Drug discovery paradigm shift
Drug discovery paradigm
shift
A convergence between
the pharma and
biotech sector will gradually see both parties leveraging their
strengths in drug development, commercialization, discovery and
manufacturing capabilities thus delivering innovation and changing the
whole landscape of M&A deals.
Global pharmaceutical companies have been swimming in
troubled
waters for quite some time but the good news is that they are now on
the proactive mode.
Big pharma’s acquisition spree started making big news since
2008. In January 2009, Pfizer acquired biotech big-wig Wyeth for $68
billion, followed by Roche ending its long drawn hostile battle with
Genentech by buying the remaining 44 percent stake, thus acquiring the
latter for $46.8 billion. This was followed by Merck’s
announcement in March to acquire Schering Plough for $41.1 billion.
Other big deals include: El Lilly’s purchase of ImClone
Systems
last year, Japanese giant, Takeda Pharmaceutical’s
acquisition of
Millennium Pharmaceuticals and Cephalon’s takeover of
Australia’s Arana Therapeutics.
Convergence is the trend
Analysts claim that convergence between pharma and biotech
companies is not a new trend and will continue to do so. Sujay Shetty,
associate director, Pharma Life Sciences Advisory,
PricewaterhouseCoopers (PwC), says, “From a global
perspective,
these big acquisitions have been taking place for the obvious reasons
like the R&D pipeline drying up, and at the same time, biotech
companies are either discovering a new molecule or a drug platform
which could help replenish that pipeline. Deals like the
Takeda-Millennium, ImClone-El lilly, Roche-Genentech will continue as
long as big pharma sees the need to augment its pipeline which is not
created in-house.”
Patent expirations will open the way for a fierce generic competition.
“A lot of drugs are going to be off patent in future and will
face fierce competition from the generic companies, thus will
marginally reduce the revenue of the pharma companies.
Increasing
issues on drug safety norms delaying entry of new drugs into the market
due to the stringent regulations in the clinical trials are some of the
other reasons for pharma and biotech companies coming
together,”
says Bibhuti Bhusan Kar, program manager, South Asia & Middle
East,
Healthcare–Pharmaceuticals & Biotechnology,
Frost &
Sullivan. Hence, industry experts claim that convergence
between
the two will drive the wheels of the much needed innovation for the
industry. It is a healthy market which will be the apt solution for big
pharma’s reeling woes.
A PwC report on ‘Lifting big pharmas prospects with
biologics’ , mentions that it will primarily be the biologics
sector which will drive the M&A activity with
protein-based
therapeutics, MAbs and vaccines being hailed as promising sectors for
growth. The same report also goes on to mention that in 2008, the
therapeutic monoclonal antibodies sub-sector drew increased investment
of $640 million in 46 deals, up from $477 million with 41 deals in
2007. Four of the top 10 human biotech deals in 2008, were companies
focusing on therapeutic MAbs. It is also estimated that the market for
MAbs is estimated to grow at a CAGR of 16.9 percent between
2006-12. Vaccines also drew in a considerable amount of investment of
$494 million from 31 deals in 2008.
“In many therapeutic areas like CNS, Alzheimer’s
and
diabetes, we have seen that further meaningful innovation is not
happening. Companies have been shifting their focus now on the root
cause of any disease and understand the corrective measures to be taken
more at the genetic level. Hence, a convergence between biotech and
pharma will result in newer ways of finding curative
therapies
than the traditional synthetic ways,” opines Nair.
Moreover, maintaining an almost perfect balance between innovation on
one hand and cost-efficiency on the other, it becomes the center of
attention for strategy teams. Shetty mentions, “Pharma is on
the
lookout for new pipeline drugs. They have typically addressed that
and are going out and buying companies. Companies
are now
saying that by 2012, they are to lose revenues and their scientists are
not coming up with anything innovative. Therefore, buying a biotech
company is the best option to keep those revenues flowing in.”
“As far as cost-reduction is concerned, pharma has got a huge
infrastructure for R&D. Now there is a hope for them to do it
more
efficiently, not just in R&D but also for the ground level and
fast-end clinical works,” he adds. To keep their business up
and
running, companies are now drawing up biological strategies which also
include tapping emerging markets. The nature of competition
is
such that one day a company’s revenue might be $10 billion
and
with patent expiry, it is zero. “This does not happen in any
industry. So the challenge is always on the innovation part of it, and
cost comes after that,” observes Shetty.
The recent trend of convergence has thus changed the rules
and landscape for M&A deals in the life sciences industry.
Sudeep Krishna, co-lead, Healthcare and Life sciences, Deloitte India,
says, “The recent convergence trend has changed the rules of
M&A activities, in the sense that traditionally we’ve
seen
that a pharma company acquires a biotech company having one or two
blockbuster drugs with the deal around Rs 100-200 crore. Now, we see
them acquiring big biotech companies having a whole pipeline of
promising targets because big pharma has the money. The interesting
aspect we’ve to look out for is the manner in which they
integrate the entities especially the talent pool from both the
entities.”
Impact of convergence
Drug innovation: With the convergence, the industry will now see a
gradual blurring of boundaries between the biotech and pharma sectors.
Such a convergence will open up avenues in the drug innovation process,
the most obvious reason being that biotech companies whose forte has
been innovation will replenish the drying up pipeline of pharma
companies. “I think that drug innovation will go through a
positive transformation. Now the cure will be much more
holistic,” says Nair. Genentech for example, has cutting-edge
products in both biotechnology and cancer medicines – with
blockbusters
Avastin, which churned a revenue of around $2 billion last
year and Herceptin, an extensive portfolio of new drugs.
Over the past one year, the number of FDA approvals for
biologics
has seen a gradual rise. For example, in 2008, there were 20 new
molecular entity (NME) and four new biologics as compared to 16 NMEs
and two biologics in 2007. Says Sanjay Singh, associate director,
corporate finance, KPMG, “Biotech will aid
significantly in
drug discovery research especially in target identification, and lead
generation and optimization activities.”
Moreover, big pharma companies are cash-rich companies. Hence,
investing in expensive assets such as biologics is a risk
they’re
willing to take, considering the returns they’ll reap at the
end.
“With biotech companies focusing on molecular biology and
genetic
engineering approaches, and with pharma companies being the lavish
spender in R&D for drugs with basic chemistry one can
expect
a larger success rate in terms of output from the biotech drug
development rather than pharma,” says Kar.
The whole process of drug innovation is an expensive one which does
require a continuous inflow of monetary funds, and convergence will be
a solution to the problem.
Licensing deals: Typically, a biotech company is always on
the
lookout for revenue churning options. So licensing deals are the answer
to the question wherein a biotech company can expect an inflow of cash
returns in the form of upfront payments, milestone payments and
royalties. Opines Krishna, “Licensing deals between pharma
and
biotech companies have been happening for a long time and will continue
to do so. In fact, I would say that it was these licensing deals which
was a stepping stone for a convergence of such a kind.”
“Biotech companies had to out-license their molecules because
of
their limited market access, and pharma companies in-licensed molecules
from biotech companies which looked promising. Later pharma companies
went a step further and thought why not go in for an acquisition of
these entities,” he adds.
An important fact to bear in mind is that big pharma’s
primary
capability is commercialization while biotech strength lies in
discovery and manufacturing. “Big pharma has much deeper
pockets.
In the present global economic environment, biotech, which
has
traditionally been a beneficiary of venture capital (VC) and government
funding, will have challenge in keeping the fund flow. Hence, a natural
consequence of this will be licensing deals which focuses on leveraging
each others strength for the best outcome,” adds Nair.
Outsourcing: Outsourcing projects on the other hand will either see a
status quo or a gradual increase but not drop. Opines Singh,
“It’ll lead to outsourcing of high-end preclinical
research
to Indian companies, though it’ll be a slow and gradual
process
as Indian companies will need to demonstrate their skill and knowledge
base in high-end preclinical research areas.” VCs will also
have
a pivotal role to play. The VC market has supported the growth of the
outsourcing market due to the fact that there’s a significant
risk involved in bringing a drug to the market.
Manufacturing: Manufacturing is another area which
will see
a positive transformation with biotech being a
catalyst in
the transformation. The dynamics of biotech manufacturing is different
from pharma manufacturing, hence, the former will remain as a separate
unit post-integration. “A convergence will lead to a need to
invest in specialized, high-end fermentation and purification
units,” says Singh.
At a closer look, a pharma company will reap more benefits than its
biotech counterpart. “If you look at the top 10 pharma
companies,
they have all made biotech investments but their manufacturing
capabilities are limited. Hence, a biotech manufacturing facility will
be an additional and useful asset to a pharma
company,”
adds Krishna.
Biosimilars: With biosimilars being the buzz word, and some movement
happening in the US Congress for a regulatory pathway, analysts and
industry experts are hopeful that such a convergence might boost up the
biosimilars space. Above all, an important fact to bear in mind is that
all pharma companies have a generic strategy in hand, which will be a
big boost for the biosimilar space.
According to Nair, “All the big pharma companies are talking
about emerging markets and all of them have a generic strategy now.
With generics being the focus for pharma companies, I see a
collaboration here which will immensely benefit biosimilars.
That’s because biosimilars have much better margins than
other
generics which will attract big pharma, even while big
pharma’s
commercialization capabilities will give the access and reach to
biosimilars.”
Integrating the two entities: A major task in hand would be
integrating assets of two entities which are in all aspects poles apart
from each other. Experts have unanimously opined that companies will
prefer to keep assets pertaining to R&D and manufacturing
independently.
Ideally, when a pharma company takes over a biotech organization, they
try and preserve the culture of the latter, which is more
entrepreneur-driven and polished compared to a pharma organization
which is more process driven. Integration will ideally be
seen in
the shared services, human resources and the financial services. The
Roche-Genentech integration is an apt example. “Genentech is
a
fiercely independent company, and even after Roche taking
over,
its R&D unit has been kept independent,” says
Krishna.
Singh opines that integration could happen at the sales force and
manpower level. “I see integration will mainly happen at the
manpower level and sales force to a certain extent. Manufacturing will
be a separate unit because you’ll need a different
technology.
Also, there could be a synergy at the development and regulatory
level,” he adds.
Company strategies
Pfizer, which has now set its foot in biologics has majorly
revamped its business strategies. Following the Wyeth acquisition, it
will establish a unique research model designed to advance the strong
scientific capabilities of both Pfizer and Wyeth, and to support the
new company’s nine diverse healthcare businesses. In order to
maximize new opportunities in biopharmaceutical research, Pfizer will
form two distinct research organizations—the
PharmaTherapeutics Research Group and the BioTherapeutics
Research Group. The PharmaTherapeutics Research Group will focus on the
discovery of small molecules and related modalities and the
BioTherapeutics Research Group will focus on large-molecule research,
including vaccines. The new BioTherapeutics Research Group will
capitalize on Wyeth’s industry-leading expertise in biologics
and
build on the momentum established by both Pfizer’s
Biotherapeutics and Bioinnovation Center (BBC), and centers of
large-molecule research and pharmaceutical science excellence in PGRD,
which will be a part of the new and larger group. This new
group’s mandate will be to create a broad and deep pipeline
in
vaccines, antibodies, proteins, peptides, nucleic acids and other novel
modalities.
“Creating two distinct but complementary research
organizations,
led by the top scientist from each company, will provide sharper focus,
less bureaucracy and clearer accountability in drug
discovery,”
says Jeff Kindler, CEO, Pfizer, in a press release. The new Pfizer will
consist of nine diverse global healthcare businesses. The convergence
between the two entities is aimed to capture key therapeutic areas such
as cardiovascular, oncology, women’s health, CNS and
infectious
disease; vaccines, biologics and small molecules; and animal health
with products for companion animals, consumer health, biologics and
anti-infective. Going into emerging markets like China, Latin America
and the Middle East is also on the cards.
In order to preserve the ‘biotech’ work culture of
the
company rather than diluting it, Genentech’s research and
early
development will operate as an independent center. At present,
Genentech’s Avastin has been approved in the US and clinical
trials are in progress to investigate the efficacy of Avastin in
several other tumors. The synergy target increased to one billion Swiss
francs annually, and a total one-time integration costs of
approximately three billion Swiss francs has been alloted. The combined
company has development portfolios with 10 new molecular entities in
ongoing or planned late-stage clinical development.
Following the Eli Lilly-ImClone systems deal last year, their combined
oncology portfolio will target a broader array of solid tumor types
including lung, breast, ovarian, colorectal, head, neck, and pancreas,
thus positioning Lilly to pursue treatments of multiple cancers.
Partnering with ImClone will expand Eli Lilly’s biotechnology
capabilities. “We think very highly of ImClone’s
ground-breaking work in oncology, particularly its success with
Erbitux(R), a blockbuster targeted cancer therapy, and its ability to
advance promising biotech molecules in its pipeline,” says
John C
Lechleiter, president and CEO, Eli Lilly. This will also help
them broaden their portfolio of marketed cancer therapies and
boost Lilly’s oncology pipeline with upto three promising
targeted therapies in phase III in 2009. By bringing together
ImClone’s and Lilly’s oncology products, pipelines
and
biotech capabilities, the company is taking a step forward in
addressing the challenges of patent expirations.
The combined entity of Merck and Schering-Plough will bring in a
combined portfolio of products in key therapeutic areas which include
cardiovascular, respiratory, oncology, infectious diseases,
neuroscience and women’s health. Moreover, Merck will now get
a
footing in the emerging markets and hence devise a strategy accordingly
for these markets because of the fact that Schering-Plough generates
more than 70 percent of its revenues outside the US with around $2
billion in revenues coming in from these markets.
The Indian vaccine sector is a growing market and post Shantha-Sanofi
deal, analysts predict that there will more such deals in this space to
follow suit.
Challenges
Integration of assets of both the entities could be a
challenge.
Biotech is a different ball game and intellectually they’re
different from their pharma counterparts. While biotech, which is still
in developing stage, is science-driven, pharma is mainly
commercialization-driven.
Kar says, “The biotech market is also much more concentrated
than
the pharma. “The biologics are costly as compared to the
pharmaceuticals. We have to really see how pharma companies are moving
ahead with the higher prices of biologics to make it a drug of choice,
as the convergence will find the pressure both from the government and
the consumer to slow down the growth of the healthcare
costs,”
Kar adds.
Looking ahead
With such a convergence, in the near future, one would see fewer pure
biotech companies. “Pharma has the money, it has the need to
reinvent itself and their solution being biotech and biotech has it own
challenges. So, a convergence will be natural. Currently pharma and
biotech is fairly distinctive and I see that line getting
blurred,” adds Nair.
Singh maintains that a major trend would be companies would have a
dedicated focus on biogenerics. “Another trend would be that
within the fold of a pharma company there would be a separate business
units which would focus on chemical as well as biopharma. The marketing
strategies might differ because normally biological compounds are
driven by value and not volume and there is a different
logistics
chain which is used for biological compounds,” he
concludes.
Mixed reactions have emerged within the industry as to whether we can
expect to see similar deals this year. There was talks of Pfizer buying
out Biogen but the deal did not take off because of valuations. There
were talks of Amgen being acquired as well as Bristol-Myers Squibb.
“Small deals will continue to happen. However, I do not
expect to
see any big biotechs being up for sale. This is primarily because, they
have the funds and are public entities,” said a research
analyst.
“ There are some big deals bound to happen this year. We can
look
out for some,” opines another analyst from a well-renowned
firm.
Nayantara Som