December 01, 2015

The Perils Of A Big Pharma Partnership

– What a Megamerger Like Pfizer and Allergan’s Can Mean to Biotech Partnerships –

The media commentary around Pfizer and Allergan’s mega merger announced earlier this week has focused primarily around the fact that the deal is structured as a corporate inversion so that Pfizer can reduce its expected tax rate from 25% to 17%. While investors are sweating over whether the US government will produce new rules to stop these inversions and this deal in particular, there are other stakeholders sweating over this transaction – the large number of small biotechs that have partnership agreements with these two behemoths.

“Pfizergan” will be the largest R&D based healthcare company in the world. Pfizer estimates that the combined company at closing, will have 40+ R&D sites, 100+ innovative programs in clinical development including 8 areas of innovative category leadership, approximately 110,000 employees and $8-9B in annual R&D budget. And while cuts to the R&D budget have been downplayed by both management teams, there is no doubt that significant cuts will be made.

In John LaMattina’s review of the impact of mergers on pharma R&D, the author concludes the effects to be “devastating”, due to:

-Reduction in duplicate costs through cuts in programs and even R&D sites

-Extensive and time-consuming reviews of the pipeline programs that can cause a significant decrease in pipeline progress

For the small biotechs that are currently partnered with Pfizer and Allergan, this is particularly concerning. Their programs are about to undergo a significant review. The re-prioritization of the overall pipeline could mean de-prioritization of their program or even termination of the partnership.

One company that comes to mind, and close to home for my Canadian colleagues, is Mimetogen. A Canadian company doing work in the ophthalmology field, Mimetogen is about to live through a partner merger for the second time. In July 2013, Bausch + Lomb was granted an exclusive option to license their lead drug candidate for dry eye, MIM-D3. Unfortunately, the owners of that option became Valeant following its acquisition of Bausch + Lomb. Valeant didn’t exercise the option, probably due to the fact that the further R&D investment required isn’t part of their business model1. Just a few weeks ago, MIM-D3 was licensed again – this time to Allergan. With Pfizergan looming, I sincerely hope the outcome of this merger will be better for MIM-D3 than the last go-round.

Mergers are just another potential pitfall in drug development, but management teams can try to mitigate the risk. In today’s high liquidity markets, companies try to keep control of their drug candidates as long as possible. Partnering can also be very effective, but make sure your agreement has three essential qualities: 1) high alignment of interest with partner, 2) the project is high priority for the partner, and 3) the partner has a significant financial commitment to the project (upside and future spend).

1 This is my personal hypothesis

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