Q&A: Research and recession	January 2009

Terri Cooper, Ph.D, a principal in Deloitte Consulting LLP's Life Sciences practice, answered questions from R&D Directions on how the economic recession is impacting innovation in pharmaceutical research and development. Dr. Cooper has advised drug companies on a broad range of strategic services for 14 years, including the creation of global business models.    
 
Q: How is the present credit crunch affecting R&D strategies in the pharmaceutical industry?
A: The current credit crisis may offer an opportunity for cash-rich large cap pharmaceutical companies to acquire smaller biotech companies at low valuations. Small biotechs will need to either merge or form more alliances with larger pharmaceutical companies as they struggle to obtain private equity funding. Large pharma is weathering the credit crisis due to strong, liquid balance sheets and relatively lower dependency on long-term debt markets. Whereas, small biotechnology companies in need of cash will be negatively impacted by the current scarcity of funding and may reduce research and development expenditures and/or seek to be acquired. Nearly 90% of publicly traded biotech companies remain profitable and about half of them have less that a year of cash according to Jeffries & Company. The concern rests with the fact that much of the ongoing innovation in research is being driven within these smaller biotech or start up companies and if they fail this can potentially have a major impact on new opportunities for innovation.  However, this does provide excellent opportunities for large pharma to feed their ailing pipelines at a much reduced cost but either acquiring these assets or starting to behave more like venture capital firms.  

Q: Do you believe the current trend in big pharma of consolidating R&D activities and narrowing therapeutic focus will pay off in the long run as companies concentrate on the projects with the greatest odds for market success?
A: The jury is still out regarding this approach. It is really an issue of managing risks. By narrowing your focus you can invest more funds in a more concentrated manner but the risk is that you may still not be first to market with new innovative compounds and thereby not be able to attain an adequate return on your R&D investment. Expanding the portfolio may manage the risks more effectively but leads to reduced funds for intense focus. I don't believe that there is any data available to suggest that any model is the best model! It is really dependent on the internal/external knowledge and capabilities that a company has access to, and the level of risk that they are prepared to live with.

Q: Is diversifying pipelines and portfolios a viable solution in combating such challenges as increased generic competition and fewer compounds being approved?  
A: My answer here is in alignment with my answer to question 2. I don't believe that there is any evidence to suggest that this approach or the more concentrated approach is the best. It really depends on the access that a company has to innovative research, their ability to leverage their own capabilities in the most productive fashion and the ability to manage their portfolio's in a more aggressive fashion, resulting in trying in improve their overall probability of success whilst minimizing the risk to the organization.

Q: With the biotech sector being hit particularly hard by the financial crisis, is big pharma taking on some of these companies necessarily good for business?
A: The companies/acquisitions that large pharma look to make as a result of the current credit crisis obviously need to be aligned with their overall R&D strategy. It is not in their interests to acquire for the sake  of acquisition without evaluating the overall risk return on their investments. However, in some areas they may strategically decide to increase their level of risk to continue to drive research efforts in areas of new research and technology platforms.