Reshaping the European pharmaceutical industry

Are big biotech companies better dealmakers than their pharmaceutical cousins? This was a question up for debate at a meeting of BioEurope in Turin, Italy in March 2014. Weighing in on the side of biotech, John McDonald of Biogen Idec observed that:


[quote style=”1″]Large pharmaceutical companies have shown “zero creativity”

in their deal-making. [/quote]


Unprecedented amount of deal-making amongst the world’s largest pharmaceutical companies

Had this debate taken place in May, Mr McDonald’s comments might have been different. The past three weeks have seen an unprecedented amount of deal-making amongst the world’s largest pharmaceutical companies – deal-making that stands out for its vision and ingenuity. Excluding the proposed takeover of AstraZeneca Plc by Pfizer Inc, the outcome of which wasn’t known at the time of this writing, major transactions have now taken place amongst Novartis, GlaxoSmithKline Plc, Eli Lilly and Company, Merck & Co Inc and Bayer AG. The total value of these deals is about $43.7 billion including some prospective milestone payments.


While the sums are indeed large, the significance of the deals lies in the message that they give about the strategic views of the companies concerned. In essence it tells us which therapeutic areas and markets the five companies see as their best opportunities for future growth. This is quite different from deal-making in the recent past which has been focused on buying up single assets or groups of assets to fill specific gaps in late-stage pipelines.


The events started on 22 April with separate announcements by Novartis, GSK and Lilly of planned asset acquisitions of divestments. Novartis will buy GSK’s marketed cancer drugs for $16 billion while selling its vaccine business, excluding influenza vaccines, for $7.1 billion to GSK. In addition the two companies will form a new consumer-health joint venture with pro-forma sales of £6.5 billion. GSK will have a 63.5% majority stake in the venture. Simultaneously Novartis will sell its animal health business to Eli Lilly for approximately $5.4 billion.


Not long afterwards, on 6 May, Merck & Co (MSD outside of the USA) announced plans to sell its consumer care business to Bayer AG for $14.2 billion. Bayer will acquire Merck’s existing over-the-counter business including trademark and prescription rights to the allergy treatment Claritin and the Afrin nasal spray. In addition, Merck will pay $1 billion upfront for rights to Bayer’s portfolio of pulmonary arterial hypertension medicines focused on a group of products called soluble guanylate cyclase modulators, as well as a Phase 2 compound for heart failure.



Novartis / GSK 's transaction will transform the European pharmaceutical industry

Focusing on just the first cluster of deals, at least four things become apparent.

First the asset transactions between Novartis and GSK are deeply transformational for the European pharmaceutical industry. Novartis will gain market share in oncology, a field where it is already pioneering in immunotherapy with genetically-engineered T cells and new checkpoint inhibitor technology. By selling its vaccine business, it is acknowledging that it cannot gain critical mass in this market despite its acquisition of Chiron Corporation in 2006, and the recent success of Bexsero, its vaccine against meningitis B infection. GSK on the other hand, will clearly profit from this unique opportunity to increase its own vaccine business, which currently includes both prophylactic vaccines against infectious disease and prospective therapeutic vaccines against cancer.


Second, as outlined, the deal would not trigger massive layoffs and site closings. In fact GSK is expecting to see a significant net addition of staff, Andrew Witty, the company’s chief executive, said during a teleconference on 30 April. If the staff levels do hold, this will turn out to be a creative approach towards driving growth in the industry.


Third, Novartis announced almost a year ago that it was considering reshaping its overall business in order to gain traction in a few strategic areas. It has now completed four major deals with two different partners in a relatively short amount of time. This is likely to become a benchmark for future business development deals within the industry.


Vertical Integration


Finally the deals underscore the attraction of vertical integration, a business model successfully pursued by Novo Nordisk A/S and Roche. By focusing respectively on diabetes care and oncology, Novo and Roche have both been able to become world leaders in their fields. As John Brett-Harris of Thomson Reuters Life Sciences recently noted: 

[quote style=”1″]Strategies that focus on precision medicine and a very clear positioning of drugs on the market may be the paradigm for the future [/quote]


The concept of highly specialised therapeutic approaches contrasts with the diversification strategies being pursued by Sanofi SA and Pfizer. Pfizer’s proposed acquisition of AstraZeneca would strengthen the US company’s presence in certain therapeutic areas. It remains to be seen, if an acquisition takes place, whether Pfizer would remain diversified, or move on to a more specialised strategy like its peers.


At the very least the transactions that we have seen in the past few weeks raise important issues for the managements of all the major companies. These include affirming or redefining the core business; identifying the next and best growth platforms and deciding which assets should be kept, or shared, and which should be divested. Managements will also have to decide who the most suitable strategic partners are, and whether the location and size of the partners matter. For example, are biotechnology companies sufficiently developed to become strategic partners, or are they likely to remain primarily takeover targets?


There are no straightforward answers to any of these questions because the business environment itself is changing rapidly. Moreover pricing and reimbursement policies in all the European countries must be factored into the equation. Not to be underestimated either is the role that corporate history plays for many companies. What is clear, is that the deals we have seen in recent weeks won’t be the last.


Author : Jean-Claude MULLER, Special Advisor,Innovation & International Relationship (I&IR)

Published in  MedNous, Mai 2014



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