One of the pharmaceutical industry’s longest-held mantras is that the first six months of a product launch defines future success. This can lead to too much focus on performance compared to a forecast, rather than building for future success by seeking a deep understanding of why a product is performing.

In this month’s white paper, we argue that while the first six months of a product launch is clearly important, it shouldn’t be the sole determinant of the future. By contrast, leading companies are using it as an opportunity to gain deep insight into how customers perceive the product and act quickly to achieve success. To download our white paper click here or on the button above.

AI is one of the hottest topics in pharma at the moment and is already starting to yield results. One area it is making significant impact is in R&D. In the last two years alone there have been several multi million pound deals with leading pharma companies and AI providers, one of the most recent being the GSK collaboration with Cloud Pharmacuticals, who we interviewed earlier this month. R&D has always been a strong area for Novasecta and given our expertise MedNous asked us to think about how pharma companies could approach AI in R&D.

For insight on what the wider pharma industry should do about AI click here

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Novasecta’s Managing Partner, John Rountree, was asked by CNBC to comment on the rumours of the sale of GSK’s Horlicks brand to Unilever, in which he reflects on GSK’s continued exploration of ways to refocus its business towards innovative pharmaceuticals.

To read our insight into R&D innovation click here or to understand the importance of R&D renewal click here.

Artificial intelligence is one of the hottest topics in the pharmaceutical industry and there seems to be an almost daily stream of stories about its benefits. This is leading to questions about whether the hype is justified, and if it be shortly replaced by something else. To get an insider’s perspective, Ed Corbett a Principal at Novasecta, interviewed Don Van Dyke, Chief Operating Officer of Cloud Pharmaceuticals to hear his thoughts on what the potential of AI is and whether the hype is justified.

To read our whitepaper on “What Pharma Should Do About AI” click here

On average in 2018 over 58% of sales for big pharma have come from products over 10 years old. ‘Mature’, ‘Established’ or ‘Diversified’ brands are products that have lost or are approaching loss of patent exclusivity and represent a significant source of revenue for pharmaceutical companies.

In 2000, few in the pharmaceutical industry had heard of mature brands. Yet now the vast majority of pharma companies have either entire portfolios or significant business units dedicated to their commercialisation. This shift in emphasis has been driven by reduced R&D productivity and the realisation that managed well, mature brands can provide strong profits following patent expiry. In this white paper, we explore the importance of mature brands to pharma companies, how best to approach loss of patent exclusivity and how best-in-class teams are commercialising mature brands effectively and redefining traditional life cycle management.

To find out how we can help with your commercial strategy click here

AI has the potential to provide huge benefits to the pharmaceutical industry, from improving R&D productivity through to more effective sales representative deployment and better supply chain management. Adoption of AI is lagging other sectors, with initial forays mainly being led by big pharma who have deep pockets and are willing to try new innovations. For many however, it remains misunderstood, or even feared. Given the transformative potential of AI, companies must at the very least understand its benefits and develop a strategy that meets each organisation’s unique situation. Those that do will be well informed to make decisions; those that don’t, may be left out of the next industrial revolution.

For an insider’s view on what the potential of AI is and whether the hype is justified read our interview with Don Van Dyke, COO of Cloud Pharmaceuticals

AI – the acronym on everyone’s lips, and rightly so, as it has a huge variety of potential applications in pharma. In light of this, Pharmaceutical Market Europe (PME) asked Ed Corbett for a special report piece, to consider AI and how pharma should navigate this burgeoning technology.

To read the full article click here or download this article using the button above.

If you want to learn more about AI in pharma our white paper on the topic gives great insight into what pharma should do about AI or for an insider’s perspective our interview with Don Van Dyke, COO of Cloud Pharmaceuticals, looks at what the potential of AI is and whether the hype is justified

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John Rountree discusses, on CNBC, Novartis financial results, pharma innovation and how acquisitions in Big Pharma are still a hot topic

To read our insight on breakthrough innovation click here and for our point of view on the cost of pharma M&A click here

 

Novasecta’s Principal, Ed Corbett, was asked by The Pharma Letter, in a special report piece, to consider an issue of paramount importance to the future of the industry: AI

Artificial intelligence (AI) has the potential to provide huge benefits to the pharmaceutical industry, from improving R&D productivity through to more effective sales representative deployment and better supply chain management.

Adoption of AI is lagging other sectors, with initial forays mainly being led by big pharma, with its deep pockets and willingness to try new innovations. For many, however, it remains misunderstood, or even feared.

Given the transformative potential of AI, companies must at the very least understand its benefits and develop a strategy that meets each organization’s unique situation

To view our content please complete the form below and submit





Novasecta defines European MidPharmas to be R&D-based pharmaceutical companies with sustaining annual revenues of between €50m and €5bn. In our fourth annual report into this fascinating sector, we examine the current health of these companies, drawing on both our extensive consulting experience with such companies and our proprietary research based on public domain data sources. We highlight important lessons for pharma and biotech companies of all sizes.

Ownership

An enduringly private group of companies

The diverse ownership structure of the European MidPharmas marks them out as a distinct and highly successful group of companies. In a global industry dominated by stock market-listed Big Pharmas and venture-backed biotechs, almost three quarters of European MidPharmas (74%) are privately held or controlled.

This 2018 report tracks the progress of 76 European-headquartered MidPharmas that fit our definition of having on-market pharmaceutical products, being based in a genuine European headquarters (i.e. excluding US companies that domicile in Ireland), investing in R&D (i.e. excluding pure commercial distributors and service companies), and generating sustaining annual revenues of €50m – €5bn. We further segment them into three ownership categories:

• ‘Pure’ Listed (20 in number, 26% of cohort) – publicly traded, no majority shareholder
• Listed Privately Controlled (9, 12%) – publicly traded with a majority shareholder
• Private (47, 62%) – wholly owned by families, foundations or funds

To further classify the companies, we combine the ownership dimension with scale; defining €50m-€5bn revenue as ‘mid-sized’ and R&D intensity as R&D investment as a % of revenue:

European MidPharmas are highly diverse in ownership, scale and R&D intensity

Notes
– Novasecta analysis from company websites and other public domain sources. 2016 data has been used for companies where 2017 data has not yet been published
– Companies headquartered in Ireland but with most of their operations in USA excluded (e.g. Alkermes, Amarin, Endo, Mallinckrodt); companies with >€50m revenue but without own-commercialisation capabilities excluded (e.g. Ablynx, Cellectis, Innate, Vectura)
– Of the 76 MidPharmas, only the 45 displayed above have sufficient recent public domain data on both revenue and R&D spend. Others are included in the remainder of the report where some data such as revenue trends are available

The MidPharma signature: resilience

One of the most enduring characteristics of the European MidPharma sector is its resilience. This underlines the advantages of a more long-term and ‘patient capital’ model that recognises it can take time and patience to reap the results of innovation. The past twelve months have, once again, shown MidPharmas to be a remarkably strong group. The size and shape of the sector has changed little since our last report. Other than Actelion – which was acquired by J&J in January 2017 – no company has left the group and there have been no significant changes in ownership, with the exception of Stada having been taken into private control.

Significantly, MidPharmas have not allowed themselves to be distracted by wider talk of industry consolidation; while their Big Pharma and biotech counterparts have been busy engaging in sometimes significant M&A, mid-sized companies have chosen a path of neither consolidating nor being consolidated. Instead some have chosen partnerships and smaller bolt-on acquisitions to build from strength. They have maintained their long-term focus and, crucially, stayed profitable.

Over the years, the influence that ownership has on both the performance and behaviour of pharma companies has been a recurrent theme of our analysis. Once again, our 2018 report uncovers some interesting findings in this regard. While R&D intensity can be seen across all ownership categories, the most revealing trend concerns the larger MidPharmas: in the mid-sized firms whose revenues exceed €1bn, almost all the companies investing more than 15% of revenues in R&D are privately owned or controlled. Even the one exception – UCB – has a strong family holding.

UCB (€4.5bn revenue in 2017) is one of just three MidPharmas with revenues of more than €2.5bn. Alongside it, Grifols (€4.3bn) and Servier (€4.1bn) are the stand-out players of scale in the sector. There is a sizeable gap between them and the chasing pack – Pierre Fabre, Lundbeck and Stada – all have a turnover of €2.3bn, with Ferring (€2bn) and Ipsen (€1.9bn) further back. Although the largest two companies are listed, they each have significant private shareholdings and the fingerprints of family ownership; the Grifols family (and related parties) still owns around 40% of Grifols, while UCB’s founders, the Janssen family, have maintained a 36% share in the business.

Stable ownership – and family influence – has been an important factor in the successes of the three largest companies. Servier, owned by a private foundation, has built solidly on the commercial success of its original R&D through careful acquisition and sustained investment in R&D. Its 2013 acquisition of Egis, the Hungarian generics manufacturer, gave Servier a complement to its pharma business, enabling it to have both generics and pharma under one structure. Alongside this, the company has consistently ploughed significant proportions of its combined revenues back into R&D (19% in 2017). Its recent bolt-on acquisition of Shire’s oncology assets for $2.5bn falls outside the scope of this review but demonstrates an intention to build from its European strength into the US market.

UCB has also used astute acquisition over many years to grow into the player it now is. Its 2004 purchase of Celltech, at the time the UK’s biggest biotech, gave it access to biologics R&D. This was followed up by the 2006 acquisition of Schwarz Pharma, a similar sized family company, for $4.4bn to bulk up its late-stage pipeline. For the last 10 years it has been less active, pursuing a more organic path to growth. In 2017 its profitability increased by 24%.

Grifols’ success is a story of focus. Its specialisation in plasma-derived products has seen it develop a dominant, diverse business across bioscience, diagnostics and hospitals. The unique nature of its business model has reaped handsome rewards; since plasma-designed protein therapies are less R&D intense, Grifols has been able to maintain profitability with a lower R&D spend. In 2017 the company invested just 6% of revenues in R&D with reported profits of 15%.

A decade of MidPharma evolution

Novasecta’s tracking of the European MidPharma sector began in 2007, allowing us to now take a retrospective ten-year view of the sector’s evolution. The general picture in 2007 showed a similar pattern to the one we see today; a small cluster of companies at the higher end of the size scale and then a large gap to a larger group of MidPharmas in the up to €1-2bn range.

In fact, during a period of 10 years of substantial global pharma/biotech M&A activity, the European MidPharma sector has been relatively immune to being acquired by Big Pharmas. Yes, some MidPharmas have acquired bolt-on biotechs or other MidPharmas, but most have chosen a more organic path to growth.

A relatively small group of MidPharmas has grown by acquiring other MidPharmas

 

Notes
– Table shows M&A involving a MidPharma as acquirer or target, pre-revenue biotech acquisitions excluded

The resilience of the MidPharma sector, and the sustainability of the companies within it, is self-evident; there has been little change in the make-up of the list with the enduring presence of many well-established players an indication of stability.

Most of the movement has typically occurred at the larger end of the scale, with MidPharmas merging or being acquired by other MidPharmas. For example, in 2008, Merck – a mid-sized player at the time – merged with fellow MidPharma Serono in a €10.4bn deal to move them both into Big Pharma territory. Similarly, in 2006 Altana was acquired by Nycomed (for €4.5bn), which was itself then taken over by Takeda in 2011 (€9.6bn), to become another Big Pharma. However, until J&J’s 2017 purchase of Actelion, the only three examples of Big Pharmas acquiring MidPharmas came in 2007 when Schering Plough acquired Organon for $14.4bn, in 2009 when Abbott acquired Solvay for $6.2bn, and in 2016 when Mylan acquired Meda for $7.2bn.

The 10-year journey of Actelion underlines how strong and attractive MidPharmas can become. In 2007, the Swiss biotech – founded by the Clozel family – was ten years old with revenues of around €400m. A decade later it was sold to J&J for an astonishing $30bn. The Actelion experience illustrates the value of founding entrepreneurs, the presence of whom is a common and stabilising feature of many present-day MidPharmas. While a world of cheap capital has focused analysts’ attention on stock markets and the venture capital/private equity firms that feed investors’ desire for ever-higher returns, family and foundation-controlled companies have typically been taking a more long-term approach to growth.

The ten-year story of European MidPharmas is therefore not one of transformative roll-up, it is evolutionary. MidPharmas typically adopt a ‘patient capital’ model that relies on R&D intensity, synergistic acquisition, and discipline to deliver sustainable growth.

The remainder of this report explores and contrasts MidPharma companies’ performance both with each other and with their Big Pharma peers. Our analysis focuses on three primary areas, R&D, commercial and corporate. These areas are further broken down to cover a range of related business drivers. The report concludes with our ranking of European MidPharmas based on three fundamental attributes; R&D intensity, commercial growth, and corporate activity.

R&D

Growth in R&D investment and R&D intensity: signs of strength

This section explores MidPharmas’ R&D investment and what it indicates about their growth strategies. We first assess how the companies are growing R&D investment over a five year period, and second, the trends in R&D intensity: the R&D investment as a percentage of revenue.

Over the last five years, European MidPharmas of all types have continued to increase their investments in R&D. Furthermore, our analysis shows that between 2013 and 2017, the compound R&D investment growth in pure listed MidPharmas is neck-and-neck with Big Pharma.

Listed MidPharmas have been increasing R&D investment at the same rate as Big Pharmas

 

Notes
– Companies with insufficient public domain data are excluded

This analysis demonstrates that the MidPharmas have not needed to have massive scale to reap the benefits of significant stock market liquidity over the last five years. By contrast the relatively flat performance of privately-controlled and fully private companies suggests that stable ownership comes with a more cautious approach to building up R&D investment. This is consistent with our findings from previous years. It appears that part of this is caused by the lower revenue growth of these companies coupled with a general industry mindset of targeting R&D spend to be a fixed percentage of revenue. This mindset is simple to execute but not necessarily helpful: R&D is more of an investment than a cost, and companies that allow it to fluctuate up and down as a percentage of revenue, in line with pipeline progress, tend to be more successful than those that consider it a cost to be kept at a capped percentage of revenue.

Closer scrutiny of the trends in R&D intensity show that the MidPharma sector as a whole has been sticking with a percentage of sales mindset for deciding what to invest in R&D, and that on this basis is continuing to invest in R&D across all ownership types. This commitment to innovation is also symptomatic of the resilience of the mid-sized sector.

MidPharmas have increased R&D intensity in the last year

 Notes
– Companies with insufficient public domain data are excluded

An encouraging group of MidPharmas is also investing more than 15% of revenues into R&D, figures more comparable with and ahead of many Big Pharmas. This level of R&D intensity is a good proxy for the long-term health of such companies: it shows either a confidence in the future potential of their R&D investments or the advancing of assets into the expensive later stages of development, or both. The significance of this high R&D intensity cannot be underestimated – the most successful MidPharma companies have often been those that have invested heavily in R&D. This is certainly the case in 2017, when four of the biggest MidPharma success stories – LEO, Lundbeck, Ipsen, and Chiesi – ploughed healthy chunks of their revenues back into R&D and reaped the rewards. All of these companies are privately owned or controlled.

In the past decade, LEO Pharma has been transformed from a company with a broad therapeutic base to one with a specialist focus on dermatology. It is now one of the world’s leading dermatology players and is investing heavily in innovation. In 2017, LEO invested 15% of its revenues in R&D while achieving solid revenue growth of 8%. This is a great example of a foundation-held company that recognised the limitations of broad legacy products and strategically chose to invest in a more focused, long-term future at the expense of a few years of lower profitability.

Long-term focus has also been a feature at another foundation-held Danish company – Lundbeck – which has continued to concentrate its efforts on the difficult, and for some Big Pharma, unfashionable CNS market. In recent years, a litany of failed late-stage trials has seen a number of big companies exit the CNS market. However, Lundbeck’s relentless focus in this area, underpinned by a sustained commitment to R&D, has paid off. In 2017, it invested 16% of its revenues in R&D – and profits increased by 26%.

It’s been a similar performance at Ipsen, where R&D intensity of 14% was accompanied by a 26% increase in profits in 2017. Privately controlled by the Beaufour family, Ipsen has managed to secure approvals for a high number of new products via clever innovation on the backbone of some relatively old specialist products. It has also extended its commercial footprint into the US which, in tandem with some shrewd bolt-on acquisitions, has seen its profits and its stock price significantly appreciate.

Privately-owned Chiesi continues to invest heavily in R&D and has created a stream of successful innovations. In 2017 it reinvested 22% of its revenues back in R&D. The company, which is still actively managed by the Chiesi brothers Alberto (President) and Paolo (Head of R&D), has become an important player in the respiratory space – a competitive category traditionally dominated by Big Pharmas. It has been very successful in securing approvals, not least in the triple combination therapy for Chronic Obstructive Pulmonary Disease (COPD), for which it was the first company to receive an EU approval.

These four examples once again show the value of long-term R&D investment, focus and control. With much of the MidPharma sector showing healthy levels of R&D intensity, the most successful players have been investing sustainably in innovation to support focused and disciplined growth strategies.

Commercial

Commercial success: the virtue of capital discipline

Our 2018 analysis appears to back up a hypothesis previously explored in our White Paper on Ownership Structure: listed companies tend to be more commercially successful than their private counterparts. Our white paper revealed that, across the industry, listed companies generate more revenue per NDA – and twice as much revenue per NME – than private organisations. At the broader level, this is borne out by five-year compound revenue growth rates (CAGRs) that show listed companies achieving twice as much revenue growth as part-listed businesses and around 50% more than private companies. However, despite the difference, it is important to recognise that almost all of the private companies in our sample are indeed growing.

Although private MidPharmas are growing, listed companies are outperforming them

 Notes
– Companies with insufficient public domain data are excluded

The reasons for the difference in performance between the ownership types are, at face value at least, relatively simple; listed companies not only have easier access to liquid capital, they are highly driven by the discipline of capital markets. Shareholders’ demands for quarterly earnings and growth force listed companies to impose a capital discipline that focuses sharply on delivering top-line revenue and profitability numbers. This, in turn, compels companies to establish excellent commercial practices, structure, and processes that can sometimes be less well developed in private organisations. Fundamentally, commercial success is not about size or scale – it’s about discipline and rigour.

Certainly, private companies can learn much from the commercial approaches of successful listed companies. Three of the most notable listed success stories in our 2018 report are Genmab, BTG and Sobi – each of which has generated a compound annual revenue growth of more than 20% over the last five years.

Genmab is the highest-performing of the trio with compound revenue growth of 29% between 2013 and 2017. Its revenues are not from its own commercialisation yet, but are in fact the result of its very successful blood cancer drug, Darzalex, and a highly productive partnership deal with J&J for commercialising the product. The deal, under the terms of which J&J sell Darzalex and pay Genmab royalties of between 12-20%, is proving tremendously successful.

With 2017 sales of Darzalex already exceeding $1bn – and analysts predicting they could reach as high as $8bn – Genmab is now rapidly reaping the rewards. Moreover, it is investing these revenues back into R&D to create the next generation of products that will ultimately enable it to commercialise its innovations itself. In 2017, Genmab invested 37% of its revenues in R&D. The company, which now has a market capitalisation of more than €10bn, is a powerful example of a listed biotech that has transitioned to become a MidPharma off the back of fantastic innovation.

BTG is another listed company that has experienced sustained revenue growth, with a CAGR of 23% in the past five years. The company, formerly British Technology Group with the sole shareholder of the UK government, has been transformed since Dame Louise Makin took the helm as CEO in 2004. It has stripped out all of its non-pharmaceutical assets and focused on interventional medicine, leveraging its access to capital to drive a series of astute bolt-on acquisitions. BTG’s profits grew by 10% in 2017.

Sobi (Swedish Orphan Biovitrum) started out as Biovitrium – a spin-off from Pharmacia (now part of Pfizer). Originally a successful contract manufacturing organisation with R&D capabilities, the business acquired Swedish Orphan in 2010 to add pharmaceutical revenues and commercial footprint. Sobi has subsequently transformed into a specialist pharma company with a strong focus on haemophilia. It is growing rapidly, with revenue CAGR of 21% between 2013-17 and a 25% increase in profits in 2017. In the past year Sobi’s share price has increased by 33%.

These three examples underline how a stock market listing can help companies access capital for bolt-on acquisitions or commercial footprint. The capital markets are a natural source of funding to scale businesses. However, while the option to part-list is open to private companies – and MidPharmas like Ipsen, Recordati, and Almirall have already taken this option – commercial success does not simply depend on ownership type and capital.

With greater structure and discipline in commercial processes or, like Genmab, a willingness to explore strategic collaborations to benefit from the commercial capabilities of others – private companies can significantly grow the commercial revenue and value of their companies.

Corporate

Profitability sustained across the board

Despite widespread challenges – not least the global pressure on healthcare spending and pharma’s ongoing efforts to redesign operating models and reduce the cost of drug development – the MidPharma sector has continued to be profitable in 2017.

The pharma industry generated healthy profitability across the board in 2017

 Notes
– Companies with insufficient public domain data are excluded

In 2017, the median EBIT of listed and part-listed mid-sized companies was almost on a par with Big Pharma – and while the median profitability for private companies was slightly lower, it still made double digits. It may, in fact, be the case that private companies are more comfortable with lower profitability; a willingness to invest in R&D suggests that some are choosing to be less profitable as part of a long-term business model. Servier, a quintessentially private company, is a good example of this: its EBIT of 10% is the same as the median for private companies in 2017 – and during the same period it invested 19% of its revenues in R&D.

Some of the most profitable MidPharmas are listed or part-listed; Recordati (32% EBIT), Orion (27%), Lundbeck (26%) and Sobi (25%). Recordati – like its larger part-listed Big Pharma peer, Novo Nordisk (44%) – has sustained a high level of profitability by using the capital markets to serially acquire synergistic businesses, and has further demonstrated the commercial acumen that is needed to deliver sustainable growth.

Continued decline in the use of M&A

Over recent years we have observed an increasing reticence amongst mid-sized pharmas to get involved in M&A activity. This is largely because M&A has become too expensive, with the combined effect of cheap capital and patent expiries pushing the price of deals beyond the reach of disciplined buyers. This 2018 report shows that our assessment in 2017 – detailed in our White Paper Pharma M&A is too expensive: now what? – has proved to be prescient

MidPharma M&A has plummeted, but strategic collaborations have remained consistent

 Notes
– Novasecta analysis of mergers, 100% and majority acquisitions, and strategic alliances from GlobalData deal database

The number of M&A deals executed by MidPharmas has fallen to just six in 2017. Interestingly, the number of deals in the sector peaked in 2007, and has steadily fallen ever since. There was a brief resurgence in 2013, when the number of deals rose from 13 to 21, but this surge was short-lived.

MidPharmas’ collective decision to broadly steer clear of M&A is well founded – the sector was the first to recognise the escalating cost of deals and, unlike some of its Big Pharma counterparts, has become much more disciplined in its buying. This is not to discount the value of good M&A. As we have already seen in the cases of UCB and Sobi, effective, synergistic deals can transform businesses and project them towards new platforms for rapid growth.

Strategic alliances: falling but still favoured

The number of strategic alliances in the MidPharma space fell slightly in 2017. However, with the exception of spikes around 2010 and 2013, the number of alliances across the sector has remained at a consistently high level for more than a decade. This paints a clear picture: while MidPharmas may be carrying out less M&A, they’ve continued to embrace strategic alliances. As our 2017 paper Growth through Strategic Collaborations shows, collaboration offers companies good opportunities for transformative growth by establishing a deeper strategic focus and more effective deployment of high-value assets and capabilities.

In the final analysis, as companies explore inorganic ways of fuelling business value and growth, both M&A and strategic collaborations provide obvious opportunities to scale. While M&A can be both expensive and disruptive, it can work well if it’s synergistic and enables aligned evolution. Strategic collaborations are arguably better suited to mid-sized companies because they allow organisations to retain some control of their assets. This can be particularly important to private companies.

With the price of M&A now mostly prohibitively high, collaborations and licenses are likely to continue to be the best way for MidPharmas to grow in the future.

MidPharma Performance Ranking

We conclude this report with our annual MidPharma Performance Ranking. Here we rank MidPharmas on three fundamental attributes that we believe are indicators of long-term strength; R&D intensity (average R&D spend as a % of revenue), business development activity (number of deals per €10m revenue), and commercial performance (5-year revenue CAGR). We take public domain data on each of these three attributes and rank the companies based on the combination of all three.

Novasecta’s European MidPharma Ranking 2018

 Notes
– R&D ranking uses average R&D intensity over 5 years. The 42 ranked companies were assigned to 5 equal groups with integer scores from 0 to 4 representing the number of quadrants of the Harvey balls displayed
– BD ranking uses number of 2015-2017 deals divided by the average revenue for 2015-2017, assigned to equal groups as above
– Commercial ranking uses revenue compound annual growth rate (CAGR) 2013-2017, assigned to equal groups as above
– Total rank is based on sum of all three sub-rankings (lowest sum is highest total rank)

Our ranking has some important caveats; the R&D measure favours R&D-based companies, while the BD measure does not favour those that have taken a selective approach to bringing in assets and capabilities. The commercial measure using top-line growth rate is new for 2018 and could be argued to favour those that have grown inorganically. Finally, it is important to note that the nature of private companies is such that many do not disclose their financial data. This year, only around a third of the private companies in our sample have published complete information. This means that some private businesses that are performing strongly cannot be ranked. The ranking table, therefore, unavoidably favours listed and part-listed companies.

The higher ranks unsurprisingly include many of the companies that have already featured in this report. Genmab’s R&D intensity of 51%, fuelled by its astute commercial partnership with J&J generating impressive commercial growth, has seen it climb to the top of the rankings. Just below it, the highest ranked private company – Helsinn – has an enviable record of FDA approvals for products in cancer and supportive care. In third place is Orexo – a listed Swedish pharma company specialising in opioid dependence and pain, which has also invested heavily (31%) in R&D. Finally, focus is a key characteristic of the third-ranked fully private company – Ferring. The Swiss firm has just one owner – Frederik Paulsen Jr – whose late father founded the business in 1950. Ferring has maintained a laser focus on reproductive medicine and women’s health, with its revenues reaching the €2bn mark for the first time in 2017.

Conclusion: resilience through focus

The trends shown in this report once again highlight the resilience, sustainability and diversity of European MidPharmas. The successes of some of the privately owned and controlled companies within the group demonstrate that, even though the price environment for M&A has changed dramatically, it is still possible to grow through clever strategic collaborations and synergistic bolt-on acquisitions. Moreover, the performances of the most successful companies across the MidPharma sector as a whole underline the value of strategic focus, long-term investment in R&D, commercial excellence, and disciplined deal-making.

Analysis of the MidPharma sector’s evolution over a ten year period further emphasises the importance and value of focus. As some predict a significant wave of consolidation across the wider sector, we see a future where the laser-focused, entrepreneurial specialists in MidPharmas increasingly demonstrate that although there are clear economies of scale in the Big Pharma consolidated model, there are real diseconomies of scale too. We therefore look forward to continuing to support progressive companies of all sizes as they grow and evolve through strategic collaborations, strong commercial operations and excellent R&D.

 

As the escalating cost of both M&A and R&D continues to challenge the global pharmaceutical industry, CEOs know that it’s incumbent on them to explore innovative ways to grow their businesses. The most entrepreneurial have recognised the significant opportunity to create business value through strategic collaborations. Initiating collaborations is complex and difficult. However, the most successful examples show that it helps organisations to fuel transformative growth by establishing a deeper strategic focus and a more effective deployment of high-value assets and capabilities. In this paper we examine the need for strategic collaborations, examples from pioneers, and the lessons learned from our experiences with making them happen.

New paradigms for pharma growth required

The decline in R&D efficiency since the ‘glory days’ of small molecule blockbuster medicines has been well documented: it just isn’t getting any easier to discover and develop your own great new medicines when there are so many great ones already out there. So pharma CEOs are still looking for alternative business models to fuel their quest for growth. The value to be had from me-too and incremental innovation has dissipated in many markets, while the cost of developing breakthrough medicines has rocketed.

As organic top-line and bottom-line growth has therefore become ever more difficult to achieve, pharmaceutical companies of all sizes have increasingly looked for external sources of on-market or late-stage products to bolster portfolios and accelerate short-term revenues. Traditionally, company acquisition has been considered a good way of adding immediate top-line, in contrast with individual country/region deals for specific products. However, scaling a business through company or product acquisition alone presents significant challenges; there are many more in-licensors of products than out-licensors, while the prices of both companies and products have been inexorably rising. Alternative approaches to growth are required.

In recent years, the difficulty of securing inorganic growth has fuelled a revealing trend across the sector: a marked fall in the number of deals that are executed. The global volume of mergers, acquisitions, asset transactions and strategic collaborations has been in steady decline over the last five years. In the past twelve months it has collapsed, dropping by 18% in the last year:

Global deal volume declined sharply over the last year

 

 

Notes − Novasecta analysis from GlobalData database of disclosed and completed pharma/biotech deals, for the year periods from July to June

The decline in deal volume has not been limited to one particular type of deal, with the volume of M&A, asset transactions and strategic collaborations each reducing in the last year. Although the fall in M&A and asset transactions (-34%) is more pronounced, strategic collaborations have also seen a double-digit decline (-13%) in the last year:

Global volume of M&A and asset transactions has trended down by more than strategic alliances

 

Notes − Novasecta analysis from GlobalData database of disclosed and completed pharma/biotech deals, for the year periods from July to June

The value of deals is down too. M&A and asset transactions value has fallen in the last two years and is now similar to the level 5 years ago. The value of strategic collaborations has been more resilient, though again the last year has shown a significant drop:

Global value of M&A, asset transactions and strategic alliances is down

 

Notes − Novasecta analysis from GlobalData database of disclosed and completed pharma/biotech deals, for the year periods from July to June

The drivers for the fall in M&A activity are varied. Fundamentally, M&A is risky, costly and time-consuming. Studies routinely indicate that a high percentage of acquisitions fail to deliver on their estimated value targets.

The challenges of M&A have been compounded in the last years by the escalating cost of doing deals. Our own deep-dive research – published in the Financial Times at the start of 2017 – showed that the price of acquiring businesses has almost doubled, making it prohibitively expensive for all but the largest and most well capitalised companies.

In addition, the challenges of post-deal implementation – known to be complex, sluggish and protracted – undermine the promise of immediate top-line growth. Common incompatibilities between business models, processes and cultures means it can take more than 5 years – and significant operational disruption – to integrate a company. Moreover, the diversity, scale and complexity of the new entity can itself become too costly or too difficult to manage.

However, despite the challenges, it’s evident that securing inorganic growth remains a strategic priority for many across the industry. This comes as no surprise. Pharma is a highly fragmented industry – its top five global players account for just 25% total market share (compared to 60-80% in sectors like Financial Services and Oil & Gas). Such fragmentation means that even the largest pharma companies almost always lack ‘critical mass’ in one area or another – whether that’s being ‘sub-scale’ in any of the various stages of R&D in diverse therapeutic areas, or having limitations in manufacturing, commercial or regional capabilities. These limitations are a natural barrier to growth. But they can also be a catalyst for opportunity.

Pharma’s inherent fragmentation suggests that there is enough capacity within the industry for an increase in collaborative deals. The challenge is to be brave and to think differently. In a marketplace where the risks and costs of M&A have led to widespread caution, strategic collaborations – in which companies trade complementary assets and capabilities – could offer an alternative path to growth.

In the past 12 months, Novasecta’s high-level dialogue with CEOs across its diverse network indicates an increasing appetite – particularly among mid-sized pharma companies – to take a bolder, more collaborative approach to growth. Entrepreneurial pharma companies are recognising that risk-sharing between companies can both mitigate the effect of limited capabilities in certain areas and fuel transformative value growth.

Strategic pharmaceutical collaborations: trade, swap, or share

Strategic collaborations are distinct from conventional BD activities such as M&A and licensing in that the emphasis is ‘strategic’ rather than ‘transactional’.

The industry has an established BD system of functions in organisations, conferences and deal brokers that enables the buying, selling or licensing of assets because they’re tangible, quantifiable and liquidly transactable. The final deal, whether purchasing a company or in-licensing a product, is ultimately a relatively simple transaction. However, conventional deals can often be reactive, opportunistic or serendipitous, with targets sometimes pursued due to their availability rather than as part of a more considered strategy.

A more effective method is to approach growth through the lens of trading, swapping or sharing carefully selected capabilities and assets. Strategic collaborations, which are founded upon transacting with something other than cash, provide an opportunity for organisations to reinforce their strategic focus by trading capabilities and assets with like-minded partners for mutual benefit. Cash may also change hands depending on the value of what is traded, but the foundation is the securing and giving of more than cash.

The rationale is simple. Every organisation has a unique and diverse set of strengths – capabilities and assets – across multiple dimensions and countries. Similarly, almost every organisation has legacy assets and capabilities that may be misaligned with core strategy or surplus to requirements. Each of these areas has its own transactable value. Moreover, each presents an opportunity to build greater strategic focus and to collaborate to create scale. These assets and capabilities are the DNA of effective strategic collaborations.

An organisation’s ability to leverage its assets and capabilities is therefore the key to strategic collaboration. This might be through a strategic ‘swap’, where companies trade complementary assets and capabilities, or a Joint Venture (JV), where partnering companies combine to create a new entity, or other types of creative structured deals.

The strategic collaboration pioneers

Examples of major strategic collaborations between Big Pharmas have been rare, but notable. Probably the most high-profile example was the 2014 deal between GSK and Novartis which saw the Swiss company swap its vaccines business for GSK’s oncology unit, with the two companies forming a JV in Consumer Healthcare. More recently, Merck has entered collaborative agreements with both AZ and Eli Lily, through which companies will share R&D capabilities to accelerate new cancer treatments. Coverage of the latter formed part of a wider discussion of how ‘fierce’ pharma rivals are increasingly becoming ‘frenemies’ that are cooperating with each other to help bring medicines to patients. It’s a direction of travel that’s likely to continue.

However, although the most memorable examples appear to involve large multinationals, opportunities for strategic collaborations have been more likely to be seized by mid-sized companies – ‘MidPharmas’. Of late Big Pharmas have reduced its reliance on partnering as their deep pockets and strong balance sheets allow them to pursue the more apparently simple route of acquiring companies and maintaining long-term control over their smaller targets. Conversely, mid-sized organisations have been more open to collaboration, not least because their business models are more suited to ‘equitable partnering’ where financial resources, skills, capabilities and risks are more easily shared to create synergistic value.

The notion that MidPharmas are more dynamic in executing M&A and strategic collaborations is borne out by the numbers. Our analysis of deal-making in 2016 shows that mid-sized companies are punching well above their weight when the volume of deals is considered as a proportion of the companies’ annual revenues:

$20bn of revenue gets you many more deals in MidPharmas than in Big Pharma

Notes − Novasecta analysis from GlobalData database of disclosed and completed pharma/biotech deals, combined with public domain revenue data from Novasecta’s analysis of European MidPharmas and Big Pharmas: strategic collaborations comprise both partnerships and licensing deals as categorised by GlobalData

Reasons to strategically collaborate

The emergent trends make interesting reading for CEOs considering new approaches to growth: collaboration is becoming more frequent than M&A in companies of all sizes. There are many potential reasons for this. Primarily, transaction values for strategic collaborations are much lower than for M&A. The average partnering deal is between five and ten times cheaper than the average M&A. This, in turn, translates into lower risk. Better still, collaborations are often easier to exit should the need arise.

Strategic collaborations are undoubtedly difficult to initiate. However, once opportunities have been crystallised and discussions have advanced, deals are proportionately faster to create and often function without the need for full integration of processes and cultures. This gives companies an operational speed and agility that is rarely experienced with M&A. Similarly, since collaborations do not have the same impact on organisational culture as acquisitions, the risk of losing talent is significantly reduced. In fact, collaborations often create opportunities for skills transfer and learning, helping organisations retain and motivate talented employees.

Fundamentally, strategic collaborations provide a powerful opportunity to create transformational value – helping companies stimulate innovation, deepen strategic focus and, ultimately, grow faster.

Illustrative examples of the benefits of strategic collaborations compared to M&A

 Making strategic pharma collaborations happen

So how can businesses determine whether strategic collaborations are an appropriate consideration for them? And once they have, how can they catalyse the opportunity to make collaborations happen? It’s a complex process that requires methodology, objectivity and trusted relationships.

To start the process of considering strategic collaborations pharmaceutical companies need to view their complex businesses across four distinct units:

  • R&D assets
  • R&D capabilities
  • On-market assets
  • On-market capabilities

Each of these units drives value and is eminently tradable. We define them as ‘Units of Transactable Value’. They’re at the root of transformative strategic collaborations, and to trade them effectively requires companies to know themselves, know their market, and make their moves.

Step One: know thyself

To identify opportunities for strategically focusing their business, organisations must have a profound and critical understanding of their own Units of Transactable Value. It is only by securing a “partners-eye” understanding of the strengths, weaknesses and value of its internal assets and capabilities – right across the value chain from R&D through to manufacturing and commercialisation – that a company can determine how attractive it is to potential partners and what it really needs to trade. Critical assessment can help identify areas where a business may be ‘sub-scale’. More importantly, opportunities can emerge to create greater value with the assets and capabilities the company has already got.

Naturally, identifying and valuing assets is familiar territory for pharma. It’s eminently straightforward. However, the same cannot be said of capabilities, which are often harder to define and equally difficult to value. The relationships between assets and capabilities are multi-dimensional and complex; a company’s capabilities are aligned within and between assets, making it essential to understand the individual parts and the relationship between the two. Structured thought is key, at Novasecta we have found that clarity can be supported by reducing down the complexity to manageable elements:

Illustrative asset and capability matrix

Despite the undeniable importance of robust self-awareness in defining strategic focus, many companies lack a clear and objective view of their capabilities and their associated value to potential partners. This makes collaborations harder to ignite. In reality, such evaluation is therefore best carried out through an honest, critical and informed dialogue between executives and their most trusted and experienced external advisers.

Step Two: look at the relevant partnership space with fresh eyes

The second phase of unlocking strategic collaboration is to identify potential partners. This is a complex process that requires a deep knowledge of the marketplace and a broad understanding of the assets and capabilities that competitors may be prepared to put ‘on the table’ for collaboration. Naturally, this is difficult. There is no open market for companies to disclose where their organisations are sub-scale or indeed to indicate willingness to divest parts of their business. Moreover, although communications between CEOs are generally warm and supportive, it’s highly unusual for leaders to share sensitive strategic information or discuss areas of corporate vulnerability with peers.

Again, a structured and experience-based approach is key, allowing a bespoke and sophisticated segmenting of potential targets based on both analytical evidence and subtle understanding of the motivators and drivers of other companies Proxy measures can be used to improve decision-making in this area. These could include pipeline data, R&D intensity, on-market product/portfolio sales, geographical footprint and divisional headcount. Likewise, in companies that have made a significant strategic shift – for example, a move from one therapy area to another – it’s a reasonable assumption that they may have legacy products or capabilities that they’re willing to trade or divest.

With the right partner, proven methodology and clear decision criteria to support partner identification, it’s possible to build a shortlist of potential targets for collaboration. Once established it’s then a case of mapping capabilities and assets to develop deal hypotheses and rationales that may resonate with specific prospective partners.

Step Three: make your move

The sensitivities of brokering strategic collaborations mean that the final step is wholly dependent upon courage and trust. This is an exploratory and open dialogue, a long way away from pitch decks and mandates. Ideally, initial discussions with target companies will preserve the anonymity of the enquiring business, leading to a more open and honest view of deal feasibility and requirements.

Novasecta’s experience in catalysing collaborations for clients is that a trusted and anonymous dialogue with a CEO or BD Head based on an initial well-reasoned deal hypothesis yields concrete interest and disclosure of additional deal hypotheses. This allows our clients to leverage the insights from such dialogues to inform – and, if necessary, change – their strategic approach. By opening the door to collaboration – irrespective of whether they choose to walk through it – organisations can benefit from real-world insights that might encourage them to rethink strategic goals. This, once again, underlines the emphasis on strategy that is inherent in collaborations – an emphasis that distinguishes it from more transactional deals.

Naturally, in the event of discussions with a potential partner becoming more advanced, dialogue is ‘best unblinded’ – freeing the two companies to engage, negotiate and agree directly based on an excellent starting hypothesis.

Catalysing strategic collaborations

The need for strategic collaborations across the pharmaceutical industry has never been greater. However, they are incredibly difficult to do well. Successful collaborations rely on trust, clear deal hypotheses and – crucially – courage. One of the parties has to be brave enough to propose something that is not publically available that could be of interest to another party – and this alone dictates the need for strong trust between CEOs to enable open and honest discussion of future possibilities.

In fact, the CEO is integral to the success of any potential collaboration. CEOs know that it is their responsibility to shape the strategic focus of their business to drive value creation and growth. The most entrepreneurial recognise that they must seriously consider spin-outs, divestments and out-licensing as well as acquisitions, asset transactions and joint ventures. However, forging successful strategic collaborations requires much more than a willingness to consider innovative growth models – it requires commitment, engagement and leadership.

The good news is that strategic collaborations can be done. Our experience is that through the addition of our experience, analysis, strategic creativity and trusted CEO network our clients are catalysing strategic collaborations that would not otherwise have been considered. And in pharmaceuticals a collaborative industry will always beat an overly consolidated one.

Novasecta’s Managing Partner, John Rountree, was asked by Reuters to reflect on Christophe Weber’s, CEO of Takeda, comments on the cuts to R&D after their deal with Shire:

“They are cutting quite deep in R&D and it is not clear if the amount of money they are saving is going to be beneficial or harmful. Merging R&D is never easy. There are going to be lay-offs and that creates uncertainty and disruption and sometimes the best talent just leaves.” To view the full Reuters article, click here.

This is not the first time John’s opinion has been sort on the deal having previously been asked for his thoughts by CNBC.

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