The Double-Edged Sword of Pharma Industry Consolidation

Posted: October 8, 2019

API Manufacturing and Pharmaceutical Manufacturing

The pharma industry has certainly experienced its share of M&As over the past few years – from Shire’s acquisition by Takeda Pharmaceuticals to Bristol-Myers Squibb’s pending merger with Celgene. M&A deals are amounting to hundreds of billions of dollars, but, as an Interesting article from earlier this year notes, is the flurry of M&As harming innovation?

There’s really no clear-cut answer. In fact, industry consolidation can be a double-edged sword.  It can jeopardize innovation when companies spend time working out the kinks of integrating different companies, yet at the same time, it can enable faster and more efficient delivery of life-saving drugs when efforts are combined. 

A Build Vs. Buy Mentality

A key reason for the rise in M&As is the lengthy development times and specialized expertise required to create tomorrow’s novel Active Pharmaceutical Ingredients (APIs) and therapies. It can take upwards of ten years to commercialize a drug and with a growing shortage of qualified talent and potential supply chain problems getting raw materials, it can take even longer. Large pharma firms with the financial chops are choosing the fast route – either acquiring the intellectual property or drug from a company or buying the company outright. It’s a sure way to fast-track delivery of drugs and the revenue boost it can bring with it. In some ways it resembles the build versus buy dilemma in the software industry. Do you buy something that already exists and see the results faster, or build it in house, costing significantly more and taking longer but more easily making it your own? With the rise in industry consolidation, many pharma firms are taking the buy route.

Other major issues that will drive M&A activity into the future is the expiration of patents that will occur between 2023 and 2026; as well as the changing regulatory environment putting stricter pricing pressures on the pharma industry and requiring they boost their size to better compete.

Consider the following ways pharma consolidation can stifle innovation:

The high cost of acquisitions. The Bristol-Myers Squibb deal was worth $74B and Takeda Pharmaceuticals’ purchase of Shire cost $64B.  These types of deals are costly endeavors. When that much money is tied up, streamlining operations and cutting costs are inevitable, resulting in lay-offs of critical talent, elimination of duplicate product lines and departments. The focus turns to merging organizations and less on innovation, at least for the short term. 

Shrinking competition.  In a recent Harvard Business Review article, economist David Autor and some of his colleagues point out that “dominant firms are wielding market power in ways that prevent rivals from emerging and thriving. The winners are winning bigger, while the number of new start-ups is falling.”  The shrinking of ambitious start-ups can stifle innovation in the pharma industry and eliminate much of the competitive climate that breeds new ideas.  

While keeping the industry innovative during growing consolidation can be challenging, there’s tremendous benefits to it as well:

Strengthened generics market. It’s estimated that 89 percent of all prescriptions dispensed in the U.S. last year were generics.  Given this figure, it makes sense that most of the M&A activity occurring in the market has been for generic drugs. These alternatives to brand-name drugs play a major role in the industry, making prescriptions more affordable for consumers, and sparking innovation in how drugs are created.  

TECH TRANSFER

Availability of specialty drugs. The inherent problem with specialty drugs is that the cost to produce them for a limited market can surpass the financial gains that can be achieved.  Yet, with the backing of a big pharma firm that purchases the API and uses its existing infrastructure and money to support its delivery, populations that desperately need these drugs can have better access to them.

Expanded resources. While not involving big pharma, another benefit of industry consolidation I’ve experienced first-hand in the Contract Development & Manufacturing (CDMO) world is the integration of talent and capabilities that can result.  My firm was acquired by Seqens CDMO in June of 2018. This consolidation is bringing expanded, world-class capabilities to sponsors looking to bring new APIs to market. In our situation, we now have integrated capabilities, resources and expertise that we couldn’t have provided previously, including access to expanded chemistry expertise, solid state chemistry development, dual site processing and substantial additional capacity for the commercialization of the next generation of products.

Consolidation through M&As is only expected to rise in the life sciences industry, but once all of the integration logistics have been worked out, it doesn’t have to stifle innovation, but can provide the muscle and brawn to reinvigorate an industry and bring much-needed products to market.

About the Author

Ed Price CEO of PCI Synthesis
Ed is President & CEO of SEQENS North America (formerly PCI Synthesis). He serves as a co-chair of the New England CRO/CMO Council and sits on the Industrial Advisory Board for the Department of Chemical Engineering at UMass, Amherst. Ed is also a long standing member of the American Chemical Society and advises the Bulk Pharmaceutical Task Force of the Society of Chemical Manufacturer’s and Affiliates (SOCMA)...

Do you have questions? Talk to Ed.