Mega Mergers

Over the past two years, big pharma has strived to achieve revenue growth and pipeline stocking through M&A. In 2007, the pharma industry mainly targeted late-stage biotechnology acquisitions to consolidate some drug development platforms, namely those with disease franchises and drug class expansion. Then came the ever-worsening financial crisis during 2008 that rapidly spread to become a global recession. This has put many big pharma companies into a holding pattern exacerbated by difficulties of accessing finance and the need to satisfy investors for the short-term.

One interesting observation is that at the time of writing this article, more than 40 per cent of the biotech companies in the US had less than a year of cash on hand. Does this serve as a once-in-a-lifetime-opportunity to build value by rapid M&A of biotech companies that could stock various stages of development for big pharma?

The latest pharma rage – Mega mergers
The forcible merger of two big companies that lack innovation doesn’t necessarily result in forming a good company. There have been academic and industry studies that have shown that this strategy had failed time and again to create any value for

shareholders, drug pipelines and ultimately patients beyond a few years. The past 12 months have witnessed many such deals in the pharma industry. (Table 1).

The mega merger of Pfizer and Pharmacia in 2000 illustrates how a merger, which lacks long-term value, has huge dilution and which is not properly integrated, fails. The Pfizer CEO, Jeffrey Kindler, was on the airwaves touting the great value that this upcoming Pfizer-Wyeth mega merger would provide. What is interesting here is that in all his interviews Jeffrey Kindler was overtly promising that the past failures to integrate value into the past M&A would not be repeated. As a result, many large pharma companies are still going for mega mergers. The latest being Pfizer-Wyeth mega merger for about US$ 68 billion in stock and cash.

The Pfizer-Wyeth deal, if consummated, would be the fourth largest M&A deal ever and would give Pfizer the distinction of having made the first, fourth and fifth largest pharmaceutical deals in history. Pfizer is still trying to integrate the Pharmacia acquisition of 2000 which was the fourth and now is the fifth largest deal ever (Table 2). The deal will merge two major pipelines with patent expiry falling in the period 2011-2013. Lipitor alone constitutes 35 per cent of Pfizer’s annual sales according to the latest IMS studies and Pfizer press reports.

Putting two anaemic pipelines together with no innovative system in place doesn’t make one great pipeline for future growth. In fact, Jeffrey Kindler repeatedly stated on news interviews that this deal would unlock value for both companies and solve the short-term problems facing Pfizer. He repeatedly stated that past M&A mistakes that destroyed value will this time provide value. Time alone will reveal the truth, but the analysis of the combined pipelines seems to be making a bigger issue and is expected to affect investors and value.

 It can take years to integrate the R&D and corporate cultures following these mega mergers­—business development groups can be taken off task for up to two years while trying to manage the integration. Big pharma companies are scared and have started reacting to the industry woes. These woes are being driven by a slowdown in growth as revenues come under threat from expiry of patents of blockbuster drugs, shrinking

pipelines from original science programmes and the ever-increasing reach and breadth of generic drug competition. Are there alternatives to this mega merger mania? Well, you have Astellas, the Japanese Pharma (Fugisawa and Yamanouchi consolidation) moving towards acquiring Small to Mid-size Biotech (SMBs); could this be a better place to put money, time and longer-term focus? (Table 1).

Global financial credit crisis – A silver lining for the big pharma?
With so many biotech companies short of cash and in mid to later stages of clinical development, does this provide a buying opportunity for low-cost drug pipeline stocking? It sure seems that way. If big pharma can muster a strong business development and licensing effort, they can merge or acquire a succession of smaller biotech companies and fill the gaps in drug pipelines from late preclinical / pre-IND to phase III / NDA. This thought is probably causing big pharma heartburn, but what are the alternatives: mega mergers? There are many problems that mega mergers won’t address (Table 3). Three interesting deals at the moment are the GSK-Attack Strategy, the continuing saga of Roche’s attempt to buy the remaining shares in Genentech and the Astellas-CV Therapeutics replay from the fall of 2008.

There are many benefits to an aggressive biotech M&A roll-up approach. Let’s look at the three scenarios in reverse order.

Astellas and CV Therapeutics – Hostile takeover attempt
Astellas is moving in on a hostile take-over with a second attempt at CV Therapeutics. The first attempt was in the fall of 2008 with CV Therapeutics turning away from any deal. As the market has moved downwards and cash reserves dwindled, Astellas feels that the addition of CV Therapeutics would provide growth into new areas and potential revenue paths for the medium future. Being a Japanese pharma company and concerned with long-term growth prospects along with a willingness to build out new franchises in both diseases and drug classes and shouldering some of the risk, Astellas is bucking the trend of Wall Street pressures, quarter-to-quarter financial performance and western big pharma. The deal that formed Astellas—putting together Yamanouchi and Fujisawa—built a sustainable foundation to grow from. It is predicted that Astellas will make more smart acquisitions in the next couple of years and take advantage of the current financial crisis. Table 4 presents a summary of drivers providing advantages to larger pharmaceutical companies with their biotech brethren.

Roche and Genentech – Remaining share buyout
Another interesting potential trend-setting deal involves the buyout of remaining Genentech shares by Roche. Roche is driving hard to purchase the remaining stake of Genentech to form the largest biopharmaceutical company with broad research platforms, core capabilities, preclinical and clinical drug pipelines. The first deal acquired a 44.1 per cent stake in Genentech at a cost of US$ 42.6 billion making it the sixth largest deal to date (Table 2). This time around, it could cost Roche double that sum. Genentech, one of the two largest biotechs in the world, could very well rebuff the Roche deal and start its own biotech M&A strategy. An approach that can be more

accretive for Genentech shareholders and a better fit with the corporate culture in California. A Roche takeover could kill the remaining innovative juices that Genentech has. One thing is probably for sure, the co-founder and current CEO, Levinson may leave his position if the deal goes through; not necessarily a bad thing. We would like to see him in a more expansive role helping more biotechs grow to become future Genentechs.

Aggressive M&A strategies of GSK
The global financial crisis has provided an opportunity for big pharma to really make a difference in how they build value into their drug pipelines. The crisis has plummeted company valuations to their lowest level in 25 years (the life of the biotech industry is almost that old) and it is estimated that more than a third of the over 3,500 biotech companies that exist in the US have less than a year of cash on hand. With most pundits predicting that financial problems would continue till mid-2010, you have a lot of companies with potentially great science and pipelines in clinical development on the verge of extinction.

Enter GSK. Although some are predicting the Pfizer-Wyeth deal could help Pfizer with short-term revenues and give a little breadth from the Wyeth pipeline, most are pointing towards GSK as the company and M&A trend to watch more closely. To date, GSK has avoided any mega merger in favour of mobilising its cash on smaller, more asset-building type of deals. The goal is an obvious one: to address long-term problems instead of adopting a myopic blockbuster-drug-only strategy and build both drug classes and drug portfolios in focussed disease franchises. Over the past 24 months, GSK has aggressively bought an accretive, sustainable and potentially expansive diverse set of drug assets—such as UCB’s late-stage drug assets and Biotene’s dry mouth drug treatment—in both established and emerging markets. It is also rumoured that GSK is looking at more targeted diversified healthcare companies and this approach could provide for more portfolio management across healthcare systems.

Adopting new development strategies
Johnson & Johnson, Abbott Laboratories and Novartis are just a few to deploy this approach with repeated success. Companies like OSI Pharma, Celgene, Amylin are just a few who are still independent and could provide great buys for big pharma. Combine one of these companies with smaller biotechs and you could build a strategy around developing some drugs yourself, co-developing with other partners (possible future acquisition targets), co-promoting late-stage assets to free up resources for creative development strategies like fostering drug programmes. AstraZeneca is very good at this. License a drug to a company, have that company develop the asset in close ties with it and at some pre-determined point in the future, it gets the rights back if requested. If not, the biotech / pharma partner has rights to development or share a range of business development options.

Another approach is the Pharmaceutical Development Company (PDC) option. One of the best companies to create and lead with great success using the PDC model is DeBiopharm, S.A in Lausanne, Switzerland. In the PDC model, a company acquires the drug asset which is generally at a Pre-IND or phase I stage and takes ownership. It then develops it through phase II, phase III or NDA. In return, the PDC gives milestone payment, royalties and / or sales kickers to the original source of the drug asset. Most PDCs don’t promote the products, they usually sell or out-license the asset to a larger company. The PDC and fostering models are great strategies for sharing resources, risk and allowing larger companies to leverage a stockpile of drug candidates on their shelves that may never be developed. Figure 2 depicts the overall strategic approach to drug portfolio development and management.

Predictions for 2009 and 2010
GSK, Roche and Novartis represent some of the best possible examples of building a diversified and scientifically-rich big pharma and could very well use the multiple biotech M&A model. As Roche eventually acquires the remaining shares of Genentech it will have a fairly balanced small molecule portfolio / pipeline with advanced biopharma capabilities. Genentech, one of the two largest biotech leaders worldwide, has both short-term goals combined with long-term visions. Amgen should be seeking targets for M&A, not being acquired. Astellas might lose out on this bid with CV Therapeutics, but they can have a short list for M&A. Companies like Abbott Labs and Celgene provide great add-on revenues, deep pipelines and sound scientific platforms.

Those companies seeking growth only through the mega merger approach will have limited success, take themselves out of contention during one of the most opportunistic times we’ve seen in decades and could spell potential disaster for the big pharma seeking to grow revenues in the medium to long term.

Pfizer-Wyeth in the end won’t be any better than its previous mega merger deals and hopefully they will see this and push along with vetting and closing a few biotech M&A deals before the good ones are gone. In the end, these purge cycles are good because they force the crème de la crème to the top and this is what we need to bridge the gap in innovation among the Big Pharma companies.