Survival Strategy in Biopharma – Mergers and Acquisitions
Success in the biopharmaceuticals industry relies on the continuous development of novel drug molecules. As a result, biotechnology and pharmaceutical companies end up spending about 17% of their revenues on research and development (R&D). Such large expenditures are fraught with risks. The large majority of drugs do not make it past all clinical trials. It takes more than a decade for a new molecule to make it through clinical trials and reach the market. The cost incurred in taking a molecule from the early discovery stage to the market can range anywhere from $4 billion to more than $10 billion. These factors have collectively made the biopharmaceuticals industry the highest spender in R&D compared to any other sector. To compound such challenges, biotechnology and pharmaceutical companies also have to contend with their blockbuster drugs going off patent, R&D portfolios stagnating, and competition increasing. These forces push companies to look externally for innovation. Historically, mergers and acquisitions (M&As) have been one of the most logical survival strategies. In 2018, 622 deals were closed. The current year of 2019 is similarly witnessing large numbers of M&A deals.
Motivation for M&As
Sharing pipeline development cost: One of the major challenges facing large biopharmaceutical companies is replenishing their product portfolio with newer drugs. This feat is mainly done through developing therapeutics through in-house research, acquiring assets, or establishing licensing arrangements. However, the return on investment generated by traditional in-house R&D has reduced to 1.9% in 2018 from 3.7% in 2017, and from 10.1% in 2010. Given the cost and amount of time it takes for drug development, many of the larger biotech companies choose to indulge in M&As to maintain their position in the competitive landscape.
For a smaller company or a start-up, it is already challenging to raise funds to support early discovery efforts. Most of these companies do not have the financial means to cover the later parts of drug development like conducting clinical trials, manufacturing, launching products, etc. These gaps in meeting companies’ individual goals create an environment ripe for M&As. Such deals give liberty to smaller companies to focus on their early discovery and larger companies a breather from investing their own budget into R&D. These larger companies can thus focus on pushing therapeutics through the later stages of drug development.
Gilead Sciences’ acquisition of Kite Pharma for $11.9 billion in August 2017 is a prime example of how M&As can allow companies to share pipeline cost. A large proportion of Gilead’s revenue was derived from its anti-viral Hepatitis C drug. With a diminishing patient population to treat and increasing market competition, Gilead’s revenue from this drug started declining. In part prompted by such declines, Gilead acquired Kite Pharma to venture into the field of cell therapy for cancer treatment. Around the time of acquisition, Kite Pharma notably received FDA approval for its cell therapy against Non-Hodgkin’s Lymphoma. Another example of companies sharing pipeline development costs involves Celgene’s acquisition of the cell therapy company Juno Therapeutics for $9 billion. This deal provided Celgene a novel scientific platform and access to Juno’s innovative pipeline. Conversely, it gave Juno’s scientists access to Celgene’s scalable manufacturing capabilities.
Patent expirations: A large chunk of the revenue for major biopharmaceutical companies comes from a handful of blockbuster drugs. For example, Abbvie’s arthritis drug Humira has accounted for an outsized portion of their revenue for several years. In fact, Humira was the top selling drug in the 2018 global drug market. Unfortunately for Abbvie, Humira’s market share is now being threatened by biosimilars from companies like Amgen, Novartis, and Mylan. As more blockbuster drugs go off patent and companies lose exclusivity of such drugs, the major biopharmaceutical companies are constantly on the lookout to strengthen their pipelines through M&A. In June 2019, Abbvie announced its plan to acquire Allergan for $63 billion in cash and stock in a move that is considered to be a strategy to cope up with the loss of Humira’s exclusivity in 2023 in the US market.
Expanding product portfolio by entering into new therapeutic area: Another major motivation for M&A is expanding companies’ portfolios. Abbvie’s acquisition of Allergan, for example, not only mitigates the future loss of Humira’s exclusivity but also facilitates Abbvie’s product portfolio diversification because Allergan has a strong blockbuster in Botox. In a similar vein, cell and gene therapy companies have shown incredible progress in the past couple of years, and many large biopharma companies have identified these as worthy of investment.
In fact, there has been a 62% growth in the deals related to the gene therapy space from 82 in 2014 to 133 in 2018. Notable deals in recent history include one between Spark Therapeutics and Roche for $4.3 billion. This deal provided Roche access to an FDA approved gene therapy drug along with Spark Therapeutics’ expertise in developing and manufacturing of other gene therapies. Another prominent deal is Novartis’s acquisition of AveXis for $8.7 billion, which strengthens Novartis’s position in the market as it ventures into the gene therapy space.
Cost synergy: Establishing annual cost synergies is yet another motivation for mega mergers and acquisitions. Dr. Anthony Berger, a former medical science liaison at Shire, emphasized the economics of the deal should revolves around maximizing each company’s strengths, resources, and pipeline. Ideally, a M&A will allow a company to generate positive synergies by eliminating any overlaps in business operations. Consolidating supply chains or removing operational redundancies, for example, should help companies save money. Takeda’s acquisition of Shire for $62 billion was expected to generate annual cost synergies of at least $1.4 billion three years after completion of the deal.
Laws governing merger and acquisition
Although M&As are a prominent feature of today’s biotech industry, companies considering partaking in such deals must content with anti-trust laws that govern these transactions. The Federal Trade Commission (FTC) is the governing body that oversees and grants clearance for M&As. It seeks to prevent any M&A that can lead to a monopoly, leading to higher prices, lower quality services or less innovation. Antitrust authorities thus scrutinize the minutia behind all proposed M&A deals. If needed, FTC can even take legal action against a proposed deal in federal court or before an FTC law judge. Time and time again, anti-trust authorities have requested more information with regards to multiples deals. One recent case involves Bristol Myers Squibb’s acquisition of Celgene for $74 billion. In order to get clearance from regulators, Bristol Myers Squibb had to divest Celgene’s psoriasis drug Otezla because Bristol Myers Squibb already had a competing psoriasis drug in development. Otelza is approved in more than 50 markets outside the US and has patent exclusivity until 2028 in the US. The annual revenue of Otezla was $1.61 in 2018 and was forecasted to bring in $2.71 billion in 2023.
Another case currently receiving scrutiny involves Roche’s acquisition of Spark Therapeutics. The primary reason for this scrutiny is the fact that both Roche and Spark Therapeutics have hemophilia drugs. Roche markets Hemlibra while Spark Therapeutics owns SPK-8011 and SPK-8016, both of which are gene therapies in this space. Antitrust committees are thus concerned about the potential for market monopoly. The FTC has not cleared this deal, which was intended to close in November 2019. The companies originally needed to dissolve this acquisition if the deal is not completed by Jan 31st, 2020. However, the new deadline for ironing out the deal is now 30th April,2020.
Fit for success
One cause for concern related to any potential M&A deal is a clash of cultures. Dr. Berger noted that both parties involved need to embody each other’s values and align themselves with a set of broader aims. Takeda’s acquisition of Shire, for example, prompted Takeda to sell Shire’s dry eye drug Xiidra because it did not align with Takeda’s business strategy of focusing on rare diseases, gastroenterology, oncology, and neuroscience.
If companies can overcome these obstacles, an M&A can emerge as one strategy to promote scientific innovation. These deals can also help companies circumvent the sizable upfront investment in R&D required to develop new therapeutics and allow companies to more effectively handle headwinds from drug pricing regulation and a heightened political focus over industry practices. Given the uncertain terrain within this industry, M&As will likely continue as a key strategy to navigate such uncertain terrain.
Kiran Deshmukh, MS works at a biotechnology company in Los Angeles, California.