Pharma Merger Trends - Insights From An Industry Consultant At Rondaxe

By Ed Miseta, Chief Editor, Clinical Leader

By Ed Miseta, editor, Outsourced Pharma

Just three months into 2013, several merger announcements have already crossed the wires. I spoke with Joel Lirot, VP of business development for consulting firm Rondaxe, about merger and acquisition trends he sees in the pharmaceutical industry.

Outsourced Pharma (OP): What types of companies are merging?

Joel Lirot: It has been across the board – CROs, CMOs, and pharma companies. Pharma firms were initially buying companies that had early-stage products. But in the last few years the focus has shifted to buying assets and companies that are late stage. Big Pharma is waiting longer before making an acquisition to reduce risk. They can reduce the chances that a drug will fail by waiting until products are approved or very nearly approved, specifically, late-phase 2 and later.

OP: Do you feel the mergers and acquisitions currently occurring are good or bad for the industry?

Lirot: It’s hard to say. From the CMO perspective, especially the larger ones, it’s good. The consolidation will be beneficial to the large players, like Lonza and DSM. But I don’t think it’s good for the smaller and mid-sized CMOs. They will get less work from the larger pharma firms that want a one-stop-shop for their CMO services.

OP: How are firms finding potential partners?

Lirot: Right now I believe companies are simply looking for an asset that fits their portfolio. For example, if a company has a promising cardiovascular drug, as it gets to the late stage and is more apt to be approved, the company will likely find itself the target of a big company in the cardiovascular field, such as Pfizer. When Gilead Sciences purchased Pharmasset in 2011, they paid $11 billion for a product that still had a significant amount of risk. That’s huge, and it shows the dire need for new drugs that we are currently seeing in the industry, particularly by large pharma. Gilead made the acquisition to get its hands on a promising Hepatitis drug. I think we will see more of that type of acquisition. When you look at Big Pharma, their pipelines are not very strong, regardless of what they try to tell you.

OP: Most mergers seem to involve some amount of short-term pain to achieve long-term gains. What do you expect to be the painful points in the short run?

Lirot: On the biotech side – loss of employment, and from the CMO perspective – potential loss of a project and revenue stream. Again, Pharmasset is a good example. I have heard some reports stating that Gilead retained something like 6 employees out of around 100. That’s painful. If you were working for them, you would be concerned. I don’t know what CMOs Pharmasset was doing business with at the time of the merger, but I would bet that Gilead is not working with a lot of those same CMOs now.  

OP: Do you have any advice for CMOs about to undertake a merger or acquisition?

Lirot: Make the merger as painless as possible for partners, and that comes down to communication. If they do a good job with that, pharma companies will likely keep them engaged and others will know about it. This will provide them with the opportunity to get into large companies they may not have been able to get into before. But just as important, CMOs need to make sure they are managing their pipeline of customers. Everyone wants to sell that multimillion dollar contract and be the supplier of a blockbuster drug. But companies also need to balance their risk. Ask yourself who you are selling to. If it is only two Big Pharma companies, you probably have too much risk. Make sure your pipeline also has products and innovators that are in earlier stages, so you have a steady stream of products reaching the late stages 3, 5, and 10 years out.

OP: How important is a global presence?

Lirot: I think it is important, but I also feel much of the deal making right now is going on in the U.S. and China.  

OP: Can we expect merger activity to continue?

Lirot: I’m not sure how sustainable this will be. There are only so many large acquisitions that can occur, and I think the pile of cash the pharma companies have will run down over time as well, especially when companies are making $11 billion deals. The pharma industry seems to keep going through cycles. At one time we saw them getting rid of generics because they wanted to focus on their core business. Then they started buying generics again, because of worries over the patent cliff and their need to increase revenue. Now they are getting rid of generics again because they want to refocus. As another example, 10 years ago firms decided they did not want to be in manufacturing anymore. They felt moving their manufacturing to CMOs would be more efficient and cost effective. But many are now going to a preferred-supplier agreement with six or fewer manufacturers, some of whom purchased their assets from the pharma companies themselves. These pharma firms have simply gone back to using captive manufacturing again. All they have done is moved around the profit centers. I think that will change again. I also believe we will find more biotech companies taking drugs to market themselves.  

OP: Are there any other trends you see in the industry?

Lirot: For years we saw companies outsourcing business to Asia, China, and India – primarily, for cost reasons. That model has also changed. Companies have seen the benefits of offshoring diminished. U.S. firms are now demanding more from their Asian suppliers. There is a much increased focus on overseas companies meeting specifications and western regulations, leading to higher costs. Also, the workers themselves in many of those places have a growing wealth. Combine that with a growing internal market and regulatory environment, particularly in China, and again you find increased costs. The flip side is that U.S. manufacturing is now much more attractive.  I believe the competitiveness of U.S. manufacturing is the strongest that it has ever been.