The New Deals - Pharmaceutical Executive


The New Deals

Pharmaceutical Executive

Pharma M&As Drop

Overshadowed by big biotech deals, the year's few noteworthy pharma M&As were driven by the growing trend to diversify outside of the high-risk branded drug business.

Novartis, arguably already both the most diversified and successful Big Pharma, acquired a 25 percent share of Alcon, the world's most profitable eye-care company, for $11 billion, with an option to buy an additional 52 percent in 2010 for another $28 billion. Although Novartis CEO Daniel Vasella acknowledged that Alcon makes a strong fit with his own contact lens and ophthalmologic drugs portfolio, he cited consumer healthcare's relative lack of pricing pressure as the deal's biggest bonus: "The margins are higher than our pharma business, and are obviously very attractive."

Meanwhile, the generics business saw some consolidation when Teva, the global leader, bought rival Barr Pharmaceuticals, the world number four, for $7.5 billion.

Spreading the risk around through diversification into generics drove not only the Daiichi/Ranbaxy deal but Sanofi-Aventis' purchase of Zentiva for a revised $2.6 billion after the Czech generics firm snubbed a lower offer.

Hot and Cold Diseases

The main trends that have lately come to define pharma's M&As, licensing deals, and other strategic alliances generally deepened in 2008.

Cancer remains the hot disease, followed closely by CNS; together, these two therapeutic areas attracted more deals than all other diseases combined. In third place is the autoimmune and inflammatory market (monoclonal antibodies in development for oncology not infrequently show benefit in this secondary area). Most of the year's biggest acquisitions, including number one Roche/Genentech (pending), number two Takeda/Millennium, number five Lilly/ImClone, and number six Eisai/MGI, involved biotechs with cancer drugs on the market and more in the works.

In the mean time, pharma is exiting cardiovascular and diabetes R&D. "Both markets are already well served with lots of treatment options, and getting payers to reimburse for a new product would require a major scientific advance," says Lowe.

This year, Pfizer announced its exit from the cardiovascular space after spinning off Espirion, the biotech with an experimental "good" cholesterol-lifting candidate that the drug giant bought for $1.4 billion four years ago when that approach was showing promise.

The Height of Sophistication

Playing for the highest stakes, the top drugmakers are deploying all their risk/reward expertise to the deal-making endeavor. From Takeda's all-cash $8.8 billion purchase of Millennium to GSK's multiple-milestone development deals, the agreements are growing increasingly elaborate and diverse. "Pharma is negotiating very complex, sophisticated deals in an attempt to spread the risk around," says Stan Bernard of Bernard Associates. And with biotech financing increasingly hard to find, "we're seeing more flexibility in what sellers are willing to accept," Greene notes. "Pharma is able to offer more stock and less cash."

Big Pharma is also getting more sophisticated in its M&A decision-making, using a team approach that includes not only business development, R&D, and legal, but also regulatory and marketing. Mindful of their poor track record at partnering, the top drugmakers have created strategic alliance management arms to oversee integration and advocate for biotechs. Preserving the shop's autonomy—and keeping top talent with generous retention packages—is the new industry standard, at least officially.

Whether or not Roche (which briefly owned Genentech in 1990) can quell a rush to the exit by the biotech's talent remains to be seen. "We will do everything to preserve the unique, science-driven culture of Genentech, something which made Genentech so successful and something we want to build on," Roche CEO Severin Schwann told the Wall Street Journal when announcing the deal—and he has repeated this pledge with his every public utterance about the deal. Roche's entire US pharma operation is relocating to Genentech headquarters outside San Francisco, and dropping the Roche name in favor of Genentech. Roche's promise of retention bonuses may be more persuasive, though they may not prevent top talent from cashing in stock options and heading for the golf course.


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