Biologic Devt Challenge Remains After Merck, Schering Deal
March 09 2009 - 2:15PM
Dow Jones News
The development of lucrative biologic medicines is being
highlighted as a selling point of Merck & Co.'s (MRK) $41.1
billion deal for Schering-Plough Corp. (SGP), but the biotech
challenge is considerable.
Selling such drugs is attractive because they don't face threats
of generic competition, as of yet, and they command high prices.
But Big Pharma is yet to prove that it can develop these drugs on
its own, and Merck isn't planning to step outside of its
traditional methods of development in the wake of Monday's massive
deal.
"I think the entire large pharma culture has pretty much been an
anathema to the biotech model," said WBB Securities analyst Stephen
Brozak, who believes that the size of the new company may raise
hurdles to the innovative development found at smaller
biotechs.
Pharmaceutical companies have long talked about wanting to
increase their presence in selling biotech drugs, which are derived
from biologic material, because they are difficult to copy and
there is no regulatory pathway for generic competition, although
President Barack Obama is proposing to change that.
Furthermore, the prices of complex biologic drugs are well above
those charged for the small-molecule therapies traditionally sold
by pharmaceutical companies.
On Monday, Merck and Schering-Plough touted how their
combination will provide strength in developing biologics. Pfizer
Inc. (PFE) made similar claims in its $68 billion acquisition of
Wyeth (WYE) in late January.
Indeed, before the deal, Merck had only two biologics in its
development pipeline, but it is adding five from buying
Schering-Plough.
A spokesman for Schering-Plough noted that the company has
experience in developing biologics, which was boosted by the 2007
acquisition of Organon BioSciences for about $17 billion.
Merck pointed to its push to develop generic biologics,
announced in December, and its 2006 purchase of GlycoFi for $400
million.
The two companies already have some experience in the
biotechnology realm with Merck being a prominent player in selling
vaccines, one of the earliest forms of biotechnology, and
Schering-Plough sells anti-inflammatory drug Remicade with Johnson
& Johnson (JNJ).
But the development of new biotechnology drugs is seen as being
a challenge for the large pharmaceutical companies.
"Big pharma markets products very well, but as far of innovation
is concerned, that has been the province of biotechnology and
specialty pharma," said Brozak.
He said the recent deals are likely to insure that biotech
companies will continue to stay ahead of their more traditional
competitors in drug development.
"It all depends on the structure of the company - pharma
traditionally is big with a long decision-making process," said
Citigroup analyst Yaron Werber. "Biotechs are smaller, more
entrepreneurial, and more focused."
Structure has proved to be key in developing biotech drugs. The
most successful venture has been Roche Holding AG's (RHHBY) 56%
ownership of Genentech Inc. (DNA) that has yielded enormous returns
in product sales for the Swiss drug maker, which is now pursuing
full ownership of the smaller company.
In the wake of Genentech's success, some larger companies have
looked to implement a more "hands off" model of biotech
development, including Pfizer and GlaxoSmithkline Plc. (GSK).
But Merck plans to use a more traditional approach in
integrating the newly acquired biotech expertise, said Peter Kim,
president of Merck Research Laboratories.
Given the challenges that are involved in developing complex
biologics, and their inexperience, many expected large companies
like Merck and Pfizer to spend their cash piles on buying
biotechnology companies as an easy way to enter the field.
That disappointment may be contributing to some of the pressure
on Merck - recently down $2.42, or 11%, to $20.32 - and the 27%
drop seen in Pfizer shares since it announced the Wyeth deal.
But those deals could have another effect on the biotechnology
industry, because the acquisition of a large biotechnology company
by Merck or Pfizer is now unlikely as they digest their sizable
mergers.
Furthermore, the newly created companies will probably make
fewer deals with cash-strapped small biotechs that are trying to
survive in the currently difficult funding environment.
Those tiny companies may have a harder time finding a partner,
or face a less-competitive bidding process, now that Wyeth and
Schering-Plough have been eliminated as potential partners.
-Thomas Gryta; Dow Jones Newswires; 201-938-2053;
thomas.gryta@dowjones.com