As cash-strapped consumers these days are trading in Neiman Marcus for the discount stores, big pharmaceutical companies flush with cash are looking to spend some of that money on bargain-bin acquisitions. Several drugmaking giants have indicated their intentions to use the economic downturn to snap up smaller developers at cheap prices, especially tiny biotech companies that are struggling to find investors. Novo Nordisk and AstraZeneca both said last week that they’re slowing down their share buyback programs to focus on acquisitions. GlaxoSmithKline (GSK) made a similar announcement earlier in October.
On Big Pharma’s side, the logic behind these moves is apparent: Pharmaceutical companies are rich, with US companies alone sitting on something like $113 billion in cash. On the other hand, their pipelines have dried up and the massive amounts they’re spending on R&D just aren’t paying off. BusinessWeek sums it up thusly:
The industry burned through a record $59 billion in research and development money in 2007, according to the Pharmaceutical Research & Manufacturers of America. It has spent $213 billion since 2004, making it among the most profligate industries when it comes to R&D. The payoff for society was supposed to be a steady flow of products that would improve people’s lives and reduce the government’s health-care expenses. Instead, drug research productivity has been declining. Last year only 19 new drugs were approved in the U.S., and few of them were true breakthroughs.
The pharmaceutical industry has long looked to biotech and smaller traditional drug developers to liven up its own internal research efforts (see the AstraZeneca/MedImmune deal, for one such instance) but the urgency around consolidation has been ratcheted up by the current economic crisis, which is hurting biotech firms more than most.
Always a risky proposition, biotechs are having a tougher time than ever getting investors to bet on them. Virtually nobody can go public these days (Phenomix just withdrew its IPO in October), and private investment has declined sharply. As a result, biotech companies are folding (AtheroGenics), cutting back on their development programs (Maxygen), or – much to the delight of those cash-rich drugmaking giants – selling out cheaply. Avalon Pharmaceuticals, a struggling cancer drug developer, did just that when it agreed to sell itself to Clinical Data for $10 million in stock. Others – like GSK, AstraZeneca, and Novo Nordisk – are anxiously awaiting their chance to make just as good a deal.