For most of the past decade, big pharma companies have been getting bigger, buying development companies to fill gaps in their product lines. But now GlaxoSmithKline has managed to surprise the rest of the sector with a novel spin-out deal. The new private company, to be called Convergence Pharmaceuticals, will research and develop medicines to treat chronic pain and neurological disorders.
The spin-out will be given the rights to several products in Glaxo's pipeline in return for an 18 per cent equity stake. The new company won't be listed, at least not straight away. Separately, French pharma major Sanofi-Aventis has also concluded a research and development partnership with Covance, a smaller drug development group.
The rationale behind the deal is that Glaxo, along with the rest of the industry, is trying desperately to boost the productivity of in-house research and development (R&D) operations. Jack Scannell, analyst at Alliance Bernstein, explains the problem: "The actual number of genuinely new molecules approved per year has been roughly constant over a very long period of time with peaks and troughs that seem related to the regulatory environment. The problem is that inflation-adjusted R&D costs have increased at an average rate of 8 per cent to 9 per cent per year since 1950."
But rather than just cutting projects and jobs, GSK has chosen to an maintain ongoing interest in its spun-out company. That gives it a handy option on any pain and central nervous system products that Convergence may develop, but without having to carry the financial burden of a notoriously hard-to-prove area of research.
But it is not only on the research side that Glaxo has started to outsource. It recently agreed a deal with Lonza, a supplier to pharmaceutical companies, to provide manufacturing space for five monoclonal antibodies to bulk up its biopharmaceutical capability. That followed Glaxo's deal to sell its Verona neurological research site to Aptuit, maintaining a link to new research.
Shore Capital's Brian White isn't totally convinced: "Why would outside investors put their money into these spin-outs if the parent companies themselves don't believe in the products?" he asks. But he also points out that the UK industry lags behind its Swiss peers when it comes to finding value in successful spin-outs.
