Finding a Way Out of Pharma's Dealmaking Dilemma
Big Pharma's being squeezed by deal prices, both for discovery and development assets. And with new capital coming in to fund earlier-stage projects, deals will only get more expensive. But a few forward thinking drug companies are making the seller's market work to their advantage, too, reducing financial exposure and business complexity while upgrading pipelines.
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Biotechs remain voracious consumers of capital, but tapping the equity markets is often prohibitively dilutive. Royalty financing can provide lower-cost-of-capital funding while putting a price on assets the market often ignores. This cash can also allow biotechs to hold onto R&D projects longer, eventually pushing up the price of licensing deals. But although royalty financiers are eager, they are limited in the amount of risk they are willing to take; new players in the business though may nevertheless increase competition and drive prices up.
Takeda Pharmaceutical's drug business started out manufacturing and selling bismuth-the basic ingredient in Pepto-Bismol--in 1895. A century later, it's still chained to the stomach-settling game with Prevacid, a $1.4 billion drug whose patent will expire in 2009, taking with it a huge percentage of Takeda's earnings. That's one big reason why Japan's largest and most international pharmaceutical company is on a US-focused dealmaking tear. Since February, Takeda has inked three major licensing partnerships and completed the largest acquisition in its history in a desperate attempt to shore up a thin pipeline.
The industry's genericization problem will seriously constrain Big Pharma's ability to pay for late-stage development on all its products. One potential solution is being developed by Pfizer, whose top R&D execs see out-partnering as a way to free up resources for key programs and to expand R&D capacity. In this interview with R&D boss Martin Mackay, Mackay reports that Pfizer is building up a war-chest of out-licensing and partnering candidates, pursuing a wide variety of transactions--including project financing, straight out-licensing and spinoffs. But the extent of Pfizer's long-term commitment to out-partnering still isn't clear.