In the last 10 years the world’s 14 largest pharmaceutical companies spent $480 billion dollars to get just 85 new products approved. The model is unsustainable and , say analysts, nowhere is that more apparent than at Paris-based global drug company Sanofi-Aventis, which stubbornly stuck to a classical approach to research and development while other European drug companies, such as Swiss drug maker Roche, relied on outside help from biotech companies to augment their pipelines of new drugs. But the French drugmaker is set to change its strategy.
Just ten weeks into the job Christopher Viehbacher, a former GlaxoSmithKline executive, acknowledged at a February 11 Paris press conference that the French drug maker’s research and development projects won’t be enough to compensate for the sales Sanofi Aventis stands to lose as the patents expire on its top-selling drugs. More than 20% of 2008 consolidated sales, excluding the company’s anti-clotting treatment Lovenox, are exposed to patent expiration between 2009 and 2013. And, due to declining R&D productivity, there are not enough new drugs to replace them.
It is a problem that drug companies industry- wide are facing. After 260 chemistry and biology based molecules were approved between 1993 and 2000 , compared to just 165 between 2001 and 2008, a decline of about 37%, according to Mehta Partners, an independent India-based equity research company which recently published a three volume report entitled Outlook 2009: Global Pharmaceutical and Biotechnology.
Sanofi-Aventis has paid a particularly heavy price for keeping most of its R&D in-house, say analysts. The percentage of sales from products approved after 2003 is just 7.7% at the French drug maker compared to 19.6% at Roche, which boosted its performance by taking stakes in U.S biotech company Genentech, among others, according to Mehta Partners.
And, while Roche’s stock price remained constant between 2000 and 2008 Sanofi-Aventis’ share price has dropped 5% per year over the same period. The French drug maker “has given one of the worst stock market performances on an annual basis,” says Tarun Shah, one of Mehta Partners’ founders. It also gets terrible marks from analysts for its failure to spot and successful snap up inexpensive biotechs.
Going forward, Viehbacher says the company will look to external sources to help it come up with new drug candidates. “Innovation is not dead in our industry, he says. “There are 6,000 biotech companies out there.” The company will strike licensing deals and look to make targeted acquisitions, he says.
“Better late than never,” says France Biotech Chairman Philippe Pouletty. “Big pharma depends heavily on young innovative biotech companies and Sanofi Aventis is one of the last to take this route.”
Biotech companies not only move more quickly they develop new drugs more cheaply. “The cost of inventing a new molecule is $4 billion in these big inefficient shops,” says Mehta Partners’ Shah. “R&D at biotech companies costs less than one-tenth, is much better and more complex.”
Big drug companies “have to wonder why despite huge increases in research and development expenditures no more than 22 new drugs get approved by the U.S. Food and Drug Administration year after year,” says Pouletty. Going forward, the emphasis needs to be on more complex therapeutics that restore functions of protein and cellular networks and “bio body parts” which replace cell tissue organs, says Pouletty. “I have high confidence that Sanofi-Aventis can turn the boat around but they are going to need to do it by buying more biotech companies and in-licensing.,” he says. “They have no choice.”
Viehbacher said February 11 that Sanofi-Aventis will seek small to midsized acquisitions to boost its drug development and has hired a new Chief Strategic Officer to oversee the effort. The company’s chief executive said he isn’t seeking a large acquisition like Pfizer’s $64 billion deal to buy Wyeth.
The French company’s own experience with mergers has not been particularly fruitful. Sanofi-Synthelabo was formed in 1999 when Sanofi, a subsidiary of Total was merged with Synthelabo, a unit of L’Oreal. Then, in 2004, Sanofi-Synthelabo acquired Franco-German pharmacheutical gropu Aventis in a deal valued at over €54 billion. The combined entity was only able to introduce six new molecules in the last ten years.
For 2008 Sanofi-Aventis posted earnings of $9.3 billion – ahead of market expectations – with a total of $35.6 billion in sales. However it reported a 76% fall in net income in the fourth quarter, due mostly to $1.84 billion of charges the company took after discontinuing development of two cancer drugs and settling a patent dispute with Barr Pharmaceuticals.
In November, the company also had to abandon research on diet drug Acomplia, which looked poised to become a blockbuster treatment but was derailed by pychiatric side effects. What’s more, the company has not yet done the kind of deep cost restructuring that other big drug companies have already undergone. “Its revenue per employee doesn’t look very good, it ranks in the bottom five,” says Vishal Manchanda, a global drug company analyst for Mehta Partners.
With so many challenges ahead Manchanda cautions that Sonafi-Aventis should not try aim to buy big biotech companies with large revenues. “Acquiring companies just to replace patent exposure is a short term technique that will not give real results in the long term,” he says. Instead, the company would be better off buying equity stakes in young innovative companies, allowing those companies to maintain their current management and remain nimble and creative, he says.