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The Search for Certainty: Trends in Early- and Late-Stage Dealmaking

Executive Summary

The industry's decade long search for novel drugs with novel mechanisms of action has increased the risk of drug discovery; meanwhile, new technologies have not significantly improved productivity. One result: enormous pressure to find late-stage products, and extraordinary prices for them, best exemplified by Bristol's $2 billion purchase of rights to ImClone's cancer antibody. And while these prices don't necessarily reflect the values of the particular drug, but far more important defensive issues, they nonetheless raise the pricing umbrella for all late-stage transactions, forcing buyers, in the short-term, to figure new ways of amortizing these increasingly costly investments. Meanwhile, the industry has seen a sharp decline in the number of early-stage transactions, reflecting the fact that such deals have not improved new-product productivity but have in fact increased R&D risk, or at least not decreased it. A number of relatively young biology companies are therefore exploiting valuation disparities to buy older chemistry firms in order to create integrated discovery platforms, on the model of Vertex and Millennium. These newer acquisitive biotechs hope to leverage the platform and sign the same kind of high-value deals the older firms have, but to do so far sooner in their corporate lives. Meanwhile, companies founded around predictive technologies aim to provide the R&D (and potentially marketplace) risk reduction Big Pharma wants in return for collaborations that give them the discovery assets they don't have. But apart from a few high value deals, Big Pharma hasn't yet bit. A few companies aim to amortize the risk of their R&D investment by broadening their goals from small molecule therapeutics to less traditional areas, including diagnostics.
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