pharma. The net result is that they will get out as soon as they can after the acquisition, probably to go and set up or join another small company, before it too gets bought up. When you look back you can see this process in action – just check out acquired smaller companies from five years ago and see how many of their personnel have remained in situ with the new larger entity.

It’s not to say that an environment cannot be created that is conducive to retaining this talent and ensuring new innovation continues to be pumped out, just that it’s not done successfully very often. Genentech is a good example of a more “hands off” approach (by Roche) of integrating biotech with big pharma, but then Genentech is hardly a small company anymore so it’s also perhaps not the best example.

So if the current spending spree isn’t actually a long-term solution, but is in reality more a short-term pipeline fix, where does that leave the industry? Well, probably having to spend just as much, or more, again next year…and the year after…and the year after that, all the while under decreasing profit margins as it rebalances in the light of healthcare cost containment and declining innovation. Eventually everyone runs out of money and there are no new drugs!

"Eventually everyone runs out of money and there are no new drugs!"

Okay, so as usual I’m being every-so-slightly tongue in cheek, but it’s something that is worth big pharma at least being honest with itself about as it splashes the cash on buying in the latest and greatest biotech to turn around its fortunes.

As such, here are some questions I hope are being asked at the senior level before such deals take place:

• Is this acquisition really a long-term value driver or a short-term pipeline fix?

• Have we thought about how to retain the environment of innovation post-acquisition if it is seen as a long-term value driver?

• Can we unlock that long-term value more effectively through partnership without acquisition?

Of course, I’m not a business development or portfolio management expert and I’m definitely not a board-level big pharma executive facing all the shareholder pressures that entails.

But I am interested to hear from those who are, or have been, involved in such deals to see if these questions are being asked.

Let me know your thoughts and, as always, stay well.

About the author:

Paul Tunnah is Founder and Managing Director of www.pharmaphorum.com, the dynamic online information and discussion portal for the pharmaceutical industry featuring news, articles, events / company listings and online discussion. For queries he can be reached through the site contact form or on Twitter @pharmaphorum.

Do biotech acquisitions drive long-term big pharma innovation?