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.
The difference is more than a name change, says Ernst & Young's Buck Luce. "Pharma is moving from selling pills to selling
outcomes, from being a low-volume, high-priced, developed-world business to being a high-volume, low-priced global one."
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."