Insights from BCC Research

2016: Merger Mania, Debate Over Drug Prices to Continue

Posted by Laurie L. Sullivan on Jan 14, 2016 6:00:00 AM

Big Pharma buyouts are accepted, expected, and indeed, business as usual. The most stunning buyout of 2015 was arguably the case of Pfizergan, the $160 billion sale engineered between Allergan plc and Pfizer, Inc. This year, Big Biotech will likely join the party, with Gilead rumored to be prepping for a major acquisition. Yesterday, a deal was announced in which Biogen has the option to buy Rodin Therapeutics for $485 million; in the meantime, the two companies will collaborate on neuronal epigenetics. Celgene is another biotech highly regarded by analysts; last year, it paid $7.2 billion for Receptos and its potential next-generation relapsing multiple sclerosis drug, ozanimod. The bottom line: Big Pharma (and Big Biotech) need to bolster their pipelines with viable R&D projects.

DEBATE TO CONTINUE ON HIGH-PRICED MEDS

But does the nose have to be cut off to spite the face? Drug makers are under relentless pressure to curb prescription drug prices while boosting productivity. In a perfect world, profits from product sales feed back into R&D and the acquisition of innovation. Yet there’s always a perceived disconnect between drug prices and R&D productivity. We’ll hear a lot more in the coming months.

In the political arena, 2016 will host congressional hearings featuring Martin Shkreli (ex-Turing Pharmaceuticals and ex-KaloBios) and Valeant Pharmaceuticals International CEO J. Michael Pearson, to answer for alleged price gouging. Valeant raised the prices of heart drugs Isuprel and Nitropress by 212% and 525%, respectively, after buying them last February. Turing was criticized (to put it mildly) for a price hike of more than 5,000% upon buying an older drug, Daraprim. The US presidential primaries are likely to prolong this debate.

Payers and pharmacy benefits managers will continue to negotiate for discounts, particularly in areas where several similar medicines are competing for market share. Physicians are also weighing in, particularly in the field of oncology, which is among the disciplines with particularly high price tags for treatment. (See BCC Research blog: As battle over US drug prices wages on, can a treaty be reached?)

Arguably, the mainstream controversy began with expensive hepatitis C treatments from Gilead and, later on, AbbVie. In fact, drugs are a relatively small part of the US healthcare dollar (about 10%). But price gouging is a lightning-rod issue in a presidential election year, brought front and center by Shkreli, putting collective pharma and biotech in an unwelcome hot seat. Let’s remember the glass is half-full too, of things like innovative, lifesaving treatments that were developed at considerable expense, disease awareness, more patient-friendly medications, and cures. Think of drug discovery and development as a whole organism. If you cut off its head (the profits), then you inevitably cripple the legs powering the innovation—the academic/industry research where it all begins.

Drug repurposing (aka repositioning) is the one of the major revolutions taking place in the pharmaceutical industry. It studies a compound or biologic agent that was developed to treat one condition to see if it is safe and effective for treating other diseases. Drug repositioning greatly reduces development costs and time (the repurposed drug has already passed a significant number of tests), improves return on investment, and facilitates the rescue of previously failed compounds. BCC Research studied the future direction of drug repurposing as an important change in the process of drug development. According to BCC’s analysis, the global market for drug repurposing will grow from nearly $24.4 billion in 2015 to nearly $31.3 billion by 2020, with a five-year compound annual growth rate (CAGR) of 5.1%.

M&A: MEGA MERGERS AND BEYOND

According to a recent report from PwC's Health Research Institute, “2016 is the year of merger mania." Over the first three quarters of 2015, global M&A activity in the pharma, medical, and biotech spheres hit its largest-to-date value since at least 2001, Mergermarket said in October. Over that period, the industries made 954 transactions worth $367.6 billion. That was before Pfizer and Allergan’s $160 billion deal. In 2016, PwC says high-profile mergers and acquisitions are likely to continue.

They could look different though. In November, AstraZeneca and Sanofi put a new spin on pharma mergers. They agreed to swap details on 210,000 chemical compounds from their respective research libraries. It’s a great example of companies experimenting with novel ways to share early-stage research in an attempt to increase the number of leads for new medicines. In the case of the Sanofi–AstraZeneca deal, no money changed hands and both companies are free to use the compounds without restrictions.

GlaxoSmithKline and Novartis were also parties to an asset swap last year. Their three-tiered transaction sent GlaxoSmithKline's oncology franchise to Novartis for as much as $16 billion, and Novartis' vaccine franchise (minus influenza) to GlaxoSmithKline for around $7 billion. According to an analysis by BCC Research, vaccines will comprise about 23% of the 2016 global market for infectious disease products. GlaxoSmithKline and Novartis also formed a joint venture for their consumer health product segments.

As companies restructure their businesses to focus on organizational strengths, swaps such as these may become more common. Sanofi and Boehringer Ingelheim are already in exclusive negotiations on a potential asset swap, under which Sanofi would send its animal health business to Boehringer in exchange for about $5.2 billion in cash and Boehringer’s consumer healthcare business, excluding its operations in China.

So, between PwC’s prediction and deals of all types cropping up, don’t expect 2016 to be a quieter year. In just a few days, Shire is expected to announce its $32.5 billion takeover of Baxalta, following a six-month pursuit. Shire and Baxalta both focus on rare diseases, for which the global drug market is projected to reach $191 billion in 2019, reflecting a five-year CAGR of 9.2% (data from BCC Research). And so it begins.

Topics: Pharmaceuticals