Historically pharmaceutical companies have posted double digit growth numbers and made many shareholders green. However, this decade has been tough for the drug makers.
The main reason behind the recent lackluster performance of the drug companies has been decrease in R&D productivity. R&D spending has increased many folds due to more than ever stress on safety. Clinical end-points are stricter necessitating larger and longer clinical trials. This in effect reduces the patent window when these companies can maximize their profits. To make matters worse not many innovative drugs are in the pipeline and those that are lack the market size.
Industry’s solution to deal with its dwindling organic growth has been merging within the industry and forming strategic alliances with smaller sized biotech companies that can take on the role of innovation and in the process employ big pharma’s sale/marketing force in pushing the drug in the market.
For instance, recently Eli Lilly and Company (LLY) and SGX Pharmaceuticals, Inc. (SGXP) announced a merger agreement. This merger will allow LLY to employ SGXP’s scientific resources in order to bolster its cancer fighting pipeline and allow SGXP, a San Diego based small biotechnology company, to realize its full potential with the help of LLY’s expertise in advancing drugs. Such synergic deals create great value for both companies. However, such deals often cause managerial complexities due to difference in culture between small entrepreneurial biotech firms and large too big to innovate pharmaceutical companies.
Even though there is no strong evidence that economies of scale can be achieved by pharmaceutical companies through M&A, it still remains a rewarding solution for the big players to enhance their competitive edge and maintain growth figures.
The main reason behind the recent lackluster performance of the drug companies has been decrease in R&D productivity. R&D spending has increased many folds due to more than ever stress on safety. Clinical end-points are stricter necessitating larger and longer clinical trials. This in effect reduces the patent window when these companies can maximize their profits. To make matters worse not many innovative drugs are in the pipeline and those that are lack the market size.
Industry’s solution to deal with its dwindling organic growth has been merging within the industry and forming strategic alliances with smaller sized biotech companies that can take on the role of innovation and in the process employ big pharma’s sale/marketing force in pushing the drug in the market.
For instance, recently Eli Lilly and Company (LLY) and SGX Pharmaceuticals, Inc. (SGXP) announced a merger agreement. This merger will allow LLY to employ SGXP’s scientific resources in order to bolster its cancer fighting pipeline and allow SGXP, a San Diego based small biotechnology company, to realize its full potential with the help of LLY’s expertise in advancing drugs. Such synergic deals create great value for both companies. However, such deals often cause managerial complexities due to difference in culture between small entrepreneurial biotech firms and large too big to innovate pharmaceutical companies.
Even though there is no strong evidence that economies of scale can be achieved by pharmaceutical companies through M&A, it still remains a rewarding solution for the big players to enhance their competitive edge and maintain growth figures.
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