The Shakeout - Pharmaceutical Executive


The Shakeout

Pharmaceutical Executive

Deal Downside: The Phase II Baby Boom

If there's a bright spot in the industry's pipelines, it's in Phase II. (See "Burgeoning Phase II Pipelines"). Over the past five years, the pharmaceutical and biotech industry has made vast investments in early-stage technologies and committed unprecedented resources to develop products aimed at new targets and pathways. Millions of dollars later, the industry is fat with Phase II compounds in development. However, it will be some time before these compounds overcome the steep clinical and regulatory hurdles they face. However, if this generation of Phase II products—which we call the Phase II Baby Boom—is at least as effective as its predecessors, success rates will overwhelm companies' budgets for Phase III trials.

Fortunately, a range of alternatives is emerging for dealing with the Phase II Baby Boom. To make better choices about which compounds to move forward, companies are applying "rapid review" development processes to cost-effectively learn more about their Phase II assets. In parallel, advances in biomarkers are allowing some companies to peek inside the body's biochemical processes and test whether drugs are having the desired effect.

Leading companies are also applying models to reduce the risk for Phase III investments. Lilly, for example, has found financing partners to take on part of the cost of risky Phase III programs. (Those partners, of course, expect to share in the returns for the product.) BMS took another non-traditional approach by sharing development risk for high-cost Phase III programs with other large companies, including deals with Pfizer on apixaban, with Merck on muraglitazar, and with AstraZeneca on saxagliptin.

In the near term, the new approaches to Phase II programs may increase attrition rates, resulting in fewer programs moving into Phase III. Large pharmaceutical and biotech companies may be less likely to look outside their own pipelines unless there is a very compelling case for displacing an existing pipeline product. This may also mean that lower priority, but still viable, Phase II programs get cut from pharma portfolios because limited development budgets are reserved for the higher priority programs.

Cheap Assets Abound as Companies Tighten Belts

Deal Upside: Financial Distress of Emerging Companies

The current financing environment is taking a toll on both emerging biotech companies. According to a late 2008 report from the Biotechnology Industry Organization, 46 percent of 387 publicly held US biotech companies surveyed have less than two years' worth of cash on their books. An astonishing 34 percent have less than a year of cash left. At the same time, funding is down significantly for private companies, and the opportunity for an IPO is virtually non-existent. (See "Tight Cash for US Biotechs".)

Most emerging companies have responded by cutting costs by focusing on lead programs and minimizing staff. In a recent review, Campbell Alliance identified more than 80 emerging companies that announced major staff reductions in 2007 and 2008. In 2009, the trend may continue, with companies reducing staff to align with a focused set of development programs.?Future reductions could occur as those programs experience normal levels of attrition.

Financial distress creates opportunities for deal-making and M&A. Companies are not going to buy unattractive programs because they're cheap, but many companies are seeing a risk/reward trade-off that they can't resist. While the flurry has yet to occur, some mid-sized and larger companies are beginning to actively track companies with promising late-stage programs but limited cash.


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