Driven to License

Feb 01, 2007

The bar for growth in the pharmaceutical and biotechnology industries has never been higher. With large and small companies alike showing gaps in pipelines, the competition for innovative products is intense, giving rise to an unprecedented diversity of partnering strategies and an equally unprecedented convergence of small-molecule drugs and biologics in company portfolios. Licensings are shaping up as the year's big deal.

New Drug Approvals
Consolidation has long been the common thread in pharma expansion. Last year we saw many classic acquisitions: Lilly acquired Icos for $2.1 billion, mainly so it could get its hands on Cialis, for erectile dysfunction; Pfizer paid $1.3 billion for Sanofi-Aventis' remaining position in Exubera, a diabetes drug with inhaled insulin; Stiefel Labs purchased Connectics' dermatology line for $640 million, extending its already-solid market position; and Watson merged with Andrx, a fellow medium-size generics player, for $1.9 billion.

But we also saw something new: drug companies pursuing diversity in novel technology. AstraZeneca bought Cambridge Antibody Technologies for $1.3 billion, making a significant commitment to monoclonal-antibody research, principally in inflammatory disorders. Merck agreed to pay $1.1 billion for Sirna Therapeutics, advancing its leadership position in RNA-interference technology. And Pfizer signed two headline deals: a $230 million purchase of PowderMed's DNA-based vaccines and a $500 million acquisition of Rinat Neuroscience in order to access early research in Alzheimer's and late-stage compounds for acute and chronic pain.

Trends in Treatments
These deals signal a striking eagerness on the part of many large pharmas to embrace true innovation for the first time in years. To fully appreciate this trend, a sense of history may be necessary. In the 1970s and '80s, big drug companies were often only a small part of mammoth diversified companies that contained divisions such as consumer packaged goods, pharmacy benefit management, and agricultural chemicals. But the '90s ushered in the pure-play era, with most leading players moving to a pharmaceuticals-only focus and business-development strategies either to acquire products relevant to the existing business or to consolidate through M&As.

What we are seeing now, as Big Pharma delves into new technologies, delivery mechanisms, and therapeutic areas, looks like a return of sorts to innovation and diversification—but implemented in a more targeted, tactical manner. Nothing illustrates this better than recent deals in the action-packed central nervous system (CNS), oncology, and immunology markets.

General Dynamics

Acquisitions and, especially, licensing deals are a tricky balancing act between, on the one hand, the needs of the marketplace as defined by holes in the pipelines at larger companies and, on the other, the promising products available from smaller companies. The financial status of each player, in turn, drives the terms by which the final deal is inked.

Oncology Deals
The less robust its pipeline, the more a company is likely to lean on licensing to replace revenue lost to generic competition. There was no let up in 2006 in the parade of blockbusters losing exclusivity, including Pfizer's antibiotic Zithromax and two multibillion-dollar cholesterol drugs, Merck's Zocor and Bristol-Myers Squibb's Pravachol.

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