A Season in Financial Hell - Pharmaceutical Executive


A Season in Financial Hell

Pharmaceutical Executive

Les Funtleyder
Les Funtleyder
Healthcare Strategist,
Miller Tabak, co-author of
Healthcare Investing

Pharma has been a consolidating industry forever, so it's not like these three megamergers mark a radical change. But the Pfizer-Wyeth merger did change the environment, and triggered the expected strategic responses as seen in the Merck/Schering deal—with probably one or two others to come.

In all three deals, people more or less agree that the price was within the ballpark of fair. So we're starting to get a better sense of the valuation parameters setting floors and ceilings of what the top pharmas can cost. But value is in the eye of the beholder and rests on assumptions that either will or will not be met.

Can Pfizer do this merger differently? If some innovative drugs come out of the combined pipeline in, say, 2013 and beyond, then spending $65 billion on one acquisition may have been worth it.

The Merck-Schering deal has better odds because their portfolios are more complementary and their pipelines are both in decent shape. But Merck has little track record at big consolidations, and I wouldn't predict that its process-driven culture will increase innovation when it's 50 percent bigger.

Roche and Genentech probably stand the greatest chance of success, if only because Genentech has such blockbuster products and Roche has proven that it can manage Genentech at arm's length. But whether Genentech's scientists, who are among the best in the industry, will want to stick around is the trillion-dollar question.

I think we're going to see a lot of deals this year, of many different kinds. The small- and mid-caps also need new products—the game is grow or go. Even though it's a very successful company, Gilead swept in and bought CV Therapeutics because it wants to grow beyond its HIV/HCV core into a new line, and CV has one or two cardio drugs.

It's unclear how pricing pressures will play out. With healthcare reform, drug reimportation, comparative effectiveness, and other proposals that have been talked about for years, things are going to get less favorable for pharma. There may be an advantage of scale for a megapharma when negotiating with payers. In the end, companies that get on board with improving access and quality and controlling costs stand a much better chance of creating value.

Dean Slack
Dean Slack
Vice President, Strategic
Advisory, Leerink Swann

Mergers and acquisitions have been a regular part of our industry for many years. Now we're seeing some major consolidation. The drivers are particular growth products, scale, and, increasingly, continuity of revenue and profit in the face of patent expirations.

While being large can help a pharma with securing preferred access for its medications, the benefits of R&D and commercial scale have been difficult to capture. Being large also makes continued growth much more difficult. But I don't think that having fewer, larger pharma companies will stifle innovation. Some pharma companies are adopting decentralized approaches, while others are using external R&D for de-risking.

The rout in the stock market has created many good values in the biotech community. Recently, one-third of the biotechs were trading at values below their cash-on-hand. Striking a deal with pharma validates the biotech and can increase valuation. Traditionally, alliances have been done with licensing and royalties. But now, to extend their months of cash-on-hand, biotechs are newly open to all sorts of cash-inducing arrangements with pharma—even being acquired.

Many pharmas' share prices are depressed right now, despite strong earnings, so there's still an emphasis on gaining efficiencies, improving operations, and driving growth and earnings. Cost cutting need not require a bloodletting of reductions in the work force. There are many ways to work smarter, empower people, and create more efficient processes. In one case, we saw a marketing organization face 63 steps—many removable—in carrying out the tactical implementation of its strategy. Companies need to be cognizant of doing business better each planning period.


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