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Drug Industry Consolidation Refuses To Arrive So Quickly

Anyone who’s watched the biopharmaceutical landscape over the years is familiar with two large forces that reshape the list of companies in the area: on one end, you have mergers and acquisitions that decrease the number of firms, and on the other you have startups that increase it. How have these two been balancing out?

This paper in Nature Reviews Drug Discovery has some numbers. Since 2000, the lowest number of “consolidative” deals (where two companies become one by some means) has been 53, in 2002, and the highest number has been 120, in 2017. (The list excludes drug delivery, medical devices, generics, OTC companies, and animal health). You’d figure that this would be leading to larger and larger firms taking up more of the market, but in fact, the share of the market (by revenues) held by the top ten firms has actually gone down over this period (from around 50% to more like 40%). The share of total clinical (industry-sponsored) clinical trials and the share of total clinical trial enrollment held by the top 10 companies has been declining pretty steadily over that time as well. The same goes for novel products and the revenues from them.

That’s something that I’m pretty sure that most people were not predicting. Typical might be this 2002 article from the Harvard Business Review, which posits four stages of industry consolidation and says “Pfizer, in its recent acquisition of Pharmacia and Warner-Lambert, is a textbook example of a stage 2 company successfully positioning itself for the later rounds of consolidation that will yield the industry’s giants“. Well, we do have giants. But we have lots of others, too. Here’s another 2004 piece which is almost entirely about how everyone’s going to end up merging, inevitably. I will admit to having had some thoughts along those lines myself.

The authors of this new paper identify several trends that have delayed the expected mega-consolidation of the industry – the move to rare diseases, the rise of monoclonal antibody therapies (done at first by a number of players outside the big 10 companies at the time), the greater availability of outsourced services, and – in recent years – the relatively easy access to capital. I would add, in that “recent years” category, the various new therapeutic modes that are being explored (gene therapy of various kinds, RNA and DNA-based agents, protein degradation, etc.) many of which have a swarm of smaller companies involved in them. Some of them have been and will be bought out, but others are staying independent longer than one might have thought.

Maybe in the even longer term we will see the industry settle into a smaller number of mega-firms, but by now, I sort of doubt it. The sheer number of new things to try (and the number of ways to try them), the vast amount of important things we don’t know about disease, coupled with the huge rewards of getting something new to work, make me think that we have some factors working on our industry that you don’t find in many others. I think we’re set up for having fragmentation, nor do I think that that’s a bad thing, overall. There are so many unsolved problems that the more organizations that can bring their different approaches to them, the better.


28 comments on “Drug Industry Consolidation Refuses To Arrive So Quickly”

  1. This data suggests to me that medical-scientific innovation thrives outside the large Pharma setting. Not to bash Big Pharma – there needs to be, I suspect, a few larger entities which can manage risk across portfolios, and deliver economies of scale in repeatable processes like drug development and manufacture. But isn’t it the case that, rather than “R&D”, big Pharma has for some time been more focused on “D&C” – Development & Commercialization – then discovery research?
    The best innovation is bought in from outside. And I do mean “bought” not “brought”…

    1. Nate says:

      I disagree. Majority of the “Big Pharma” players have very large and robust Discovery efforts. It’s just that most of them have their Discovery focus on the legacy type activities of small molecule / monoclonal antibody. Even big pharma cannot afford to do R&D in every possible therapeutic area & therapeutic type, hence the perpetual need for startups to be able to cover everything.

    2. beentherdonethat says:

      “research in big pharma is just for show”

      1. Derek Lowe says:

        Gotta disagree with you on that one. Some of it ends up being that way, but not all of it by any means.

      2. Isidore says:

        I have worked in large and small pharma over the years. Research in big pharma may not be managed efficiently and often slow to adjust to a changing environment but it is definitely not “just for show”.

    3. pv=nrt says:

      I disagree for many reasons, one being that you have no chance of vetting out the BS that some small companies will pitch you during diligence if you don’t have an internal discovery team that know what they are doing. You’ll wind up getting taken by ten Sirtris like companies.

      1. Chrispy says:

        This is happening right now: all these little biotechs with their magic beans. Sirtris, Stemcentrx, Flexus get bought for massive dollars, creating a huge gold rush even though their science was borderline fraudulent and went down in flames following the purchase. It threatens to poison the well for honest biotechs.

        1. An Old Chemist says:

          chrispy: Add one more to the list of borderline fraud: A few years ago, Merck acquired Cubist for a few billion dollars, but just a few days before the deal was to be executed , Cubist’s patents were found to be invalid by a US court.

      2. pharma phriend says:

        pv=nrt has it right. While the scientific objective of a small biotech may be to discover a drug, the business objective is typically to develop an attractive asset for sale. The financial exigencies can overtake clear eyed objectivity. The potential buyer needs to be able to recognize real innovation and value and distinguish that from showy glitz.

    4. tt says:

      The definition of innovation especially in the context of bringing new therapies that measurably impact disease, is very slippery. While I think the above comment reflects the conventional wisdom (i.e. big pharma doesn’t innovate, it just buys and commercializes), I don’t know that this notion is measurably true as it very much depends upon how you define and measure innovation. By what metric do we judge this? Is it just by novelty based on MOA, or is it based on what therapy delivers the most benefit to the patient?

  2. RandomWok says:

    Fragmentation might lead to more productivity for a reason unrelated to scale economies, etc. A fragmented drug discovery/development system forces diversity in the decision-makers who make the crucial green-lighting go/no-go decisions in the fate of candidates. Think about it…the large monolithic R&D organizations often end up having a handful of key executives making these calls, and group-think, risk-aversion, NIH syndrome etc etc often renders them blind to alternate pathways, programs and candidates. Layer on the non-science MBAs obsessed with “attriting” the pipeline, and pretty soon you get a march of the lemmings mentality. A diverse landscape of smaller companies don’t hew to this dynamic, which might be the real reason for the innovation drought in an industry with a handful of big players, controlled by the same stale executives…

    1. Bill says:

      This: “Layer on the non-science MBAs obsessed with “attriting” the pipeline, and pretty soon you get a march of the lemmings mentality.“ It screws up the beneficial incentives and helps direct the organization to quarterly returns instead of the longer term profits, especially in the heavy industry I’ve been in.

    2. Emjeff says:

      Well-said, Random Wok. In other words, small companies MUST make a decision – big companies can afford to delay and post-pone. This makes a huge difference in how they operate.

    3. MCS says:

      NIH: Not Invented Here or National Institute of Health, your choice which is most deadly.

  3. Some idiot says:

    Another factor to consider in the acquisition/market share equation is time… The assets acquired in a purchase merger will probably take a long time before they start adding market share to the buyer (if ever), and certainly long enough to confound statistics only covering a short (ie 10 year) time frame. So even if there is a correlation between acquisitions and market share, I would not expect to see it raise its head over noise in just 10 years…

  4. Emjeff says:

    Another beautiful MBA theory destroyed by ugly facts. What was not taken into account (apparently) is that scientists layed off by Big Pharma do not just crawl into a hole and die – they actually start companies of their own. And, these companies are productive, for the most part.
    Here in SE Pennsylvania, there is a huge number of start-ups trying to make it. There is a lot to offer here – a well-educated population, good schools, and proximity to DC and points west and north. But the biggest draw is the large number of Pfizer/GSK cast-offs who refuse to give up or go work for Home Depot. Meanwhile the big , lumbering dinosaurs (Pfizer, GSK) continue to lumber along, shedding employees, re-organizing, and (every once in a while) developing a drug.

    1. tt says:

      Ahh…the good old theory of “creative destruction”. Not sure that tells the whole story as most of this laid off talent was forced to migrate to where the venture capital resides: Cambridge and South Bay. The real driver is the availability of cheap money for venture capital to throw at high risk biopharma startups based on the lotto ticket mentality. As long as ~10% of their bets pay off big (i.e. sell it off to big pharma), they make out well (and good luck to those staffing the other 90%). Basically, big pharma has out sourced early discovery risk to the venture capital market which is being driven by piles easy cash, available talent, and crazy valuations. Not sure how sustainable this whole thing is…

    2. CR says:

      “Another beautiful MBA theory destroyed by ugly facts. What was not taken into account (apparently) is that scientists layed off by Big Pharma do not just crawl into a hole and die – they actually start companies of their own. And, these companies are productive, for the most part.”

      Is this true? I’m not aware of the “for the most part productive” part.

  5. DTX says:

    There can be a false sense of success by small firms because those that make the headlines are usually the successful ones. The huge numbers that go belly up are usually forgotten.

    e.g., How many of these failed small pharma companies are household names?

    In contrast, failures at big pharma get big headlines and hence are known by many. In addition, most big pharma have spent a large amount of $$$ buying “innovative” small pharma companies, only to see the compounds fail in development.

  6. marcello says:

    If anything, research is for show in small biotechs. Many times they have shiny ideas as window dressing for investors and actual clinical candidate based on repurposing or something close to that

    1. Ted says:

      I wouldn’t hold it as a truth, but I have certainly had that experience at a small biotech. I asked “why is our entire group working on a lead that carries five negative charges at physiological pH?” and the answer was “our investors expect it.” That was a group that deserved to lose their money, and did.


      1. marcello says:

        I wonder if you’re talking about ICOS, Ceptyr or your current employer

  7. Anonymous says:

    Although the main topic is M&As, others have mentioned the role of VC in creating new biotechs to be gobbled up. Does anyone know if there is a reliable update of this WSJ article from 2004?
    (Link in my handle) WSJ, May 20, 2004, page A1.
    “Dose of Reality — Biotech’s Dismal Bottom Line: More Than $40
    Billion in Losses; As Scientists Search for Cures, They Gobble Investor
    Cash; A Handful Hit the Jackpot; ‘The Ultimate Roulette Game'”
    by David P. Hamilton

    […] “Since the first biotechnology company went public a quarter-century ago [Genentech, 1979], stock-market investors have put somewhere close to $100 billion into the industry.

    The results so far: More than a hundred new drugs and vaccines, several hundred million people helped by biotech medicines — and cumulative net losses of more than $40 billion for the industry’s public companies.” […]

    My spin: That was $40B of losses to all investors, not just VC. Smart VC take their exits early (making the big bucks) and let the peon investors follow on after the IPOs and watch the stock prices shrink like they got a massive injection of cortisone. It’s mostly the hoi polloi who ate that $40B.

    I am wondering what a similar analysis would show for 2004-2018.

  8. DTX says:

    Anonymous – I was going to post the same question. That was an eye opening article. It also noted that at that time, biotech was the biggest money losing industry in the history of the US. And that losses continued until the last year of the study.

    I would love to see an update that assesses the impact of the biologics that have been very successful versus the industry overall.

    1. Anonymous says:

      DTX: Your handle always reminds me of Boston University’s (or John Silber’s) venture into biotech with Seragen in the 1980s-1990s. Seragen’s main technology was based on diphtheria toxin (Dtx) fusion proteins. Seragen (or Ligand) did eventually get FDA approval for “Ontak” but it was later withdrawn due to off-target toxicity. Interested readers can google “Seragen” or start with the link in my handle.

  9. JB says:

    Overpaid McKinsey consultant strategies.

  10. aa3 says:

    I would consolidate by trading divisions with other big pharma corporations. Like in each disease area there only needs to be 3 or 4 big pharma with significant operations in that disease area.

    Each mega cap pharma corporation only needs to focus on a few areas, maybe 4 to 5. Look at how Gilead has had success by focusing on just a few areas.

    Then if the corporation ends up with a drug that also shows benefits outside of the corporation’s core area of expertise, the corporation can just partner with another corporation who is specialized in that area selling that drug.

    The reason I see it going this way is because of the insane complexity in each organ system. Like you could have a large team of brilliant scientists, spend 20 years just researching into the arteries, and they wouldn’t even be close to ‘solving’ the questions. But they may well be able to make a significant advance for the clinic in that time.

    You see even though pharma is an industry, its not like other industries in terms of complexity. Like in car companies whether the company is building a minivan or a truck or a small car, its basically the same physics, assembly process and so on. Whereas the science in say the arteries has some connections but also huge differences with research into say the liver.

  11. MCS says:

    I seem to remember reading somewhere that in drug discovery; plausible hypotheses are cheap if they’re not free, the cost of early investigation and development maybe no worse than exorbitant to obscene, but from there you need to use the semi-log paper to plot the cost curve. This last stage is the one that favors consolidation of capital. Unsurprisingly, it resembles the status quo.

    Imagine if Compu-Chem really started to work. This would seem to favor the big players; super computers aren’t cheap. But, there wouldn’t be “a” candidate or even a few. There would likely be dozens or hundreds spread over all areas in short order. Even assuming these were all but guaranteed to be good, the cost and effort to bring them to market remains huge for each and every one of them. Not that the advantage would last, the cost of computer power follows a much more favorable exponential curve.

    My conclusion is the the only advantage likely to survive the inevitable disruptions and that favor large organizations are in terms of maintaining intellectual resources, people not patents. The old AT&T maintained Bell Labs as a sort of zoo full of really smart people which they fed by asking questions from time to time. This let them go from carbon granule transducers and cambric covered wire to fiber optics and satellites before the business grads killed them. To whatever extent this ever existed in Big Pharma, it died long ago.

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