Monday 23 March 2009

Two Final Thoughts on Big Pharma Acquisitions

A coda in two parts to my recent postings on the mega-transactions by Pfizer, Merck and Roche of Wyeth, Schering-Plough, and Genentech, respectively.

Coda No. 1

I had surmised that one of the possible outcomes of the current spending spree by Big Pharma would be that promising small companies in the pharma area, and in particular, biotech companies, would be gobbled up principally for their promising technology. However, if the observations by Ben Levinsohn are correct ("Biotech Bonanza", Business Week, Feb. 16th), I may have to modify by predictions.

According to Levinsohn, writing in the "Money Report" section, the driving dynamic of Big Pharma is that it needs quickly to replace (read cash) to make up for the fact that many blockbuster drugs will be coming off patent in the next several years. If so, and relying on the views of an industry analyst (Leerink Swann), what Big Pharma needs is "manufacturing knowhow of big biotechs to bring new biopharmaceuticals to market." If that be correct, then the biotech companies most likely to be in play are those with manufacturing capabilities and not merely promising technology. Stated otherwise, small biotech companies without a manufacturing capability will be less likely to be acquired than their larger and more integrated corporate brethren.

I think I need some help here. A mantra being expressed a lot these days is that it is a buyer's markets for those flush with cash seeking to buy promising technology on the cheap.Perhaps this is only true for pharmaceutical products that are not biotech per se, where "cash is king" still enables nimble, dynamic small companies to attract a willing purchaser for its technology. If Swann is correct, however, that mantra is less appropriate for biotech products, where the desire by Big Pharma for quick revenues means that manufacturing prowess may be no less important than promising biotech technology.

Biotech: it may be about manufacture after all

So what happens to the smaller biotech companies, especially if they need to obtain additional financing during the coming years? Does this mean that there will be less aggregate development for biotech because of this concern for shorter term revenues? If not, exactly what is the mechanism for ensuring that technological developments remain apace in the biotech area? I would be delighted for some insight here.

Coda No. 2

Perhaps I got a bit carried away when I assumed that Big Pharma was funding these acquisitions by their cash reserves. It seems that all of these purchasers-Wyeth, Merck, and Roche--are in fact reaching out to the bond market as well to borrow money from the public to fund at least apart of the acquisitions.

As reported by on March 17th ("Pfizer May Get Lower Rates Than Roche in Planned Bond Offering", by John Detrixhe and Gabriella Coppola), drug makers have already offered $27 billion dollars in bonds in 2009, as compared to $13 billion dollars in all of 2008. While these may not be bind-boggling sums in an era of AIG excess, they still point to a willingness by the public to buy the debt of Big Pharma to fund these purchases and the willingness of the public to invest in this corporate paper.

Maybe I should have bought those big pharma bonds all along

I need some help here as well. Given the sums being borrowed by corporate Big Pharma for the acquisitions via bond offerings, I would like to understand better how Big Pharma is funding its R&D efforts to replace its product lines. Is it being funded internally by company cash, by bank loans (that hardly seems likely in today's lending/borrowing climate), or otherwise? And whatever the answer to this question, is this funding adequate to support the kind of R&D that will be needed to replenish the drug pipeline? In the flurry of the business press to cover these mega-acquisitions, the issue of product R&D has been largely ignored of late. I, for one, would be grateful if it would return to center stage.

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