Adam Houldsworth

Merck Group, Pfizer and Eli Lilly have, in quick succession, announced that they are considering moves to sell large, non-core parts of their businesses. Intellectual property, and its valuation, would inevitably play a large part in such transactions. But perhaps more significantly, the pressures for consolidation and specialisation which are driving these sales may also spur a new wave of patent-driven pharmaceutical deals in coming years.

It came to light in September that Merck is weighing up whether to sell its consumer healthcare business, whose sales exceed $1billion annually. It expects to reach a decision on whether to divest the unit – estimated to be worth $4.4billion – in early 2018.

Earlier this month came an announcement that Pfizer, too, is looking to sell or spin-off its consumer healthcare business, thought to be worth $15 billion. Including products such as Chapstick, Centrum and Advil, it enjoyed $3.4billion sales in 2016. As with the Merck sale, major consumer health players such as Proctor & Gamble, Johnson & Johnson, Reckitt Bensicker and GlaxoSmithKline are all thought to be potential buyers. Most recently, Eli Lilly announced last week that it is considering selling its animal health unit, Elanco, which brought in in $3.16 billion worth of sales last year – approximately 15% of the company’s total revenue.

Significantly, these potential sales all seem to be motivated by a desire to divest ‘non-core’ business in order to consolidate activities in higher-priority areas. Announcing Merck’s potential deal, CEO Belen Garijo said that the company was unable to make sufficient investment in its consumer business, while a strategic document released by the German outfit stated that a potential sale would be a means of “strengthening core business”, namely in biopharmaceuticals products.

Likewise, Pfizer’s CEO Ian Read stated that the consumer health unit is “distinct enough from our core business that there is potential for its value to be more fully realised outside the company”. Such a deal would also allow for a redistribution of resources to what Read described as Pfizer’s “core biopharmaceutical businesses”. Eli Lilly’s move, too, has been interpreted as a strategic decision to divest a non-core business to focus on key pharmaceuticals activities.

Given how central intellectual property is to the life sciences, patents and other rights will inevitably be to be at the heart of such deals, if they do occur. Trademarks, of course, are likely to feature prominently in consumer healthcare sales; while designs are also of increasing importance within the sector.

What is most interesting for patent practitioners about these deals, however, is that they reflect a tendency towards consolidation, specialisation and prioritisation in the pharma sector. This disposition does not only apply to companies’ approaches to their non-prescription drugs businesses, but also has a potential bearing on biopharmaceutical drugs – and their patents. True, there is a particular logic that applies to sales of tangential non-pharma business units: as Bernstein analysts have pointed out: “Consumer health is an industry ripe for consolidation.” Yet, a number of ongoing trends in pharmaceuticals industry are amplifying existing inducements for companies to distinguish between core and non-core pharmaceuticals activities, and to consolidate the former while cashing in on the latter.

Innovative pharmaceutical companies, facing pricing strains and a potential second ‘patent cliff’ (in which sales $194 billion will be put at risk by the expiration of IP protection between 2017 and 2022), are under significant pressure to replenish their pipelines with potentially lucrative new treatments. At the same time, the development of new products is becoming even more specialised, difficult and expensive, due to the increased importance of biologics (complex drugs made from living cells) and the exhaustion of ‘low-hanging fruit’ opportunities. According to EvaluatePharma’s World Preview 2017, Outlook to 2022, much of the anticipated growth in prescription drug sales until 2022 will be accounted for by cutting-edge specialist treatments, such as cancer immunotherapies, and orphan drugs, targeted at small patient populations.

Taken together, these developments are increasing the incentives to build critical mass in particular areas of product development, either by buying promising development-stage drugs or by raising capital for additional R&D investment. This in turn may give rise to an upswing in patent-heavy M&A, licensing and transactions in coming years.

This tendency is already evident in the behaviour of many major pharmaceuticals players. Building on its cancer focus, Novartis this week agreed to buy a French-based biotech company, with an attractive oncology portfolio. Also, Eli Lilly announced earlier this year that it was seeking to offload six research-stage drugs in order to prioritise the development of seven other ground-breaking products.

Having attempted a takeover of AstraZeneca in 2014, Pfizer, it is thought, is now seeking to buy Bristol-Myers Squibb, in order to acquire its leading oncology business and promising pipeline. Moreover, Merck has emphasised its commitment to “continuously stringent prioritization” in the development of its pipeline, focusing on the development of its oncology, immune-oncology and immunology activities.

Patent-driven deals, of course, have long been a fixture of the pharma sector. And the desire to specialise is not new either: Novartis notably swapped its vaccines business for GlaxoSmithKline’s cancer unit, as part of a wave of transactions in 2014. But the motives which drive such deal making continue to be accentuated by industry trends.

The extent to which this will lead to an increase in patent transactions depends on broader economic and political factors: much expert analysis (here and here, for example) sees US tax reform as a potential catalyst for a groundswell of activity. In any event, a growing need to specialise and consolidate core business activities will provide an important background against which pharma patent deals will be forged in the coming years.