Written by Mark Osterman, Senior Vice President, Kineticos
The current climate for merger and acquisition (M&A) in the pharmaceutical industry is very strong. The challenges that most pharma companies (typically, the buyer) face are similar: the lack of R&D productivity, pricing pressures, and patent expiration, to name a few. Similarly, most emerging biotechs (typically, the seller) suffer from the same primary issue: lack of capital. As these pressures on both sides of the table increase, there are few options for companies.
Several companies, such as Johnson & Johnson Innovation, are piloting unique models of innovation. These models require long periods of time to validate their ROI; in the short term, M&A will have to supply both innovation and cultural changes to help move the industry through the turbulent environment.
During the “salad days” of the pharmaceutical industry (80’s and 90’s), it was easy to create value and deliver meaningful returns to shareholders. The era of the “me too” product has passed for most therapeutic classes, and now innovation is at the core of delivering value. Internal R&D has been stagnated by metrics and incentives that move safe and less innovative products through the pipeline. Pharma companies are acutely aware of this, but changing the culture will take significant time and rigorous retooling of their processes; this is why M&A is good for pharma.
M&A helps transfer innovation from smaller, risk tolerant companies to pharma companies, who have capital but are currently struggling with innovation themselves. Also, M&A can eliminate redundancy and provide economies of scale that will improve the seller’s negotiation position.
However, M&A can also destabilize the workforce and demotivate employees. With a constant environment of change, biotechs can experience delays to important projects and reduce shareholder value. The restructuring process is difficult and therefore requires strong strategy and implementation. Not many unique structures have proven successful within the industry.
Obviously, the benefits and risks of M&A are constantly surveyed by the leaders of these companies and evaluated for each potential deal. The issues of short-term visibility and long-term viability are difficult to quantify, but they are critical in assessing value. There are multiple models that require expert analysis, and as the industry evolves, the models will as well. In the immediate future, it is inevitable that M&A deals will increase in frequency. The true outcome of whether it creates value or more inefficiencies will not be known for some time.
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Mark Osterman, Senior Vice President of Kineticos’ Biopharmaceutical Practice, brings 25 years of experience in the biopharmaceutical industry to the team. His team is focused on helping growth-oriented biopharma companies realize their commercial potential at the corporate, portfolio and product levels. Mark’s therapeutic expertise includes cardiovascular, pulmonary, metabolics and cell/gene therapy.