Pharma deal-making minimizes manufacturing

Brand recognition outweighs manufacturing risk in Big Pharma thinking when it comes to growth by deal-making. In fact, "Brand acquisitions typically help buyers avoid any manufacturing risks."

So says Abhishek Sharma, life sciences head at MAPE advisory group, in the Business Standard. "Most manufacturing does not require innovation," he adds as a further kick in the pants to the ops forces. And contract manufacturers are "happy to pitch in" when manufacturers guarantee volumes.

But a deal between drugmakers that does not include a brand is riskier, and it leaves the suitor open to perils--not the least of which may be costly manufacturing upgrades.

Just ask Japan's Daiichi Sankyo, which in 2008 paid $4.6 billion for India's Ranbaxy as a means of entering the generics market. Ranbaxy's manufacturing troubles were fairly well known at the time, especially in light of a 2006 warning letter from the FDA. Within weeks of the deal closing, the FDA lowered the boom on Ranbaxy for manufacturing noncompliance and misbranded drugs. Two plants were closed, and 30 export products were barred from the U.S. In an assessment of business transactions, the Wall Street Journal labeled the deal a "fail."

Sharma says pharma companies are increasingly outsourcing their production for domestic markets, maintaining few manufacturing facilities. "Outsourcing is clearly the name of the game," he adds.

"You can't write off manufacturing entirely," the Business Standard cites another (unnamed) analyst as saying. The analyst points to the Sanofi ($SNY)-Shantha buyout, in which the latter company--an Indian vaccine maker--had its World Health Organization prequalification for a major vaccine rescinded because of manufacturing defects.

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