The IN VIVO Blog: Big Pharma
For at least a decade, biotechnology was seen by many observers as the likely winners of the evolution in the race for survival and prosperity in the pharmaceutical industry. The credit crunch has radically changed the environment in which companies operate, and the biotech business model now appears to be much less likely to deliver the large returns on capital and price-to-earnings ratios, which have traditionally been associated with companies providing high returns. new drugs.
So who will be the new winners and what strategies should they employ to thrive in these difficult times? Scisive Consulting president Robert Easton, partner Catharine Staughton and consultant Matt Young speak with a naturalistic analogy.
With historically bad P / Es, growth, R&D productivity – pick your metric – Big Pharma has one thing to do. The current financial crisis has, at least in the short term, reversed the fate of the still cash-rich pharmaceutical companies and biotech start-ups that have inexorably learned – for about 25 years – to beat pharma at its own game.
The financial collapse itself appears to have been a sort of bailout for Big Pharma. Now they are able to buy new compounds at low prices from small businesses that are dying to sell them.
The 20 largest pharmaceuticals have a combined war chest of over $ 100 billion. If current projections hold true, their cash and cash equivalents will reach over $ 500 billion by 2014. With these funds in hand, Big Pharma could purchase not only enough candidates to replenish their pipelines, but the majority of the world. the biotechnology industry itself.
On the other hand, according to Burrill & Co, a third of publicly traded biotechnologies have less than six months of operating cash flow.
The result of the financial collapse will be that Big Pharma remains preeminent, at least as long as the capital crisis lasts, albeit with more modest P / E valuations. As a result, biotech companies, which had attracted investors with the long-term hope of Big Pharma’s high P / E-based valuations, are struggling to fund their pipelines and need to focus on – and perfect – their business development strategies just to stay viable.
So, is there anything Big Pharma can do to make its new lease of life more than temporary?
Superficially, the recipe for scalable success seems obvious: Large pharmaceutical companies are using their huge cash reserves to acquire cash-strapped biotech companies. But before launching into the fray with an open checkbook, companies must consider the attractions of the process, in light of their specific situation.
Scisive Consulting has defined pharmaceutical companies according to six types of animals: those who have adapted to a narrow evolutionary niche, and those who are more flexible inhabitants of their environment.
Consider the polar bear. These beasts are powerful and can move quickly – challenge them at your peril. However, they must adapt to a shrinking environment, thanks to global warming, to survive and thrive. Not a bad analogy, we think, for Big Pharma.
At the other end of the spectrum, biotechnologies are rabbits. They eat a lot of green. And their population varies greatly depending on the availability of food. When rabbits are stressed by predators or lack of resources, they will eat their own young. (That is true, you can search!)
Like polar bears, big pharmaceutical companies are the biggest predators in their shrinking world. However, to remain relevant, they must either understand how to live in their declining environment or find and adapt to new territories.
In industrial terms, such an imperative translates into the need for a fundamental change in the economic model of the pharmaceutical industry. When this industry started, it was built on a fairly simple model. Science created a pill that was manufactured cheaply and marketed by the sales force to a large group of patients. This model has led to profit margins almost unthinkable today.
The model has also allowed all of the big pharmaceutical companies to evolve into very similar creatures. For example, AstraZeneca, Novartis and Bristol-Myers all operate in the fields of neuroscience, oncology and cardiovascular health. While some pharmaceutical companies are involved in nutrition, animal health, infectious disease, and other areas, all of these companies are also engaged in a mix of therapeutic areas.
Relative strategic uniformity is generally not the case with leading companies in other industries. In the high-tech industry, for example, there is a much higher level of specialization. Google is mainly in the advertising business; Microsoft, software; Research in Motion, in wireless solutions. Facebook is unlikely to be making semiconductors any time soon. (Yes, we’re familiar with Microsoft’s Bing search engine and the new Google Chrome operating system, but still.)
Similarly, healthcare businesses will evolve. The leaders of the future will be those with unique and complex models that sub-specialize in differentiated shapes. Companies will focus almost all of their efforts on a single therapeutic area, becoming “immunology companies” or “cancer companies”. These companies will also become more integrated in all sectors. A cardiology company will sell diagnostics, devices and therapeutics related to cardiovascular health.
Such a transformation will involve radical changes in their structures. Fortunately, pharmas now have a lot of cash, which gives them the means to undergo such a transformation. The winners, ultimately, will be those who recognize this need to adapt, specialize and develop more complex business models, and subsequently capitalize on their first-come advantage.
A good example of this can be seen in Astellas’ determination to acquire CV Therapeutics. Although CV’s board of directors repeatedly rejected the offer, ultimately fleeing into Gilead’s arms, the acquisition attempt marked a turning point in how Japanese companies operate relative to their American counterparts. Typically, Japanese companies have refrained from hostile corporate activities and this fundamental shift in Astellas’ strategy shows its willingness to adapt and its understanding of the new reality of the pharmaceutical market.
Second, Pharma’s polar bears must acquire the best candidates among their prey, the cash-strapped biotech rabbits of the world. However, there is a timing issue involved here. While biotech assets are cheaper than ever, they probably haven’t hit bottom yet. It is clear that these money-eating biotechs will become increasingly desperate as this crisis continues and, as a result, the choices for polar bears will improve.
The smart will watch and wait, and the real art will be knowing when to pounce – before the competition does and the opportunity passes.
For the full article, including the likely fate of duck-billed platypuses and other animals of the pharmaceutical world, see www.scisive.com.