Will Big Pharma embark on an accelerated buying spree of small pharma/biotech startups in 2024 and 2025?
2023 was a tough year for workers in the pharma/biotech industry. Reacting to future uncertainties (such as how the Inflation Reduction Act will play out) and certainties (patent cliffs, reduced income from Covid-related products), about half of Big Pharma companies have been in the headlines over the last 12 months for significantly cutting R&D programs, restructuring their development pipelines, and laying off workers.
Shareholder Benefit or Short-Term Reaction?
Some would say these companies are proactively protecting their shareholders to ensure stable returns, but I personally have never liked this approach. Anyone can react to immediate market conditions. Inspired leaders predict the future and plan for it, and follow their vision to achieve results, undeterred by short-term circumstances unless they are severe.
I’ve worked for companies that manage too closely to the quarterly and annual report, including GE. When the company I worked for was bought in 2002 and formed a new business unit at GE, the finance people they inserted into the company made us spend many, many wasted hours doing activities to boost short-term quarterly numbers, time that could have been better spent securing long-term gains. This was common practice in other GE divisions, too, and after years of lackluster performance, it all collapsed in 2017 as a result.
I prefer to see companies managed with long-term value creation as the priority and with little focus on quarterly reports. Genentech was famous for this in their first 20+ years, and they seem to have done all right for their employees and shareholders.
I’ll be a little cautious here and not bite the hand that feeds me too hard—IPM does a lot of PM consulting work with Big Pharma. I understand the need to provide stable returns for shareholders, and that an occasional reinvention is a good thing. But it still seems to me like the current cutting and layoffs are a risk-averse short-term play.
R&D Cuts Now, M&A Deals Later
Regardless, what does this portend for the next few years? Big Pharma has been through this cycle before. Due to similar external factors, they made cuts to their R&D investments during the 2008-2009 recession. The result? Strong years for mergers and acquisitions in 2010 and 2011, particularly related to clinical-stage development assets, as Big Pharma filled gaps in their pipelines from the R&D cuts they had just made a couple of years before.
Venture capital funding into the pharma/biotech startup market has grown dramatically over the past 15 years to create a much-expanded ecosystem for the high-risk endeavor of drug development. And M&A dealmaking with these companies is now a common component of R&D strategy for Big Pharma.
There are of course many variables that result in M&A activity peaks and valleys. But expect one key variable—the need for many Big Pharma companies to fill gaps in their pipeline due to R&D cuts they made in 2023—to lead to strong M&A activity in the next couple of years, particularly for smaller companies with clinical-stage development assets.
Whether that is a smart strategy for a Big Pharma company to reduce risk, or the result of overly transactional focused strategy and leadership, I will let you decide.
January 8, 2024
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