Innoviva, Inc. announced its $149 million all cash acquisition of La Jolla Pharmaceutical Company, following a wave of pharmaceutical consolidation that has swept the industry over the last decade. As drug companies have struggled with stagnating research productivity, they have turned to acquiring startups that focus on high risk research and development.
While smaller biopharmaceutical companies created just 31% of new molecular entities in 2009, that jumped to 63 percent by 2018 – and continues to climb. The smaller companies take on the risk of creating the new treatments while the larger companies wait to acquire promising drugs and then help shepherd through Food and Drug Administration (FDA) approvals or assist in distribution. In effect, the larger pharmaceutical companies are increasingly outsourcing new drug development.
While Innoviva is not a typical pharmaceutical giant, it is pursuing their acquisitive playbook: with this acquisition, Innoviva adds to its portfolio of healthcare assets La Jollas’s lead product, GIAPREZA, which was previously approved by the FDA in 2017 to increase blood pressure in patients with septic shock, as well as XERAVA, which was approved in August 2018 for treating intra-abdominal infections. The companies’ join press release explains, “This acquisition strengthens Innoviva’s portfolio in infectious diseases, anchored by the company’s recent purchase of Entasis Therapeutics Holdings Inc., an advanced late-stage clinical biopharmaceutical company focused on the discovery and development of novel antibacterial products.”
Unlike the rest of the world, which uses price boards to control prescription drug prices, the United States allows pharmaceutical companies to charge what the market will bear. And for this reason, Americans pay the world highest prices for prescription drugs. Both the fact that such products are often a necessity for survival and/or wellbeing and that patent protection often limits substitute products creates highly inelastic demand not seen with other products. Other developed countries set price caps that limit the pharmaceutical companies’ margins in those nations, while they earn obtain significant profits from the United States market.
Some argue that this means that the American consumer pays for the bulk of pharmaceutical research and development, while other nations reap the benefits. Indeed, the U.S. represents 44% of worldwide pharmaceutical R&D spending and holds approximately 40% of global patented drugs.
But that is beginning to change. Effective November of 2020, the Secretary of Health and Human Services implemented a provision of the Federal Food, Drug, and Cosmetic Act (FD&C Act) to permit importation of specific prescription drugs from Canada. With patented drugs approximately 3.5 times higher in U.S. markets vs. Canadian, this may spell significant savings for American consumers. While Americans in northern states have driven to Canada for years to take advantage of the far lower prices, that was technically illegal while legalized importation opens the floodgates to consumers across the country.
These regulatory changes may further spur industry consolidation as larger companies increasingly outsource innovation to startups. LA Jolla Pharmaceutical was advised by law firm Gibson, Dunn & Crutcher LLP and financial adviser Cowen and Company, LLC. Innoviva was advised by Willkie Farr & Gallagher LLP and financial adviser Moelis & Company LLC.
