A question that seeks answer in view of the challenges that the pharma industry is currently facing globally and specially in Europe.

Pharma has to find ways in order to improve Research and Development (R&D) productivity by reducing development time frames, R&D costs and increasing the chances of success from the pre-clinical phase through market launch. As these interdependent factors have remained stable or even worsen (cycle times and probability of success at each phase have not changed significantly while R&D costs have impressively increased since 1990s) pharma has to seek other methods in order to overcome this huge challenge.
In my view solutions towards these direction are mainly:

i) Entrance to new therapeutic areas with unmet medical needs and large market potential can, in the long-term be a source of ensuring cash inflows. Adapting such entrance directly at emerging markets (BRIC) can prove successful.

ii) Filling the pipeline gap.

iii) The convergence of diagnostics with pharmaceuticals for efficient and effective drug delivery that can prove to be an additional revenue source which can then be re-invested for R&D purposes.

iv) Developing orphan drugs, not so much for financial reasons but for restoring the industry's damaged reputation.

v) Personalised medicine; need to say more?

From a company's strategic perspective there are two main pathways for achieving these solutions: M&A and organic growth. M&A has been well-incorporated as a significant part of the overall strategy of pharma companies, mainly big pharma. But what are the major features of these deals in the different M&A waves? It can be suggested that during the 1980s and 1990s there was a significant amount of pharma-pharma "mergers of equals" (at a national level) aiming at gaining knowledge about monoclonal antibodies and genetic engineering for drug discovery. In the post-merger period absorption was the most common integration technique. From the late 1990s and onwards, particularly after the genomics boom the investment community realised that there are many years ahead for the sequencing of the human genome to actually add value both financially and medically. From that point onwards, for pharma, issues such as clash of cultures, post-merger integration techniques and potential disruption of R&D, were secondary. The pharma industry performed many mega-acquisitions and hundreds of small acquisitions which had one key characteristic in common; most of the companies acquired were biotechs present in different geographical areas (cross-border M&A). A preservational approach was used as a post-merger technique to avoid cultural clashes and financial risks as well as the time consuming and extensive process of due dilligence (which can strongly disrupt every-day decision making). The key drivers for this shift from national mergers in order to dominate, to acquisitions in order to fill the pipeline gap are mainly the intense competition from generics (70% of prescriptions in the U.S., reference 1), patent expirations (between 2010-2014 the revenue of the prescription sector is expected to be reduced will by approximately US$ 110 bn, reference 2) and the pressure for lower healthcare costs (as buyers demand lower prices and reference pricing is a growing pricing strategy for public healthcare systems).

However, why did pharma choose biotech? As an industry expert had once told me "pharma missed the boat" and so it wants to catch up. But regardless of this historical explanation the main reason that early and mid- stage biotech acquisitions take place is that biotech companies, although having equity as the only source of funding and make little or no revenues, they for sure have strong R&D platforms and high future prospects. Pharma companies also have strong R&D focus but marketing and sales force effectiveness remain the number 1 in terms of resource and cost allocation. It has also been concluded that small molecules (biologics) have a higher overall chance of approval compared to chemical compounds. In addition, generics are an exact copy of branded drugs, while for biologics there are biosimilars. There is a much greater difficulty for developing biosimilars and hence, this can provide pharma-acquired biotech companies a "virtual" extention of market exclusivity.

Coming back to M&A trends; M&A intensity has remained fairly stable particularly after the beginning of the crisis in 2008. M&A model of growth is shifting towards a hybrid model in which pharma companies form strategic alliances/partnerships or perform licensing deals with biotech firms paying them in tranches rather than up-front. In such performance-based approach pharma decides whether to acquire the biotech firm in the future or not based on its success or failure during the partnership.

The last model of growth is organic growth. This is the model followed by biotech companies until the point in which they are eventually acquired from pharma (Sanofi-Genzyme, Roche-Genentech, AstraZeneca-MedImmune etc.). Companies that have grown organically are characterised by a high degree of autonomy and independence. But even Merck, the brightest example of such growth model, performed its first mega-acquisition by acquiring Schering-Plough in 2009. Organic growth for big pharma is not a solution anymore in such a mature and saturated market. For biotech, it is the opposite.

So can biotech M&A save pharma? In such an uncertain and ever-changing environment, the answer is: it depends. It depends on how M&A is taking place (horisontal or vertical, friendly or hostile) what are the expectations and reactions of the investors, what are the post-merger financial strategies (do you follow the same straight-forward cost-saving strategy in R&D as in sales and marketing?). In my view, a hybrid model is required: performance based preservational M&A in combination with open innovation (in-licensing, off-licensing) and strategic alliance/partnership formation. Most big pharma companies have already started choosing this model realising its declining R&D productivity but its strong marketing and sales effectiveness; Incorporating biotech's R&D focus and rational compound targeting and pharma's marketing success it can eventually prove to be a viable and successful business model.
 

REFERENCES

1. Murray, A., Berndt, E. R. and Cutler, D. M. (2008) Prescription drug spending trends in the United States: looking beyond the turning point. Health Affairs, 151–160.

2. EvaluatePharma Alpha World Preview 2014. Evaluate Pharma report (2009).