Skip to main content

Business and Markets

You Mean You Don’t Have to Buy Them?

Johnson & Johnson’s CEO has given an interview to the Financial Times explaining his company’s strategy with acquisitions. And right now, that strategy is. . .not to make acquisitions. They see partnerships as making a lot more sense:

“The cost of developing compounds has become so high and become so risky that we are looking to share the risks and opportunities and find more and more partnerships.”

J&J has been putting this into practice recently, taking equity stakes in several different companies. In the case of Elan and Crucell, interestingly, the company has agreed to standstill provisions, in order to make it clear that they’re not just on the first step to an outright acquisition any time soon. It’s interesting that this would be coming from Johnson & Johnson, since in many cases they’ve been one of the less destructive acquirers in the business already. (Well, with some exceptions, like when they took over Scios).
The temptation to compare this policy with Pfizer’s is almost overwhelming, but the two companies are in very different positions. For one thing, J&J has their medical devices and diagnostics businesses, which are both profitable and run on different rhythms than their pharma side. Even more importantly, they also aren’t locked into a grow-or-die situation, needing larger and larger infusions of revenue to meet the expenses which get larger every time they go out and buy those revenue streams, which mean that they need to go buy some more and then. . .
The article says that J&J has no deals under consideration right now, but that this style of deal-making is definitely how the company plans to operate. There’s definitely enough risk to be spread around – I just hope that there’s enough reward for everyone, too.

19 comments on “You Mean You Don’t Have to Buy Them?”

  1. Aspirin says:

    Chris Viebacher of Sanofi Aventis has said pretty much the same thing. It remains to be seen if these gentlemen will stick to their guns.

  2. Sili says:

    So what happens to Pfizer when they end up partaking of that last “wafer thin mint”?

  3. You're Pfizered says:

    This whole ‘risk sharing’ thing is in vogue right now, mostly in dealing with collaborations with off-shore CROs. They take on a portion of the ‘risk’ by working on a project on the cheap until it hits certain milestones, which then triggers bigger paydays.
    This offers incentives for them to kill themselves in order to get a project to work, but could also lead to potential problems when they feel they have to meet goals in order to get paid. Pharma is going to have to have extreme due-diligence on deals like this to prevent any sort of chicanery from occurring. It is also going to force Discovery organizations to start giving up better drug targets to CROs in order to run the true experiment. Imagine what happens if this paradigm works well.
    It may slow the mega-mergers, but it won’t stop the outflow of Discovery work to third party organizations ex-US.

  4. Hap says:

    I don’t know what would (justly) slow the offshoring of work, though. If the offshored profits were taxed as domestic profits (minus the tax charged by the country receiving the offshored work), then the domestic and outsourced work would at least be paying equivalent taxes. Even then, though, the cheaper labor and eventual growth markets are all elsewhere. Whether the cheaper labor is good enough that it makes sense is a judgement call, and whether training your competitors is a good idea is also a judgement call, but outsourcing seems likely to continue to make business sense, particularly considering that the current calculations already factor in the relative productivities of workers (which have been high in the US and are unlikely to be able to increase as much as elsewhere).

  5. David P says:

    Isn’t it an opportunity for CROs inside the US, though?
    I understand there are a few people with some drug discovery experience looking for such an opportunity right now.

  6. Hap says:

    That’ll happen, too, but there’s probably a more limited supply of people and a higher base wage (though it requires lots of judgement calls, again, to figure out what makes sense).

  7. HelicalZz says:

    Well, maybe ….
    Cougar was an outright buy. And Elan if purchased would have risked Tysabri, so partnering may well have made more sense than outright purchase (and hence that option play JNJ attempted, but got called on — pun intended). Crucell too was highly partnered already, so outright purchase may have not been as practical as partnering. Biotechs partnering earlier certainly muddies the waters on later acquisition, so perhaps the better opportunities simply with additional partnerships.

  8. Mercury says:

    “one of the less destructive acquirers”
    All such things are relative.
    True, Johnson & Johnson is not as bad as Pfizer, but nevertheless it does not have a good track record of making acquisitions work. In theory it indeed adheres to the honourable principle of giving the acquired companies the independence to do whatever they are good at. But in practice it can never resist the temptation of imposing its own corporate culture. And because JNJ is only secondarily a pharmaceutical, that corporate culture is primarily attuned to other business, and a misfit for pharma. Being acquired by JNJ is a slow death rather than a fast one, but the end result is the same.
    I think this new focus on “partnering” is a mixture of realism and defeatism: JNJ now understand that they don’t know how to manage a pharmaceutical business, so they have decided no longer to try. That’s wisdom, sort of.
    But partnerships can be tricky too. They bring loads of legal tangles and potential conflicts of interest. Those can delay a project for years, eating in the profits that can be realized before the patents expire.

  9. Morten G says:

    Speaking of outsourcing.
    Let’s look at the GLP-1 analogues.
    Lixisenatide was licensed from Zealand Pharma (Danish) to Sanofi-Avensis (French).
    Taspoglutide is a co-op between Ipsen (French) and Roche (Swiss).
    Albiglutide is a co-op between Human Genome Sciences (US) and GSK (UK).
    Exenatide (Byetta) was licensed from Amylin Pharmaceuticals (US) to Eli Lilly (US).
    Liraglutide from Novo Nordisk (Danish) is as I recall licensed from an American company but I can’t remember which one.
    So don’t worry – drug development looks to be squarely placed in the Western world. So no problem, unless you’re out-sourcing anger was nationalist instead of racist.

  10. Anonymous says:

    “So don’t worry – drug development looks to be squarely placed in the Western world”
    Maybe, but is it shifting from the US to Europe?
    The center of gravity of pharma used to be in the USA, but that seems bound to change. Not, I think, because Americans are no longer willing to pay ridiculous amounts of money for mediocre health care, but because R&D in the USA has always been strongly dependent on foreign scientists. (The locals prefer to become lawyers, or–even worse–have bought into creationism.) One of the effects of the economic boom in Asia and the other BRIC countries may be that these scientists are going to find work closer to home, perhaps after training in the US. (The exercises in paranoia of Homeland Security don’t help much.)
    I remember one pharma CEO who insisted that they were not outsourcing work to China for cost reasons (although of course it MIGHT be cheaper) but because good chemists were easier to find there.

  11. Tok says:

    “…but because chemists were easier to find there for

  12. Morten G says:

    Dammit I have to apologize for the racist/nationalist comment. Sorry, that was out of line.
    But if the kids aren’t taking educations geared to pharma then does that mean that the American pharma workforce is almost completely baby boomers? Are there any numbers? Are there for that matter unemployment numbers by education so it is possible to tell if the American chemists really are disproportionately unemployed compared to earlier. I hear a lot of anecdotes and losing your job sucks for anyone but I do want some numbers…
    Europe is increasing it’s pharma industry but that is (in part) due to a focused effort from governments. Europeans looked to the US and saw a bunch of good jobs and said to themselves “We want that”. Europe – always a little late to the party.

  13. Confused European says:

    Hmm sorry Morten G, I can’t really think of any way Europe have been ‘late to the party’ regarding pharmaceutical R&D. Just take a look at your own list in #9. There are plenty of pretty well established European organisations I imagine we can all think of…
    And as for Europe ‘increasing’ its pharma industry? Err, how so? Is this why previously buzzing research labs all over the UK are now virtually deserted ghost towns?

  14. Art says:

    This new strategy is interesting in light of the massive layoffs in J&J’s internal drug discovery that are planned for next week. It won’t be long before J&J is not doing any of its own research, and these “partnerships” will be completely one-sided in terms of scientific inventiveness. It’s sad to see that J&J management is killing its own research, and heading down the path of just becoming a marketing business.

  15. Hap says:

    Well, people have been wondering if buying discovery research and marketing and developing it into drugs was a viable business model for pharmaceutical companies. I guess J+J (and its ex-employees, and shareholders) are going to find out, one way or another.

  16. Kim says:

    The “buy versus partner” decision often comes down to valuation. With internal industry R&D doing fairly poorly in terms of inventing viable new products practically everywhere, the focus shifted to licensing at the beginning of the decade. Since there wasn’t that much really outstanding IP to be had from the smaller companies, it became a seller’s market and the deal terms just got out of hand. A number of Licensing & BD executives simply figured out that in many cases it was cheaper to buy the company than to pay the sort of outrageous premiums required for a more traditional transaction. In some cases, the acquirer could almost throw away everything else the target firm possessed (apart from the molecule of interest) and still be ahead financially. With a number of biotechs still running on fumes in terms of being able to raise substantial money in the equity market, acquisition will probably remain a viable strategy for a while yet, especially if big pharmas continue to maintain large cash amounts on their balance sheets.

  17. Mercury says:

    “. I guess J+J (and its ex-employees, and shareholders) are going to find out, one way or another.”
    Easy. Unfortunately 99% of what pharma companies are being offered is junk, and internal research teams spend a lot of time panning for the scarce nuggets. Without internal research, a company is going to buy essentially at random, and will discover the consequences in phase III…

  18. Art says:

    Mercury said, “Without internal research, a company is going to buy essentially at random, and will discover the consequences in phase III… ”
    That’s what Proctor and Gamble found out. Their decision to try to run a pharma group without an internal discovery program failed, forcing them out of pharmaceuticals entirely. Those running J&J Pharma are blindly heading directly toward the same fate.

  19. Anonymous says:

    “Those running J&J Pharma are blindly heading directly toward the same fate.”
    In JnJ Pharma it is considered axiomatic by everyone, from junior lab technicians to CEOs of the subsidiaries, that “those running J&J” are ignorant of pharma. But in the nature of things that wasn’t surprising. And it did little harm because they didn’t micromanage and provided a safe if unspectacular helmsmanship to JnJ.
    Of late, their level of pharma knowledge has remained stable but the level of management interference has gone through the roof. The results are destructive on a heroic scale–George Lucas couldn’t match it.

Comments are closed.