In a prior Xconomy post, I explored the unwritten and often hidden challenges of successfully navigating and completing a ‘build to buy’ acquisition. The fundamental issue that underlies those challenges is that the acquirers in these deals are not in the business of developing a single asset in a disciplined, focused manner.
These buyers are in a different business entirely. For all of their shortcomings (of which much has been written and can fill many, many volumes), pharmaceutical companies are in the business of commercializing science. That means there are a banquet table full of challenges involved in mating a ‘science focused’ R&D project wrapped in a small, lean company with a large and often cumbersome enterprise—a marriage ultimately judged as a success only if that project actually eventually generates revenue.
For this success to happen, we need to focus on the idea of therapeutics as ‘solutions’ rather than simply ‘drugs’ and my prior post touched on this nuanced difference between the two. In summary, the acquirer’s strategy is to find a ‘solution’ that can be marketed, paid for, and used in usually very complex clinical pathways of care. Drugs per se are not solutions, they are just a form of technology, and they’re not necessarily useful to modern pharma companies (or their customers). I termed this issue the “Applicability Problem,” and in this post I’ll explore it in much more detail.
The Problem of Applicability
The business model for any commercial biopharma company, however traditional or innovative it may claim to be, must always be based on a deceptively simple premise: for any new drug to be successful, it must be relevant and provide incremental value when used commercially in contemporary clinical pathways of care. People can (and do) quibble over how to define value. The CEO of The Medicines Co. (where I work), Clive Meanwell, has a simple way of defining it. He says that if you charge customers (hospitals, payers, and providers) some amount of money for a drug, they better get back at least that amount plus a dollar more or you will be removing value, not adding it.
I like this definition because it clearly explains the problem of applicability. Want to charge $100 for your new drug? If you are replacing a generic competitor at $1 and you are selling on the awesomeness of your pharmacology or your dosing or some other direct feature of your drug, then you are effectively finished before you start because that’s a losing proposition for customers. You need to be able to show customers that by using your drug, they will achieve some downstream, indirect result that ends up saving money. This could be through a shorter hospital stay, less time in an operating room, or one of literally hundreds of relevant, meaningful outcomes. Sometimes these savings are easy to show (saving a life, for instance), but most of the time demonstrating them is a Herculean effort because the positive results occur in very different venues than where a drug is administered (think how giving a blood thinner in an operating room results in less bleeding during the first 48 hours after surgery when the patient is in an ICU).
What all of this means is that a drug needs to be packaged in a number of wrappers which eventually enable it to address a worthy, unmet medical need. This packaging will need to include data and information that address aspects of behavioral and process change that go hand in hand with any really useful new technology (like a drug or a device). As I noted before, the challenge with the slow-simmer M&A deal lies in converting a clinical development program that was designed to get to proof-of-concept with speed, elegance, and capital efficiency, into a program that produces a solution that addresses a real unmet need for patients, and also brings value when deployed in the real world.
In the modern era, there is no market for new ‘drugs,’ period. Instead, there is an increasingly centralized and consolidated healthcare environment where solutions compete for very limited resources, and regulatory approval is not enough to ensure market access, utilization, uptake, and growth. What the world is asking for are solutions to medical problems that include, at the most basic level, answers to questions beyond safety and efficacy. Chief among these are: Which patients best merit the drug? What is the value of that drug in the specific patient population? Is the utility of the drug in a real-world setting relative to other important drugs known, and is it better? Even if your drug cures something like nonalcoholic steatohepatitis or hepatitis C, there is really no escaping these demands.
A question my medical school class was asked on its first day (intended to illustrate the moral complexity of human frailty) captures this problem perfectly: “How much would each of you be willing to pay for a new drug that cured cancer?” The answer of course depends on whether you have cancer. The point being that to make rational choices about who gets these drugs and at what costs, we cannot just resort to the simple notion that everyone who needs it should get it, or because I don’t have the problem, it’s not worthy of attention. Solutions address these issues and it’s solutions, not drugs, that tackle unmet needs in the modern world of healthcare. In the 1940s, Ted Levitt of Harvard Business School once said that “people don’t want a drill bit, they want a hole.” Apple appreciated this insight 60 years later when it recognized that people do not necessarily want a wall of compact discs, they just want to listen to music. In the world of 21st century medicine, we do not need or really want a new drug, just the hole.
Although a single-asset, lean company may produce a drug that is applicable “as is” at the time of acquisition, it’s highly unlikely. This statement seems simple enough, but below the surface, it’s rich with consequences. One that immediately comes to mind is the old adage that if something is too good to be true, it probably is. In a case like this, the build-to-buy deal does in fact go a long way towards solving two massively important problems: the R&D challenges of modern biopharma (covered here, here, here, and here) and the financing/investor risks associated with funding early-stage, novel drug development. However, the deal not only fails to address the applicability problem—it actually magnifies it.
The question is, why? The need for strong commercial-clinical development bridges is not new and the failure of drug launches (see here) has made clear time and again that pharma ignores the need for
