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Pharma dealmakers seeking long-term growth balance pipeline diversity and focus

Pharmaceutical and biotechnology dealmakers are walking a tightrope between focusing on a few therapeutic areas and fostering a diverse portfolio of products.

Executives from the industry's largest players spoke often about this balancing act at 2019's J.P. Morgan Healthcare Conference in San Francisco, which ended Jan. 10. Their comments reflect a trend towards portfolio and pipeline diversification within key therapeutic areas, providing a safety net if one or more of those drugs fail to meet expectations without stretching resources too thin.

The architects of the year's biggest deal so far — the $74 billion acquisition of Celgene Corp. by Bristol-Myers Squibb Co. — touted the diverse portfolio that will cushion the blow when cancer drug Revlimid, Celgene's major cash generator, faces generic competition by 2022.

New York-based Bristol-Myers also has the next decade's patent expirations of its own cancer blockbuster, Opdivo, and blood thinner Eliquis to make up for, as well.

"We think about the cash flow from Revlimid as really important to help us delever and maintain a strong financial flexibility going forward," Bristol-Myers CEO Giovanni Caforio said. "But when you think about the totality of the company, this is a growing company with significant diversification opportunities in areas we know really well."

Bristol-Myers after Revlimid

Key to the combined company's long-term growth strategy are experimental medicines in the areas of cell therapy and immuno-oncology.

"Celgene ... has talked about these five products being able to generate in an unadjusted platform between $12 billion and $14 billion in peak sales," Celgene CEO Mark Alles said. "Of course, this overlays the window we're talking about with respect to Revlimid intellectual property, so it's not only the confidence in the estate and the outlook for Revlimid cash flows, it's also how we layer on in the combined company a lot of launch revenue, a lot of new diversification."

But while the lineup of products gives the new Bristol-Myers options outside of its mainstays, the diversity lies mostly in the single therapeutic area of cancer, a strategy that external advisers say is ideal for a company looking to grow past its patent losses.

According to Ernst & Young’s 2019 Firepower Report, published on Jan. 6, companies with more focus in a particular therapeutic area have more potential for future growth. Oncology is the therapeutic area with the most growth potential, with metabolic and musculoskeletal, cardiovascular, immunology and inflammation, and infectious diseases rounding out the top five therapeutic areas that currently have a growth advantage.

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EY's global life sciences transactions leader Peter Behner said that for companies to catapult out of a low-growth, less focused category, "mega mergers" like Bristol-Myers' and Celgene's could be considered to focus on a therapeutic area like oncology. The acquisition moved the New York-based company from a low-growth and low-focus category to higher growth potential and greater focus, as Celgene boasted a robust oncology portfolio built in part by its own dealmaking.

During a Jan. 14 call to discuss conference takeaways, J.P. Morgan's pharma and biotech analysts noted that larger companies, such as Merck & Co. Inc. and Pfizer Inc., emphasized their capability to make deals, big or small. However, a deal size similar to that of Eli Lilly and Co.'s acquisition of Loxo Oncology Inc. may be more likely, they said.

Such deals could make big pharma companies "more interesting," the analysts said, adding that they have not been interesting for a long time. For example, bolt-on acquisitions, which comprise less than 25% of the buyer's valuation, could help companies create more verticals in areas other than oncology and immunology.

Other companies may consider divestments. In 2018, major pharmaceutical companies such as GlaxoSmithKline and Pfizer took steps to consolidate their consumer health units for a planned spinout in the next three years, while Bayer announced a sale of its animal health unit and Eli Lilly spun out its own animal health business, Elanco.

2019 will likely see such activity continue, EY's report noted.

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Value of pipeline diversification

Even while large pharmaceutical companies strive to stay focused on certain therapeutic areas, they look to their pipelines to create diversity within those areas.

Novartis AG CEO Vas Narasimhan highlighted the importance of diversifying the pipeline of potential medicines within set core areas. For Novartis, those core areas include oncology, cardio-metabolic, ischemic heart disease, neuroscience, ophthalmology and respiratory.

"Along with the breadth of the pipeline, we're very focused on building depth in every one of these therapeutic areas," Narasimhan said Jan. 7 during the J.P. Morgan conference. "I believe we need to be diversified across these core therapeutic areas; I think overly focusing on a single therapeutic area, in the long run, creates substantial risk for a company of our size."

Similarly, Pfizer's new CEO Albert Bourla noted the value of spreading risk over a range of candidates rather than on a small number of front-runners.

"What makes me comfortable with this pipeline is that it is very diverse and very large," Bourla said. "I would feel more nervous if our growth trajectory was based on the success of one or two franchises, but right now there are five, six therapeutic areas and each one of them has significant blockbuster assets."

For Merck, licensing deals are one way to gain diversity in its lineup beyond leading cancer drug Keytruda and also to expand the uses for Keytruda. CEO Ken Frazier mentioned agreements with Eisai Co. Ltd. and AstraZeneca PLC as examples of finding diversification from outside sources to strengthen the therapeutic area of cancer.

"We continue to focus on opportunities to develop new molecules through business development that are actually going to be differentiated and make a big difference," Merck CEO Ken Frazier said. "Diversification is an important thing as long as you're bringing forward the kinds of products with the kind of differentiation meeting unmet medical need that the healthcare environment will pay for."

Diversity at the biotech level

Meanwhile, at smaller biotechnology companies, platform design sometimes plays a role in the range of therapeutic areas for drug development.

For instance, women's health company Daré Bioscience Inc. said it focuses on diversification based on the marketplace rather than a proprietary chemical entity or platform. Daré CEO Sabrina Johnson said the company seeks to find treatments to address gaps in the women's health landscape rather than rely on a specific technology to apply across multiple indications.

Diversifying product portfolios based on platforms is common among biotechnology companies like CRISPR gene editing company Intellia Therapeutics Inc. and Acceleron Pharma Inc., which leverages its method of transforming growth factor beta to develop therapies for different disorders.

And although smaller companies would like to end up with a diverse pipeline, it is not always the right direction for biotechs like Bavarian Nordic A/S that focus heavily on the specific areas of cancer and infectious diseases.

"We take each product and program on a case by case basis; everything we do, we're trying to meet an unmet medical need," Bavarian Nordic CEO Paul Chaplin told S&P Global Market Intelligence. "But to be honest, when we review new programs, it's not really about, well, we need one more infectious disease programs to balance the scales. It's more about each program on its merit."