Cash rich and hungry, big pharma hunts for deals
Always provocative and never disappointing, the BIO-Europe opening plenary session has become a popular tradition of the conference program. This year’s session, led by Vaughn Kailian from MPM Capital, pondered the question: “Rethinking R&D: Can Big Pharma Address the Productivity Gap through Earlier Stage Collaborations?”
This productivity “gap” is a polite way of saying that big pharma has a looming crisis on the horizon when an estimated 25% of revenues will disappear as patents expire on current products in 2012. Clearly evident among the panelists was the immediacy of the financial crisis that has caught many small biotechs at a critical moment and left them short on cash.
“We’ve all seen the numbers,” said Kailian, referring to the report on cash strapped biotech companies featured in an earlier presentation.
See story, BIO Report : Tightening cash pushing small cap U.S. biotechs to alliances)
Kailian then pointed to another important number, the estimated USD 100 billion in cash held by major pharmaceuticals.
“With the 10,000 partnering meetings scheduled here in Mannheim over the next three days at BIO-Europe, I can promise you, you will be collecting a thousand business cards the moment this discussion ends,” he predicted.
Barbara Yanni, VP and Chief Licensing Officer, Merck & Co. said, “That is why we are here,” agreeing that not only is there a productivity gap, but that the gap is beginning to move beyond Phase I projects to Phase II. “The best way to address this problem is to work with people outside our company,” she said, noting that her group manages 50 external deals each year, most at a very early stage.
Michael A. Yeomans, Senior VP Global Business Development and Licensing at Bayer Schering Pharma, agreed, “There are alarming statistics in productivity, and to try to find reasons for this is not so easy. Huge amounts of money were invested into big technologies and platforms, but the output to this point has been very disappointing.”
Contributing his take, panelist Bernhard Kirschbaum, Executive VP for Research and a member of the Executive Board at Merck Serono, said it is wrong-headed to believe that a high number of external projects for a big pharma company means that there has been a failure of internal R&D, especially “if you are successful in pushing things through the pipeline.”
He said his company reserves 30% of its development budget for external projects, and has been known to add even more for deals that are a special fit for the company.
Returning to the global financial crisis all panelists agreed that the landscape has dramatically changed for all stakeholders. Yanni said “Everything is upside down now. We have been approached for upfront payments equal to the entire value of the presenting company,” she said, and with company valuations at dramatically depressed levels some licensing deals are turning into outright acquisitions.
Yeoman agreed saying the value of deals has increased so greatly in recent years that at this moment when the values of companies are extraordinary low, it forces a ‘rethink’ of the nature of the deal.
Moderator Kailian pushed the panelists on current conditions asking if the market is weeding out the weak players.
“Is it going to be that only the good survive or only the rich survive?” he asked.
Ted Torphy, CSO and Head of External Research and Early Development for Johnson & Johnson Pharmaceuticals said, “I wish I could say that it is a rational market, but it is not and I’m afraid that the latter comment might be correct.”
“It is not a weeding out of the weak projects but of the companies that happen to be in the wrong financial position at the wrong moment, which is not good. It may be an advantage for the four of us [Pharma], but it is not helping to weed out the companies based on the quality of their platform or product.”
Yeomans said that the current market conditions are not good for the industry, for small biotech and for big pharma alike.
“We can’t pretend to the big companies that we are unaffected by this,” he said. “While we may be in a better position than some other industries, we are going to have to be very selective in the next 12 months, especially on the kinds of deals we are doing and what we are paying. So I do not see it as a particularly good time.”
Yanni said that she has been approached by bankers pushing projects because they are “cheap”. I have to tell them it doesn’t matter if it is cheap if this is something we do not want to buy. In the end it is about the opportunity, not the price, except at the very end, of course, when it is all about the price.”
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