Big Pharma and Biotech: Marriage Made in Hell?

by Hisham S. Ayoub, DMD
BioHealth Investor



In Thursday's edition of the Wall Street Journal the feature article focused on the grim future of big pharmas, as old ways of doing business, top drugs facing loss of patent protection coupled with increasing competition from generics, and dried up pipelines add up to a not so bright horizon.

In fact, Wall Street has built in the negative view of big pharma into the market price of many stocks. The Dow Jones World Index gained 75% over the last six years, while the FTSE Global Pharmaceuticals Index dropped almost 20%.

So what's the solution? Many big pharmas are already involved in damage control. Many are establishing in-house generics subsidiaries in order to squeeze out as much as possible from their own blockbuster drugs. Pfizer's (PFE) generics company, Greenstone, launched a generic version of the parent company's blockbuster Zoloft as the wonder drug went off patent las year. Novartis's (NVS) generics unit, Sansoz, actually grew three times as fast as the parent companies brand name business, and contributed almost 20% of total revenue in the first nine months of the current fiscal year.

Some pharmas are spending on corporate image and public awareness campaigns, while others are cutting workforce and downsizing!

But I believe there exists a greater force that big pharmas must contend with other than generics companies and public backlash, and that is biotech. While some argue that the biotech industry has so far failed, others contend that the pharmaceutical industry is losing ground. The old way of drug development using "dart board"-like chemistry is giving way to the modern technology of gene sequencing, protein analysis, and nanotechnology.

Big pharmas have already began to swallow up as many biotechs as possible to bolster a depleted pipeline born out of an aging technology platform. Big pharmas have spent almost $76 million since 2005 to acquire biotech companies, and the trend is pointing upwards. In 2005 there were 33 deals worth $16.5 billion. In the first nine months of this year there were 49 deals worth $28.7 milllion, including the blockbuster acquisition of MedImune by AstraZeneca PLC (AZN) for a whopping $15.6 billion after a heated bidding war with Eli Lilly (LLY) and others. Some pharmas are saving some money and establishing in-house biotech outfits, including Pfizer and Novartis.

But this raises an important question; is it possible for big pharmas to integrate biotechs into their business seemlessly? I personally do not think so.

Biotechnology companies were born out of a necessity to live on the edge of medical research if you will. Many biotechs today have risen out of little laboratories of educational institutions, the corporate world's equivalent of teenagers building a website in their parents' basement. To carry out research that is based on cutting edge, and usually unproven, technology and to target a relatively small population of disease sufferers would seem like suicide to big pharma who bank on large scale production, and view the world population as a target patient base.

I can see how a biotech firm might fold under the corporate pressures of a large pharma. Biotech firms need the free-flowing and open environment that is necessary in order to think outside of the box. Unless big pharma can provide this environment, the only way I can see this marriage working is if pharmas can evolve and change their ways.

Big pharmas must accept the fact that biotechnology will provide a way to attack diseases at a personal level. Genetic-based drug development is on the horizon. Thinking on a large scale and viewing problems with a wide lens will not work, and this marriage will be doomed from the start.




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