Why innovate when you can buy someone else's innovation?

The two most fascinating facts that I have read recently are:

1,453 drugs have obtained FDA approval as of 31 December 2013

Merck’s morphine was approved in 1827 and 1899 saw aspirin get the nod: both, not surprisingly, before the creation of the FDA as we know it today (Source).

Modern pharma’s research is a mix of big pharma mega labs and biotech’s agile efforts but is it notable that small pharma has a long and honourable history with the overwhelming majority of NMEs being brought to market and owned by small companies. Kinch et al state that more than 150 drugs have been brought to market as a company's sole NME, and more than 50 of these drugs remain on the market.

Buying in, or licensing in, interesting molecules from smaller companies has fuelled much of big pharma’s innovation, BUT there has been a marked shift in “upstream” licensing, i.e. more emphasis on discovery/ lead molecules.

This trend seems set to 53 percent of the 112 reported transactions in the first 3 months of this year being for discovery/ lead molecules. (Source: “Finding Cures in Early Research”, Peter Winter, Thomson Reuters 2015.) That the recent raft of mergers and acquisitions is certainly eye-catching as shown in the chart below. Whilst enlarging portfolios and strengthening geographical or functional capabilities are undoubtedly drivers, capturing attractive pipelines are often the main attraction. This is evidenced by Pfizer. Firstly with its (failed) pursuit of AZ and its oncology and allergy/ asthma pipeline last year, but also by its acquisition (amongst others) of Wyeth in the last decade. Strip out Wyeth legacy molecules from Pfizer’s sales and pipeline, and it would be a different story.

Admittedly, 2014 was exceptional with Allergan, nee Actavis, embarking on one of pharma’s biggest ever spending sprees.

2014 may still be overtaken by 2015 given its strong start. Teva’s decision to pay $40.5bn for Allergan’s generics business and Shire’s $30.5bn bid for Baxalta would be major components in this.

The key question, of course, is whether all this activity is reflected in new agents and fresh sales.

2013 and 2014 saw record numbers of FDA approvals (50 in both years) this millennium, and up to early July this year has seen 25. More importantly, the 50 new small-molecule and biological product approvals expected in 2015 are expected to generate $18.6bn in sales in 2020. (See chart below.)

The 25 approved so far represent $11bn in sales in forecast 2020 sales. Several of these have been highly anticipated, high-value assets that should see high uptake as they address significant unmet needs. The prime example is Vertex Pharmaceuticals’ cystic fibrosis therapy Orkambi, forecast by analysts to sell $3.2bn in 2020.

2015, however, is unlikely to match pharma’s stellar year of 2013 as the launches here are projected to yield $24bn sales in 2018, with the standout brands being Gilead Sciences’ hepatitis C drug Sovaldi and Biogen’s multiple sclerosis agent Tecfidera.

The remainder of the year will feature Amgen’s cholesterol agent Repatha, Glaxo’s asthma drug Nucala and Actelion’s pulmonary hypertension project Uptravi. While all of them have met expectations in the clinic, they also present interesting case studies for the durability of the biotech bubble. 

Coverage decisions by payers, including tiering levels, will shape investors’ views about whether the pharma’s pricing expectations are realistic. This, in turn will affect the valuations applied to biotechs which in turn, ought to affect sentiment about biotech valuations.

But M&As and licensing are likely to continue at current levels provided “cheap” money is still available and pharma is willing is invest it. For medium-sized speciality companies, defensive deal-making is required to stave off take-overs whereas larger companies seem determined to overspend on assets they suddenly regard as necessary.

Hopefully pharma is heading for a gentle deceleration rather than a head-on crash…