Alliances have been an important part of strategies that have gone into the growth of some of the big Pharmaceutical and Biotechnology players across the world. The primary reason for this is that the larger pharma companies need to increase research productivity. Biotechnology represents one of the major sources of cutting edge research. It is this symbiotic relationship that fuels an increasing number of alliances. The year 2005, has been significant for the pharmaceutical and biotechnology industry when it comes to alliances and acquisition. 500 deals in a single calendar year, of which nearly 200 were acquisitions, make this growth strategy the most talked about and also the most tested last year.
Some key issues that are driving alliances in the pharmaceutical industry are the high cost of drug development, threats to intellectual property, pricing pressure, product liability issues and the potential of personalized medicine.
Strategic drivers for alliance formation
The wide spread research breakthroughs in biotechnology make it tough even today for the largest pharmaceutical giants to assemble all the necessary capabilities. Also the technology-intensive nature of the human therapeutics mega-industry means that complex organizational issues will dominate alliance formation. Vertical integration, in particular, faces severe limitations, which means that "networks of collaborative ventures" are likely to become the dominant institutional arrangement of the industry. Such arrangements allow companies with widely differing competencies and resources to rely on each other's strengths and thus build a new business model of virtual integration. As the company enriches its experience and as collaborative practices become institutionalized, returns on investment in alliances are expected to increase.
Confirmation of this premise comes from a study of more than five hundred licensing deals by Wharton researchers who found that drugs produced by co-development partnerships are more likely to win FDA approval than those developed by a single company. The researchers also concluded that alliances help small biotechs by signaling a more accurate assessment of their potential value to the financial community. In particular, a biotech company developing its first product benefits from an alliance with a large pharmaceutical company because of the credibility this partnership establishes with prospective investors.
Product pipeline innovations
Poor R&D productivity and blockbuster patent expiries have resulted in a weak pipeline of innovative products. As the number of new molecules is in short supply, R&D spending towards biotechs is expected to become more critical. Innovative drugs are being developed by biotech companies in a shorter span of time and at reduced development costs. Biotech companies have shorter product time-lines and bringing more patentable products to the market. Thus an attractive factor for the Pharma companies is to have a research alliance with these biotech research based companies and acquire their product portfolio. Small biotechs have a more successful record at discovering and developing novel compounds than big pharma companies. This driver is expected to remain of high importance in the short and medium terms, as pharma companies strive to fill critical R&D gaps through alliances with biotech in order to access early-stage molecules for development.
Early stage revenue for additional research
Pharma companies provide the funds for additional years of research for many biotech companies, especially for many of the emerging biotech companies. They have the resources to support the cost of developing a drug and expertise to take it through the required clinical trials and overcome the regulatory barriers. This means that in-house R&D can be fully exploited and enables a biotech company to share and reduce risks as well as raise their profile in the industry. Capital can be obtained through milestone payments, up-front payments, commercialization rights and royalty payments. For example, AstraZeneca announced a five-year research and development alliance with Cambridge Antibody Technology in 2004.
Successful product commercialization is likely to drive future sales of the European biotech industry, from research to commercialization. Pharma companies excel in drug development, manufacturing, and marketing: areas where biotech companies most often fall short.
They will benefit from the global development, in global supply chain and in global commercialization that a pharmaceutical company has. For example, due to the alliance between CuraGen Corporation and Bayer AG in 2001, CuraGen Corporation benefited from the marketing and sales of the pharma company and also from Bayer's expertise in drug discovery.
Pharma companies can essentially help small companies grow more quickly, adding credibility and helping spread development risk. In the longer term, as biotech companies grow and become more mature, they will be able to fund themselves as well as emerging biotech companies. Additionally, in the future, as biotech companies are licensing more early-stage compounds, the pharma companies will have fewer issues in funding early stage development. Therefore, in the longer term this driver will be less significant.
As the pharma company finances the biotech, it enhances its credibility with prospective investors. The alliance helps small biotech's by signaling a more accurate assessment of their value to the financial community.
Flexibility: Financial and operational
Alliances are not as permanent as mergers and acquisitions are. They are in certain cases more cost-effective and cheaper. Pharma companies are entering into early alliances with biotech companies. This saves higher premiums being paid in acquisitions. One particular way these deals can be flexible includes allowing either company in the strategic alliance to opt in or out of the development at any stage.
Biopharmaceuticals growing in size and power
The larger biotech companies often lack the economies of scale and scope in research, marketing and sales to fully exploit their opportunities. To ensure future success, they must guarantee product pipelines. Alliances are key drivers. For example, the alliance between QLT Inc and Xenova Group Limited in 2001 enabled QLT Inc to expand beyond photodynamic therapy and also to grow and become a fully integrated biopharmaceutical company.
Biogen Idec, Genentech Inc and Genzyme Corporation, three of the most mature companies in the industry, are acquiring the rights to products from smaller biotechnology companies and then taking them through the development and commercialization stages. As they grow in experience and sophistication, it allows biotech companies to pursue a diverse range of possible partnerships. A larger biotech company can help fund a smaller emerging biotech company because of its size. However, in comparison to larger pharma company, smaller biotech companies can differentiate themselves because of their lesser complexities of scale.
Biotech companies with one or more products in the market have found that they also need new sources of innovation as well as late-stage products to fill in gaps in their pipelines. They therefore turn to other biotech companies and also in-license products from big pharma company. The future is very much dependent on biotech companies not remaining just a one product company. The issue with many biotech companies is that they have to decide whether they are going to invest in R&D or in establishing a sales force franchise to compete with the pharma companies. The sales force franchise is what they are looking for, but investing in this area will stifle innovation. Typically, what is happening for the larger biotech companies in particular, is a shift of focus from survival to growth.
Targeted medicine, diagnostics, niche disorders and unmet needs
Industry trends are moving towards biotech products and market driven treatment. Unproven technologies include genomics, proteomics, pharmacogenomics and stem cells hold the key to future alliances. Patents have increased significantly over the last decade and there has been successful new product development. Pharma companies are exploiting these opportunities. As this area develops further and grows, this factor will increasingly become important in the future. Many large companies can use these methods for entering new geographical markets / regions in prominent therapeutic areas.
In conclusion we can see that the number of deals which have been struck between pharma and biotech have increased significantly from 2001 to 2006 and at the same time the average deal values have also escalated. While outsourcing has driven the industry for its goal to achieve faster productivity and better profitability, acquisitions and licensing deals seemed to be the flavor of the year.
(The author is program manager, Healthcare Practice, Frost & Sullivan. He can be reached through sdedhia@frost.com)Deals between pharma & biotech firms on rise