A Season in Financial Hell - Pharmaceutical Executive

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A Season in Financial Hell

Pharmaceutical Executive



Peter Tollman
Peter Tollman
Senior Partner,
BCG, The Boston Consulting Group

The industry has been consolidating for a long time, and to some extent Pfizer-Wyeth, Merck-Schering, and Roche-Genentech are part of that trend. But it's still not a highly concentrated industry. If you look at the projection for 2010, the top 5 players represent about a third of the industry revenues, and the top 20 players about three-quarters.

Being bigger can be helpful in many ways. Your negotiating power with payers, especially powerful private or governmental institutions, is greater. Your global reach is greater. Your ability to access innovation is greater; your presence among suppliers, like CROs, and your ability to improve cash flow by managing costs are all greater. So both Pfizer and Merck have announced improved cost positions that are going to come about as a result their transactions. If you can gain $5 billion in cash flow a year at a P/E of even 10, that gives you $50 billion in market value.

But ultimately it's the ability to grow through innovation that's going to drive success, and it's very difficult to see any relationship between size and innovation either positive or negative.

The three mergers have shaken up the industry. If you want to compete at scale, a new level has been attained. There's now significant distance between Pfizer, Roche, or Merck and the rest. At the same time, there's a scarcity of targets the size of a Wyeth or Schering-Plough.

The biotechs have been picked over many times. At this point it's a buyer's market, but the buyers are finding few opportunities in their sweet spots—even among early compounds. So the force of the market is going to be played out, and a significant number of biotechs are going to go out of business.

The Big Pharmas have been progressing their own pipelines, and their drug discovery is more productive than it used to be. Even the biggest aren't able to fund everything they'd like to as compounds go through the clinic, so many are looking for creative ways of sharing the cost of development and/or the upside of the compound—from deals with each other to deals with private equity. This trend in exploring different risk-return trade-offs is only going to accelerate.

Despite the megamergers, the idea of the monolithic pharma company that discovers, develops, and commercializes all under its own roof is being deconstructed—and not just by biotechs.


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