Pharmaceutical Giants & Biotech Firms: Happily Ever After?

Pharmaceutical giants have flirted with biotechnology firms over the years, but only recently has there been serious talk of marriage. Since the 80’s and 90’s, these two kinds of drug producers have tried everything from joint licensing deals to extensive alliances. However, the two industries have maintained their independence. Both tacitly acknowledged inherent differences in their business models and cultures, and therefore avoided complete mergers.

That is, until their recent union. In 2007, an estimated $60 billion in biotech acquisitions by pharmaceutical companies occurred in the U.S. alone. The most talked- about example is Swiss pharmaceuticals company Roche and its $44 billion offer for California- based Genentech, the largest biotech firm in the world. Other major deals of late include Bristol-Myers Squibb’s bid for ImClone, AstraZeneca’s purchase of MedImmune, and Takeda’s acquisition of Millennium. The purchases are surprising given the recent recession and investment slump. So what spurred this sudden upsurge in mergers?

The most apparent driving force appears to be the pending wave of expirations on patents pharmaceutical companies have traditionally relied on. Starting with the Hatch-Waxman Act of 1984, the Food and Drug Administration (FDA) has granted exclusive marketing rights to brand name drugs for specified periods of time. Comparable generic drugs could typically enter the market after ten to fourteen years, causing prices to drop by about eighty percent. This government-granted monopoly has been both a blessing and a curse for the pharmaceutical industry: while they raked in billions from drug patents, easy profits have largely stifled any desire to innovate.

In buying up biotech innovators, pharmaceutical companies hope to fill their emptying pipelines with products less susceptible to imitation. Unlike most pills, biotechnology drugs often consist of complex proteins. Generics have difficulty replicating such products, giving pharmaceutical companies time to boost their sales while competition plays catch up. Furthermore, since biotech products are relatively new, FDA regulations pertaining to their patents are less clear. So even if generics successfully copy biotech drugs, regulatory barriers can make getting the drugs to the market arduous and expensive.

Still, it seems risky for pharmaceuticals to put high stakes on large biotech players when smaller firms are much cheaper to absorb. One possible explanation is heavier regulatory oversight on the part of the FDA. Recent safety scandals involving brands like Merck’s Vioxx and GlaxoSmithKline’s Avandia shook regulators, making them wary of sanctioning new inventions. Even if start-ups have good ideas, the FDA will likely regard them with suspicion and therefore complicate their profit prospects. Established biotech firms, on the other hand, have approved drug lines. Pharmaceutical businesses are hence willing to shell out more for partnerships with greater guarantees of return.

Some pharmaceutical companies also view the recession as an advantageous time to buy. Investors remain pessimistic about the industry’s lack of innovation and potential government price-controls on drugs. Acquisitions could therefore revitalize innovation and boost investor confidence. The weak dollar has also made U.S. firms prone to foreign takeovers, as the recent European courtship of Californian and Massachusetts biotech firms attests to.

Moreover, drug companies are working on a product that would treat colon cancer, which has been rumored to exceed original expectations. If on-going trials confirm this report, then the drug would be worth significantly more than its current valuation. Roche might therefore want to get its hands on Genentech before final test results come out. Big pharmaceuticals prove that while they struggle in coming up with actual merchandise, they recognize a sweet sale when they see one.

Despite the persistence of their pharmaceutical suitors, biotech firms remain uncertain about reciprocal affections. Ernst & Young’s 2011 report shows that biotech firms now face more competition for financing and have less means to push drug trials into later stages of development. Plus, in the wake of the credit crunch, venture capitalists that largely sponsored biotech firms are now actively searching for exit routes in the form of buyouts.

Financial hardships appear to have driven many reluctant biotech firms into the arms of pharmaceutical giants. Large biotech powers like Genentech and ImClone initially held out on offers before grudgingly caving in. Although playing hard to get could just be a bargaining strategy to fetch higher sale prices, cultural differences between the two industries are undeniable. Scientists are worried that extensive drug bureaucracies, themselves unable to innovate, will drag down their creative biotech industry. Many Genentech employees are uneasy about the acquisition, uncertain about how reorganizations in company structure will affect their ability to work.

However hesitant they may be, many biotech firms have accepted big pharmaceuticals’ proposal, signaling the birth of a new recombinant company. These acquisitions could potentially benefit both partners: a boost in innovation for pharmaceuticals and ample research funding for biotech. But thus far, it is hard to tell whether this whirlwind romance will end in bitter squabbling or matrimonial bliss.