Filling Up the Larders
The competitive landscape is about to change, and the cupboard is pretty much empty. If the current high valuations are anything to go by, however, many investors have not noticed yet. Other than Amgen’s Denosumab, there really isn’t anything in the entire industry pipeline that looks like it can even begin to make up the lost sales. And even Denosumab is hardly the standard biotech blockbuster, it will be entering a market currently dominated by Merck(www.merck.com) and Novartis(www.novartis.com).
It seems increasingly clear that once a biotechnology company reaches a certain size, it, like its larger pharma brethren, becomes unable to get much out of its heavy R&D spending. Other than Genentech(www.gene.com), no other large and profitable biotechnology company has a productive internal R&D engine. And even Genentech’s is now dependent on new indications for its recently launched products. At least Biogen Idec(www.biogen.com)came clean and began to set aside a large part of its R&D budget for external sourcing, although it has found meager pickings so far.
Everyone is looking for ways to fill their empty larders, as the new science is taking longer to mature and needs another decade or more. So, for the time being, it is a zero-sum game, and only a lucky few are able to overpay and bring in one of the few exciting late-stage products.
The new science will bring innovative therapeutics with predictable productivity within a generation. Their impact on the quality of our lives is going to be even greater than the impact IT has had over the last generation. Such targeted products aimed at well-diagnosed subpatient populations will need much smaller trials of short duration (supported by extensive on-market monitoring with IT tools), requiring focused marketing with little sales effort.
First, however, we will have to survive another decade of painful transition, where our analysis of the industry pipeline shows only incremental life-cycle management types of new products.
M&As may be the only effective near-term answer. Unfortunately, there are few companies with truly innovative products. Hence, good deals are hard to find, with competition keen and bidding wars bringing final prices well above fair value. Still, it may be better to swallow hard and take the hit now for longer term benefit. Luckily, these profitable biotech companies have high valuations that helps make the dilution more palatable. Amgen could spend over $4 billion on acquisitions and still only dilute shareholders by 5% (assuming an all-stock transaction). This may not be the case for long.