PharmExec Blog

Putting the M Back in M&A

JoePanetta1Joe Panetta, president and CEO of BIOCOM, discusses an emerging model of M&As in which human and IP assets are valued and biotech brings expertise to Big Pharma as venture capitalist funding dwindles and patent cliffs loom large.

Pharm Exec: Can you tell me about how small biotech and specialty companies have started switching from relying on venture capitalist (VC) funds to M&As, and when that shift came about?

Joe Panetta: I wouldn’t say they’re switching from relying on VC. I think the fact is that VC investment has taken on a different approach than it had traditionally; so we’re seeing a different, let’s say more conservative, shorter-term VC investment model. That’s combined with the fact that we’ve seen for a couple of years now that VC firms have been much more engaged in investing in their current portfolio companies, and there’s been less of an appetite for investment in new companies than there was five years ago.

Part of that is the fact that we’ve got economic challenges; part of it is the fact that we have a tremendously challenging environment at FDA; and part of it is the fact that we have uncertainty from a political standpoint. So those kinds of things have created a much more conservative approach to VC investing than we’ve seen in the past, and that’s had an impact in terms of the ability of our companies to be able to raise the kind of funding that they still need to raise to move their products through the pipeline.

What that means is that companies need to turn toward alternative sources of funding beyond VC. VC is also taking a much shorter timeframe perspective in terms of the investments that they’re making now. But that leads us to the need that large pharma companies see for innovative technology to fill their pipelines; the ability of biotech companies to attract large biotech and large pharma partners much more successfully than they have in the past; and the dynamic that we’re beginning to see—biotech companies becoming much more focused on management of the products that they’re developing, and on partnering to gain the expertise that is needed to move through development and clinical testing and commercialization.

So that creates the opportunity for companies to focus on innovation and to team up and partner with the experts on product development, commercialization, and manufacturing. And that’s where pharma comes in and plays an enormous role. Obviously pharma’s pipelines have become more depleted in terms of new innovative products over time, so there’s a greater appetite from the pharma side to engage in real partnerships with biotech companies. It’s not outright acquisition; rather, what I’m hearing more and more from a number of different pharma companies, is that the partnering model is more attractive than the outright acquisition model. And if the outright acquisition takes place, then the ability to allow a biotech company to continue to function as a satellite entity is much more attractive than simply acquiring the assets and letting the people go.

PE: What has changed in the industry or the economy that has larger pharma realizing that partnerships where both organizations work together on a level playing field may be more valuable than the straight acquisition model?

JP: There isn’t so much of an appetite any more in biotech, from the investor side or even from the management side, for creating fully integrated future large biotech companies that look like pharmaceutical companies. That used to be much more the direction that the companies were headed in, and for the most part that model has gone by the wayside. Now there’s a more virtual model, a leaner model, and that makes it much more attractive for partnering. The larger partner doesn’t have to worry about what to do with an entity that is duplicating—or at least attempting to duplicate—what they already have the ability to do.

The other thing that’s changing is the fact that we’re seeing generics come on the scene. Now there’s a future road map for biosimilars that is being developed. We see that way forward, and larger companies are beginning to plan for the world of biosimilars. Also, Big Pharma is beginning to plan more for the world of generics and of patents expiring, and I think they’re beginning to realize that they need to go into fast forward to begin to fill the pipeline, and to develop more innovative products. That’s not coming out of the merger of pharmaceutical companies. Those mergers are actually resulting in the large pharma companies having to deal with duplicate organizations and integrating existing products together, so that isn’t providing for innovation.

PE: So the mergers with smaller or more specialized biotech companies are where you believe the more specialized knowledge can come from?

JP: Absolutely—the more specialized knowledge, and the ability to do early-stage research and development much more nimbly and more quickly, resulting in more candidate products that can be developed through partnerships.

PE: How is this working so far as an economic strategy? Is this helping to bridge the financial gap that’s left from VC funding?

JP: I think it’s more than bridging the gap. Last year we did our first pharma/biotech partnering conference here in San Diego, but the relationship between large pharma and biotech has been evolving slowly over time. There was a time when the attitude on the pharma side was, ‘don’t call us, we’ll call you.’ But what we saw at out partnering conference last year and we are continuing to see now is a real appetite for equal partnership on both sides.

Everything we hear and everything we see points to a greater desire for there to be a real partnership between the two. And I think that can sustain smaller biotech companies. Pharma needs biotech as a partner, and biotech needs pharma, but pharma especially needs to continue to appreciate the value of biotech as a partner in terms of the people assets, and not just the intellectual property assets.

PE: Can you tell me more about the dynamic? How is this model of partnering different in terms of what both sides might be gaining, compared to the traditional acquisition model?

JP: The major difference is that by utilizing the resources of smaller biotech companies and by creating partnerships with various smaller biotech companies, a larger pharma can take advantage of the diversity of technologies that these small biotech companies are working in; they can take advantage of the creative environments that exist within these companies; they can harness all of that energy. Just as the biotech model is evolving away from creating a fully integrated pharmaceutical company, the pharma model is evolving away from creating these enormous R&D organizations; if we look at the performance over the last few years for the investment that’s been made, it’s pretty clear that that model isn’t as successful as it was years ago.

PE: What are some factors that result in VCs not being as willing to invest as they were in the past?

JP: I think FDA is overwhelmingly the concern right now. I don’t think a day goes by where I don’t hear or read something about how the FDA is negatively impacting the ability of the industry to be competitive in terms of developing and introducing new drugs. The climate has changed. Because of the risk-averseness at FDA, the lack of ability to accept innovation at FDA, the investor community—particularly the VC community—has been encouraging its members to obtain their approvals outside of the US, in Europe in particular. And that’s because the review process at the European Medicines Agency (EMA) is much more predictable and much more innovation-focused than the FDA is here.

If we look at what has happened with a number of drugs that have been reviewed by the FDA in the last year or two, in the obesity arena in particular and in diabetes drugs, the FDA has shown a real reluctance to approve new products and new technologies. So why invest in a process that’s unpredictable and has demonstrated that the ability to get all the way through the process to commercialization is pretty slim? That wasn’t the case years ago with FDA, especially when the Prescription Drug User Fee Act (PDUFA) came into play 15 years ago. There was a real desire on the part of the FDA to move products through the pipeline more efficiently, to take advantage of the user fees and the deadlines that were agreed upon. But now we’ve got an FDA that’s just mired in bureaucracy and risk-averseness.

Part of that is fear of making a mistake. We’ve got examples like Vioxx where, post-approval, there have been issues that have come up, and FDA is taken to task by Congress for having made a mistake. There’s a lack of understanding of the fact that there are risks associated with all products that are approved; from a media standpoint, from the Congress standpoint, from the public’s standpoint. So that all makes for a very risk-averse climate and VCs won’t invest in a process that isn’t predictable. That’s why we’re seeing a lot of VC investment moving more towards early-stage product development with an investment period of maybe three years. This way, they can be more focused on the part of the process that doesn’t involve FDA review, and can let pharma or other partners deal with the later stages of review at FDA.

I think FDA is beginning to appreciate the fact that this is an issue, and is beginning to talk more about the need to focus more on innovation. But making good on that is a long-term process, and it’s going to take years for it to happen.

PE: How do you see all of this panning out in the next five to ten years? Will M&As continue to spread, and will VCs come around if they see certain changes occurring within industry?

JP: I think pharma will continue to need to engage in M&A over the next five years. I think biotech is becoming more sophisticated in terms of its ability to rely on outside expertise and predictive tools.

Two weeks ago I talked to a VC firm that actually has an FDA expert within the firm, who now goes in and looks at all of the relationships that the biotech company might have had with the FDA before making a decision on investing. I think that’s good; I think it helps to focus in on the companies that are doing it right, and it helps to drive other companies to understand that they need to bring in the expertise to help them to create greater predictability for the investors.

But I think in the next five years, if we see an FDA that truly responds to this call that’s coming from the industry and from Congress to focus more on innovation, and we begin to see some results, then I don’t think there’s any doubt that we will see the VC community engaging in later-stage investing. But I don’t think that changes anything in terms of the need for Big Pharma to create more partnerships across the board with biotech companies. And I think we’ll continue to see that happening as there’s a need to fill pipelines and as the patents expire on products, and as we move more towards the implementation of the biosimilars legislation. VC funding and healthy, dynamic M&A deals do not have to be mutually exclusive.

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