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Inhale Chooses the Service Path

Executive Summary

Drug delivery has seen plenty of acquisitions-but they represent two basic philosophical approaches, represented most recently by Johnson & Johnson's purchase of Alza and Inhale's acquisition of two privately-held firms, Bradford and Shearwater. The basic question: can a service model bring significant returns to a large shareholder base or will Alza's evolution into a product company define the way forward for the industry?

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Skyepharma:Trying To Take Off From a Short Runway

Since 1998, through a series of inexpensive acquisitions, SkyePharma has assembled a wide range of drug delivery technologies, positioning itself as a one stop shop. But the company still has to convince both its customers, and its investors, that it has not sacrificed quality for quantity.

Alkermes' Incrementalism

Alkermes' success in creating a commercial product out of Genentech's growth hormone has taken it across a fundamental credibility gap all new drug delivery companies face. One result: an extraordinarily high valuation that has permitted it to raise plenty of cash. And it's using these assets--credibility, cash and valuation--to invest in programs which can bring it nearer term revenues and higher margins, in terms of new, accelerated, or risk-sharing deals. Indeed, it's even treating its current net-loss position as an asset, spending heavily now--which its profitable competitors can't, given their valuation-sensitive earnings constraints--and even signing complex deals to take its partners' expenses onto its own P&L, reimbursing itself with equity and downstream milestones. Moreover, it's shown itself, as in its acquisition of Advanced Inhalation Research, willing to dramatically expand its portfolio of technologies with work done on the outside. Alkermes also wants to develop products for its own account, though its strategy for commercializing them, while maintaining a strong delivery technology base, is unclear.

Alza Takes Independence Road to Acquisition

Alza's acquisition by Abbott reflects, in part, Alza CEO Ernie Mario's belief in the near-impossibility of a mid-sized pharmaceutical company retaining a sustainable growing business. But Mario recognized that to get a high-value acquisition bid, he needed to do everything possible to create an independent, sustainable business. His strategy succeeded.

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