Mergers - how do we benefit?
Stephen Archer of Spring Partnerships looks back on weeks of M&A buzz in the pharma community, and asks whether the industry will really benefit from such movement.
Mergers and acquisitions may excite the markets and shareholders on both sides but their record of success in delivering the anticipated benefits is not good. Around 80% fail on costs savings and growth in shareholder value. Despite this, ambition, hubris and corporate desperation mean that boards often move with the heart rather than the head. Pfizer is a good example. It has made acquisitions of $240 billion in the past 15 years and yet its current market capitalisation is just $189 billlion today.
Was the Pfizer ambition for Astra Zeneca one of hubris? Actually I don’t think so. It was certainly over-reaching ambition with a hint of desperation. To understand the Pfizer move we need to consider the state of the pharmaceutical industry. It has been in relative decline for the past decade. Compared with 20 years ago the industry has fewer novel drugs and a weaker pipeline of new drugs. This is despite an annual global R&D spend of $88billion* per annum by the top 50 pharma companies. The costs of a new drug coming to market is now circa $1.3 billion but the painful statistic is that the return on R&D investment has halved in the last five years in round numbers.
This situation is something of a paradox given that research tools have advanced and doubly paradoxical given that the slowdown in drug innovation co-incides with the emergence of genomics as a mainstream science allowing companies to in theory to match compounds to individual genes and individual genomes, ie. a person’s unique gene constitution. The truth is that with advances in science have come complexity and cost. Managing R&D is very difficult. In the last decade this issue has been partly answered by the growth in pharma investment in outside organisations – biotech’s, research institutes and more who do the heavy lifting of research and can then pass the development and trialing back to pharma. But still the R&D cost is returning less for each pharma company. On top of that, two other pressures are working on the industry.
Firstly, as drugs come off patent then the generic copies come to market and decimate the product revenues of the patented version.
Secondly, the state health systems in most wealthy, mature economies have been pushing down prices of drugs quite aggressively as their own sovereign deficits have been under pressure in recent years and with healthcare a large and increasing cost to states.
These factors threaten shareholder value and have pushed pharma leaders into protecting or trying to enhance shareholder value through mergers and acquisitions. The consolidation of the past 20 years has been huge. The motivation for these consolidations fall into the following categories:
Access to additional R&D pipeline projects, some of which may hold out high promise;
Access to skills in R&D;
Reduction in overall R&D spend;
Strengthening presence in certain markets: eg. diabetes, heart etc. to build market credibility in these therapeutic areas;
Access to new or more markets through additional sales channels;
Synergies and cost savings in general operating costs;
Access to new markets and new therapies to add to the existing portfolio.
So as we see consolidation in the industry we will also see that R&D is consolidated and more outlying conditions being left behind as the fewer
R&D functions focus on the drugs that will bring the best returns and most likely success in clinical trials.
In the next ten years we can expect the cost of getting drugs to market to rise and the potential for new drugs to be blockbusters and cure major diseases to remain a challenge.
So the good news is that diagnosis will improve for patients and smaller niche pharmas could come back into play as viable businesses though they, like the recent crop of biotechs will inevitably be swallowed by larger pharmas who will want to buy revenue streams and down stream profits as well as access to new markets and patients.
In the final analysis, I believe that competition through R&D innovation, better disease understanding, better diagnostics and more targeted compounds will lead to the emergence of new players in the market who can serve communities better than ‘big pharma’ is willing to risk doing.
R&D is going to get tougher to succeed in and returns may not improve but diagnostics and genomics will enable pharma in general to reach more people with more therapies. Until that time we should remain skeptical of the motives and effectiveness of pharma to serve the population.
* European Commission