Is M&A The New R&D?

Frost & Sullivan 20091

Is M&A The New R&D?

October 2009

Next Generation Pharmaceuticals SummitFrost & Sullivan

Healthcare and Life Sciences

North America

http://www.frost.com/prod/servlet/frost-home.pag


Focus Points

• Current State of Biopharma• Restructuring• M&A Trends• Short Term vs Mid-Long Term Views• Conclusion



Current State of BioPharma

• The pharmaceutical and biotechnology industry is in a state of transition.

• Reorganization, M&A, consolidation, and portfolio changes are being evaluated in order to maintain growth centers in the face of a myriad of serious challenges.

• Overall, companies are looking to align with areas of growth opportunity as well as new business strategy and product development paradigms.



• Adjusted for large mega deals, M&A in the pharmaceutical & biotechnology industry set a new record in 2008.

• Potential value of strategic alliances also set a new record (Source: E&Y Beyond Borders 2009)

• Consolidation is expected to continue among smaller companies as they attempt to continue operations in a tight funding environment.

• Deals expected to continue as Big Pharma seeks to provide itself with pipeline and R&D innovation.

• The industry overall is increasingly seeking synergies to drive down overall costs of R&D activities which are continuing to increase.

Economic Perspective: Restructuring the Industry



Pharma-Biotech Industry: Factors Driving Industry Changes (Global), 2008-2020

Year

2008 2009 2010 2011 2012

0

5

10

15

20

25

30

Re

ven

ue

Lo

ss (

$ B

illio

n)

$7B

$22B

$25B

$5B

$19B

Source: Frost & Sullivan

2000 2005 2010 2015

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2020

R&

D E

xpe

nd

iture

($

Bill

ion

)

Forecasts of R&D Expenditure for Launch of a New Molecular Entity

(Global), 2000-2020

Estimated drop of approximately $80 billion in sales over the next

five years

Continued Increase in R&D expenditures for successful NME

launch

Revenue Loss due to Patent Expiry (Global), 2008-2012



1

Drivers for M&A in Pharma - Biotech

Blockbuster drugs

have been major

contributor to both top

line and bottom-line

growth of big pharma.

With slowing of small

molecule blockbuster

model, Big pharma is

looking for new

revenue drivers from

biologics and

specialty drugs

Big pharma has

strong financial

leverage to

acquire cash

starved small &

medium biotech

firms. Offers an

exit for Venture

Capitalists who

initially fund the

research based

biotech firms.

234

Strong product pipeline of

biotech companies in high

growth therapeutics Ex:

oncology, autoimmune, CNS.

Gain from established

manufacturing and

commercialization structures.

Biosimilars – development is

challenging compared to small

molecule generic drugs.

Biotechnology

companies offer

novel technology

platforms,

infrastructure,

scientific talent pool

and R&D

productivity

potential.

5

Existing

alliances

with biotech

companies

eases

acquisition

hurdles due

to cultural

compatibility

& knowledge

of acquiring

company


Pharma- Biotech Industry: Key Drivers for M&A Activity (Global), 2010-2016



Solution Pathway: Merger & Acquisition Strategy

Theoretical Benefits• Portfolio diversification – new therapeutic areas, technology• Pipeline• Transfer of technical knowledge• Reduced time to market• New assets, capabilities, infrastructures



Trying to Avoid Stalled Growth

13%

87%

Outside Management Control

• External Factors = 13% (Regulatory Actions, Economic Downturn, Geopolitical Changes, National Labor market inflexibility)

Within Management Control

• Strategic Factors = 70% (innovation management breakdown, premium position captivity, premature core abandonment, failed acquisition (7%), key customer dependency, strategic diffusion or conglomeration, adjaceny failures, voluntary growth slowdown

• Organizational Factors = 17% (Talent bench shortfall, board inaction, organization design, incorrect performance metrics

Root Causes of Revenue Stalls

Source: Olson, van Bever, and Verry, Harvard Business Review, March 2008

50 representative Fortune/Global 100 companies with growth stalls – N= 500



Most Active M&A Industries

Source: Burrill & Company (Dealogic, Financial Times)

Deals below $10bn

Deals above $10bn

Most Active M&A IndustriesLast 12 Months* (thru May 2009)

Finance

Healthcare

Utilities & Energy

Telecom

Real Estate

Oil & Gas

Technology

Food & Beverages

Mining

Construction

0 100 200 300 400 500 600 700



Top Pharma-Biotech M&A (Global), 2008-2009

2009

46,800 (remaining 44% shares)GenentechRoche

200941,000Schering-Plough Merck & Co.

2008

2008

2008

2008

2008

2008

2008

2008

2008

2008

2008

2009

2009

Year

68,000WyethPfizer

720 SirtrisGSK

880SpeedelNovartis

1,100ScieleShionogi

1,600AlpharmaKing

1,700 LifecellKinetic Concepts

3,700APP PharmaceuticalsFresenius

4,100ConvatecNordic Capital

4,600RanbaxyDaiichi-Sankyo

6,500ImCloneEli Lilly

6,700 Invitrogen - Applied

BiosystemsInvitrogen + Applied

Biosystems

8,800 MillenniumTakeda

1,400CV TherapeuticsGilead Sciences

Value ($ Million)TargetAcquirer

Until March 2009 Source: Frost & Sullivan



Significant Mergers & Acquisitions in 2009

Pfizer - Wyeth

Value: $68 billion

Key Reason:

Imminent loss of Pfizer’s revenues due to patent expiration of Lipitor ($13.4bn ) during 2010-2011

Wyeth’s current portfolio of marketed products and strong pipeline of biologics particularly in CNS.

Merck & Co. - Schering Plough

Value: $41 billion

Key Reason:

Schering-Plough pipeline consisting mainly of biologics, with about 18 drugs in Phase III.

Schering-Plough offers geographical diversity with 70% of its revenue outside the United States.

Roche -Genentech

Value: $46.8 billion

(44% of remaining shares)

Key Reason:

Roche, through acquiring the remaining 44% of shares gets complete control of Genentech, a leader in biotechnology with blockbusters such as Avastin and Rituxan.




M&A – Short or Long Term Fix?R

estr

ain

ts

Lack of improvement in R&D productivity

Cultural compatibility

issues

Alliances - Licensing

Economic Crisis

Previous M&A activities have not significantly mitigated the R&D innovation and productivity crisis.

Alliances / Licensing deals is seen as less riskier option than outright acquisition, especially with early stage developers.

Severely affected credit markets could make debt raising difficult.

Conflict potential with Big-business culture of a large pharmaceutical company versus biotech entreprenurial culture.


Pharma-Biotech Industry: Top Restraints for M&A Activity in Pharma-Biotech (World), 2010-2016



The Short-Term View

• Investor and Shareholder Value Focus• Corporate Realignment Focus• Cost savings• What will take us to the future?

New Company



Mid- to Long-Term View

• R&D Innovation• Organic Growth• Internal Forces and Environment• Creativity• Successful incorporation and development of acquired assets

What creates a sustainable company?What creates a sustainable company?



Fortune Global 500 Companies assessment. Champions = at least 5% annual organic growth, Laggards = less than 5% annual organic growth

Organic Growth Advantage

Source: von Krogh and Raisch; Harvard Business Review, October 2009

0% 10% 20%

Total return toshareholders

Sales Growth

EBIT Growth

Organic Growth Champions Organic Growth Laggards

Companies with high organic sales growth rates tend to outperform those with lower rates.



Is M&A the new R&D?

• In house R&D is a vital asset for industry leading companies.

• Research & Development is the core of scientific innovation

• You cannot buy long term sustainability• M&A doesn’t replace value from organic growth and

alliances



Discussion Points

• Economic Crisis: would Mega-deals have happened this year anyways?

• Consequences on small-mid tier companies• Discovery process activities for increased productivity• Best Practices implementation?• Challenges in late stage clinical programs from M&A


18

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