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Convergence of Opportunities and Interests in Pharmaceuticals and Biotechnology

Wed, 01/24/2007 - 3:57am
By John Rhodes, Global Sector Leader, Life Sciences & Health Care Industry Practice
Deloitte & Touche USA LLP


Historically, the business interests of pharmaceutical research/manufacturing companies have taken a different path than those of biotechnology companies, specialty pharmaceutical manufacturers, generic manufacturers and clinical research organizations (CROs). However, recent trends – especially product discovery advances and product pipeline shortages – have brought about a convergence of opportunities and interests as each sector refines its strategic focus. As the sectors have sought to grow their individual opportunities and operating margins, they have also discovered that they are becoming more alike than different in the common pursuit of new proprietary drugs, innovative delivery systems and improved health outcomes.
More Leverage for Biotech; Increased Focus for Pharma
Key Issues in Pharmaceutical/Biotechnology Convergence
• Biotech companies have more opportunities on the table regarding their expected participation and rate of return.
• Expect to continue to see converging interests and a shift in the transaction profile for money exchanged at different stages of product research, development and commercialization.
• To achieve success in an era of convergence, players need to be nimble about relationship structures and relationships in general, whether at the production, discovery, development or marketing level.
• It may well get to the point where the lines between pharma and biotech become completely blurred and production, discovery techniques, and reputation no longer separate.
Convergence itself is not new to the life sciences industry. Many pharmaceutical manufacturers today are focusing their strategy on pure research-based pharmaceuticals and combination products that have the potential for significant improvement in health outcomes. This complements historic and active interest by pharmaceutical companies in biotechs, as evidenced by Roche’s ownership stake in Genentech and Novartis’ merger with Chiron. What is new, however, is how companies in the various sectors are working together and the evolving nature of their collaborations. Today’s partnerships and alliances are more sophisticated and costly than they used to be, and biotech companies have more opportunities for expected participation and rate of return.

Specialty pharmaceutical manufacturers historically targeted opportunities for niche products that could be more fully exploited in a focused specialty pharmaceutical portfolio model. The successful cash flow from these endeavors has resulted in robust sector growth and the potential for investment in sales and R&D by these organizations. This could lead to further drug discovery and sector development, resulting in a convergence of new business needs for specialty pharma companies, such as additional competencies in regulatory, manufacturing and sales. This is a valuable model in the evolving pricing landscape, particularly in the U.S., where Medicare-reimbursed pricing is growing and changing.

The biotech sector, which is maturing but still in the early stages of life, has a number of companies that have evolved from funds-seeking research entities to organizations that are research-based pharmaceutical manufacturers and sales entities. The strategic needs of these biotech companies are quite similar to other sectors in the research and development area. They welcome convergence as an additional funding alternative to help develop and launch their products. This position is quite critical to the future success of the life sciences industry and global health improvements, as over half of the current sales dollars for major, global pharmaceutical companies have been generated from relationships and alliances between biotech and pharma companies.

The potential for continuing convergence between biotech and pharma players is expected to increase in the next five years as the industry seeks to replace fading proprietary product revenue streams from significant patent expirations. Expect to continue to see converging interests and a shift in the transaction profile for money exchanged at different stages of product research, development and commercialization. Biotech may have a strong future position from an intellectual property perspective and the market’s preferential pricing for biologics, but funding is tight and development capacity is strained. Many biotechs still need to rely on a number of third-party relationships to bring products to a commercial state. Pharmaceutical companies, while reluctant to release significant upfront investment, have been yielding greater percentages of future royalty streams. This trade-off has resulted from pharma’s generally selective approach to later-stage development efforts. However, this trend is shifting to earlier-stage options as the late-stage options are limited.

Generic manufacturers have benefited from strong growth and global consolidation, resulting in larger, well-financed organizations. The tremendous increase in the volume of scripts and the shift to generic prescriptions when patents expire has produced strong cash flows and greater buying power. This is being leveraged into potential proprietary drugs to complement strong generic positions. Many generic companies have invested – and will continue to invest – in drug discovery and development and alliance collaborations to seek higher-margin revenue streams. They also have added scientific and sales capabilities. Additionally, convergence is occurring as certain proprietary pharmas have purchased generic companies or expanded their generic lines.

Generic manufacturers will need to invest in biologic capabilities should generics become a viable option from a regulatory standpoint. Currently, these companies are pursing with the FDA a path to launch generic biologics, which will open a new market to them. While the United States is not yet headed in this direction, some recent progress has been made in establishing a so-called bio-pathway in Europe to launch generic biologics. This focus will result in a convergence of interests with branded pharmaceutical companies and biotech. Biologics are more difficult than chemical processes to replicate, so producing these products is not currently a core competency and talents will need to converge for success. Also, the capital investment and approval process likely will be longer.

Clinical Research Organizations (CROs) have traditionally served as the outsourced research and clinical trial arm for pharma and biotech companies. They, too, have expanded their footprint to participate in a greater way in growth opportunities from proprietary drugs and drug delivery systems. In particular, CROs are looking to have a greater stake in their biotech partners. Strategically, they have R&D competencies and leveraging these in collaboration with biotech discovery, in particular, can be powerful. This opens another source of financing in the biotech area following a tightened investing cycle. Likewise, future growth in CROs is expected to be challenged to deliver at the rate of the 1990s unless new opportunities are strategically redefined. Pursuing higher-margin revenue streams by leveraging CROs’ strong, clinical business-based cash flows is one way to target these higher growth rates. This will result in another wave of convergence as well as competition.
More Products, Competition
What does increasing convergence mean for the industry? While it seems that greater and broader participation will lead to higher costs for deals, more competition and pricing impacts, there also will be additional collaborative opportunities, resulting in more products and a continuing, viable industry that perpetually reinvents itself. Convergence could very well provide the platform for new business models that will lead to greater deal-making and a competitive blending of strategic interests and opportunities. To achieve success in an era of convergence, players need to be nimble about relationship structures and relationships in general, whether at the production, discovery, development or marketing level. The share of ultimate product revenues will continue to grow for those companies that participate and contribute intellectual property and value. Historically, big pharma had greater leverage in that regard.

Biotech is still a very young industry. It keeps reinventing itself. Convergence in one shape or another will perpetuate forever because biotech is so fragmented. Eventually, more biotechs/biopharmas will grow into very large companies. It may well get to the point where the lines between pharma and biotech become completely blurred and production, discovery techniques, and reputation no longer separate. Perhaps size and age will be the only distinction. This is a truly exciting prospect that will bring additional product offerings to global health care markets.


John Rhodes can be reached at 973-683-7296 or jorhodes@deloitte.com.
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