Saturday, February 14, 2009

Consolidation Strategies of the Biotechnology Companies

In the current market, the biotechnology industry is undergoing a period of dramatic change, a change that necessitates the creation of new business models. Consolidations are on the rise and it might be a solution to many of biotechnology’s problems. Therefore, the question, what drives mergers and acquisitions (M&A) in the biotechnology industry needs to be answered.

Biotechnology mergers and acquisitions can help the industry’s fully integrated players to increase in size and market value, boost the emerging companies’ efforts to reach full integration or allow the start-ups to survive cyclical financial crises. M&A in the biotechnology sector (including inter-sector deals between the pharmaceutical and biotechnology companies or intra-sector deals within the biotechnology sectors) serves three main purposes, where one company acquires another in order to increase pipeline productivity and innovation or aid the transition to become full integrated biopharmaceutical company (FIBCO) or a company merges equally with another to support product development, market expansion or sustainable profitability.

The dramatic situation has brought down valuations and dried up access to financing, for many biotechnology companies. However, for the leading pharmaceutical and biopharmaceutical companies that still have access to capital; the ongoing crisis is an opportunity to acquire valuable additions to their own product portfolios and technological base. Subsequently, as the industry under pressure needs to demonstrate sustained profitability and increased shareholder’s value; the acquiring process becomes eminent to boost its specialization. These deals are either within the same sector from which the acquirer increases its product pipeline or technological capabilities within a niche market or the deals in which the acquirer adds a new business unit to its supply chain, thus enhancing its internal capabilities, or in order to achieve diversification (which would be difficult during a crisis period), the acquirer gains a new business outside its current portfolio.

Pharma-Biotech Consolidations (Transactions: mostly acquisitions)

While the leading pharma or biotechnology sectors have managed to maintain stable growth performance, the consolidations have been unavoidable as a means to accelerate productivity and revenue growth, identify profitable areas and attend global focus. The deals mostly comprise of licensing agreements or joint ventures in the first place. Direct acquisition is usually considered at a later stage, as experts believe, that might affect the R&D productivity of the innovative company. Usually the drivers for the licensing agreements or mergers are in the first place. In many cases, successful acquisition of the target company occurs with the companies in alliances, in such a way that productivity is left intact. While the major pharma players acquire significant research knowledge or attractive product pipelines they also allow the biotechnology player to grow its talent and unique business independently to maintain the higher productivity of this sector. The fully integrated companies acquire emerging mid-size biotechnology companies that carry strong research and drug development capabilities but that are not able to market their own products.

In short, the strategic rationale for the pharma-biotech consolidation is to i) Strengthen product pipeline through acquisition, ii) Strengthen technology platform, and iii) Target company’s’ features should include products with clinical proof of concept, strong intellectual property capabilities and good value for money.

Biotech-Biotech Consolidations (Transactions: mostly mergers)

Regardless of innovative companies’ characteristics, to maintain sustained profitability and to protect shareholder’s value in the highly competitive environments, the emerging biotechnology companies need to increase in size and reach, which includes both revenue and asset growth, and that fuels the merger activities among themselves. A consolidation within the emerging sector brings the firms closer to full integration and potentially to sustainable profitability. The goal is to expand the technological reach of a company’s product portfolio, thereby lowering the level of risk resulting from operating in a small number of markets. Despite coming closer to sustainable profitability in the long term, the emerging sector is likely to face significant challenges related to manufacturing or regulatory complexities. However, the demand for bio-services sector in the hard financial times and subsequent consolidations might become a cure for the declining market values.

In short, the strategic rationale for the biotech-biotech consolidation is to i) Build critical mass and increase value, ii) Achieve reasonable degree of integration along value chain, iii) Resolve financing issues, iv) Resolve capability issues, and v) Create exit opportunities.

In conclusion, the consolidation wave hits all the players that are unable to secure either enough funding to grow their technological platforms or expand their customer base. However, it would also be interesting to know if some types of alliances make more value than others, for example multiple target or product deals with a single biotechnology company vs. smaller alliance deals with several companies.


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