How Big Pharma learned to share

With risks increasing for blockbuster pills, the big drug companies are discovering that sharing can be the smartest strategy. Fortune's John Simons explains the cooperation trend.

By John Simons, Fortune writer

(Fortune) -- Sharing is not something most scientists do well. It makes sense. In the laboratory, valuable intellectual property flows from each new discovery. It's the coin of the realm, and as such researchers guard it closely.

Nowhere is this culture of confidentiality more in evidence than in the modern drug industry, where a new finding could generate billions of dollars in revenue. Why, then, are many Big Pharma companies suddenly playing so nicely together? So far this year, at least five of the world's biggest drugmakers have unveiled collaborative deals with sizable competitors. They've promised to share their intellectual property, put scientists together, split costs to attack thorny medical problems, and, of course, share the proceeds of any future medicines.

In January, AstraZeneca and Bristol-Myers Squibb agreed to co-develop and commercialize two diabetes treatments. Earlier this week, Bristol-Myers (Charts, Fortune 500) and Pfizer (Charts, Fortune 500) finalized a deal to collaborate on the research, development, and future marketing of another investigational diabetes drug - research that might also yield a treatment for obesity. Also this week, Schering-Plough (Charts, Fortune 500) and Merck (Charts, Fortune 500) announced that they had filed an application with the FDA to co-market a treatment for nasal allergy symptoms. The new medicine, which the companies had co-tested over the last year, combines in a single pill two already-marketed drugs, Schering-Plough's Claritin and Merck's Singulair. Merck and Schering have already produced a successful joint venture. They co-developed and now split the revenues from cholesterol treatment Vytorin, on the market since 2004.

It's no secret that Big Pharma is increasingly laying out billions of dollars to siphon bright ideas from smaller companies - either by purchasing the rights to experimental medicines or acquiring the companies that own them. But usually, those companies are much smaller specialty firms or biotechs. What's different about the latest spate of joint ventures is that they're occurring among relative peers.

The new collaborative atmosphere is a sign of the times. The cost of ushering a new medicine from lab to market is between $800 million and $1 billion. Much of the low-hanging fruit in medical research has been picked and turned into marketable treatments. In the last half-decade, disease targets are harder to locate and exploit. Competition from generic drugmakers has stiffened. The FDA is tougher too. The stakes, therefore, are high in drug research - and a poor clinical test result or an FDA rejection can be incredibly expensive. In the drug industry today, returns are decreasing while risks are on the rise. So, sharing the costs makes sense.

"It's like buying an insurance policy to mitigate the risk of failure", says Roger Longman, managing partner of Windhover Information Inc., a consultancy that tracks healthcare industry deal making. Why would Pfizer, the biggest of Big Pharmas, a company flush with cash (which already spends $7.6 billion on annual R&D) need "insurance policies"? Pfizer and many of its peers face looming patent expirations on lucrative drugs, all of which will face brutal price competition from generic versions in the next few years. As a result, companies are forced to take an any-means-necessary approach to churning out new novel drugs.

"It's great that Pfizer is asking, 'what are the best opportunities out there', rather than 'what's best in my pipeline'," says Deutsche Bank drug industry analyst, Barbara Ryan. "The more products they have in development, in other words the more shots-on-goal, the more they score."

The new spirit of Big Pharma teamwork, then, can benefit patients and investors alike.  Top of page