By Wendy Meyerhoff
Talk to experts tracking changes in biotech, big pharma, and other related industries, and it’s easy to get a sense that they see the Pfizer/Wyeth and Merck/Schering-Plough mergers as signals that big pharma companies are trying to recreate themselves. “These mergers are representative of a sea of change in pharma, away from the era when the pill was king,” says Bill Cooney, president/CEO of MedPoint Communications, which provides diversified communications for pharmaceutical and biotech companies.
“It’s not that companies like Pfizer are getting out of making pills and tablets — no one’s suggesting that — but strategically, it’s not where their interest to grow is. It’s in vaccines, biologics, devices, and even OTC and consumer products,” says Cooney.
In Indianapolis, Eli Lilly seems to exhibit this change of mindset clearly, according to Larry Davidson, Ph.D. As a professor of business economics and public policy and director at the Indiana University Center for the Business of Life Sciences, he has observed the pharmaceutical industry for more than 20 years with a particular interest in Eli Lilly. “Lilly says it’s a biopharma company, but I always thought it was a chemical company,” says Davidson.
Rebuilding the Pipeline
Experts agree that just as Wyeth’s vital biologic division is a major attraction to Pfizer, biologics in general is one of the biggest targets of pharmaceutical makers. “They’re heading over the ‘pipeline cliff’ as it’s being called,” says Jason Richardson, CEO of Cutting Edge Information, which provides industry analysis through syndicated reports and customized research.
“The drugs that were enormous in the 1990s and the early 2000s are going off patent, and that represents a huge chunk of these companies’ business. They’re almost becoming a victim of their own success. Drugs like Pfizer’s Lipitor were such blockbusters they’re almost impossible to replace in terms of income generation. The companies can’t find any one-to-one replacements,” he says.
“Ethical pharma [the biotech industry] is much more lucrative, and through it, once again big pharma can feel like scientific leaders, creating products that can change the world. There’s a general feeling among a lot of the pharmaceutical companies that mergers like this are the only thing that’s going to fix the pipeline problems that have been holding their stock prices back.”
Costs involved in making chemicals is also driving interest in biologics. There’s been pressure for reducing pharmaceutical products’ costs for nearly a decade. “There’s a belief that you can develop product quicker and cheaper with the biologic methods. There are probably some examples of cancer drugs already out there that are close to being blockbusters but didn’t cost nearly what they might have if they’d been a chemical,” says Davidson.
Laura Mahecha says OTC medicines were a big part of why Pfizer was attracted to Wyeth, adding that other pharmaceutical companies may want to reexplore this area as well. “Pfizer probably regrets selling that area to J&J not that long ago. It’s protection, and it’s additional diversification,” says Mahecha, who is the industry manager of the healthcare practice at Kline & Company.
“J&J has done a great job of achieving good sales with the OTC brands. The Zyrtec switch is one example, highlighting the revenues Pfizer could have kept in-house when their drugs went OTC if they’d kept Warner Lambert. Pfizer has other prescription items that have the potential to switch to OTC, maybe Detrol and even Viagra.”
Mahecha admits OTCs offer lower margin, “but there’s a longer term prospect for cash. You won’t make as much, but at least you’re not losing your shirt completely,” she says. Thus, a consumer health unit such as Wyeth’s offers appeal to buyers.
MedPoint’s Cooney agrees. “The trend through the 1980s and 1990s was to focus on core proprietary Rx and shed the others. Even big consumer companies like Monsanto and P&G wanted to get into pharmaceuticals. Now, you’re almost seeing the opposite trend as companies expand into OTC. Those drugs aren’t as susceptible to government payor pricing restrictions, which is definitely an attraction,” he says.
There is another opportunity related to OTC drugs — a group being called the third class of drugs, or the so-called behind-the counter OTC products. There’s talk of moving medicines for more chronic conditions, such as asthma and high cholesterol, to such a class after they lose their Rx patent. It’s been more than five years since Merck applied to have Lovastatin (Mevacor) turned into an OTC. A third drug class like this might provide profit options by retaining revenue in-house.
Lessons To Learn From Buyouts
The size of a biotech company is a critical factor when talking about biotech buyouts. Companies like Wyeth, Amgen, and Genentech (which Roche is so aggressively pursuing) are not small entities after all. “It’s not an easy thing to swallow a 60-to-80 billion dollar company. Never has been, never will be,” says Davidson. “Companies have different cultures, different systems for handling information technology, different global footprints, so it’s always risky business to acquire a large company. It takes a lot of work.”
Another critical factor in these buyouts is the attitude of the acquiring company. “Pfizer has always been very clear in its mergers: ‘When we buy another company we don’t share the pain.’ Pfizer people keep their jobs, but the other company’s people don’t, so the company being acquired has to worry,” says Cooney.
That’s especially true of departments that are seen as redundant to the acquiring company. “Whereas R&D tends to stay intact, massive core functions, like IT, HR, and finance, get trimmed. It’s a way to reduce costs while increasing shareholder value,” says Cooney. But he notes that the Obama administration’s stimulus package offers an important challenge for companies that might now first be looking at M&A options. “The banks lining up with all that TARP (Troubled Assets Relief Program) money are also the ones doing the lending for the M&As. That means they’re helping to put lots of people out of business,” Cooney adds, which is something that’s more than a little contradictory to the government’s objectives right now.
The bigger player also needs to remember something critical regarding its new R&D group. “It’s not a one-way street, telling the other guy what to do. You really have to rely on these people and build a two-way relationship,” says Davidson.
What happens when a company isn’t so big? Lots of biotechs may be eager for merging, especially with the golden era of venture dollars seemingly past. However, they need to bear in mind that joining forces may not only create the redundancy issues noted above, but other issues more destructive to the nature of many of these organizations. “A lot of these companies are smaller, more agile, and more flexible, which is what has allowed them to formulate strategies that could be quickly changed or altered. That’s part of what’s made them successful,” says Mahecha. “They have to worry about losing that in a more bureaucratic environment.”
Whatever ultimately changes as big pharma moves forward one, one thing seems clear. “These are large changes, and they’re not going to succeed without blessings from the top. And not just a blessing,” says Davidson. “There’s got to be clear-cut goals and objectives, including a system not only of rewards but also of penalties.”