A Season in Financial Hell - Pharmaceutical Executive


A Season in Financial Hell

Pharmaceutical Executive

Carolyn Buck Luce
Carolyn Buck Luce
Global Pharmaceutical Sector Leader,
Ernst & Young LLP

No two deals are alike—and that's the case with the three megamergers. Each deal was structured in a different way for particular strategic reasons—a straight merger, a reverse merger, and an unsolicited takeover that finally became friendly. However, once the deals are consummated, the strategic imperative becomes the same: how to execute the alignment and/or integration in a way that will capture value.

By creating three mega biopharma companies, the landscape of Big Pharma is transformed. Biopharmaceuticals are no longer a mid-cap game.

The collapse of the financial system makes this a great time for acquisitions in general; pharmas have a lot of cash, and biotech valuations are low. But when there is such a discontinuity in strength between buyers and sellers, it's more important than ever for pharma to ask, "Does this acquisition accelerate my ability to execute my strategy?" For companies that don't have their strategies straight, their ability to be successful in a major merger are reduced.

Being the partner of choice is not something pharmaceutical companies are known for. Their ability to be flexible, to grow based on other people's innovations versus their own, and to understand how to create a win/win has been limited. The partnership has been defined as "what I need" at a point in time.

We're seeing the start of a marriage between private capital and the pharmaceutical industry, in terms of financing business activities in which one partner is willing to take the scientific risk and the other is willing to take the financial risk. Recently, there was a very interesting partnership among Lilly, TPG-Axon, a private equity partnership, and NovaQuest, a joint venture created by TPG-Axon and Quintiles. It's an example of how pharma can be part of someone else's grand strategy as opposed to having to create the grand strategy themselves.

Right now, the entire revenue stream for a pharmaceutical company is based on what it makes, not what it knows. Content and research and benchmarks about the product are monetized only through sales. At the same time, pharma companies educate consumers and doctors so that they are more effective and efficient in their choices—and they give that away for free. The future involves moving from a product-only company to a product-and-service company in order to have a long term revenue-generating relationship with customers.

Gino Santini
Gino Santini
Senior Vice President, Corporate Strategy and
Policy, Eli Lilly and Company

You'll never go find a merger between two large pharma companies that has gained market share. That doesn't mean the Pfizer-Wyeth or Merck-Schering mergers will destroy market share, but it does tell you why they merged in the first place. A merger can help you become more efficient and cut a lot of cost, but do not expect to see more innovation or big growth.

For Lilly, the acquisition of ImClone—besides being very interesting because of Erbitux and other products in the pipeline to substitute our patent expirations and complement our oncology franchise—also had the element of the biologic capabilities. We see our portfolio in the future split approximately 50/50 between biologics and small molecules, and ImClone will help us achieve that.

We need to become a lot more productive to decrease the cost of bringing one molecule to market. At Lilly we set our goal at a one-third reduction—from $1.2 billion to $800 million. We believe we are already half way there. We spun out all our in vivo toxicology to Covance, We think they can actually run their operation more efficiently than we can, so we've done a lot to decrease our costs through a better percentage of variable versus fixed costs.

We're experimenting with a lot of pilot programs, trying to establish a network of partnerships to develop many of our molecules. There is an element of risk sharing, because they take the risk of the development cost; if the molecule is successful, we have an option to buy it back, but at more than we paid for their costs. We've done a few arrangements with external investors on some of our more expensive internal development projects. The expected return that a financial investor requires is a lot less than what a fellow big pharma does.

At Lilly, the targeted therapy approach is a top priority, and virtually every program in development has a biomarker strategy. That really justifies having a very high market share in that group of patients, because your drug is absolutely better than the alternative, and its value justifies the price.

The days when pharma just came in and paid a biotech to give up its program are gone. The smart biotechs and pharmas both realize that they need each other, and there's a very positive, mutually beneficial overlap around mid-stage development—as opposed to arm's length transactions.


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