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Why drugmakers are suddenly merging

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The latest deal in the pharmaceutical industry is the $1 billion purchase of Sprout Pharmaceuticals, which just won FDA approval for its female libido pill, by Valeant Pharmaceuticals.

According to the consulting firm KPMG, in just the first half of 2015, we saw $221 billion worth of deals in this sector, triple last year’s figure through the same period.

That’s because the early stage research and development work traditionally done by the Mercks and Pfizers of the world is now also being done by small startups. Avalere Health’ s Dan Mendelson says that’s possible as DNA sequencing, molecular modeling and powerful computer costs have plummeted.

“It used to be that you needed a huge amount of scale to be able to comb through millions of compounds,” he says. “And now drug development is really more about the clinical brain power and less about brawn.”

An army of entrepreneurs has entered the industry and is doing early and mid-stage research. With more people in the pool, Big Pharma has developed a new set of skills — namely, knowing how to shop for the next blockbuster. 

Steven Goldman, a corporate attorney at Kramer Levin in New York, says that’s why so many drugmakers are snapping up these promising biotech firms.

“This is their business, and they need to be players in it. And so they are buying these companies because it is the new frontier in medicine,” he says.

So as some traditional R&D by the largest manufacturers seems to be replaced by smaller outfits. Craig Garthwaite, a professor at Northwestern Kellogg School, says the question is whether this new model is actually more expensive.

“I don’t think there is anything inherent in it that we are going to spend more on drugs because we are doing it out of the company than we are doing it in the company,” he says.

But Garthwaite says no one has studied that question. Given the concern over the rising cost of drugs, it may be worth taking a look.

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