Wednesday, 26 September 2012

The New Age Pharma Business Model: Part 3 - The Case of the No-Exit Biotech




With virtually no R&D department, no blockbusters, and stifling generic pressures Big Pharma is not in a happy place today. Many multinationals have gone the licensing and acquisition way, but increased crowding on the shop floor is resulting in largely over-priced deals. Vaccines are a seemingly hot area of acquisition, whilst oncology has seemed to be all the rage for the past three years. Amgen paid a whopping US$ 1 billion to the vaccine specialist BioVex for its OncoVex cancer vaccine in 2011, Biogen acquired Stromedix for US$ 562 million and Gilead acquired Calistoga for US$ 600 million—all relatively over-priced deals, even for unmet niche targets.

In fact, the average takeover premiums for biotech companies are nearly double the premiums of acquisitions in other industries in the current markets. The game of panicky music chairs occurring in the industry is generally indicative of the multinationals’ desperate efforts to explore cost-cutting alternatives in the R&D department, as well as to access new areas of growth.

Big Pharma Eager to Acquire

The number of licensing agreements has also increased by a substantial 16% in the last five years. Notably, in anticipation of the patent cliff, the majority of licensing deals struck in Q2 of 2010 involved molecules in marketing stages of development; leads in phase III trials were the second most popular licensing target. In-licensing cost Big Pharma US$ 25 billion in 2010, and sales from licensed products amounted to ~26% of total sales. In the US, venture-backed Life Science M&A exits massively soared last year, and exit volume reached unprecedented levels, even in comparison with biotech’s 2007 peak (Fig 1). 

Figure 1. Exit volume & number for US Biotech, 2005-2011

Source: Silicon Valley Bank, 2012

In-licensing activity stats show that oncology and neurology currently dominate the target disease field (by licensing activity - Fig. 2). Interestingly, in line with vigorous pharmerging expansion, infectious disease has made a comeback hit last year. All of this is in stark contrast with the biggest blockbusters of the last decade, who have for the most part targeted pervasive “first world” conditions such as stroke, heartburn and asthma. Because like the likes of Lipitor have now gone generic, cardiovascular health has dropped to the bottom of the popularity rankings.

Figure 2. Licensing activity volume by therapeutic area, 2011

Source: Deloitte Licensing Deals, 2012

The Biotech Declaration of Independence

With shrinking pipelines, Big Pharma are left with little choice but to streamline efforts towards partnerships and licenses. Bristol-Myers’ “String of Pearls”, and Lilly and Merck’s novel aqcuisition-focused business models, discussed in our previous post, serve as testimony to that. However, the visible whithering of the pharma giants’ power is also strong incentive for smaller players to challenge industry leaders and to dodge “Pharmocracy’s” sphere of influence. 

Enough lone biotech examples have now emerged to conclude that the No-Exit trend is now a dawning reality, rather than mere speculation.  Beside the fact that US equity valuations already prefer Biotech to Big Pharma, there is now an impressive collection of biotechs valued between US$ 500 million and US$ 3 billion who have chosen the independent route, with impressive results. Big Pharma are uncomplexed when it comes to making obvious their objects of desire: GSK recently placed a whopping US$ 2.6 billion bid on Rockville, while everyone else is visibly eyeing the San Diego-based Amylin Pharma, who could potentially dig any large pipeline out of the ditch in the current markets. But the lone wolves are standing proud - for now, at least. 

Why Big Pharma Has Lost its Appeal

Intuitively speaking, the traditional exit model postulates that a biotech’s value is commonly created, and indeed dictated, by “the exit”—a highly coveted event for a small player. But in the current industry scenario this may no longer be so. For starters, Big Pharma are now nowhere near as intimidating in terms of scientific capital and IP as say, ten years ago—which means that biotechs now have a realistic chance at competition with conglomerates. Secondly, investor confidence in the lone biotech is growing as markets are beginning to fathom the actual benefit ratio of a modern Big Exit.

All factors considered, today, a small player transfers substantially more value to Big Pharma in a licensing deal than it receives in return. After all, both are now likely to use the same tools in reaching the market—Contract Research, Manufacturing, Sales and Marketing organizations. Even the famous marketing departments—the force Big Pharma could proudly boast to exit anticipators—are on a visible decline. In turn, the CRO (contract research) and the CSO (contract sales) industries have grown at lightning speeds since the onset of the Patent Cliff, as they have received the shifting volumes of Big Pharma’s R&D projects and became a viable, affordable option for small biotechs. Almost all of the future growth CROs are poised for is expected to be driven by biotechs, rather than by pharma multinationals.

Access to Global Markets

Luckily for Big Pharma, the CSO market at the moment is still heavily concentrated in developed economies. In China, only a small number of CSOs are currently in operation; leaders include NovaMed, with 500 representatives, and Invida with roughly 600. In India the number of CSO players is lesser still. For the most part, this is due to lack of appropriately skilled personnel on the ground, but global talent migration is likely to compensate for low volumes in the not-too-distant future.

It is because of their pharmerging market presence that pharmaceutical giants remain confident that their lingering, unbeatable allure rests with their global coverage. DIY biotech strategies may pay off in local markets, but the chances of unpartnered companies reaching global markets are still rather slim. Needless to speculate, burgeoning service provider industries are just as eager as Big Pharma to reach foreign shores, and the lone player may be granted global market access sooner than multionationals would like to believe.

Raising Capital the DIY Way

In terms of financing, Big Pharma are now in much lesser possession of cash flows than before they went on a cliff-induced panic shopping spree. Furthermore, pharma executives are naturally shopping around the therapeutic areas which are highly lucrative on their own, namely areas of unmet need and with well-defined patient populations which would warrant a lesser marketing force. In the charts of investors’ priority lists, clinical trial success and FDA approval are fast becoming top hits, pushing out the traditional value-creating partnership. As investors are beginning to understand that clinically and comercially sound lone players have the potential to generate more value than partnered ones, the markets are beginning to reward the DIY system, generating more cash for biotechs who would otherwise have no choice but to resort to the exit.

Crowdfunding

Governments are likely to play a role in Biotech survival too. France has had a crowdfunding  scheme, titled “Fonds Communs de Placements dans l'Innovation”—roughly meaning the Communal Innovation Fund—for over 15 years, raising around US$ 6 million from the crowd for the greater scientific good. The British Bioindustry Association has recently picked up and improved on the idea, initiating the “Citizens’ Innovation Fund” which promises lucrative tax breaks and reasonable returns for those supporting the bio-industry with investments of over £15,000 a year. Crowdfunding is probably a rather infantile notion as of yet - but with schemes such as the CIF this way of raising capital likely to play an increasingly crucial role in safety-netting the lone biotech arena. 

It seems the giants may be under a realistic over-shadowing threat from audacious young biotechs eager to go it alone. Perhaps it is too early to tell who will win out in the long term, but Big Pharma could certainly do with a disruptive business strategy in order to regain its appeal in the eyes of the biotech--and the world. Change is undeniably in the air, but only time will tell whether Big Pharma will be able to gracefully regain composure, or whether the industry will once again return to its very foundations of lone players and great innovations.