In the same week that Pfizer announces a $160bn takeover of Allergan, Alliance Pharma announces a $192m takeover (just 1.2% of the size) of the non-aesthetic assets of Sinclair IS Pharma. Both companies will expect to reduce costs, benefit from the commercialization of the acquired products and boost earnings per share after a year or so. Both companies have a history of doing such deals (Pfizer buying big companies; Alliance buying products) but for Pfizer this is an acknowledgment of the failure to create sufficient de novo value from its R&D engine (see John Gapper’s FT article Big Pharma has Become Addicted to an Illusion; for Alliance this is business as usual.
I suppose it is only natural that society should have high hopes of a large pharmaceutical company with a R&D budget of approx. $7bn and feel able to criticize if it doesn’t deliver new products. After all, society effectively contracts to give a company a sales monopoly (a patent) on innovative products in exchange for a R&D commitment to unmet clinical need. Society also allows a company some freedom to create demand for new products through their sales and marketing organisations. However, society doesn’t really care who creates those new products as long as they are developed and delivered into the market place, safely and efficiently. Shareholders do care about such things and will allocate value to those companies, large or small, that can add value through the value chain.
So what is the role of Alliance Pharma, a small company that does no R&D at all? Its stated strategy is to buy small, mostly off-patent branded products, and distribute them, marketing only those that have potential for future growth. It does not obviously practice price gouging, like some companies in the news recently; indeed prices are more likely to go down in the markets in which Alliance operates. However, it has a role to play towards the end of the value chain and could be thought of as a consolidator of useful products which their original owners have no use for, either because they are too small or don’t fit the strategy. Gross margins are not as high as the younger portfolios of “big pharma” but then Alliance doesn’t bear the cost of risky R&D. Nevertheless, operating margins are over 25%, the company generates cash and manages to grow, albeit sometimes erratically as an issue impacts a larger brand.
Comparing Pfizer and Alliance Pharma is a little silly but the comparison is instructive. Alliance Pharma does what it says on the tin whereas Pfizer has embraced the notion of fully-integrated pharmaceutical company to do whatever it needs to survive. (see Pharma M&A: Survival or Strategic Growth). Despite this obvious difference in strategies society needs Pfizer and its financial resources to invest in R&D for the benefit of society’s future health needs, even if productivity is poor. Society doesn’t really need Alliance Pharma at all, although if I had to invest in one of the two companies it would probably be Alliance. How curious.
The author was a Pharmaceutical Analyst at Lehman Brothers for 23 years as well as being involved with the PharmaFutures projects www.pharmafutures.org but is now writing independently. Stewart Adkins is a Director of Pharmaforensic Limited www.pharmaforensic.co.uk
Stewart Adkins was a Pharmaceutical Analyst at Lehman Brothers for 23 years and was involved with the Pharmafutures projects.