There’s a general consensus that partnering and M&A in the life sciences enable access to external innovation, which leads to more successful and profitable drugs. The best way to secure these external innovations, however, is less clear. Recent articles have argued that either M&As or collaborative agreements are best – but which is it? Read on to find out.
The Rush of M&A
2015 is barely half over, but it has already set an impressive pace for M&As. According to Reuters, in March, M&A transactions were up 94% compared to the same period a year ago and M&A is at the highest volume for this stage in any year since 2009. This follows 2014’s record breaking $212 billion in M&A transactions. Why is M&A so popular? Here are a few reasons:
First, for pharmaceutical companies still recovering from patent expirations, M&A provides a quick way to replenish pipelines. As a Life Science Leader article points out, specialty pharmas in particular are an attractive option, offering high-priced drugs to treat conditions like cancer, rheumatoid arthritis, multiple sclerosis and orphan diseases. By acquiring a drug with significant clinical development already completed, large pharmas limit the risk of failure.
Second, M&A is one way to combat the ever increasing cost of drug development. Small companies with the right team of scientists can advance a new molecule into phase II clinical trials more cheaply than large companies. Large companies, however, are still better at effectively commercializing new products.
Finally, a Deloitte article argues that, “M&A often drives consolidation that enables businesses to achieve scale economies, boost market power, and generate cost-saving synergies.” This has always been true of M&A, but recently more and more life science companies are consolidating and focusing on their core businesses. Take, for example Novartis, who sold their animal health and non-influenza vaccine units in exchange for increasing their footprint in OTC and oncology. There’s also Actavis (now Allergan), who underwent a complete transformation using M&A. However, M&A is just one way that companies acquire the skills and assets necessary to succeed.
Collaboration: The Way of the Future
M&A may be having a big year, but evidence suggests that collaboration is the way of the future. Partnering is cheaper, less risky and involves fewer regulatory hurdles than M&A. It also leaves the innovative laboratories and dynamic culture of smaller companies intact. Take, for example, Celgene’s $1 billion investment in Juno Therapeutics. By partnering instead of acquiring, Celgene has access to what it really wants – Juno’s innovative, cancer-killing technology – without actually acquiring the company itself, worth $4 billion.
Another way to access external innovations is through academic drug discovery centers or innovative hubs. Rather than acquiring intellectual property rights outright, pharmas are looking to partner with academics. Eisai, for example, is collaborating with The Brain Science Institute (BSi) at Johns Hopkins University for drug discovery. Eisai leaves the drug discovery effort to BSi, getting involved only if those efforts prove to be successful. This leads to more risk-sharing but also a higher level of co-ownership of intellectual property.
To compete in evolving markets, life science companies are also increasingly collaborating with players outside the industry to access their unique capabilities. For example, Novartis is teaming up with Qualcomm, J&J is partnering with IBM and Biogen, Novartis and AbbVie are collaborating with Google. Collaboration both reduces risk for pharma companies and provides faster access to new capabilities vs developing them in-house.
Finally, collaboration may become more popular simply because smaller companies have more choices when it comes to financing – VC, private equity investment, mezzanine funding, follow-on rounds from current venture investors, IPOs, partnerships with global pharma companies, or even regional commercialization deals. With the right asset and a host of financing options, smaller companies suddenly have a lot more say in what type of deal they’ll accept.
A Partnering Place to support flexible deals
Ultimately, what companies really need is flexibility. Different circumstances require different solutions. Sometimes, an acquisition is most appropriate, for example for an asset of important strategic value or to support depleted pipelines. However, according to Deloitte, mid- to large scale, M&A’s are rarely an R&D investment which adds value in the long-term. They’re organizationally disruptive and command a price premium. Instead, companies should look to license or partner for assets early. The deal structures are usually more favorable with reduced upfront fees and downstream fees based on commercial success.
Whatever the deal type, to win the right deals faster, life science companies need a place to track opportunities. Business developers collaborate more effectively when all of their partnering intelligence, including scouting, deals, and alliances, is centralized. Inova’s software includes best practice workflows and provides support for evaluations, ensuring that opportunities are efficiently, but thoroughly vetted before a decision is made. For deals that are successfully signed, partnering places include full alliance management, including tracking obligations triggered by date or milestone.