The New Deals - Pharmaceutical Executive


The New Deals

Pharmaceutical Executive

The RNAi Race

Big Pharma continued its rush to the latest "game changing" technology, RNA interference, which promises to be the next decade's version of monoclonal antibodies. Merck was first on the scene, dropping $1.1 billion two years ago for Sirna Therapeutics; last year, AstraZeneca inked a $400 million milestone deal with Silence Therapeutics while Roche sealed one worth up to $1 billion with Alnylam Pharmaceuticals, which holds most of the patents, making it the king of the gene-silencing kingdom.

In April, GSK got in on the act with a $600 million alliance with Regulus Therapeutics, which is chasing drugs using microRNA, aka RNAi 2.0. Then Alnylam scored again, winning a $1 billion milestone deal with Takeda in May, and announcing in July that Novartis was extending its 2005 development pact worth $700 million. All of the Alnylam alliances are nonexclusive and limited to specific targets in select disease categories; if the critical hurdle of systemic delivery can be overcome, the sky's the limit for this Cambridge, MA–based biotech, with its vast vault of potential targets.

But the explosion of early-stage deals isn't limited to RNAi. "Pharma is now acquiring platforms that lack even a product in order to operate in a certain space with genomics, say, or biomarkers," Pickering says. "The old dogma about not buying technology rather than products is over." The year's biggest such deal was GSK's $1.5 billion alliance with Cellzome, whose technology is used to identify small molecule inhibitors of specific kinase targets in inflammatory diseases.

"Pharma realizes it has not been very successful at keeping talent when it acquires whole biotechs, so more and more companies are focusing on individual assets," competitive intelligence consultant Cliff Kalb says. "To keep the price down, they're buying earlier, even though the risk of failure is greater."

The Drive to Divest

Lilly's ImClone acquisition eclipsed what some experts viewed as a more interesting deal: the sale in August of its early-stage R&D facility to contract research firm Covance for $50 million, plus another $1.6 billion in drug-development contracts over the next decade. By shedding a portion of its drug discovery and outsourcing a portion of its clinical development, Lilly is slicing and dicing its R&D value chain in a way that is new for pharma. "The deal acknowledges Covance's ability to bring drugs to market faster and more efficiently. With this investment, Lilly is solidifying its outsourcing strategy in a way that turns a contractor into a true partner," says Brenda Gleason, president of M2 Health Care Consulting.

Meanwhile, Bristol-Myers Squibb redoubled its divesting efforts, jettisoning its wound-care specialty, ConvaTec, to two private equity firms—Nordic Capital and Avista Capital Partners—for $4.1 billion, having last December sold its medical imaging division for $525 million to yet another private equity firm.

And the divesting is likely to continue, according to BMS' Cornelius. "Assuming there will be capital markets next year, we'll try to take a piece of our nutritional business, Mead Johnson, public in the first quarter. Our guess is it's worth $8 billion," he told Business Week.

The Next Megamerger?

Cliff Kalb suggests that Cornelius is angling to make his firm the object of a bidding war between AZ and Pfizer—as he previously did at Lilly with stunning success by pitting J&J against Boston Scientific for Guidant, Lilly's stent maker. "Cornelius is 'cleaning up the balance sheet' by spinning off the non-pharma businesses that are unattractive to pure-play pharmas. And he has recently done separate copartnering deals with both AZ and Pfizer for some potentially very lucrative drugs," Kalb says.

Last year, AstraZeneca signed a $950 million milestone deal with BMS to share the development costs of two late-stage diabetes compounds, while Pfizer inked a nearly identical deal for $1 billion for an anticoagulant and some early-stage obesity and diabetes agents. "If they want to hold onto the products, Cornelius will make Pfizer and AZ fight over BMS," says Kalb

If so, the pharmaceutical industry may finally see its equivalent of Superhero Fight Club, with two drug giants battling over a third, followed by a quaking megamerger. This may be a sign of a new order in M&As. "As the industry begins to contract, we will see both small biotechs and big pharmas start to fail, and they will be rescued or acquired by other companies," says Stan Bernard. Stay tuned.


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