Business Models and Biotech Deals

If 2009 was all about megamergers and healthcare reform, 2010 will at least offer a change of subject. Few headline-grabbing mergers are predicted for the new year; top pharmas are content with smaller, strategic plays. But most analysts agree that this fragmented industry will gradually bend to the law of consolidation. "The growth aspirations of the industry don't match the capacity of the markets to develop it," says Peter Tollman, Boston Consulting Group's global pharma leader. "Consolidation is one way of getting rid of the excess." Meanwhile, the market share of the top players remains in the single digits, although Pfizer could break 10 percent this year as it digests Wyeth.

Pharma's relentless pursuit of organic growth by tapping emerging markets and specialized drugs is the leading indicator for expansion. At the same time, most major drugmakers will continue to deconstruct the monolithic, primary care business model (with its dramatic spikes and drops in profits) in favor of fast-acting, flexible, independent units. The industry's new, youngish leaders are attempting nothing less than turning drug behemoths into global healthcare networks that girdle the world with as wide a range of products and margins as possible.

Internal restructuring—"right-sizing"—will result in more layoffs and other cost cutting. And in R&D, CEOs seem to be daring one another to drive the knife deeper. Sanofi-Aventis CEO Chris Viehbacher currently holds the record, having matter-of-factly told analysts that he will cut R&D by 20 percent, to $5 billion, by 2011. Of the top pharmas, only Merck, Bristol-Myers Squibb, and Lilly plan to increase their 2010 R&D budgets. BMS and Lilly are also the two biggest pharmas to buck the diversification trend by hewing to a strictly pure-play course.

The road to becoming an industrial healthcare company is paved with many acquisitions, and 2010 will see its share of bolt-on deals. "With over $100 billion in cash on their collective balance sheets, pharma will continue to identify M&A as the only way to ensure growth," says John Campbell, CEO of Campbell Alliance.

Although biotech has averted an industry-wide implosion (so far), many early stage shops went belly-up in 2009. That trend may slow, but not stop, in 2010. "Over the next year, there will be even fewer VC players," says Sherrill Neff, founding partner of Quaker BioVentures. "That means you can get some extraordinary opportunities, though it takes some looking."

(Hot tip: In 2010, smart shoppers will check out parallel fields like diagnostics, devices, and healthcare services.)

Biotechs with "revolutionary technology" or just a good-old Phase III products will still fetch high prices because demand far outstrips supply. Says Peter Young, president and CEO of Young & Partners: "Pharma is in the driver's seat, but with fewer very attractive targets, the competition for an acquisition can drive up the price."

With M&A being the new R&D, options-based, pay-for-performance biotech agreements will proliferate as Big Pharma hones dealmaking into a science. Yet the jump in the number of givebacks in 2009 may signal a resurgence in acquisitions in 2010, says Jan Heybroek, president of the Arcos Group. "You have to very actively manage licensing relationships, and there's plenty of evidence that the divorce rate is as high as it is for people."