Terra Infirma: Pharma Dealmaking 2001
Executive Summary
With Big Pharma still trying to figure out how to create productive businesses from their mega-mergers, most of the year's high-value M&A saw biotechs buying late-stage or marketed products. But these biotechs are also, with the risk of development failure ever clearer, actively in-licensing and acquiring products and product-creating technologies in order to diversify what are often single-product portfolios. Unlike many Big Pharmas, these companies have been willing to improve existing chemical entities, often exploiting drug delivery and other pharmaceutical sciences. Meanwhile, large companies focused on late-stage in-licensing, in part because they couldn't afford acquisitions--given the valuation disparities between large companies and small ones with valuable late-stage products. Nonetheless, while more affordable than acquisitions, the high price of these deals has transferred the majority of the regulatory and commercial risk to the licensee. As for the early-stage side of the biotech industry: platform companies have not been able to sell their discovery technologies at anything like the prices they expected; as a result, many of them have merged in an effort to create product-focused discovery operations.
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Why Pharma Needs to Do Early-Stage Deals
Though there are far more preclinical than late-stage compounds available, drug firms don't license these still-early projects frequently because they prefer to reduce their risk with later-stage compounds. But by increasing the number of preclinical deals, in effect creating a venture portfolio of a few winners among many losers, drug firms would do better economically--even if they increase preclinical deal prices by 50%. That may be necessary: biotechs have held back on preclinical deals because of poor deal terms; sweetened offers, particularly in the current financing desert, would induce them to change their wait-for-late-stage-deal mentalities. Meanwhile, to alter their dealmaking habits, Big Pharma companies will need to make significant changes--among them, redrawing their financial models, elevating the role of and increasing corporate resources for licensing, and restructuring licensing's relationship to internal R&D.
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