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M&As: Let’s serve ‘em up rare and juicy
My boss here, DDNews Publisher Bruce Poorman, has a reputation for grilling that I have heard much about but never have had a chance to experience, being located half a nation away from him (virtual offices do have their downsides). I don’t know if his legendary skills extend to rare steaks as well as the medium-rare and medium preparations (as for medium-well to well-done, I have personal issues against such treatment of steaks, but we need not dwell on that here), but whether he goes rare or not on the grill, the pharma world certainly likes their dishes on the rare side lately.
Those “dishes” being merger and acquisition (M&A) targets. And the “rare” being rare/orphan disease-oriented companies.
One of the tasks Bruce set me to when I was named chief editor was to make sure to balance out our hard business news (M&As, collaborations, etc.) with news of research, tech advancements, etc., that were “softer” business—that is, they affect how many of you readers go about your daily business of doing pharma and biotech research and development, even if they aren’t actually business deals. But while we don’t do as many of those hardcore business stories as we once did, I would be remiss if I didn’t talk about the orphan drug sector and how it plays into M&As—perhaps the hardest of hardcore business news.
And for that topic, we have Moody’s Investors Service to thank. In late May, the firm released news of its report titled High Hurdles and High Prices Make Orphan Drugs Appealing M&A Targets and wrote, “High barriers to entry and high pricing levels of drugs that treat ‘orphan diseases’ will continue to drive acquisition activity in the pharmaceutical sector.”
Orphan diseases are those rare and serious conditions that affect fewer than 200,000 patients and generally require treatment for life—with treatment costs that can exceed $500,000 per year.
I think you can all see where this is going. As they often say in journalism and in police investigations, “Follow the money.”
“Nearly half of the recent M&A activity in the pharmaceutical sector has been for deals involving orphan drugs,” wrote Michael Levesque, a Moody’s senior vice president. “Favorable credit characteristics of pharmaceutical companies that produce orphan drugs include high barriers to entry and the life-threatening nature of orphan diseases that require patients to stay on therapy for life.”
U.S. regulations are skewed to favor (and encourage) companies that produce orphan drugs, with longer exclusivity periods from generic competition than you see with therapeutics for more common diseases. Patents also protect orphan drugs from competitive threat and often extend protection beyond the expiration of the exclusivity period. In addition, Moody’s notes, “it is very difficult for a competitor looking to enter the space to find patients to enroll in a clinical trial, as the small number of people with the disease already take the approved drug.”
Also, many orphan drugs are biotech products, “which have significantly higher hurdles for generics compared to traditional products because of their manufacturing complexity.”
As such, Moody’s and other market-watchers tell us that we probably aren’t anywhere near done with the drive by bigger companies to gobble up smaller rare-disease-focused companies. I would agree.
Of course, I would also say that too much of a good thing can be a bad thing. We certainly saw how so many mega-mergers of decades past and more recently result in behemoth corporations that suddenly found themselves loaded down with pipelines they didn’t want or couldn’t handle.
And to that end, I’ll point you to the online words of the FiercePharma website, courtesy of author Carly Helfand, who told us June 1 that, “as some pharma skippers have warned lately, companies shouldn’t be too quick to the draw—even if lucrative orphan drugs are involved. As GlaxoSmithKline CEO Andrew Witty told the Financial Times last month, ultralow interest rates—a.k.a. cheap money—were spurring companies to make ‘poor choices’ when it came to dealmaking, and Valeant helmsman J. Michael Pearson recently told Bloomberg that some of the industry’s most recent acquisitions were ‘not going to work’.”
While we wait to see how all that plays out, how would you like your steak?