Acquisitions & Licensing: No Panacea

A recent Lex article from the FT highlights some of the recent deals done, both acquisitions and licensing, between big pharma and biotechs. Usefully, it serves to remind us, that while the popular headlines capture pharma's and bigger biotech's need to buy-in research programs from R&D stage companies, this is no sure thing for earlier stage companies.

R&D productivity across the board has seen declines when looking at product approvals versus R&D dollars spent – and so far biotech as an industry has not yet proven it has a better rate of productivity.

So, how can R&D stage companies benefit from knowing this? More than ever, key facets include: innovation, well-protected IP, qualified and experienced management, astute cash-flow management, and multiple routes to financing and commercialisation which must be juggled at any one time.

Here's the Lex article from the FT:

Pharming it out

Published: February 21 2010

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Outsourcing usually provides a better service at a lower cost. But for pharmaceuticals companies, farming out their research function is a risky move. Last week, AstraZeneca agreed to pay up to $1.25bn to Rigel Pharmaceuticals to license its new rheumatoid arthritis drug.

Last July, Sanofi-Aventis bought its way into emerging market vaccines when it spent €429m on a majority stake in Shantha Biotechnics of India. Industry giants such as Pfizer and GlaxoSmithKline have also been busy signing licensing and partnership agreements for a range of new drugs.

These deals, though, do not signal a permanent shift towards outsourcing the costs and risks of research. Morgan Stanley may reckon that an investment in purchased compounds could yield three times the return of that same investment in in-house research. But leading players such as Pfizer and AstraZeneca have maintained a research budget of about 16 per cent of revenue over the past decade.

That is because while early-stage research has a low chance of profitability, it is relatively cheap. Buying developed research, with its higher expected return, is far more expensive. It costs about $1bn to bring a drug developed in-house to market. AstraZeneca will pay Rigel up to one quarter more.

Furthermore, an outsourcing strategy leaves companies at the mercy of the secondary market as it assumes a ready supply of quality drugs is available from bio-tech companies. The output of these smaller research houses, though, is cyclical and the number of people who can finance them is limited. Few of the researchers among the 11,000 staff jettisoned by GSK and AstraZeneca last month are capable of launching their own company.

And large pharmaceuticals companies will be loath to enter into a bidding war for the successful ones, especially when a looming patent cliff makes cash flow uncertain. Outsourcing research can be as appealing as a doctor’s visit.


This post is by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.


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