Consolidation or Sea Change?

Less than a month after Pfizer bought Wyeth for $68bn, today’s big merger news is that Merck will buy Schering-Plough in a deal worth $41.1bn. In the current economic climate, it’s easy to reach the conclusion that this is simple industry consolidation, with the cash-rich companies opportunistically buying up those less fortunate, integrating the businesses and continuing as before. But, as we’ve pointed out in CRfocus previously, the link between the global economic turmoil and the changes in the pharmaceutical industry is perhaps less direct than one might think…

Analysts have argued that the pharmaceutical industry is one of those least threatened by the global recession: big pharma companies are less highly leveraged (ie, funded by debt) than their comparators in other industries, many have substantial cash ‘cushions’, and share prices already reflected investors’ knowledge of the impending ‘patent cliff’ facing many companies in the next few years. Indeed, you could expect the sector to outperform overall stock markets as investors flee other ‘blue chip’ industries (eg, financial services, automotive industries etc.) that are suffering the brunt of the crisis.

So, if this isn’t a ‘fire sale’ to prevent Company X from going under (which, at these prices, it clearly isn’t), then why are these mega-mergers coming thick and fast at the moment? My view is that it’s a rush for a ‘critical mass’ of intellectual property, bargaining power and cash. The goal is to propel big pharma from the “invent it here, develop it here, sell it here” model that was the only game in town 20 years ago to the “license in candidates, contract out development, manufacturing and sales” model that’s been discussed in recent years as the only way to make big pharma sufficiently diverse and agile for the future. In the short term, this requires a pipeline broad enough to navigate the patent cliff safely, with key patents on many high-earning drugs expiring in the next couple of years. In the longer run, though, access to huge quantities of resources is vital, to manage such a deep strategic change while mitigating the operational shock and potential brand damage of changing how tens of thousands of people and their associated infrastructure are deployed.

I’ve previously commented that these changes of ownership will make relatively little difference to how clinical research itself is conducted: scientific requirements and professional standards are unchanged, and there is still more demand for clinical research than there are professionals to perform it (or patients, for that matter, but that’s another story…). Company cultures will differ, as will the precise nature of the SOPs to meet these professional standards and scientific requirements, but we will mostly be doing the same tasks, albeit increasingly in the CRO sector rather than within pharma.

This could make work more complicated, as the ground rules of successive studies change subtly as we work with a wider variety of sponsors, on studies that are getting increasingly complex anyway for unrelated, medico-economic reasons. However, it should also make life more interesting, as we work in a diversity of therapeutic areas.

So, is all of this a ‘good thing’? I’d have to say that it is, because the expiry of key patents is the ‘elephant in the room’ throughout the pharmaceutical industry. We may be well placed, as a sector, to ride out the current turbulent times but our own crisis was looming well before the financial services industry started crumbling. The political appetite for bail-out funds will almost certainly be gone before anyone in our sector needs one, so we need to take advantage of this opportunity to change the way our industry is organised.

Who’s Buying, Who’s Selling? And Will It Make Any Difference?

One of the few news stories in the past few weeks not to be entirely ‘doom and gloom’ came from the widely-reported Datamonitor study that suggested some pharma companies might be quietly cheering the looming global recession. This is because big pharma companies are generally less ‘leveraged’ (ie, funded by borrowing) than many other industry sectors, particularly in comparison with their venture capital-funded colleagues in small biotech companies. The current problems facing many businesses could be used as an opportunity for pharma to open their ‘war chests’ and snap up some acquisitions to bolster pipelines (and share prices) for far less than might otherwise have been the case.

The flagship acquisition for this model was the spectacular emergence of Lilly as the ‘mystery suitor’ that snatched biotech company ImClone out of an increasingly bitter bidding war (and war of words) with prospective buyer Bristol Myers Squibb that had been going on since earlier this year. The purchase, worth $6.5 billion, gives Lilly a best-selling oncology compound Erbitux, along with a healthy pipeline and platform of other products in development.

Although any move of this value is risky (Lilly CEO John Lechleiter stated that “We place risky bets on our pipeline. This is what our shareholders expect us to do.”) the strategic thinking behind it is solid. It is the timing, though, that is significant; at a time when many companies are ‘battening down the hatches’ for a bumpy next few quarters, Lilly was willing (and able) to make a big investment to help transform its future portfolio. The authors of the Datamonitor report argue that this won’t be the last substantial acquisition in the coming months, as routes to other sources of funding dry up and venture capitalists look for liquidity to offset losses in other industries.

All of which is interesting enough… but how much will actually change for us down ‘at the coalface’, working on the clinical development of these pipelines? With many pharma studies now staffed by contract personnel or outsourced entirely to CROs, does the ultimate owner of the compound impact on the development process itself? Even when re-organisations lead to redundancies, the increasing volume of clinical research means that these are more a strategic shift in how studies are resourced, and experienced staff are quickly snapped up by other companies, possibly even to work on the same study although ‘wearing a different hat’! With overall revenues per compound declining, and increasing automation in manufacturing etc., our colleagues in other business units might not be so fortunate…

The current economic pressures were the trigger, but not the cause, of the current round of merger and acquisition activity, and any consolidation should enable us to meet the increasing demands of the next few years more effectively. At a personal level, any change of employer is somewhat traumatic, and different companies having differing cultures and ways of working, but the overall goal of clinical research, and the activities required to reach it, are the same for every organisation.