Recent Deals Signal a Continued Shift in the Innovative Pharmaceutical Business Model

Recently, GlaxoSmithKline Inc (GSK) entered into an agreement with South Africa's largest generic drug manufacturer, Aspen Pharmacare Holdings Limited (Aspen). The agreement gives GSK a first right of refusal to sell GSK branded versions of any one of Aspen's 1,200 unpatented drug products in a number of emerging markets outside sub-Saharan Africa and India. This is the latest of many transactions in the past few months between innovative and generic drug companies, as part of a continuing shift away from the traditional "blockbuster drug" business model of large pharmaceutical companies. Traditionally, large multinational innovative pharmaceutical companies focused their R&D and marketing efforts on the development and promotion of so-called "blockbuster" drugs, that is, those drugs with annual sales in excess of US $1 billion. These were heavily promoted, and garnered the majority of their sales in the established markets of North America, Europe and Japan. Faced with the impending loss of patent protection for a number of blockbuster drugs, as well as pressure from payers and governments searching for more cost-effective medicines, the large innovative pharmaceutical companies have have begun to reexamine the blockbuster model. The agreement between GSK and Aspen signals two emerging tends in the new business model of innovative drug companies. First, the deal signals a move by GSK away from the reliance on blockbuster drugs. Under the agreement, GSK will gain access to a number of smaller, unpatented niche drugs. Instead of relying on a few blockbuster drugs that tend to act as cash cows, GSK is shifting towards a plan to sell a broader range of low-cost, branded generics in a number of markets. This strategy of reducing reliance on blockbusters through the sale of generics came to the forefront in 2005, when Novartis AG (Novartis) became the first innovative drug company to move in a major way into the generic market with its purchase of Hexal AG (Hexal) of Germany for US $8 billion. It merged Hexal with its Sandoz division, to form what, at the time, was the world's second largest generics group. The GSK deal also signals a second trend; the increased interest of multi-national pharmaceutical companies in emerging markets, particularly emerging markets in Asia. Recently, when discussing the new strategic priorities of GSK, CEO Andrew Witty commented that the company will focus on "actively seeking to unlock the geographic potential of our different businesses, particularly in emerging economies." The deal with Aspen was seemingly struck with this goal in mind. The GSK deal came hot on the heels of a deal last month between Japanese innovative pharmaceutical company Daiichi Sankyo Company, Limited (Daiichi) and Ranbaxy Laboratories Limited (Ranbaxy), India's largest generic drug manufacturer. Daiichi acquired Ranbaxy purportedly for US $4.6 billion. Analysts have commented that the deal will give Daiichi a head start in capitalizing on Japan's small but fast-growing generic drug market, which is witnessing expansion spurred by government initiatives to reduce the costs of medicines. The deal will also give Daiichi a foothold in the emerging Indian market and other emerging markets in Asia. As with Novartis' acquisition of Hexal, the acquisition will have the additional benefit of reducing Daiichi's reliance on branded "blockbuster" drugs. Also this month, French innovative pharmaceutical company Sanofi-Aventis bid to purchase the outstanding shares in the Czech generic drug manufacturer Zentiva, for US $2.6 billion. Zentia rejected the offer, but the offer remains open until September 19, 2008. The purchase would give Sanofi-Aventis a solid footing in the emerging eastern and central European generic drug markets, and at the same time reduce the company's reliance on blockbuster drugs. Yet another example occurred this month with the acquisition by the German innovative drug company Fresenius SE of US generic drug maker APP Pharmaceuticals, for $3.7 billion in cash. Over the past few years, it has become apparent that large innovative pharmaceutical companies would have to adjust their business models to fend off impending patent expirations and pricing pressures. The recent flurry of deals between innovative and generic drug manufacturers indicates that a new hybrid innovative pharmaceutical business model, which combines both innovative and generic drugs, is becoming increasingly popular. These recent deals also signal a renewed interest of innovative pharmaceutical companies in emerging markets, particularly those in Asia. For commentary on the GSK-Aspen agreement, see: http://www.gsk.com/media/pressreleases/2008/2008_pressrelease_10086.htm; and http://jse.hosted.inet.co.za/news/story/fcb77056-9cdd-412b-868f-990b1ffa5a26 For commentary on Sanofi-Aventis' bid for Zentiva, visit: http://uk.biz.yahoo.com/11072008/323/sanofi-aventis-bids-1-65-billion-euros-control-zentiva.html and http://finance.sympatico.msn.ca/investing/news/businessnews/article.aspx?cp-documentid=8712827 For commentary on Daiichi's acquisition of Ranbaxy, see: http://www.ft.com/cms/s/0/25a46440-3780-11dd-aabb-0000779fd2ac,s01=1.html For commentary on Fresenius' acquisition of APP, visit: http://www.canadianbusiness.com/markets/mas_ipos/article.jsp?content=D91P8KJO6 For commentary on Novartis' purchase of Hexal, see: http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BC7E391B1-A248-44A9-85EE-D36AF64DA9E5%7D&siteid=google&dist=google Summary by: Michael Migus