Biopharma Convergence

Heralding a new era

Rajeshwer Chigullapalli,  Chief Editor

Biopharma convergence seems to be the panacea for pharma companies struggling with weak R&D productivity and biotech firms facing funding shortfalls.

It might not have been in the wildest dreams of Genentech and Hoffman-LaRoche Inc. that what they were about to do would be a harbinger for other biotech and pharma companies. The deal between the two firms in the year 1990 is considered as the pioneer of convergence between pharma and biotech. Genentech was facing an uncertain future when its sales hit at an all-time low. Even though the company had a very attractive product pipeline, it lacked the resources to maximize the pipeline’s value. Its stock price was down and fears of a hostile takeover were looming large. At this juncture Roche bought 60% of Genentech’s shares for $2.2 billion, while allowing Genentech to continue as an independent, publicly traded company. It was an equity investment that proved to be mutually beneficial for both the companies. In the subsequent years, the two firms have partnered with each other, with Roche commercializing Genentech’s products outside the US, among other things. And since then, many pharma and biotech firms followed suit. Of late, the trend has reached a new peak.

The global biopharmaceuticals market was estimated to be $64.3 billion in 2005 and the pharma-biotech partnering deals were worth $15 billion. According to Frost & Sullivan, more than 1,500 alliances were formed from 1997 through 2002, and the contribution of licensed products to total sales is estimated to increase from 20% in 2002 to 40% in 2010. Some pharma companies are gearing up to reinvest around $100 billion in the biotech industry instead of channelling the money for their in-house R&D. The pharma industry reinvests an estimated 25% of its revenues in R&D, which is twice as much as other high tech industries viz. aerospace or IT. In biotech, the pharma industry found a way out.

The blockbuster model began fading and biopharma started gaining ground. Pharmaceutical companies are either consolidating or forming strategic alliances with biotech companies to overcome the double whammy of R&D productivity woes and onslaught of blockbuster patent expiries resulting in weak product pipelines. The biotechs, in turn, are motivated by the marketing and financial prowess of the pharma companies.

What’s in it for me?

The global pharmaceutical industry is currently going through a difficult phase on account of three major issues i.e. increasing penetration of generics in developed markets, fewer new drug launches and drug safety issues. While New Molecular Entity (NME) approvals by the FDA have fallen since 1996 for pharma, biotech’s share of NMEs has been increasing since 1995. Of the total 21 NMEs approved by FDA in 2003, 12 belonged to biotech companies.

The pharma and biotech firms are now converging to leverage each other’s complementary core competencies. The pharma companies partner with biotech firms to develop and / or market new drugs, or acquire biotechs to revive their research base and product pipelines. Heather E Fraser, Global Life Sciences Lead, IBM Institute for Business Value opines, “At the level of the body’s molecular pathways, drug companies are racing to put their R&D efforts to good use. But few will succeed on their own.” She further adds that from the perspective of large pharmaceutical companies, outsourcing R&D projects to smaller, innovative biotechs continues to be an important strategy.

Acquiring a biotech implies that the pharma company can add new products, product platforms and technologies which would be more economical than to start from the scratch. Biotech products are also more difficult to be reproduced by the competing generic companies because of the biologics involved. Tom Newton, Pharmaceutical Market Analyst, Visiongain, quotes the example of TEVA and says, “TEVA is actively seeking biotechs. In 2004, it acquired Sicor, and more recently acquired a controlling interest in Tianjin Hualida Biotechnology, a Chinese biotech company.” Other recent instances of pharma companies acquiring biotechs are – Roche acquiring Antisoma, Pfizer acquiring Esperion Therapeutics, Novartis taking over Chiron and the acquisition of Scios by Johnson & Johnson (J&J). Wyeth too, has been actively forming partnerships and alliances with biotechnology companies. Says Cavan Redmond, Executive Vice President, Wyeth BioPharma, “If you take a look at Wyeth and biotechnology, especially our biotech group, about 80% of our revenues are with partnered companies.” Other companies like Pfizer and Merck are deriving at least 20% of their revenues from the biotech products, while it is a sizeable 70%, in the case of Roche. GSK, Roche/Genentech and sanofi-aventis have the maximum number of biotech products in their total R&D pipeline - 35, 25 and 23, respectively. From an R&D perspective, Roche/Genentech, Amgen, Eli Lilly and Boehringer Ingelheim focus their R&D pipeline more towards biotech.

When a pharma firm partners with a biotech firm for the development and commercialization of a drug, it implies that the risks involved in the drug discovery process also get divided. It becomes more important to have partners to share the risks considering the high cost of developing a new drug. By 2010, the cost of turning a promising compound into a patentable drug (currently around $1 billion compared to $200 million in the last decade) is estimated to be an astounding $2 billion.

The pharmaceutical companies benefit the biotechs through their rich experience in developing drugs through trials. The unavailability of a strong IPO market for biotechs encourages the biotech founders and venture capitalists for a sell off, in order to realize returns on the investments made. Says John Wong, Regional Chair, Asia Pacific, Boston Consulting Group, “For biotech companies, the real strategic issue is basically growth and sustainability.” Forming an alliance with a Big Pharma company also increases the value of the partnering biotech firm in the market. According to a study by the National Bureau of Economic Research based in USA, biotech firms in a partnership received substantially higher valuations from venture capitalists and from the public equity market.

The alliance formed between a pharma company and a biotech can have different structures. It can be a technology alliance like Celera Genomics’ alliance with LION bioscience AG, or a product alliance based on the strength of each partner in the areas of drug discovery, development, marketing etc. It could also be a manufacturing alliance or a marketing alliance wherein a drug developed by the biotech company is marketed by the pharma company. For instance, Imclone has partnerd with Merck and Bristol-Myers Squibb (BMS) for developing cetuximab, an anti-cancer drug, where Merck and BMS have codevelopment and co-marketing rights for Imclone’s drug.

F M Scherer, Professor, Harvard University opines, “Biotechs have a large menu of interesting therapeutics. But it is hard for them to fund full-scale clinical trials; and they often lack the field sales organizations to market the approved NME.” As an example he quotes the history of Amgen’s epogen (red blood cell enhancer). Amgen carried epogen through clinical trials. It could build a marketing force to interact with the several hundred hemodyalisis centres. But it couldn’t reach the much larger number of hospitals where epogen could be used in cancer chemotherapy, and therefore licensed Johnson & Johnson to develop that and other markets.

The biopharma market

The biopharmaceutical market has undergone rapid expansion since its emergence thirty years ago. The market is no longer confined to growth hormones, insulin and RBC stimulating agents. Innovative science, driven by the 2001 human genome project is accelerating the market into targeting a wide range of diseases from growth deficiency to arthritis to multiple sclerosis and orphan diseases such as Fabry’s disease.

The biopharma market was estimated to be worth $ 64.3 billion in the year 2005. The market comprises of 9 major therapeutic areas i.e. oncology, anti-infectives, vaccines and blood disorders, endocrine disorders, multiple sclerosis, enzyme deficiency disorders, arthritis and ophthalmics. By the year 2010, analysts expect that the market will represent 17% of all prescriptions compared to 12% in 2004. The biotechnology sector is on an upsurge after several years of significant decline. Global revenues rose from $23 billion in 2000 to more than $50 billion in 2005. According to the IMS, almost 16% of products achieving blockbuster status in 2004 were biotech drugs and going by its current rate of transformation, the sector is expected to have an increased share in the blockbuster market. With majority of the sales revolving around 10 companies, the biotech market is more concentrated than the pharma sector. These top ten global biotech companies together are responsible for more than 80% of sales. The market leader, Amgen, alone, contributed around 24% of total sales with six showing above-market growth. The top ten biotech products globally accounted for 43% of sales in 2004. Currently, the US is the leader of the biotech market and will continue to be for some more time. Analysts expect that Japan and the EU will see a fall in the global market share, while the Asia-Pacific region will witness high levels of unprecedented growth.

The pharmaceutical market in Asia, especially China and India, is already witnessing consolidation on a large scale. The pharma companies in the region are making efforts to make their presence felt globally. Big firms like Dr. Reddy’s and Ranbaxy are already into biotechnology in a big way. Asia is still in the process of catching up with the trend of biopharma convergence, and experts have their own opinions regarding the impact of this trend on the markets in Asia. John Wong says, “The biggest market in Asia – Japan - is still into traditional pharmaceuticals. And in India and China, the biological idea is not well defined. So it might be longer before convergence happens in Asia.” However, Kiran Mazumdar-Shaw, CMD, Biocon Limited opines, “As confidence in the expertise of Asian drug companies grows, we are likely to see more synergistic alliances between them and their Western counterparts in niche areas.”

Challenges

In a biotech-pharma alliance one of the main challenges is whether the two companies can adjust to each other’s vastly different cultural environments. Biotech companies have an entrepreneurial culture while pharmaceutical companies have a big-business culture. According to IBM Institute for Business Value , a change in the senior management at the pharma company was the biggest contributor to alliance failures. Scherer avers, “I think innovation is likely to be more vigorous if different kinds of companies are kept separate at the discovery stage.” The partnering companies need to understand that the alliance is a necessary means of survival rather than a mere trend. Better understanding of each other’s expectations, commitment and trust are the deciding factors for the success or failure of an alliance.

Post merger, large biopharmaceutical companies may face the risk of a shifting demand in the marketplace, including a potential reduction of pricing power and an increasingly demanding customer base. These companies will have to take significant business risks, related to the spiraling cost of gaining and preserving intellectual capital.

The road ahead

The convergence of pharma and biotechnology gives rise to the question whether the traditional chemical formulation based drugs will see a downtrend. John Wong says, “Biologicals as a percentage of overall medicine are still small. So, may be the growth rate of chemical formulations segment won’t be as high but still there will be a lot of value there.” The development of new drugs through the conventional chemical-based technologies is increasingly getting more difficult and expensive. Therefore, it is too early to decide if the recent decline reflects a long-term downtrend or if it merely is a random fluctuation.

The biopharma convergence is expected to initiate the platform for new business models that will ultimately lead to greater deal making and an efficient blending of strategic interests and opportunities. Notes a white paper by Deloitte, “To achieve success in an era of convergence, players need to be nimble about relationship structures and relationships in general, whether at the production, discovery, development or marketing level.”

Though biotech-pharma convergence is the current remedy adopted to meet pipeline woes and the increasing demand for biopharmaceuticals, this alone may not be sufficient to drive growth on a sustainable basis and companies need to increasingly analyze in-house R&D productivity and the innovation process. Experts feel Convergence of Opportunities and Interests in Pharmaceuticals and Biotechnology that convergence will gradually reach a point where difference between pharma and biotech processes and techniques will disappear. John Wong avers, “Over a period of time, the so called real big difference between a biotech and a pharma company will fade away.” It would not be wrong to say that the biotech sector is indeed maturing, however, it is still in the nascent stages. It would be too pre-mature to conclude that biotech would overtake pharma or would prove to be a major threat to it. It’s been thirty years since the biotech revolution began but the industry is yet to make significant aggregate profits. In fact, the industry in total has lost $100 billion since its creation in the 1970s. Therefore, only time would answer if this convergence results in a smooth integration of competencies or if both the industries emerge as major competitors to each other.

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Author Bio

Rajeshwer Chigullapalli
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