Elimination of the Middle Class


While most are quick to follow the latest hot merger or rumored takeover target, Beaker has noticed a more alarming big picture in the current M&A environment of the life sciences industry. More and more, we are seeing evidence of an accelerated migration toward two classes of company: the mega-conglomerates and the developing innovators.

Either through acquisition or divestiture, mid-sized companies across the industry are being eliminated at a quickening pace. Just in the past few weeks, Stiefel, Nycomed, Solvay, Ranbaxy. From the past few years, MedImmune, Millenium, Imclone. How long is it until the remaining successful mid-sized companies in our industry are gobbled up: Allergan, Shire, Biogen IDEC, Genzyme.

For certain, acquisition is a normal part of any industry’s move into maturity. Smaller companies see it as a natural exit strategy for their investors. Bigger companies use business development to expand their business rapidly apart from organic growth. Yet, the supply & demand must always match to avoid any disruption in the industry landscape. Big companies overfeeding on M&A activity can suffocate innovation and disrupt the entrepreneurial food chain.

Luckily, the consolidation has not been as aggressive in the medical device & diagnostics sector, although J&J and Abbott continue to bolster their ranks through acquisition on a regular basis. Just a few years ago, the problem was more evident, with Medtronic & Boston Scientific in a horserace to see who could acquire more small technologies to round out their device portfolios. Now that pace seems to have settled.

Whatever the case, the life sciences industry is getting smaller, in terms of the number of companies operating in it. And especially across the pharmaceutical industry, the middle class is dissolving, leaving us with a limited society of aristocratic conglomerates that dominate the landscape.

And with cash-rich carnivores at the top of the food chain, the trend looks likely to continue. The result is a consolidating life sciences industry that is starting to look skinny around the middle.


4 Responses

  1. Turn to page 33 of the white paper, “The Continuing Evolution of the Pharmaceutical Industry: Career Challenges and Opportunities” http://www.regentatlantic.com/media/pdf/RegentAtlantic-Pharma-Paper-Dec-07.pdf and check out our version of bracketology, pharma style. This report was released in December 2007 and we discussed a good deal about consolidation in the industry and how the big will get bigger while the medium sized companies will either get big or become acquired by bigger companies (pages 61-63).

  2. Having worked at two mid-sized antibody therapeutics companies that are up on the selling block, I have been noticing and thinking about this trend for quite some time now. As circumstantial as it may be, during this time of economic downturn, what’s happened to mid-sized life science companies is a result of inherent cash flow issues that plague the current model of therapeutically focused biotechnology companies. It’s a bad time for mid-size biopharma’s – they just don’t have the options that start-ups and multinational conglomerates utilize to stay above water.

    Unlike large and medium size companies, small start-ups have achievable short term goals that involve more intellectual property, novel data, and promising biologics rather than deliverable hard goods and a guaranteed revenue stream. Given the age and nature of a start-up’s business model, the potential for success is essentially boundless and opportunities are abundant. Venture capitalists and angel investors are willing to take on this risk as part of larger investment pools where multiple companies receive funding in order to spread the risk. Future rounds of financing and mergers/acquisitions is the start-up’s formula for sustainability.

    Large life science corporations, on the other hand, have well established therapeutic, manufacturing, and contract services programs in order to maintain a positive cash flow situation, on top of already selling a blockbuster drug. When times are bad, and investors are weary about the cost of long therapeutic project time-lines, large companies rely on these alternative cash flow sources to fund their therapeutic R&D. These companies are flexible enough and have many opportunities to raise money through deliverable hard goods.

    It is no mystery that positive cash flow is the only way to fund research of new products. Now think about the situation of mid-size companies. Their main source for cash is tied up in collaborations and partnerships with larger companies, where a lot is given up in terms of intellectual property and licensing rights for the technology. Looking at other funding sources, manufacturing and contract services cannot solely sustain an efficient therapeutics research program because they are not as well established in their infrastructure and personnel. So, simply put, where are medium sized companies supposed to get money? They have no blockbuster therapeutics to sell and cannot offer quality contract services, so they have to sell the entire company (if anyone wants to buy them), hence why we currently see much of big pharma buying out small and mid-sized biotechs.

    The current model for the therapeutically focused biotech company is not working to sustain technological advancement and consistent growth. The cash flow question must be addressed in order to allow medium sized companies to operate. This, of course, all depends on innovation. Not just scientific, but economic innovation is also key. That should go without saying, but the industry is forgetting that organic growth and progressive scientific thought is what drove biotechnology into it’s heyday, and lack thereof will bring us back to the days of the medicine man.

  3. The original comment is correct, and this trend has been underway for some time. IPOs have not been an exit for small companies for at least 3 years; at best, they are funding mechanisms for Phase 3 trials.

    The gap between the point at which funding entities (both corporate and venture) will invest in a life science company, and the point at which such investment is needed by that company if it will survive, has been growing for at least 3 years and probably longer. This is the manifestation of the demand for less risk and better return on the part of funding entities (shareholders in the case of corporations, limited partners in the case of venture funds) and the simultaneous demand by society for cheap drugs with zero risk. Government grants requiring matching funds are not useful as a bridge, as even matching funds are increasingly unavailable. And massive public spending in the form of true grants is no longer an option – the landscape of intellectual property has moved too far, and the cost of maintaining organizations is now too great.

    The last sentence of the previous comment should be emphasized. New perspectives on risk (both financial and medical), the reality of technical innovation, and the need for long-term investment are required across the board; this is more than a re-adjustment of the current business model, it may be more accurate to call it a “change in culture”. And regardless of our individual opinions, the current trend noted in the original comment will make such changes in perspective inevitable as investment opportunities diminish and no new drugs are added to the medicine cabinet.

  4. […] from here. 43.547982 […]

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