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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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In the Pipeline: Don't miss Derek Lowe's excellent commentary on drug discovery and the pharma industry in general at In the Pipeline

In the Pipeline

« Open For Business | Main | How Not To Do It: Ruining Stuff »

January 30, 2007

BMY-SNY?

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Posted by Derek

So, could Bristol-Meyers Squibb really be merging with Sanofi-Aventis? Even though this is a poorly sourced story from one French paper, the answer is still: they certainly could. That deal has been kicked around for a long time now, partly as a way of making more out of the Plavix revenue stream. Both companies seem to feel as if their pipelines could use some help, and they're no doubt looking to realize some cost savings through layoffs and site closures. If the formal announcement came one day after a successful outcome in the Plavix patent case, it would surprise no one.

But does that make it a good idea? I've criticized Pfizer relentlessly for growing into such a leviathan, and I think that a Sanofi-Synthelabo-Hoechst-Marion-Roussel-Rhone-Poulenc-Rohrer-Marion-Merrill-Dow-Bristol-Meyers-Squibb might, just might, suffer from similar problems. I still think the research productivity is the thing that doesn't scale in these mergers, and research productivity has to increase, eventually, or the whole mighty monument is going to topple over. You have to have something to sell, and it should come from your own research. Going out and just buying the good stuff ends up raising its price - the good stuff is, naturally, in rather limited supply, and other companies might want it just as much as you do.

You can't buy your way out of trouble in research. More people and more money, after some point, can actually make things worse.

Comments (22) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. molecularArchitect on January 31, 2007 12:31 AM writes...

"You can't buy your way out of trouble in research. More people and more money, after some point, can actually make things worse."

Amen. In that one sentence, you've summed up the biggest problem in the industry.

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2. milkshake on January 31, 2007 1:09 AM writes...

It is a great opportunity for self-aggrandisment of the top management. The cannot realy control research success and growth, at least not in short term - whereas a major merger produces instant results.

I was as Marion-Merell-Dow at the time when it merged with Hoechst-Rhone-Poulanc (before Sanofi). As this was happening, we were joking that if you tie two one-legged cripples, together they will surely be hoping lot faster...

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3. Petros on January 31, 2007 3:29 AM writes...

Another issue that comes into play in these mergers is the issue of comptaible cultures. How would the French culture of Sanofi square with the US culture of NMS? I've heard stories of hoorendous problems due to such issues. While the companies have never been identifeid I don't imagine the merger of Pharmacia and Upjohn proved very compatible.

And Derek is quite right to comment about research productivity in these mergers. There is no evidence of any improvement resulting from any major merger, and frequently such mergers are driven by the presence of two weak pipelines (e.g GSK)

And to achieve cost savings from such a merger would need the closure of another Wonder Drug Factory, doubtless the Sanofi US site since the main BMS sites would be regarded as sacrosanct.

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4. JBoydell on January 31, 2007 5:17 AM writes...

I may be mistaken, but isn't GSK's pipeline looking pretty healthy right now?

Wouldn't that be the exception that is used by upper management to justify these type of boardroom maneuveures manoeuvres

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5. Derek Lowe on January 31, 2007 7:52 AM writes...

My best guess is that the Glaxo-SmithKline merger was the one that did the least harm. How much good it did is worth debating, though. But those two were about as good a fit as I've seen, so that places the other mergers further down the list.

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6. Petros on January 31, 2007 8:46 AM writes...

GSK's pipleine looks impressive now but that in 2000 was'nt Even in 2003 the late stage pipleine was weak. In December 2000 it was asserted that the company had "A high quality late stage pipeline with 7 NCEs in phase III or registration". Four failed, one flopped and the other two haven't been speactaulr successes.

JPG has extolled how the revamping of R&D and the CEDDs have led to a much better discovery process, with improved productivty, and faster progression into development.

On Derek's point about mergers, it seems to have worked well although the relationships between the two groups, at least in Europe, don't seem to have developed as smoothly as those in AZ.

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7. GSK questions on January 31, 2007 8:57 AM writes...

I was also wondering whether GSK is an exception to the general rule, and if so, what they did differently from, say, Pfizer. Superficially, their productivity, as measured by Phase II/III starts, appears to have increased. Is this a function of their CEDD model, which purports to give more autonomy and control to disease-based research units, while enjoying the benefits of scaling certain platform functions like genetics and HTS? I've heard that the cultures of legacy SB and GW weren't that compatible, so there must be something else going on with them.

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8. DrSnowboard on January 31, 2007 11:05 AM writes...

I would suggest that it's still too early to assess the output of the GSK reorganisation - several of the current flagship development projects were well underway before the reorganisation. The impact and depth of the reorganisation won't be obvious until they shut an entire CEDD (ie a therapeutic area) and close the hub on which it's based. Then we can assume they're playing to the same entrepreneurial rules that exist in the real biotech world.

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9. BMS question on January 31, 2007 11:18 AM writes...

Petros - why do you feel the main BMS sites are untouchable? I would think a majority Sanofi board would stay loyal to Sanofi.

Regardless, any cost savings from consolidation would take years to realize, and I'm not even sure if consolidation occured after Sanofi-Aventis merged...unless someone knows otherwise.

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10. pc on January 31, 2007 11:31 AM writes...

As far as M&A goes, it's said that J&J seems to have done a somewhat better job in managing the acquired party by sort of letting them alone, although, for instance, Scios' Natrecor later has been in the spotlight for its toxicity.

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11. mrtwoiron on January 31, 2007 12:59 PM writes...

We're 15 years on from Sanofi's ingratious purchase and immediate shuttering of Sterling Winthrop.......

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12. Duece on January 31, 2007 2:49 PM writes...

A SNY-BMY merger would be the result of one thing: EGO. DeHecq wants one thing: to be #1 worldwide at any cost.

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13. GATC on January 31, 2007 3:40 PM writes...

Is that Meyers or Myers? Bristol-Myers-Squibb I believe.

About the culture at GSK; they were still getting over the Beecham and SmithKline-French union nearly ten years on when Glaxo came in. Aside from the blown sunshine in the annual reports since 2001, the general consensus in the press is that the CEDD concept is a snoozer.

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14. curiousGeorge on January 31, 2007 9:24 PM writes...

I assert that the price of the "good stuff" is almost always less that its true worth, a testament to the relatively strong position Big Pharma is negotiating from when it entertains offers from startups. Vertical integration no longer sustainable and the key to any future success is offloading risk as much as possible.
Gilead's deal with Roche is the only counterexample I can come up with.

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15. milkshake on February 1, 2007 1:13 AM writes...

Funny that you mentioned Gilead - because their line of phosphonate-based antivirals was in-licensed for a bargain price from Czech Republic. I happened to work at the institute in Prague where they developed these Gilead drugs...

Azitromycin (Zitromax) produced quite nice payoff for Pfizer over the years. What they don't emphasize is that the stuff was discovered in former Yugoslavia (Pliva).

Permalink to Comment

16. curiousGeorge on February 1, 2007 5:09 AM writes...

milkshake-
Thanks I did not realize that Gilead had not developed these in-house.

Here is a followup article that supports the notion that biotechs are getting underpaid in the current scheme. Interestingly, these authors show that *both* sides would benefit a lower discount rate.

new math for drug licensing

Pharmaceutical companies that license drugs too late are losing out on significant amounts of value.

James Kalamas, Gary S. Pinkus, and Kevin Sachs

2002 Number 4


Big pharmaceutical houses have long relied on drugs developed by others—particularly biotechnology firms—to fill the huge gaps in their product pipelines. In-licensed drugs accounted for 30 percent of Big Pharma's revenues in 2001, and with the looming expiration of many key patents, to say nothing of lagging R&D productivity, that reliance is likely to increase. But this licensing strategy, our analysis shows, has a widely overlooked flaw: deals are often struck too late to generate maximum value.

To put it simply, pharmaceutical companies are overdiscounting for the uncertain prospects of deals made early in the development process. To reduce the risk of licensing a drug that ultimately fails to win approval from the US Food and Drug Administration (FDA), these companies make low offers to biotechnology firms during preclinical testing, when researchers complete the synthesis, purification, and animal tests of a drug. About one-third of all licensing deals occur at this stage.1 For the rest of them, pharma companies often don't commit substantial resources until clinical trials demonstrate the drug's safety and efficacy in humans. While this delay is understandable, it can cost companies tens of millions of dollars in higher fees and royalty payments to the biotechs for every compound. Up-front and milestone payments for a single late-stage drug can exceed the cost of buying the rights to ten drugs in the early stages—and at least one of those drugs, industry statistics show, will pay off, frequently with annual revenues of $500 million or more.

To find the right time for licensing deals, we first calculated their expected completion phases if pricing had been "fair"—that is, if the risk-adjusted net present value of the deals made both parties indifferent to the phase when licensing occurred.2 The results show that the expected distribution of deals is skewed heavily to the preclinical phase (Exhibit 1). We next carried out a Monte Carlo simulation, based on industry-average data, to determine the optimal time of licensing for 10,000 hypothetical compounds. With every simulated deal, we tested variables such as the success rate at each stage of development, the duration and cost of the phases, and the licensing terms by phase.3 The model was designed to simulate the prospects of a given drug at the start of preclinical research (that is, on a forward-looking rather than retrospective basis), to help managers decide on their course of action before uncertainties are resolved, as they would have to do in reality. The outcome was clear: under current conditions, pharma companies would capture the greatest expected value from preclinical licensing virtually 100 percent of the time because the greater risk of failure for preclinical compounds was more than offset by the low terms available early on. The problem is that biotech companies are usually reluctant to settle for them.

Our calculations, however, show that pharma companies could dramatically increase the amounts they pay for compounds in early development and still come out ahead. In most cases, they could pay 150 percent more at the preclinical stage for the rights to a drug—for instance, by increasing up-front payments to $5 million, from $2 million, and milestone payments to $40 million, from $15 million. Although a pharma company would be paying more money sooner and waiting longer for a return, drugs licensed at the preclinical phase would be expected to create the maximum amount of value for the company in 85 percent of all cases in which a deal could be negotiated (Exhibit 2).4 In effect, pharma companies would be making more bets sooner and, rather like venture capitalists, building broader portfolios in hopes of securing a few hits when the potential returns were highest.

Biotech firms, by contrast, prefer to wait. The booming capital markets of the late 1990s, which provided them with enough money to finance their early research without a large steady income, made them more willing to gamble that a drug would make it to clinical trials. Accordingly, our simulation showed that, in today's typical deal, these firms almost always reap maximum value in Phase II or Phase III. The preference of biotech firms for late-stage deals is obviously rational, but with richer incentives to make deals earlier, that could change (Exhibit 3). In our model of sweetened deal terms, a biotech firm that licensed its rights at Phase I would collect, on average, $60 million in extra up-front and milestone payments and retain a 20 percent royalty, giving the firm a continuing stake in the drug's success. In such a scenario, the firm would gain maximum value from preclinical or Phase I deals in over 60 percent of all cases in which a deal could be negotiated. And by licensing drugs sooner, biotech firms could also capture more quickly the benefits of the pharma companies' powerful sales and marketing capabilities and clinical-trials expertise.

Given the innovation challenge now facing the pharma industry, the competition for new drugs developed by biotech companies is bound to increase. Pharma companies that can assess the risks of early-stage compounds and secure the rights to the most promising among them will probably be rewarded—and so will these companies' biotech partners.

About the Authors
James Kalamas and Gary Pinkus are principals in McKinsey's San Francisco office, where Kevin Sachs is a consultant.

Notes
1This figure is based on the licenses that the top 12 pharma companies negotiated with biotechnology firms from 1991 to 2002.

2This analysis assumes that prices increase to reflect the rising odds of success at each phase of development, so that the only factor driving the distribution of deals is attrition—the rate at which compounds fail.

3While every deal is different, we assumed that, on average, preclinical deals would be worth $2 million up front, $15 million in milestones, and a 7 percent royalty; Phase I deals, $5 million up front, $25 million in milestones, and a 10 percent royalty; Phase II deals, $10 million up front, $35 million in milestones, and a 20 percent royalty; and Phase III deals, $15 million up front, $50 million in milestones, and a 25 percent royalty.

4Because of the different expectations of the developer and of potential in-licensers, pharma companies won't be able to come to terms with biotech firms in many or even most cases. Nonetheless, our model shows that, on average, pharma companies would be better off if they paid more for selected deals early on than if they waited. Furthermore, the number of compounds in early-stage biotech pipelines is large enough to make the opportunity for pharma companies significant even if only a fraction of the compounds are licensed.
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Permalink to Comment

17. curiousGeorge on February 2, 2007 8:05 AM writes...

In the Pipeline was cited as a source by Forbes in their coverage of this issue. Tip of the hat to Derek...

Permalink to Comment

18. merj on February 2, 2007 11:38 AM writes...

Everybody seems to be ignoring the fact that BMS cannot survive or grow as they are now. Their stock has not moved in years until this recent potential acquisition by Sanofi. Companies lke BMS or SGP are in similar positions. They really do not have the research pipeline needed to grow. They can buy research leads and then develop them but they are limited in how many they realisticaly can develope. Even Pfizer has realized when a major research failure occurs they must cot back.

Permalink to Comment

19. curiousGeorge on February 2, 2007 12:34 PM writes...

Yes but what we have hear is a vicious cycle:

Larger size needs more cash needs more products leads to merger/acquisition to cannabilize pipeline leads to larger size. Repeat and rinse.

This model, where pharma is vertically integrated is unsustainable. Ironically they have all known this for a decade now, yet like any addict, they keep thinking that this next time will be different. Sadly, yhe windfalls of the late 80s early 90s has wreck the pharmeceutical industry.

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20. Bruce Grant on February 2, 2007 2:02 PM writes...

Actually, that's a double dip on the "Marion."

Hoechst AG, which had already acquired Roussel-Uclaf (something of a Franco-Prussian War at the time) picked up Marion Merrill Dow, which was itself the product of the acquisition by Marion Labs (founded by Ewing Kauffmann, former owner of the Kansas city Royals) of Merrill Dow Pharmaceuticals, the former pharma division of Dow Chemicals (those wonderful folks who brought you napalm, Agent Orange, and Bhopal).

Permalink to Comment

21. Anonymous on February 2, 2007 3:07 PM writes...

You forgot Dupont (previously Dupont-Merck)

Permalink to Comment

22. milkshake on February 2, 2007 3:33 PM writes...

Bhopal is thanks to Union Carbide (as anybody should know), and Dow Chemicals used to be one of the most innovative commodity chemical producer. Agent Orange is not Dow's fault- they were just blending the stuff. The nasty ingredience in Agent orange, 2,3,5-T that was so heavily contaminated with TCDD and other dioxins was actualy manufactured in communist Czechoslovakia in Spolana Neratovice. Czechs were cranking out these components for Agent Orange cheaper and on bigger scale than everybody else - so US government just bought the stuff from them, to spray it on VC...

The reason why the czech-made Agent Orange material was so cheap and deadly was that Spolana chloralkali electrolysis plant was making all kinds of chlorinated stuff, such as vinyl chloride and chlorinated insecticides on massive scale and they had a big problem with waste stream from Lindane production - only one isomer of HCH is useful, the rest (>70%) goes to supernatant waste. So they thought it would be great if they could re-cycle the unvanted hexachlorocyclohexane stuff into something actualy useful, say trichlorophenol. But this harsh process generated craploads of various chlorinated dioxins, and the danger of dioxins was not widely recognized in 60s - before the Seveso disaster. So sloppy Spolana manufacturing contaminated the bulk ingredient of a herbicide that was designed to be harmless.

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