The Change The current R&D model—in which companies work individually to develop products—is not sustainable because of the costs and risks involved (reported to be $800 million to $1.2 billion per product). As Janet Woodcock, FDA's deputy commissioner of operations, has observed, "We have this tremendous science in the lab discovering new innovations that would help people, but the process for development is actually what we did 100 years ago." By participating in the consortium, these companies are admitting that it is time for a change—and pledging to cooperate on an unprecedented level in modernizing the predevelopment process.

The Implications It may prove challenging to sort out what information should remain proprietary and what should be shared. Cynics also would warn that under the agreement, companies could withhold their most lucrative intellectual property and share only abandoned research.

Still, success in this collaboration could:

• Advance the industry's use of in silico studies, predictive modeling, and statistical/mathematical support for registration purposes.
• Enable companies to make earlier go/no-go research decisions based on biomarkers.
• Usher new discoveries to the market faster and more efficiently, since applicants would be using safety tests required by FDA, rather than proprietary test trials.
• Provide the tools to identify patients who will benefit differentially from a treatment, taking healthcare closer to the elusive goal of personalized medicine.
• Create even more pressure for product differentiation, as competing drugs are developed based on the same biomarker.

When animals are threatened, they often attempt to appear larger and more formidable. The blowfish inflates itself to several times its normal size, and even domesticated dogs will raise their hackles to look intimidating. Midsize pharma companies seem to have learned the lesson, and achieving critical mass via mergers has become a standard self-defense tactic.

The Harbinger During two hectic weeks last September, three midsize companies announced mergers with other midsize companies: UCB purchased Schwarz Pharma, Merck KGaA bought Serono, and Nycomed bought Altana's pharmaceutical division. All were privately owned. All were European. And all three targets reportedly commanded unprecedented premiums.

The Change For a decade, specialty pharmaceuticals—which can be acquired at relatively low risk and sold to specialists through a small sales force—have been the lifeline of midsize companies. But recently, Big Pharma has entered the game, outbidding its smaller competitors for new molecules and holding on to products it once might have licensed out.

Clearly, we've seen the end of the stable, comfortable business that midsize pharmas once knew. Most likely, the owners of Schwarz, Serono, and Altana knew their opportunities as stand-alone businesses had peaked, while their buyers saw an urgent need to strengthen their positions—so urgent that they were willing to pay top dollar.

Implications By merging, these companies have become more difficult for the giants to swallow and have achieved the critical mass to compete. They now stand a fighting chance against the giants in acquiring promising biotech drugs.

As the number of midsize players shrinks, those remaining are likely to feel increasing pressure to make similar moves. Companies outside of pharma's top 20 each command less than 1 percent of the market. If they are not rich in innovation, they need a survival strategy.

At least in the short term, the three deals have driven up prices for companies high on the midsize food chain. Yet, as the midsize pressures increase, premiums could give way to discounts.