Why has Outsourcing Gone Mainstream in the Pharmaceutical-BioPharmaceutical Industry

Gil Roth the Editor of Contract Pharma magazine invited several people to comment about the outsourcing trends in the industry in honor of the magazine's 10th anniversary. I sent him my thoughts and wanted to share them here as well (along with a few additional details):


At a macro level, the largest changes in the last 10 years that have occurred in the Pharmaceutical/Bio-pharmaceutical outsourcing-contracting-consulting space is how it has become totally main stream and in many ways regarded as a necessity to being competitive in a world where the classic Pharmaceutical Industry model no longer works. Layer on top of that what Thomas Friedman of New York Times fame labeled as “The Flat World” and it is no wonder that the outsourcing band wagon is so much the order of the day.

The way Wall Street would put is that this trend is a result of a “secular change”. That change is rooted in failed pipelines, lower R&D productivity, the rapid ascent of generic drugs (over 70% of US prescriptions in 2008), increased government regulations, the acknowledgment about the effectiveness of the sales force, extraordinary expense profiles, a public who will not or cannot appreciate the value of the product, a hostile congress and the advent of significant health-care reform from the Obama administration. By the way, Wall Street has acknowledged these secular changes by stripping much of the "P/E premium" from large pharmaceuticals stock prices and turned them into relatively poor performers.

When you combine those challenges with the enormous advances in technology and communication that enable global research and development and supply chains, an outsourcing strategy is not only prudent, it is a requirement. It is indeed a very straightforward way to lower the costs of doing business. When one adds on the acknowledgment of the demand generated by the rising wealth and demand for health-care from very rapidly developing countries including India and China, the requisite of using outsourcing as a way to enter those markets is on the top agendas of many senior executives in the industry.

While the Pharmaceutical/Bio-pharmaceutical Industry has been a notoriously slow adapter of change (yes, there are lots of reasons, not the least of which are regulatory) compounded by risk adverse cultures, the one thing they are not is naive. Gone are the days of “top line revenue” is the only thing that is of concern of management. Today there is a focus on “The Bottom Line” which includes unit costs, effectiveness and efficiency among the tactics. Sure there are other strategies being deployed, for example we have identified two camps in the industry, the consolidation camp and the diversification camp. The “consolidators” would include the big pharma mega-mergers (Pfizer-Wyeth, Merck-ScheringPlough, etc.) and include even some of the consolidation seen by several large biotechs. When you couple a parallel path by the big CRO's, contract manufactures, consultants, etc., the appeal of awarding large pieces of business functions in either long term contracts and/or joint ventures becomes attractive. In a similar fashion, the “diversifiers” (Sanofi, Novartis, etc.) want to focus on their new business endeavors such as animal health, consumer pharmaceuticals or diagnostics and therefore are far more likely to look at an outsourcing strategy as a natural way to allow management focus to be aimed at their new strategies.

The outlook, in my opinion even more to come with innovative joint ventures, terms and conditions and capabilities which will aid the industry to continue its path toward attractive business results.

The Pharmaceutical Industry Merger Mania-”The Consolidation Camp” vs. “The Diversification Camp”

The Pharmaceutical Industry Merger Mania-
”The Consolidation Camp” vs. “The Diversification Camp”


Consolidation in the Pharmaceutical and Biotechnology Industry has been grabbing headlines lately and of course we have a strong point of view about how this may shape or mis-shape the industry going forward. While the biggest headlines involve the Pfizer-Wyeth, the Merck-Schering Plough and Roche-Genentech consolidations, we feel compelled to discuss these and alternatives that may have been considered and the landscape that may develop as a result of these moves.

Let's look at some of the alternative strategies that can be deployed given that most CEO's would acknowledge that the combination of low ROI from R&D investments, patent expirations, demise of the blockbuster model, ineffectiveness of the sales force armies, excess manufacturing capacity, increased regulatory oversight, significant pricing pressures, and the lack of success (failure?) of large consolidations wreak havoc with long term direction.

Chris Viehbacher, the new CEO of Sanofi characterized two strategic camps in a recent interview with Bloomberg News-they are the “Consolidation Camp” and the “Diversification Camp”.

To us, Pfizer is the prime example of the Consolidation Campers with expenditures of nearly $200 billion in the last several years to acquire Warner Lambert and Pharmacia along with several other smaller acquisitions, only to have its stock market cap for the consolidated company reach under $100 billion despite loads of restructuring, re-engineering and synergy targets. It appears that once synergy targets are met (1-4 years), company values as measured by stock market capitalization seem to wane quickly and the quest/thirst for more consolidation continues at a frantic pace.

For us the leaders of the Diversification Campers are Johnson & Johnson and Abbott. Both companies have major lines of business outside traditional large molecule pharmaceuticals with significant and growing businesses in consumer healthcare and medical devices and diagnostics. Their acquisition strategy seems to be small to mid size chunks, notably J&J's $16 billion+ acquisition of Pfizer's Consumer Healthcare Businesses as well as numerous biotechnology companies, while Abbott has acquired Advanced Medical Optics (AMO), Guidant's Vascular Intervention and Endovascular businesses and Kos pharmaceuticals.

Both J&J and Abbott seem to have incremental “bite sized” acquisitions, all meant to provide a portfolio of “health care” lines albeit balanced among multiple sub segments of the industry. Both companies seem to have accelerated the success of these acquisitions by leveraging existing franchises and/or management and infrastructures. Notably one wonders why they haven't or if they might look at generic pharmaceuticals and/or animal health to round out their portfolios.

We will next discuss our opinions of the recent merger wave and who were the smart ones (could it be Pfizer, Merck or Roche??). Stay tuned and we will look at other alternatives we think may be developing.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.


Contributed by Larry Rothman

If Pfizer-Wyeth is Absurd, What do you think about BMS-Sanofi or BMS-Biogen-Idec or even BMS-Amgen or Sanofi.....?

It's no secret that Guy de Lastin and I feel very strongly that the Pfizer-Wyeth merger is a train wreck about to happen.

However, as long time members of the Life Sciences Industry, we know better than to think that this merger will be the only one to occur this year despite our earlier views (see our multiple blog articles on this subject over the last few months) that
there is no rational and compelling reason for these companies to consolidate.

So, let us speculate about what could happen next. Many Wall Street analysts and august financial papers suggest that BristolMyers Squibb (NYSE:BMY) is a maiden in distress and is being dressed up by its "savvy" management team to be taken to the alter.

If BMY is acquired, the leading contender may very well be Sanofi-Aventis (NYSE: SNY) of Paris. There was an extensive article in yesterday's Financial Times on this subject http://www.ft.com/cms/s/0/27be6860-09a-1dd972c0000779fd2ac,_i_email=y.html) and the truth be told, there is some merit in their thinking. SNY has lots of cash, a new CEO Chris Viehbacher, ex-Glaxo and runner up to Andrew Witty for that CEO job who is anxious to make a mark for himself by "expanding and diversifying" their business. And, oh lest we forget they share rights to PLAVIX, both companies' largest blockbuster and one that is beset by potential generic competition.

Let's suppose BMY want to be the acquirer, not the "acquiree". BUT, wait a minute, didn't BMY very recently get outfoxed by Eli Lilly (NYSE:LLY) in a very expensive acquisition of Imclone Systems and its blockbuster oncology pipeline known as Erbitux? It seems to us that BMY's strategy was a combination of expanding its oncology franchise, diversifying into large molecule (e.g. Biotechnology) science and hanging onto some potentially massive blockbuster extensions? If you believe that and BMY's management has learned a lesson,why not think that BMY looks at Biogen-Idec (NASDQ: BIIB) as an alternative or parallel version of its Imclone thinking. With a market cap of $14 billion or so, it could be affordable-NOT cheap, but very attractive with marketed and developing drugs in the areas of oncology, neurology, immunology, and cardiology in the United States and internationally. Its product set includes AVONEX for the treatment of relapsing forms of multiple sclerosis (MS); RITUXAN for the treatment of relapsed or refractory low-grade or follicular, CD20-positive, B-cell non-Hodgkins lymphomas, or B-cell NHLs; TYSABRI for the treatment of relapsing forms of MS; and FUMADERM, an immunomodulator for the treatment of severe psoriasis (http://finance.yahoo.com/q/pr?s=BIIB). This would be a very interesting fit with BMY's marketed products and pipelines. However, THE SAME COULD BE ALSO SAID FOR SNY!! Think of the fun, merriment and mirth that the bidding war could become!

Now, just for the pure joy of it, let's suppose that Amgen (NASDQ:AMGN) were thrown into this mix. What a powerhouse of a company despite some near term challenges. An attractive mix of marketed therapeutic products in supportive cancer care, nephrology, inflammation, and oncology. The company's principal products include Aranesp and EPOGEN that stimulate the production of red blood cells to treat anemia; Neulasta and NEUPOGEN, which selectively stimulate the production of neutrophils, a type of white blood cell that helps the body fight infections; and ENBREL that blocks the biologic activity of tumor necrosis factor by inhibiting TNF, a substance induced in response to inflammatory and immunological (http://finance.yahoo.com/q/pr?s=AMGN) and a potentially "golden" pipeline in each of these areas. One small challenge, AMGN's market cap at almost $60 billion dwarfs BMY at about $45 billion which at best suggests a merger of "near-equals" albeit some potentially very reluctant management and shareholders who may very well question the "synergies" and "value creation". Again substitute SNY (market cap over $75 billion) and does it make any more sense-we don't think so-do you?

As always, we are interested in your comments, please send them to larryrothmansblog@gmail.com

Contributed by Larry Rothman

Pfizer-Wyeth-Are We Kidding? If Not, Who and What is Next??

A Pfizer Wyeth Merger—Are We Kidding? If not, Who's Next??

This morning, January 23rd, The Wall Street Journal “speculates” that there have been talks between Pfizer and Wyeth about a combined company, although they quickly point out that there is nothing imminent. My colleague Guy de Lastin recently wrote in this blog that there isn't a rational business reason for big pharmaceutical company mergers this year and has been notably supported in The Journal with "The record of big mergers and acquisitions in big pharma has just not been good. There's just been an enormous amount of shareholder wealth destroyed," said Gary Pisano, a Harvard Business School professor who has written about the issue.

Admittedly there are contravening forces at play here-Pfizer among others has been notably non-productive in its R&D sector spending over $7.5 billion a year with little tangible payoff—in fact they announced 800+ layoffs for this particular group in the last week or so. On the other hand, Wyeth has had a bit more success with a newly re-engineered R&D organization—having said that, both companies have major blockbusters, Lipitor and Enbrel come from acquisitions, not in house development. Clearly there are enormous “synergy targets” should two such massive businesses merge. Combine these factors with an investment community that is pushing for consolidation, and a lower market cap this year than last mixed together with a cash position of over $25 billion for Pfizer and a market capitalization of just over $50 billion for Wyeth—maybe, just maybe this could happen.

If Pfizer-Wyeth becomes a reality, we enter a new realm of what we call “Super-Mega-Global” Pharmaceutical giants. This may force other merely mega-globals into a merger frenzy. Europe's big 3, Glaxo, Novartis and Sanofi may view the world in a different way and look in their backyards at the likes of AstraZeneca, Bayer and even Roche as feeding fodder. How about the likes of Merck, J&J, Abbott or BristolMyers looking over the landscape at each other or such potentially delectable morsels as Amgen, ScheringPlough or others or each other or some large generics, or...... You get the point, in an industry known for follow-the-leader mentality, the investment bankers, lawyers and our friends the consultants are in for some major paydays.



Contributed by Larry Rothman

Obama’s Won, Now What?

OK, I’m getting ahead of myself, but only by a little. I understand that I have to wait for the votes to be cast and then counted for the rest of the world to know what I do today – Barack Obama will be the next President of the United States.

I’m going to leave the significance of this momentous event to the historians and the pundits. I want to talk about what this means to the people who read this blog. What happens to the Life Sciences/Pharmaceutical Industry now that we have a new Democratic President? Actually, a lot depends on what happens in the Congress and the Senate. If the Democrats can achieve a filibuster proof majority in both Houses then President-elect Obama is sitting in the catbird seat. Without these, a lot’s possible but it won’t be as easy.

Let’s start with Big Pharma. In my last blog, I forecast tough times ahead, if not an actual overhaul of the business model:

We may see a very significant decrease in private funding of major new drugs.

Mergers or acquisitions? Especially with target companies valuations falling? Not likely, unfortunately, given the state of the markets, mergers and acquisitions, except in the financial services industry, are practically nonexistent.

New drug pipelines that are already running dry. The FDA has not exactly been setting records for new drug approvals despite record R&D spending by Big Pharma. Are we to believe that the promised "new regulations" will help or hinder FDA cycles--we would strongly suggest that things will get worse for a while and approvals will be even more difficult and slower.

We think that 2009 will probably show declining revenues for the major drug companies, dramatically so if the ambitious plans for universal health insurance and concentration of buying power occurs--in fact Obama may be a breath of fresh air here compared with the McCain campaign promises (more like threats) toward big Pharma. Profits will depend on how well they manage their cost cutting programs. I won’t even go into what the foreign exchange markets’ impact could be.

Next, let’s talk about outsourcing companies. Here the damage may be even bigger than just the pharmaceutical industry. With a new President talking about giving preferential tax rates to companies that bring jobs back to America, folks might not be so quick to outsource/offshore jobs as they once were. (Remember that filibuster-proof Congress?). The other side of that equation is the possibility that R&D done offshore certainly will be more cost attractive and therefore may still be compelling.

Now, let’s talk about consulting firms. These guys are normally pretty good at playing it whichever way it lays. There is a unique problem this time, two things are working against them:

First, I don’t think the drug companies have figured out what to do next. They won’t spend until they do.
Second, with cost cutting (efficiency) programs being put in place as a response to declining revenues, there is another good reason not to spend money on consultants without laser4 focused projects. So, there is another industry segment could be in for a hard time.

This will be my final blog entry before Election Day. Assuming I’m right about the outcome, we’ll have a lot to talk about in the next few months. If I’m wrong, I’ll get over it and figure out what could happen next.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.


Contributed by Guy de Lastin

Is this the time we all predicted....Transformation of the Pharmaceutical Biotechnology Industry?

Is this the time we all predicted....Transformation of the Pharmaceutical Biotechnology Industry?
Can the Services Industry be of help?

It is fairly obvious to those of us who are involved with the Bio-Pharmaceutical Industry that things could not stay as is. The industry is suffering with a multiplicity of challenges including but not limited to:

1.With dry (or near dry) pipelines despite massive spend on R&D.
2.Negative productivity gain from additional sales force additions (interestingly enough this could be a salvation as the industry consolidates and/or continues buying pipelines or licensing deals from biotech companies).
3.Massive governmental pressure on pricing and a hyper-vigilante, highly politically charged FDA making new drug approvals difficult, costly and lengthy.
4.Significant reductions in value for both Pharmaceuticals and to an extent Biotechnology companies that are traded on the stock exchanges.
5.Throw in for good measure that generic drugs now represent somewhere over 60% of all volume of prescriptions while accounting for under 20% of dollar spend and that there is a concurrent consolidation in that business.

Is this not the making of the perfect storm and is it possible that the service providers can help the industry in this regard?

One doesn't need to look much further than the business press to recognize the enormous change taking place, just look at these 5 deals that have taken place or will that are in aggregate way over $100 billion:

1.Roche wanting to buy the remaining share it doesn't own in Genentech
2.BMS bidding to buy what it doesn't own of Imclone
3.Pfizer's multiple Biotech purchases
4.Takeda's takeover for Millenium
5.AstraZeneca's purchase of Medimmune

There are several other interesting consolidations that are taking place within generics as well:

1.Teva of Israel buying IVAX (US) and now Barr (US)
2.Daichii Sankyo of Japan buying Ranbaxy of India
3.Novartis's earlier adding EON Labs (US) and Hexcel (Germany)

My thinking is that we are rapidly seeing consolidations on at least two concurrent fronts-and both are global:

1.Large pharmaceutical companies paying high premiums to acquire a combination of soon to be commercially attractive pipelines and/or complimentary product lines to add to their existing therapeutic areas.
2.Companies of various size forcing a major global consolidation in the generic space. This becomes a most interesting aspect of the equation as more and more drugs go off patent over the next few years and pricing and reimbursement pressures mount.
3.What about the next targets—it's easy to speculate about Amgen, Genzyme, Biogen-Idec and Gilead as the big fish here—but what about those big pharmas such as Merck and ScheringPlough potentially getting together and what that could mean?

Since part of our target audience are service providers to the industry, the question/challenge I pose is-what can you do to help?

As always your comments are welcome at larryrothmansblog@gmail.com