Global pharma is finding great value by investing in biotech companies as they are better at advancing compounds than pharma. Due to technological developments and increase in R&D costs, pharma companies are increasingly looking at external resources complimentary to their own expertise. Companies are pooling resources to build scale in R&D and to fill gaps in their product pipelines. The total value of partnering deals was $15 bn in 2005. A handful of pharma companies seek to reinvest nearly $100 bn in the biotech industry instead of channeling the money for in-house R&D.
Gone are the days, when big pharma companies used to enjoy high profit margins and market cap backed by their blockbuster models. They are now facing tough times with falling New Molecular Entity (NME) approvals, intensified competition and increasing drug safety norms. The number of compounds approved by Food and Drug Administration (FDA) has fallen since 1996. Similarly, the number of new drugs entering clinical trails has been declining since 1998. As patents are expiring in the global pharmaceutical market, the blockbuster drugs are facing competition from low-cost generic players. According to Data Monitor, a market research organization, 80% of the world's blockbuster drugs, worth $104 bn a year in sales will come off patent and face generic competition by 2010. Currently, it costs over $1 bn to bring a drug from lab to markets compared to $200 mn in the last decade. Further, the regulatory concerns, steep rise in size and duration of clinical trials delayed the entry of drugs in the market and caused bumping up their R&D spending. It is expected that R&D costs incurred by pharma companies is likely to touch $60 bn this year in which 60% would be borne by the big pharma players. KV Subramanium, Sr. Executive Vice President, Reliance life sciences Pvt ltd., says, "Global pharmaceuticals industry is today going through a difficult phase due to three major issues drug safety, fewer new drug launches and increasing penetration of generics in developed markets. All three aspects affect long-term growth, profitability and returns of the pharmaceutical companies."
In order to improve productivity of R&D spending and products in pipelines, big pharma players are looking at external sources of innovation such as biotech companies. Big pharma companies have generally focused on basic chemistry approaches to product development, while biotech companies have more often focused on emerging molecular biology/genetic engineering approaches. The emergence of biotechnology industry in this decade has come to the rescue of the troubled pharma industry. According to a report by IMS Health, pharmaceutical pipelines are at 25 years low and biotech industry is making increasing contribution to the pharma industry. FM Scherer, Professor, John F Kennedy School of Government, Harvard University says, "Traditional pharma companies are running into diminishing returns in finding effective small molecule therapies, whereas, the DNA revolution has made the use of large biological molecules a field of greatly increased promise."
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