Given deal-making’s importance in this market environment, and the diverse roles of the panel members, the topic of who makes the better deal partner was bound to lead to a very spirited and informative discussion during the Allicense 2014 conference, last month in San Francisco. With more and more deals getting done in order to fill gaps in pipelines, create therapeutic franchises, and form new companies, the importance of picking the correct partner has never been more important.
Beginning with the hypothesis that smaller, specialty pharma players are actively doing more deals, and as a result, beginning to take significant “market share” away from big pharma, two macro discussions began to take shape: Who makes the better partner for getting a deal done vs. after a deal gets done, and overall reasons for doing a deal, financial engineering vs. innovative science.
In picking a partner, efficiency of being able to complete a deal was a major topic of discussion. Jeff Jonker, Senior Vice President at Theravance, believes that the smaller the company, the quicker it is able to act, and the more likely it is to move on an opportunity on which big pharma might pass. He also attributes specialty pharma’s ability to act quicker than their counterparts, due in part to a lack of imagination in big pharma companies. Contrarily, Graham Brazier, VP of Business Development at Bristol-Myers Squibb, and George Golumbeski, SVP of Business Development at Celgene, took similar positions on the other side of the aisle, each summarizing that they come across so many inbound opportunities, day in and day out, that even if they didn’t perform any outreach, they still wouldn’t miss a potential deal. However, Brazier did concede that, while they would not miss any opportunities, in specific cases, they may come to the table later than a potential specialty competitor. Natalie Holles, SVP of Business Development of Hyperion Therapeutics, agreed with both camps, commenting that big pharma can move quickly when there is an internal champion who wants to get a specific deal done, but absent of that internal champion, a ton of opportunities are created for specialty pharma buyers.
Once the ink dries, and a deal is done, the new partner must be able to execute on the potential value and collaboration created between the two parties. It is vital to pick a partner that you believe can best help realize the contingent value, especially given the increasing number of deals structured with downstream economics. Once again, two differing positions emerged between the panelists. James Mackay, President & COO, Ardea Biosciences and Global Product Vice President of AstraZeneca, Lesinurad, believes partnering with the correct big pharma company is the best of both worlds. Mackay commented that allowing the smaller partner to operate as it always has, but with big pharma’s influence and resources, makes for a perfect marriage. Jonker shared his own company’s model as a point of agreement with Mackay, saying that Theravance is attempting to get bigger by getting smaller. Theravance is splitting into two arms, one taking over their assets obtained through a GSK alliance, and the other controlling assets discovered through internal R&D efforts. Perhaps the best example of the big/”small” alliance is Roche’s acquisition of Genentech. This monster acquisition still allowed both sides to maintain their autonomy, and is widely seen as one of the most successful biopharma acquisitions of all times.
Making an argument for the specialty player, Natalie Holles debated that if specialty pharma truly believes in the science behind a deal, this class of players is more willing to focus on making the deal work. Often times specialty companies have fewer products, and are thus forced to fully back an idea in order to survive. Gary Phillips, SVP and Chief Strategy Officer of Mallinckrodt Pharma, argued that it is harder for larger companies to realize value created in future activities/milestones, because of their slower, more conservative nature.
The second debate emerged from the topic of motivation behind completing an acquisition. The specialty side of the aisle claims that big pharma is currently only acquiring companies for the sake of financial engineering, not for exciting science, while big pharma stands strong in saying that breakthrough science is still the driver for doing deals.
This is an especially hot topic, due to Pfizer’s desire to purchase AstraZeneca, which many believe is for the tax benefits from an inversion into a foreign parent, and has nothing to do with pipeline value. Gary Phillips hypothesized that the current state of the market is the main driver behind the trend towards financially engineered deals, and that this trend is here to stay. Cheap debt and tax domiciles are creating opportunities to leverage lower tax rates in foreign countries and minimize G & A expenses. While this is good for the financial well-being of pharma companies, many worry that this motivation is not healthy for the long-term outlook of drug development. George Golumbeski mentioned that investing in innovation is the most defining consideration, but this is harder to do in large pharma, where there is currently so much emphasis on financial wizardry. With the focus away from innovative science, this leaves the door wide open for specialty pharma to take advantage of opportunities that otherwise would not be available. Overall, it may not be the intent of big pharma to focus on cost cutting, but with smart leaders at the helm and advantageous financial opportunities across the globe, the market is forcing their hand.
Like so many other “whom is better than whom” debates, the final answer to the question of who makes the best partner in deal-making really comes down to “it depends”. If the market for a specific drug or company is so complex and large that only big pharma has the scale to accommodate it, then maybe they make more sense. On the flip side, if a specialty, single product company has extensive knowledge in a therapeutic area, with natural synergies, and their survival depends on putting the full efforts of the company behind a deal being successful, they may be the correct partner. One thing is certain, in an industry that relies so heavily on completing deals, selecting the correct partner can be the difference between a drug making it to market and collecting dust on the shelf.
Check out the video that kickstarted the Allicense 2014 conference:
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