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'Europe' a Creek, as Emerging Markets Letting Pharma Down

By Randy Osborne
Staff Writer

SAN FRANCISCO – At the lectern and away, talks at the 31st Annual J.P. Morgan Healthcare Conference are sure to concern the steadily worsening revenue shortfall, and how major pharma firms might satisfy profit-hungry shareholders as more casualties topple down the patent cliff.

The bellwether meeting, which opens today, long has been a venue where the beginnings of such solutions – in the form of deals with biotech companies offering innovative solutions – might be found.

It still is, but pharma will need to do more, said Jeffrey Greene, global transactions advisory services leader in life sciences with Ernst & Young (E&Y).

"If you have blockbuster drugs with high growth, high revenues, high margins, maybe you're not prioritizing efficient working capital management as much, whether it's inventory or receivables or payables," he said. "But when you face the patent cliff, you have to be a little more attentive to basic housekeeping issues of how you manage capital."

Obvious enough, Greene allowed, but the strategic details are less so. Those details are the subject of "Closing the gap? Big pharma's growth challenge and implications for deals," a 12-page report that E&Y is releasing today.

Glen Giovannetti, global life sciences leader for E&Y, said the hoped-for pharma rescue routes have not materialized. "We've heard a lot in recent years that big pharma would look for growth outside of their traditional markets – emerging markets were going to be a big part of the savior," he said. "The developed markets have become that much tougher because of the economic crisis, especially the stagnation in Europe, [and] pricing pressure in the U.S.," added to the loss of patents.

Giovannetti said the situation in Europe proved a surprise, while emerging markets' growth rate of "very strong double digits, maybe up toward 20 percent, have slowed in the past year. It's not filling as much of that gap as might have been expected."

And now that the need to patch revenue holes "may be more acute than ever, you've got a diminished buying capacity for those [pharma] companies, as compared with four or five years ago," he told BioWorld Today. "This will have an impact on deals, but it will also have an impact on how those companies behave relative to increasing their firepower, and you can do that through more effective capital management, divesting things, and freeing up cash to do acquisitions in faster-growing areas. That's the big thesis of the report."

Shopping for deals is what the J.P. Morgan meeting is all about for Sofinnova Ventures, where general partner Jim Healy said he uses the "rule of threes" to decide about prospects: Phase III data, returns within three years or less and a goal of at least tripling the investment. "We're happy to be funding the Phase III data, usually in a three-year or so time frame," he said.

Healy has three types of meetings arranged from dawn to dark, and after, in the course of the meeting, which runs through Thursday. One is with large pharma, in order to learn about drug targets of interest and therapeutic areas they would like to explore; this is Sofinnova in sell mode. Another involves locating spinout opportunities, where mature products might be extracted from big pharma or major biotech firms; this is buy mode. The third entails chatting up mutual funds, hedge funds and investment bankers to gain a sense of their likely level of investment ahead; this helps Sofinnova decide about initial public offerings.

The famously (over-)crowded meeting, held in the historic Westin St. Francis hotel, is "a great way to start the year," Healy said, calling it a solid means of "[taking] the temperature of public investors' appetite for certain companies in our portfolio. We use it as a launch platform."