Can drugmakers find profit in collaboration?

Feb 12, 2014

FORTUNE -- Three years ago, when government health officials suggested that major pharmaceutical companies work together to find cures to diseases rather than compete, the drugmakers squirmed.

Big Pharma, after all, is one of the most competitive and fiercely protective industries around: Companies patent every aspect of their medications, fight rival manufacturers that step on their toes, and engage in price wars to ward off competitors when those patents expire.

Yet now, some of the world’s largest drugmakers are taking down their fences and sharing some of their most proprietary assets -- from genetic research to drugs themselves -- with each other, in hopes of reaching cures faster. The National Institutes of Health announced last week that it has recruited 10 Big Pharma companies, including Bristol-Myers Squibb , GlaxoSmithKline (
), and Eli Lilly , to pool their data -- and even some of their patented molecules -- for a five-year research project. Soon after, Merck (
, which is also participating in the NIH initiative, announced that it would team up with Pfizer, Amgen , and Incyte (INCY) to see if the other drugmakers could improve upon a new type of cancer drug that Merck is developing.

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“It’s a pretty dramatic shift from the hyper-competitiveness of the past,” says NIH director Francis Collins, who has been nudging companies to collaborate since that initial discussion in 2011. “It took a while. Much of the discussion since then has been around that issue of, is this going to be good for business or not?”

Pharmaceutical manufacturers, however, have grown increasingly frustrated that more than 90% of the drugs in their pipelines fail in clinical trials, wasting up to $1 billion on each dud. And when their treatments for insidious diseases like cancer and Alzheimer’s actually make it to market, they typically work only for a handful of patients. Doctors often prescribe cocktails of drugs made by several different companies, making it harder for firms to gain an edge.

“No matter how big a company might be, it does not have a monopoly on exciting drugs for any disease,” says Mace Rothenberg, chief medical officer for Pfizer’s oncology division. “When we look back, is this the reason we haven’t been able to make more progress on these diseases, by targeting only one element at a time?”

The $230 million NIH collaboration aims to figure out which disease-causing elements for Alzheimer’s, type 2 diabetes, rheumatoid arthritis, and lupus should be targets of new drugs. Even though scientists have already generated promising leads in these areas, “Those did not seem to be opportunities that any single company could capitalize on, at least not as well as they would like,” Collins says.

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Analysts say that the teamwork between Big Pharma rivals might actually make them more competitive in the market. Merck’s collaboration, for one, came at a time when it was racing several other companies to develop a first-of-its-kind cancer therapy, known as an anti-PD-1 drug, that has recently shown success treating a variety of tumors. “We haven’t seen anything this exciting in cancer drugs that we can remember in a long time,” says Steven Rees, head of U.S. equity strategy at J.P. Morgan Private Bank.

But Bristol-Myers appeared to be winning, beating Merck to advanced trials, says T. Rowe Price biotech analyst Ziad Bakri. To catch up, Merck sought help from other companies whose cancer treatments might enhance its own -- even though it might mean splitting revenue from the final product. “With respect to owning both vs. collaborations, well, obviously, under the best circumstances, you’d like to own both, but you can’t expect to discover everything yourself,” Merck’s president of research and development, Roger Perlmutter, said on a conference call.

Going it alone, on the other hand, would be to risk losing out on an estimated $30 billion market for PD-1 altogether, says Rees, who suspects that the market will multiply as more uses of the drug are approved. “Sharing and being a more credible competitor is better than sticking with what you have and missing out,” he says. And, he adds, such collaborations might spur more mergers and acquisitions: “What might start as a partnership might end as a company actually buying another company, when you see how many synergies could be realized.”

Investors seemed to support the team strategy, sending Merck’s shares 2% higher on the morning of the announcement. “If Merck wants to compete with Bristol-Myers, all of these collaborations have the potential to give it some kind of advantage,” Bakri says.

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It’s not the first time that pharmaceutical companies have combined their drugs to bring needed treatments to patients faster, but their penchant for exclusivity has sometimes been a roadblock. Collins had envisioned a larger NIH collaboration between more than 10 companies that would seek clues to treating all diseases, not just a few. “Companies were not as enthusiastic about that,” he says. Originally, the project planned to also focus on schizophrenia. “But when it came down to pulling out wallets and putting money down on the table, there wasn’t a critical mass of companies to make it work,” as fewer than four volunteered.

Still, experts agree that Big Pharma’s willingness to work together is growing. For several years, Collins has also been gently prodding companies to “open their freezers” of tried-and-failed drugs to scientists who want to test them for other possible applications. “Five years ago when this idea started to surface, I was told, ‘Oh, companies will never do that. They won’t be comfortable giving up a compound they’ve invested so much money in.’”

But eight large pharmaceutical companies eventually provided 58 abandoned drug compounds for research, and last summer, the NIH green-lit trials for nine of them with $20 million. The advantage to the repurposing is that because the drugs have already passed safety tests, they can skip straight to more advanced trials, shortening the typical 14-year pipeline to as little as two: As early as later this year, “We’ll be able to see whether we’ve hit any home runs,” Collins says.

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