Posted by: tristar3research | March 10, 2009

Big Mergers Finally Pushing Drug Consolidation, Hurting R&D

The Merck-Schering Plough deal reveals some disturbing trends that foreshadow how the industry views President Obama’s health care reform: 1) “frenzied consolidation” signals a sharp cutback in R&D work and innovation (WSJ), 2) venture capitalists have  “lost patience” with the pace of drug development (NYT-DealBlog), and 3) mergers frequently cause scientists to be fired as the teams get too large and pressure rises to cut costs (BusinessWeek).

Big Investments Havent Yielded Blockbuster Drugs

Big Investments Haven't Yielded Blockbuster Drugs

Drug makers have begun a frenzied consolidation drive that is redrawing the industry landscape: The push to consolidate is being driven by the knowledge that the big companies’ pipelines aren’t producing enough new moneymakers to keep growth going when major products lose patent protection over the next couple of years. As a result, the drug giants are looking to consolidations that will cut costs by combining research and sales efforts and eliminating other overlaps. What will be left is an industry dominated by behemoths, raising questions about the fates of smaller drug companies, as well as the countless small biotechs hungry for suitors. “There are too many companies chasing smaller revenue opportunities, so there’s got to be a shakeout,” says analyst Tim Anderson at Sanford C. Bernstein & Co. “If you’ve got cash and the value of the companies you want to buy is lower, it’s the perfect setup.” There could also be pressure tied to moves in Washington, where health-care reform could eat into margins. Meantime, 180, or 45%, of publicly traded biotech companies have less than a year of cash on hand, and about half are trading below $1 a share, according to (trade group) BIO.

VC Cutoffs Signal their Doubts about Exit Strategy

VC Cutoffs Signal their Doubts about "Exit Strategy"

Drug Investors Lose Patience: As merger mania plays out among the pharmaceutical giants, a different sort of financial frenzy has seized some small, struggling drug makers. Investors are demanding that stragglers close up shop and hand over any remaining cash, The New York Times’s Andrew Pollack writes. So much for the traditional model of patience in biotechnology investing, in which companies may burn through more than a decade and hundreds of millions of venture capital or shareholder dollars before reaching profitability — if they ever get there. Now, with cash scarce, credit tight and big drug companies like Merck intent on branching into biotechnology themselves, struggling start-ups may no longer get second and third chances to succeed. In at least eight cases in the last year, anxious investors have tried to block an unsuccessful biotech company’s quest for the next blockbuster, and have fought with management for control of the corporate carcass. The investors argue that the remaining cash belongs to them and that they — not a losing company’s executives — should decide how to invest it.

Old Adage Too Many Cooks Spoil the Drug Development

Old Adage "Too Many Cooks Spoil the Drug Development"

3) Drug Mergers: Killers for Research: When big pharmaceutical companies merge, R&D always seems to suffer- Merck’s decision to acquire Schering-Plough (SGP) for $41 billion will improve its bottom line over the next two to three years, as the merged company cuts at least 16,000 staffers and streamlines its operating costs. Further out, however, Merck (MRK) may find itself in the same wobbly boat it’s in now: No big drugs to replace the best sellers that are on the verge of losing patent protection. That’s because the one part of a drug company’s operation that never seems to do well in a Big Pharma merger is research and development. Pfizer’s long term R&D prospects aren’t any better after it wrings all the efficiencies it can out of its $64 billion merger with Wyeth Labs, announced six weeks ago. “Making R&D bigger does not make it more efficient,” says Dr. Joseph Schlessinger, chairman of the Department of Pharmacology at Yale’s School of Medicine and the founder of three biotechnology companies. “On the contrary, it’s very hard to manage science when you have huge teams of people.” The pharmaceutical industry has seen plenty of huge mergers over the last 15 years, including several by Pfizer (PFE), and Schering’s $14 billion purchase of Organon, a Dutch company, two years ago. But the consolidation has not led to an upsurge of new drugs. Analysts estimate that pharma R&D productivity today is two-fifths of what it was 10 years ago.

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