Pharmaceuticals: Small, Targeted Deals Will Continue In 2011

Drug companies will get no respite in 2011 from the stream of patent expiries battering their bottom lines. Notably, Eli Lilly & Co. and Pfizer will both face generic competition on their best-selling drugs: the Lilly schizophrenia drug Zyprexa and the Pfizer cholesterol pill Lipitor, which lose patent protection in April and November, respectively. Lacking new products to offset the losses, the industry will watch revenues drop by as much as 12% between 2009 and 2014, according to PricewaterhouseCoopers (PwC).

Thus challenged, companies are focusing on external opportunities that will fill gaps in their pipelines and lower cost structures. Last year, the industry did not witness anything like the spate of megamergers that occurred in 2009, when Pfizer, Merck & Co., and Roche all made major purchases. But the volume of deals remained steady from 2009 to 2010, Decision Resources analyst Lulu Pickering says, as companies focused on small to midsized acquisitions that could fill a specific hole in a pipeline, bolster a therapeutic area, or improve an emerging market position.

“There are very real reasons that companies were selecting smaller targets, and I think that’s what you’re going to see continuing in 2011,” Pickering adds.

PwC suggests drug companies will continue to look for “strategic midmarket buys” between $100 million and $500 million. But as they shop for deals, companies are also hoping to share some of the financial risk of drug development. Shifts in the structure of licensing pacts and acquisitions reflect their goal of spending R&D dollars more wisely.

In the past, drug companies would hand over a sizable sum up front for access to a technology or drug candidate; today, more firms are pursuing options-based deals in which they pay less up front—often for early-stage technologies—and are given the option to pay more to license a drug after more data are available. Similarly, some companies are acquiring biotech firms for modest sums initially, with the promise of more money later if a molecule hits a milestone.

That trend “is absolutely going to continue,” says Dimitri Drone, leader of transaction services for PwC’s life sciences sector.

As for acquisition targets, Drone suggests hot commodities will be over-the-counter drug companies that can help extend big-pharma firms’ reach into emerging markets. In particular, companies will look beyond China and India to countries such as Turkey, Indonesia, and Mexico that are also poised for health care spending growth.

Decision Resources’ Pickering points to companies with biologics as high on big pharma’s 2011 acquisitions wish list. As biosimilars, or generic versions of biologic drugs, draw closer to the market, companies will be focused on how to manage the life cycle of older biologics that might soon be subject to competition.