All opinions are my own.

Friday, April 24, 2015

Could Pharma’s New Movers and Shakers Make a Difference?

Mergers and acquisitions in Pharma like any other M&A have consequences. They are:

·       Higher Revenue

·       Increased Profits

·       Loss of jobs

·       Lot of money for some in “C and S” suites

Generally the first three happen due to economies of scale and elimination of redundancies. The last happens due to contractual obligations.

Generally economies of scale and better manufacturing technologies can be easily incorporated to improve the overall business. In pharma M&As incorporation of better manufacturing and related practices is not easy. In brand mergers it is impossible due to short patent life. For the generics after the low hanging fruits have been collected companies have to sort out their product portfolio. Companies that cater singular products [single active formulated in different doses] have to decide the future course. If they want to increase the market share, they have two options.

1.     Stay with the existing practices irrespective of their efficiencies or inefficiencies. This will depend on their market position.

2.     Capitalize on economies of scale and use better and efficient technologies to expand their market share. Upside would be higher revenue due to larger market and higher profits. Downside would be the investment (unknown) necessary to ensure the product meets accepted efficacy and performance. Process economics can justify their course.  

I do not believe that patients in either case will see much or any reduction in their drug costs. Most likely the drug costs after the mergers go up and that is especially true for the brand drugs. We have seen that in the recent case of HCV.

Focus of the pharma companies is to maximize their revenue and profits while suggesting that their more expensive drugs are better for the disease. A recent opinion by Dr. Jeremy A. Greene (1) is in an interesting and excellent overview about drug strategies and pricing. Reformulation of existing drugs through patent extensions and charging higher prices (2) is another strategy. I just wonder why in the name of better drug, which may be no better or marginally better than the existing drugs, companies are charging higher prices. It is obvious revenues and profits are the focus rather than the patient. Mutually subsidized healthcare systems really camouflage the real sales prices. Higher drug price are justified for longevity and convenience but generally patients are the losers as they cannot afford their higher priced drugs.

Recent merger frenzy involving Teva, Mylan and Perrigo has an interesting cast of CEOs (3). They are not pharma bred. Their demeanor during their consulting careers has been to maximize profits and shareholder values. They could be the “creative destructionists” pharma has needed to move from “regulation centricity” to “process centricity” which would bring significant change in the generic pharma model.

Generics have the best opportunity to increase their revenues by including almost 1.4 billion people, due to lower drug prices, in their patient base through the use of better manufacturing technologies and business practices. Economies of scale and “process centricity” could release pharma from the regulatory guideline and directive shackles that have impeded “operational excellence” in pharma. If they venture out to include “manufacturing excellence” they could save as much as $200 billion dollars. Using the current estimated monies needed to develop and commercialize a new drug could result in the development of one hundred new drugs. With this money developers for the new drugs could be busy for the next forty years and may save many jobs.

Girish Malhotra, PE

EPCOT International

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