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Across the Border

A study by global law firm Reed Smith, in partnership with Mergermarket, reveals that 94% of pharma companies are planning to make an acquisition in the next year, with a further 87% expecting these to be cross-border transactions. For the report, 100 senior corporate executives at life sciences companies across Asia-Pacific (APAC), North America and Europe were surveyed. The report, titled ‘Life lines: Life sciences M&A and the rise of personalised medicine’, explores the main drivers behind the pursuit of cross-border life sciences deals, the challenges faced in executing those deals, and how advances in personalised medicine may change the face of the industry.

New Horizons

The first six months of 2015 saw $164.3 billion worth of deals in the life sciences sector – an increase of almost 53% on the previous year – while the second half of 2015 began with a burst of new transaction announcements. This included the Israeli company Teva Pharmaceutical’s $40.5 billion purchase of the generics division of Allergan, a US-based pharma company – the largest deal announced over the past year.

James Wilkinson, Reed Smith Corporate Partner, London, comments: “Most of what we see has a cross-border nature to it. Companies striving for growth in a saturated marketplace are looking to develop their portfolios, diversify their products, move into new markets and restructure their businesses through divestments.”

Companies seem particularly intent on acquiring in the APAC region due to population numbers and developing markets, where demographic changes and increasing personal incomes are combining to create ever-larger potential customer bases for pharma businesses. From the other side, APAC governments have recognised the need to open up to Western markets and have eased regulations to facilitate market entry and growth of market share for international companies. A cross-border merger and acquisition (M&A) today represents an opportunity for unprecedented growth on both sides.

Other regions of interest include Western Europe, due to their governments’ high spending on healthcare; North America, for their technology and R&D abilities; and the Middle East and North Africa region, for their low costs and high return on investment.

Expanding Portfolios

But why is acquisition so attractive to life sciences companies in the first place? There are several reasons for this trend – the most important being that acquiring a company already in the final stages of drug discovery outweighs the costs and risks associated with developing a drug in-house. As one chief executive officer of a European pharma business says: “It makes sense to acquire companies involved in late-stage R&D as the failure rate of early-stage R&D is so high, and the mistakes are only realised when resources and time have already been utilised.”

Aside from the region where companies wish to enter the market, they also need to consider what type of business to acquire. The majority of respondents from the study are looking to expand and diversify their product portfolios, as their current ones struggle to deliver sustainable revenue growth. Therefore, they are targeting companies that have early- as well as late-stage R&D potential. Brian Miner from Reed Smith explains that “it is quicker, potentially less expensive and certainly less risky to buy into existing expertise than to develop it from scratch in-house”.

Indeed, “as competition in the industry is high, companies will focus on broadening drug portfolios as demands tend to reach uncertain levels at some point in time”, states the Director of Strategy at a US life sciences company. “In some areas, over-the-counter drugs are selling well, while in others personalised medicines are strong; so having a good mix of therapies will help to counter the competition.”

Why Personalise?

Speaking of personalised medicine, another trend identified in the survey is this sector’s growing role of these in life sciences companies’ strategies. With benefits such as higher drug prices, improved efficacy rate per patient and smaller clinical trials, it is no wonder that personalised medicine is at the fore. More than two-thirds (70%) of respondents cite businesses that have a focus on personalised medicine as an area in which they will increasingly look to make acquisitions.

There are many advantages to personalising medicine, with the most significant one being the opportunity to charge higher prices for drugs. More than a quarter of life sciences companies (26%) cite this as a benefit, alongside a higher efficacy rate per patient (25%) and better cost/benefit argument at payer level (24%). Medicine that is personalised essentially provides a higher degree of security on treatment results, which will create a difference in market position for businesses, as well as generate positive attention. Indeed, the real draw comes from the fact that organisations would be able to distinguish themselves from competitors; in today’s competitive landscape, this is more desirable than ever.

Despite a continued focus on the development of broad application pharmaceuticals, companies recognise that personalised medicine offers the promise of higher returns, even though the patient population is much smaller. “The future of medicine is to have the right medicine for the right patient, and the right dose at the right time,” says Carol Loepere, Reed Smith Partner in Washington DC and Chair of Reed Smith’s Life Sciences Health Industry Group. The majority of pharma companies believe that advances in technology will make the shift towards personalised medicine possible.

Jumping the Hurdles

However, every new development is presented with challenges, and personalised medicine is no exception. The biggest hurdle is a lack of regulatory guidance, according to 34% of the life sciences companies questioned in the survey, followed by disease/patient stratification. “Some of the challenges are around reimbursement and payment, because if you have a drug and then an accompanying laboratory test to see whether the patient would benefit from it, whether the insurance company or the payer will pay for both the product and the test is an area of regulatory uncertainty,” observes Reed Smith’s Carol Loepere. “There are also issues about post-market surveillance, because if you start with a relatively small patient population, it’s more likely that other symptoms or negative outcomes will come to light later on.”

To view the full report, visit: key-findings

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