With the rush of quarterly results from Big Pharma now past, focus moves to UK biotechs. Historically, results from these companies were mixed, frequently eclipsed by transatlantic rivals. But 2016 looks like the year in which the crown jewels of the UK biotech scene will sparkle. The question is how quickly others will join them?

Show me the money

For those that work in life sciences, long lead times and the uncertainty of medicine development are accepted and well understood. The sector has a reputation for providing solid returns over the long term and savvy investors, such as Neil Woodford in the UK, as well as many European families and foundations, realise this and allocate capital accordingly.

This provides the much needed stability and cash flow required to develop innovative medicines – without the ‘noise’ of focusing on quarterly results. Access to ‘patient’ capital, from investors that understand the timeframe and risk associated with investing in healthcare is critical for the success of a nascent biotech.

A long path with multiple steps

As capital is secured, companies can focus on the hard task of moving a product along the value chain, towards commercialisation. This transition from biotech to integrated biopharma company typically has a number of complementary and overlapping phases:

  • In-house development
  • Technology Access Deals
  • Individual Product Deals
  • Major Alliance
  • Direct Product Sales
  • Fully Integrated Pharma

At each stage, executives must make critical decisions that will determine the future success of the company – with each representing a significant value inflection point. In conjunction with major investors, executives must weigh the long-term benefits of such decisions, with the short-term value created. This creates temptation to create a ‘quick buck’ and not realise the full potential of the company.

Success can be substantial

At some point, all big pharma companies were small. Their path to success has been varied, frequently including fund raising, selective acquisitions and building internal capability. One area that is common to successful companies is that of focus. This manifests itself in concentration on specific technology or therapy areas, a determined approach to R&D and only playing where they know they can win – with Gilead as the classic example.

In less than 20 years, it has grown from small biotech into fully integrated pharma-company with a market capitalisation of $110bn. At all points it has remained focused on specialty medicine, particularly HIV and Hepatitis, and has not been tempted to diversify beyond its core capabilities.

Patient investors have been richly rewarded. As a US based company, Gilead has had access to regular capital infusions from investors that understand the timeframes that are associated with investing in the biopharma industry. Unfortunately, Europe has not been as structurally suited to raising risk capital for pharma/biotech. Consequently, the European biotech scene has evolved more slowly and in a different way.

As with so many things, the UK is somewhere in the middle – with 2016 shaping up to be the year where homegrown biotechs demonstrate some European stability with American upside.

Rough diamonds and crown jewels

With its focused approach, selective acquisitions and strong licensing revenue, the UK’s BTG stands out as a company that has the right elements in place for success. CEO Dame Louise Makin is clear that such success is a long-term game, with a strategy to match. It is a similar story with UK’s GW Pharma, in its case focusing on a unique technology platform (cannabinoid science) and finding partners to develop selected products. These two jewels in the crown have been successfully following the steps from biotech to fully integrated pharma – with investors being rewarded accordingly.

Beyond these jewels, there are some companies in earlier stages that can be considered rough diamonds. Adaptimmune, Circassia and Immunocore are typical examples. As yet not generating enough of their own revenue to have the long-term perspective on R&D that is required to succeed, but each possessing the focus, ambition and investor roster which could pivot their performance.

On paper, the UK is the ideal place for UK biotechs to mature into fully integrated pharma companies. The UK biotech scene has matured with a number of companies leading the way, with others following and learning as they grow. 2016 is the year in which we hope to see many of these rough diamonds maturing into the jewels in the crown of UK Plc.

Ed Corbett is an Engagement Manager at specialist pharmaceutical strategy consultants, Novasecta.

 

GSK is a pillar of the UK business establishment, delivering consistent returns for investors seeking a reliable place to deposit their money. For many years ADVAIR sales, particularly in the US have driven its performance, but as patent protection is lost around the globe, generic entrants will eat into its revenue. Replacing this loss of sales is top of mind for senior management, with 2016 as the stated year in which the company will return to growth – Q1 earnings shows that this ambition is beginning to be realised.

Losing market exclusivity is a fact of life in the pharma industry and all companies need to address it at some point. Since becoming CEO in 2008, Sir Andrew Witty has had to focus on how to replace the loss of ADVAIR sales, though during his tenure he has to deal with both a $3bn fine for bribing US doctors and allegations of corruption in China. These events required focus that could otherwise have been directed at launching new products.

What we saw with the Q1 results was an indication that historical plans are bearing fruit and that 2016 may be the year in which the company returns to growth. However, three longer-term issues and potential headwinds remain:

Keeping the revenue stream fresh:

20% of GSK’s pharmaceutical revenue comes for new products, especially ANORO, BREO and NUCALA, which are key components of the respiratory franchise and designed to replace the loss of ADVAIR. Whilst this figure is encouraging, it begs two questions – what can GSK do to increase this contribution, and what can it learn from other comparable companies? Gilead and J&J have contributions of 68.5% and 49% respectively from new products, with comparable revenues. GSK needs to apply the philosophy and edge that companies like this have to in its growth agenda and uncover if money is being left on the table.

Managing growth after stopping payments to healthcare professionals:

The bold move to unilaterally stop payments to healthcare professionals has positioned GSK ahead of its rivals in terms of transparency and has be widely welcomed by doctors’ groups. Other companies are yet to take a similar step, particularly because they fear the commercial impact. The introduction of stopping payments to healthcare professionals was not mentioned in the Q1 results – this could be for a variety of reasons, but any hint that it has affected revenue will determine how the rest of the industry acts.

Making sure cost cutting only cuts fat, rather than muscle:

Delivering £400m of incremental cost savings in a quarter is no mean feat and GSK is on track to deliver £2.4bn annual cost savings by the end of the year. This supports the margin and is primarily driven by restricting and integration savings. The question is whether the company has trimmed available fat and will next have to cut into muscle. Any reduction is sales and marketing costs in the rest of the year may indicate that muscle is being hit, with a likely impact on top line revenue immediately or later.

On top of these specific issues, like other big pharma companies, GSK faces challenges of pipeline progression, geographical coverage and organisational agility. In the past, M&A activity has been seen as the solution to these problems – though with very variable results. While big pharma represents a dependable investment with median revenue growth of 3.2% per year, over the last 5 years, mid-cap pharma companies, particularly those that are listed, have achieved higher revenue growth rates (around 8%). Such growth is driven by a combination of a focused and entrepreneurial approach to drug development, coupled with requisite capital to grow the products. Big pharma could do worse than taking a similar approach, rather than defaulting to M&A to solve its problems.

Fundamentally, GSK is a strong company with a range of products that address the healthcare needs of humanity. In the long term, its volume driven, emerging market focused approach makes sense – the sheer number of patients who have unmet medical needs in such markets speaks for itself. The question that faces GSK and their next CEO, is, can it maintain revenue growth in the short to medium term? Confidently answering this in 2016 will keep investors happy, reduce the clamour to break up the group and maintain GSK’s position as a pillar of the UK business establishment.

Ed Corbett is an Engagement Manager at specialist pharmaceutical strategy consultants, Novasecta.

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