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.

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

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.

 

The relative advantages of being a privately owned or publicly listed pharma company is an enduring debate across the industry. It polarises opinion. The central consideration is simple: how much influence does ownership structure have on the evolution and growth of a pharma business? With private pharmas typically smaller than their listed counterparts, it’s often suggested that this fuels a nimbleness and agility that gives private an advantage over listed. Conversely, it’s argued that listed companies’ ability to access capital markets gives them opportunities to scale that are rarely possible in privately owned businesses. Our own analysis reveals a deeper complexity. Although there are distinct advantages to both ownership types, these seldom relate to size and scale. The comparative benefits of private and listed companies – and indeed the characteristics that can stifle their growth – are embedded in cultures and processes that are synonymous with ownership type. The clues for value creation are in the same place. To grow, pharmaceutical companies must craft R&D and commercial strategies that suit their ownership structure. A bespoke approach is best; one size does not fit all.

Ownership matters: impact on growth

The ownership structure of a pharmaceutical company can have a significant influence on the nature of its evolution and growth. Yet in an industry where the majority of the biggest players are stock-market listed, a large proportion of highly successful mid-sized companies are privately funded. A good example is the European MidPharmas, defined by Novasecta as R&D-based integrated pharmaceutical companies with annual revenues of between €50m and €5bn. Over 70% of them are privately owned or controlled. The resilience and growth of the European MidPharmas has been an ongoing trend in the market for several years. Their growth has invariably been accompanied by an R&D intensity that illustrates a strong commitment to long-term innovation, with many consistently investing more than 15% of their revenues in R&D.

The MidPharma model, which typically relies on a long-term view and ‘patient capital’, contrasts sharply with the approaches of listed counterparts. However, the attractiveness of the mid-sized sector, as evidenced by J&J’s $30bn acquisition of Actelion in 2017, shows that carefully planned private ownership prior to listing can yield stunning results.

The relative benefits of listed and private ownership are difficult to isolate. However, through the analysis of trends, data and real-world experience, it is possible to evaluate the influence that ownership structure can have on a business, and to explore strategies – in keeping with that structure – that may help stimulate the growth required for sustainability.

The data: comparing private and listed performance

In late 2017, Novasecta reviewed the R&D and commercial performance of 84 large and mid-sized pharmas in Europe. Our evaluation focused on the volume and commercial success of New Drug Applications (NDAs) for every company within the sample, with both US and EU-approved drugs (Marketing Authorisation Applications) included in the calculation. We also looked at New Molecular Entities (NMEs) as a subset of NDAs to establish the volume of approvals in more innovative classifications. 70% of the sample were privately held or privately controlled companies (where >50% of shares are privately owned). The remaining 30% were listed. The private companies tended to be smaller than their listed counterparts, yielding a mean revenue of €2bn versus €7.5bn in listed companies.

In terms of NDA generation, the proportion of non-producing companies in the two ownership categories was broadly similar, with a slightly higher percentage for private companies (64%) than listed (54%). At the other end of the scale, in terms of the more innovative NME generation, the share was even closer, with 22% of private companies and 23% of listed generating NMEs.

However, of the producing companies, private companies appear to be more productive than listed. Our analysis shows that private companies generate more NDAs per €100m R&D spend (1.48 versus 1.03) and more NDAs per €1bn revenue (2.64 versus 1.64).

Private companies generate more NDAs per R&D spend and per revenue

 

Notes
-26 companies generated NDAs in the past 5 years AND had available R&D spend data (12 listed and 14 private)
-32 companies generated NDAs in the past 5 years AND had available revenue data (12 listed and 20 private)
-Revenue and R&D figures are 5-year averages across 2012-2016
-Privately controlled companies (>50% shares privately owned) are included in the category ‘Private’

When comparing NME-producing companies, the difference is even more pronounced. Private pharmas generate 0.98 NMEs per €100m R&D spend versus 0.24 in listed organisations – almost 4 times the amount. Similarly, private firms generate 1.46 NMEs per €1bn revenue, nearly 3 times as many as listed companies (0.54).

Private companies generate more NMEs per R&D spend and per revenue

 

Notes
-19 companies generated NMEs in the past five years and comprise the analysis above (6 listed and 13 private)
-Revenue and R&D figures are 5-year averages across 2012-2016
-Privately controlled companies (>50% shares privately owned) are included in the category ‘Private’

Private companies also appear to be more efficient with their R&D spend, investing a slightly smaller proportion (16%) of their revenues on R&D than listed (19%), yet generating more NDAs and NMEs as a result.

Private companies are more efficient with their R&D spend

 Notes
-26 companies generated NDAs in the past 5 years AND had available R&D spend data (12 listed and 14 private)
-Revenue and R&D figures are 5-year averages across 2012-2016
-Privately controlled companies (>50% shares privately owned) are included in the category ‘Private’

However, significantly, listed companies appear to be more successful in commercialising their NDAs and NMEs. Listed firms generate more revenue per NDA than private pharmas (€1,023m per NDA in listed versus €848m in private). Moreover, they generate more than twice as much revenue per NME (€3,792m) than their private counterparts (€1,825m).

Listed companies generate more revenue per NDA and per NME

 Notes
-32 companies generated NDAs in the past 5 years AND had available revenue data (12 listed and 20 private)
-19 companies generated NMEs in the past five years and comprise the analysis above (6 listed and 13 private)
-Revenue and R&D figures are 5-year averages across 2012-2016

Creating R&D value

Our analysis reveals three hypotheses that could relate to the common characteristics of each ownership type. The first hypothesis is simple: private companies are better at generating NDAs than listed companies. The data shows that private companies are generating more NDAs on a bang-for-buck basis, yielding a greater number of new drugs despite investing less revenue in R&D.

However, further interrogation of the data brings private pharma’s productivity into sharper focus. Private companies’ NDAs appear less valuable than those produced by listed companies; they generate lower revenues and rarely reach the same levels of peak sales. This fuels two related hypotheses: either listed companies are better at commercialising new drugs, or they produce more commercially-viable NDAs and NMEs than private firms. In some cases, both may actually be true.

Let’s examine the first hypothesis. Our experiences of working closely with leadership teams at European MidPharmas tell us that it’s no surprise that R&D is more productive and efficient in private companies. It’s their lifeblood. Private companies depend heavily upon having innovation within their pipelines – without it, they could quickly disappear. Moreover, since they don’t have access to the capital markets to buy their way out of trouble, private firms need to be totally focused on innovation to ensure they remain sustainable. As a result, they tend to take a longer-term perspective, leaving them free to focus on delivering better R&D.

Taking the long view is a key characteristic of private ownership. Whereas listed companies are likely to be more focused on quarterly earnings, commercial growth and shareholder value, family companies are typically thinking about sustainability and the next generation. For example, Roche CEO Severin Schwan says being family owned gives his company an important edge and allows it to think about the long term. Roche, he says, thinks in ’30-year cycles’ that afford it the luxury of making decisions that may not produce tangible benefits for 10-15 years. This philosophy is unlikely to fly in most listed companies.

A natural consequence of the long-term focus is that private organisations tend to take fewer risks. If your key goal is sustainability, rather than shareholder price, you’re likely to refrain from pursuing ‘super drugs’ or making big bets with innovation. Private companies avoid the volatility and vulnerability of market fluctuation but miss out on the high risk, high reward of ground-breaking innovation.

Nevertheless, there are some great R&D success stories among the European MidPharmas. In terms of the number of NMEs per €1bn revenue, two of the top-performing companies are privately-held MidPharmas; Helsinn Therapeutics (6 NMEs per €1bn revenue) and Chiesi (1.5 NMEs per €1bn revenue). Another high performer – Ipsen (0.9 NMEs per €1bn revenue) – is privately controlled and part-listed.

By comparison, some of the industry’s biggest companies yield far fewer NMEs. For example, AstraZeneca and Novartis both generated 0.25 NMEs per €1bn revenue.

Lugano-based Helsinn is the most prolific producer of NMEs per €1bn revenue in our sample, with an enviable record of FDA approvals for a privately-held company. The business has grown significantly off the back of its cancer portfolio. Its approach has been to focus on innovation, securing approval for drugs that it can subsequently distribute through commercial partners. Without the inherent pressure of a commercial organisation, Helsinn has proven extraordinarily strong at securing NMEs. It’s a great example of how releasing yourself from the commercial discipline can help a business focus on R&D value. Such has been Helsinn’s success that it is currently introducing its own commercial salesforce in the US. That’s a powerful evolution fuelled by innovation.

Chiesi is family-held and has grown impressively in the past decade under the ownership, direction and active management of the Chiesi brothers Alberto (President) and Paolo (Head of R&D). Chiesi is unusual in that, unlike many other private companies, the family remains heavily involved in the running of the business. This has helped it maintain a focus on sustainability to prepare for the next generation. Consequently, Chiesi has been able to innovate in the respiratory therapy area and become an important player in a competitive category dominated by big pharmas. It has been very successful in securing approvals, not least in the triple combination therapy for COPD, where it was the first company to receive EU approval. Chiesi is a great example of how family management and control can help an organisation succeed at R&D and compete with its bigger competitors.

Actelion is historically one of the jewels in the crown of the MidPharma sector. Prior to its acquisition by J&J, it portrayed all the characteristics of a privately-held company under the leadership of Jean-Paul Clozel. This led to some very long-term decision-making and a strong focus on R&D. Actelion’s track record in innovating is impressive; not only did it secure approval for its first major product, Tracleer, in September 2017 but it quickly followed it up with approval for a second, for Opsumit, just two months later. This is highly unusual. Although Actelion was subsequently listed prior to its acquisition by J&J, the company has reaped the benefits of the long-term R&D focus it established as a privately owned organisation.

Ipsen, another high producer of NMEs per €1bn revenue, is one of the most interesting companies in our sample. The business is privately controlled by the Beaufour family but also has a listing. Ipsen’s approach has been to secure approvals for some clever innovations on the backbone of some relatively old specialist products. It’s proved very successful. The company’s commitment to the long-term and its focus on R&D has seen its share price rocket. However, the evolution comes with a twist: Ipsen has begun to commercialise itself in the US. The strategy was originally unappealing to the analyst community who weren’t keen on the idea of investing in commercial. Yet the move has proved enormously successful. Ipsen’s story provides a good counterpoint to the argument that private companies should leave commercialisation to the bigger players. They’ve bucked the trend – and it’s worked.

These examples demonstrate that a long-term model of R&D can yield great results. Ultimately, however, the job of managing R&D to create value hinges on three key steps. Primarily, create a reality-based strategy that aligns with your ownership structure and accounts for the strengths and weaknesses within your organisation. Secondly, ensure this strategy is made real through meaningful action plans for your portfolio and sources of innovation. Finally, create a management system with strong project leadership and fit-for-purpose governance. Taking these steps – irrespective of ownership structure – can help create a platform for long-term sustainability and commercial growth.

Creating commercial value

The second hypothesis – that listed companies are better at commercialising new drugs – is arguably more straightforward to quantify. At the headline level, the data shows that listed companies generate more revenue per NDA than private companies – and they generate more than twice as much revenue per NME. At a more granular level, the numbers are even more revealing.

We analysed the top 300 drugs (by sales, 2016) and ranked pharma companies according to the number of products they had in the listing. The top performers are unsurprising. Merck & Co has the most (27), followed by Pfizer (25), Novartis (23), GSK (19), and Sanofi (17). However, when we interrogated the data further to establish companies’ revenue per product in the top 300, the ranking takes on a completely different look. The top companies are: Regeneron ($3,323m revenue, per product in top 300), Alexion ($2,843m), Gilead ($2,595m), Abbvie ($2,413m), and Celgene ($2,177m).

Top performers (by revenue per product in the top 300 drugs) are largely listed US companies

 Notes
-Source: PharmaCompass – top 300 drugs by global sales in 2016

The rankings are both intriguing and instructive. The top 5 companies are all American listed companies with the top three each being classic, high-risk biotechs. Furthermore, four of the remaining five businesses in the top 10 are also listed and American; Amgen, J&J, BMS and Biogen. The only exception, in 6th position, is the family-controlled Roche, which with 16 products in the top 300, yields revenue of $2,121m revenue per product. However, Roche’s strong performance is inexorably linked to its mega acquisition of the American biotech, Genentech. That shrewd 2009 purchase, de-risked by the time it was completed, epitomises Roche’s long-term view and its willingness to look beyond a 3-5 year horizon.

Using revenue per product in the top 300 as a proxy measure, it appears that the most commercially successful companies have followed a typical route; US listing and big, high-risk bets on innovation. The two most prominent examples are Amgen and Gilead.

Amgen, perhaps the original risky biotech, kick-started the biotech revolution by investing venture funding in biologics. When the gamble started to pay off, it began the process of commercialising itself and has been growing ever since.

The Gilead story involves similar risk. Its $11bn purchase of Pharmasset in 2011 was the catalyst for groundbreaking successes in hepatitis C. But when it ran out of patients to treat, Gilead rolled the dice again with an $11.9 billion acquisition of Kite Pharma to access its CAR-T treatment for advanced lymphoma. Its share price immediately rocketed.

The nature of Amgen and Gilead’s successes should provide an important learning for listed companies: always be conscious of what your shareholders want. In the US, shareholders are looking for huge returns. They’re happy to put up with the inherent volatility of high innovation if the potential upsides appear worth it.

In Europe, shareholders are perhaps more conservative – and it’s led to alternative types of approaches. GSK, for instance, has convinced its shareholders to value sustainability. The company is taking the long-term view more commonly associated with private organisations. It has eschewed high risk innovation in favour of volume, focusing on getting greater quantities of its medicines around the world. The approach has seen GSK expand into emerging markets, securing high volume rather than high value. From an R&D perspective, its output of NMEs per €1bn revenue has been just 0.16. Yet its commercial model is thriving, yielding strong and sustainable dividends for shareholders.

GSK’s approach of favouring volume over radical innovation is in sharp contrast to the growth strategies of most listed companies. As our ranking of companies by revenue per top 300 products shows, many of the top performing companies are pursuing high innovation. The top 10 certainly suggests that our third hypothesis may be true: listed companies generate more commercially-viable NDAs and NMEs than private organisations. It also underlines the potential rewards of investing in high-risk innovation. However, it’s a strategy made for companies that have access to the capital markets. As we’ve already seen, it doesn’t sit comfortably with the long-term ethos of private companies.

So what of our second hypothesis? Are listed companies better at commercialising new drugs? The data backs up the claim. The reason for this once again relates to the vagaries of ownership and the divergent demands of shareholders. Whereas private companies focus heavily on innovation, listed companies typically place a greater focus on commercial performance. This is entirely driven by the discipline of the market.

Shareholders’ demands for quarterly earnings and commercial growth force listed companies to impose a capital discipline that focuses sharply on the numbers. The share price matters. This means establishing robust processes, bringing in great people and focusing them firmly on delivering commercial success. Aligned to this, the ability to recognise opportunities that can deliver shareholder value, along with a preparedness to invest, are equally important attributes. Collectively, these are the hallmarks of commercial effectiveness.

Private organisations can learn much from the commercial approaches of listed companies. Fundamentally, commercial success is not about size or scale, it’s about discipline, rigour and process. Private companies don’t need to play the high innovation game to be commercially successful. With better structure, discipline and methodology, it’s possible to squeeze more from your assets without betting the farm. A good start point is to use external benchmarking to gain an objective view of your marketing strengths and weaknesses. This can help you establish where you need to invest to achieve the greatest commercial returns.

Objective measurement and external assessment of commercial plans is standard practice in most competitive industries. As the value of external marketing audit is increasingly recognised, pharma companies are beginning to benchmark key elements of marketing against comparable companies and are using objective insight to inform commercial strategy. It’s an approach that we endorse. Companies chasing superior commercial performance must ensure that they have strong marketing excellence structure and processes.

One size doesn’t fit all

The ownership structure of a pharmaceutical company can certainly influence the nature of its evolution and growth. But that doesn’t mean that the different ownership types cannot learn from each other. They must. With R&D still essential to the future of the industry, listed pharmas can learn from private companies in taking the long view on innovation. However, since commercial success is vitally important for short-to-medium term survival, private can learn much from their listed counterparts in this crucial area.

In the final analysis the message is simple: one size doesn’t fit all. Companies should craft their R&D and commercial strategies to suit their ownership structure. The bespoke approach, based on reality-based evaluation, is always best.

For privately owned/controlled companies – in particular the European MidPharmas– our analysis can act as a satnav to guide the next part of their journey. R&D is more productive and efficient in private companies, but with listed companies proving more successful at commercialising NDAs, there’s a critical need to think carefully about your R&D and commercial strategies. European MidPharmas should certainly continue to develop their own molecules. With in-licensing too expensive, it’s important to maintain focus on your own products. But with better commercial discipline and process, it should be possible to sweat your assets and deliver more value.

One final thought for private companies is the opportunity to part-list. A number of family companies are contemplating part-listing to access the capital markets. Others – like Ipsen, Recordati and Almirall – have already taken the plunge. It’s an option worth considering; it can give you the capital discipline and edge of the market and put you on a more ambitious, if volatile, path for growth. Part-listing won’t work for everyone. However, if it’s done with care – as is the case with Roche – it may be possible get the best of both worlds. After all, as the data shows us, ownership matters.

 

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 defines European MidPharmas to be R&D-based integrated pharmaceutical companies with annual revenues of between €50m and €5bn. Our consulting work in this sector has given us a uniquely powerful understanding of how this tremendously diverse group of companies can survive and thrive. In this annual report we share some of our insights into their health. Through this analysis we point to a focused and entrepreneurial future for the entire industry that goes beyond an industry dynamic driven by Big Pharma and small biotechs.

Ownership

It is the ownership of European MidPharmas that makes them such an unusual yet successful group of companies. In an industry that is dominated by stock-market listed Big Pharmas and venture-backed biotechs, the fact that more that 70% of European MidPharmas are privately held or controlled points to a more long-term and “patient capital” model for the industry. We therefore segment the 74 MidPharmas that we track into three ownership categories throughout our report:

  • ‘Pure’ listed (21, 28%) – publicly-traded with no majority shareholder
  • Listed privately-controlled (8, 11%) – publicly-traded with a majority shareholder
  • Private (45, 61%) – wholly owned by families or foundations or funds

To further classify the various companies we combine the ownership dimension with scale – defining €50m-€5bn as “mid-sized” – and R&D intensity, defined to be R&D investment as a proportion of revenue:

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

Notes
− Novasecta analysis from company websites and many other public domain sources. 2015 data has been used for selected companies where 2016 data has not yet been published
− Companies headquartered in Ireland but with most of 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 74 MidPharmas, only the 42 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 (e.g. Angelini, Menarini, Thea, Urgo)

The resilience of European MidPharmas, as noted in our 2016 report, has continued in the past 12 months. Only two have left our list in the year: Shire, a tremendous growth success story, now a Big Pharma with its transformative Baxalta acquisition, and Meda, acquired by Mylan at a 92% premium. So MidPharmas are not only surviving, many are flourishing. There appears to be an encouraging continued R&D intensity across the sector, with a good number of the companies investing more than 15% of their revenues in R&D. MidPharmas are increasingly recognising that investment in R&D reduces the risk of not having product and is a key ingredient of a sustainable business.

The rise and resilience of the MidPharmas is perhaps best exemplified by Actelion, which was acquired by J&J for $30bn in January 2017. So this is the last of our MidPharma reports in which Actelion will be covered. Its acquisition underlines how strong and attractive MidPharmas can become. The $30bn price tag, based on an eye-watering multiplier of 15 times revenue, also shows how much Big Pharmas are prepared to pay for strong innovation capabilities. The purchase was indeed a ‘wake-up call’ to the industry, reinforcing the value of good R&D and focus. Moreover, it breaks the mould of market valuation; analysts have traditionally not valued discovery assets and capabilities, considering them too distant and volatile to quantify accurately. J&J’s purchase is based not on consolidation cost-savings but on strategic benefits and long-term growth. The high price – mirroring a trend towards increasingly expensive M&A in pharma that will be examined later in this report – reflects the growing strength of some European MidPharmas.

The ownership of the European MidPharmas can provide a helpful foundation for sustainability. In an industry that has long-term horizons but operates in an uncertain and volatile economic climate, this is a valuable characteristic. Certainly, corporate sustainability can be a force of good in the industry; a laser focus on achieving excellence in a core, specialist area is evident not only in many European MidPharmas but also in larger companies like Boehringer Ingelheim and Roche, both of which have substantial private shareholdings. Combining patient long-term capital (a characteristic of privately-controlled companies) with financial discipline (a characteristic of pure listed companies) can indeed be a great balance to have in this industry.

One new trend in the past year has been the increase in private capital being deployed in pharma companies that doesn’t emanate from families or family foundations. For example, in the UK both Circassia and Kymab have had major funding rounds from large private shareholders that are not family offices, with the intention of creating powerful integrated pharma companies in the future. It will be interesting to see if this trend continues, with Private Equity funds seeing the value that can be created, as well as the clear risks, amply demonstrated in the case of Circassia and its major clinical trial setback.

The remainder of this report explores and contrasts MidPharma companies’ performance both with each other and with their Big Pharma peers. We focus on three primary areas, structured broadly in the order of the value chain: R&D, commercial and corporate as follows:

  • R&D
    • R&D Intensity
    • R&D Externalisation
  • Commercial
    • Revenue Growth
    • Commercial Models
  • Corporate
    • Profitability
    • M&A
    • Partnering

The report concludes with our proprietary ranking of European MidPharmas based on three fundamental attributes; R&D strength, global commercial reach and corporate business development.

R&D

R&D Intensity: Still important but some signs of pulling back in MidPharmas

This section examines the intensity of businesses’ R&D investment and what that indicates about their growth strategies. To measure a company’s R&D intensity we consider its R&D spend as a percentage of revenue. This tends to be a highly instructive proxy of the corporate business model; to what extent are companies seeking to grow organically through R&D or looking to buy their way to growth?

As shown in our opening graphic above, the proportion of revenue that European MidPharmas invest in R&D is hugely variable. This is consistent with our previous annual reports. As was the case last year, there are two clear clusters: those that maintain a significant commitment to R&D, investing between 15-25% of revenue, and those that invest between 5-15% in R&D. In the latter cluster R&D may perhaps be considered an investment necessity for Life Cycle Management and commercial success, rather than a source of future earnings and growth. Outside of these two clusters, there are a small number of companies – from across all three ownership types – investing less than 5% of revenue in R&D.

Another indicator of R&D intensity is the extent to which R&D investment grows year-on-year. We see R&D investment growth as a good barometer of company health; those that increase investment year-on-year have either been succeeding with it (late-stage drug development costs more than early-stage) or have confidence in its ability to create value for the organisation. So what are the latest trends? Below we explore the five-year compound annual growth rates of R&D spend across the various company segments, including Big Pharmas:

Listed companies have been increasing R&D investment more than their private peers

Notes
− Novasecta analysis:each dot represents one company, those with insufficient public domain data are excluded

In our previous two reports we observed that ‘pure’ listed MidPharmas were growing their R&D at a similar rate to their larger peers in Big Pharma. This trend continued in 2016: an encouraging sign that indicates a strong belief in the future value that R&D can create. By contrast, the privately controlled and private MidPharmas have not been increasing R&D investment as strongly, with -0.4% and 3.5% mean CAGRs respectively, albeit with a small sample size. The reasons for the decline are varied. Privately controlled MidPharmas are naturally cautious about increasing R&D investment, sometimes because they have less capital to deploy than their listed counterparts. Yet there are other more company-specific factors at play. For example, Almirall’s five-year R&D spend CAGR is negative (-7.4%), partly due to a strategic change in therapeutic focus from respiratory to dermatology. Similarly, Ipsen’s five-year compound R&D spend has also seen negative growth (-2.3%), but the company has made commercial growth in the US a clear investment priority and is starting to see very positive results from that. Elsewhere, Lundbeck’s R&D investment has steadily declined over the past five years, though it has enjoyed an encouraging increase in the last 12 months.

R&D Externalisation: Some signs of not being embraced sufficiently in MidPharmas

Our focus now shifts to the analysis of R&D business models. We examine a simple but important question: are companies using their own R&D resources or outsourcing to external parties? One proxy measure for this is the number of R&D-focused employees an organisation has, as when normalised for R&D investment. This indicates the intensity of internal R&D activities compared to external. Our analysis aims to establish whether the perceived trend and fashion for outsourcing more R&D is reflected in the data.

Certainly, the ‘virtual’ model of R&D, where companies deploy external contractors and partners to conduct R&D activities, has become a familiar direction of travel for pharma and biotech. The benefits are widely understood; outsourcing is regarded not simply as a means of securing cost reduction. Just as importantly, outsourcing represents an opportunity to access capabilities that increase flexibility, improve productivity and accelerate the speed of development. Therefore, twelve months after our first analysis of this area identified that MidPharmas had more proportional R&D heads than their Big Pharma counterparts, we once again examined the extent to which the different pharmaceutical segments are balancing internal versus external R&D.

Big Pharmas continue to externalise more of their R&D than MidPharmas

Notes − Novasecta Analysis: Each dot represents one company, those companies with insufficient public domain data are excluded

Big Pharmas now deploy a remarkably similar proportion of internal R&D staff to each other, settling at a median of 2.7 heads per €1m of R&D spend, with an apparent cap of around 3 in the number of heads per million that they choose to invest in R&D. Their similar business models and pipeline mix (later stages are typically more outsourced than earlier) clearly have an effect here. By comparison, there remains much more variability among the MidPharmas. The spread in R&D heads per €1m of spend in MidPharmas is yet again evidence of the variety in business models in this sector. Interestingly, Stada, with the highest R&D heads per €1m of 9.6 in 2016, is still as we write being actively pursued by private equity investors in 2017 in a move presumably to reduce some of the excess fixed costs in its R&D. Finally and notable this year is the smaller sample size: more companies are choosing not to disclose how many R&D heads they employ, perhaps reflecting either a reluctance to disclose decreases. Or more likely the general industry sense that it is not about numbers of people it’s about the quality.

What is clear, though, is that some private companies appear less willing to reduce the number of R&D staff they have in-house than their listed counterparts. This can be caused by a more family attitude to staff reduction – only done in extremis – or facing less pressure to do so from the stock market. Whatever their motivation, it does mean that private MidPharmas’ relative reluctance to outsource and partner does mean that these companies are missing out on the benefits of flexibility, cost reduction and productivity.

The larger companies are still refining their approach and developing new ways of transforming their R&D models. This is perhaps best exemplified by Allergan, who has – with great success – extolled and pursued an ‘open science’ model to R&D. Through this open science approach, Allergan identifies external partners – biotech companies, specialist pharma companies and academia – to conduct early stage discovery and then acquires the rights for compounds at a later stage of development. The company says that its open science concept, which has seen it reduce R&D costs, has made it ‘a magnet for game-changing ideas and innovation’. So far the stock market appears to be rewarding them for this approach. The need to find innovation and flexibility from external partners, whether biotech or service companies, is not going away soon, and many MidPharmas are behind their larger counterparts in embracing this change.

Commercial

Revenue Growth: A clear strength for MidPharmas

Comparing the growth of the various types of MidPharma with their Big Pharma peers provides some interesting clues to the evolving shape and direction of the industry.

 

MidPharmas continue to grow faster than most of their Big Pharma peers

Notes − Novasecta Analysis: Each dot represents one company, those companies with insufficient public domain data are excluded

MidPharmas are still growing their top-line revenue at a faster rate than their Big Pharma peers – continuing the trend identified last year. Furthermore, remarkably few MidPharmas have not grown at all. The same cannot be said of Big Pharma where pricing pressures and high profile patent expiries on significant products have led to a number of companies experiencing negative compound annual growth over a five-year period. Naturally, smaller mid-size companies whose businesses aren’t reliant on dominant products don’t tend to face these challenges. The contrast of the less volatile MidPharmas with the more fluctuating fortunes of Big Pharmas is notable.

Some MidPharmas have gone on to become Big Pharmas through M&A. Shire is the most recent example, having made enormous strides not least through persistent and focused acquisitions – the most recent of which being its $32bn takeover of Baxalta. Others like UCB appear to be on the same track. But the vast majority of MidPharmas are not growing top-line significantly through acquisition, preferring a more conservative and organic path to growth.

There is more recent evidence that M&A alone may not always be a ticket to success. In this regard, Valeant provides a cautionary tale. At face value, Valeant has enjoyed the biggest growth in the Big Pharma segment, with CAGR of 36% over the five-year period. However, this growth was fundamentally driven by over-paying for acquisitions that overloaded the company with debt. The massive drop in Valeant’s share price and its continued troubles prove that overly financially driven M&A roll-ups is not a viable strategy in the pharmaceutical industry.

Highlights of growth in MidPharmas include impressive compound growth at Genmab (39%) and BTG (36%), albeit from lower bases. These companies – previously classified as biotechs – are great examples of successful MidPharmas that have adopted new commercial structures to help them grow. Genmab’s compound growth, the highest in the listed franchise, is largely the result of a very focused business model. The Danish company has built its business through licenses and careful use of capital – and it has had the courage to commercialise itself as well as striking some very good partnering deals. BTG has chosen a niche – interventional medicine – and pursued targeted acquisitions to grow in this area.

The successes of BTG and Genmab, unburdened by the legacy of old commercial models, shows how new players can start with a clean sheet to establish effective commercialisation strategies for a highly competitive environment. This freedom, combined with tightly focused business models and astute leadership, has provided the engine for significant growth.

Commercial Models: Some much-needed change to come

The emergence of new and agile commercial models yielding great success shines a light on a much-debated question: are the industry’s legacy commercial models fit for purpose in the modern health and economic environment? The overwhelming consensus is now that a traditional volume-based sales model is often misaligned with the needs of new and emerging customers and influencers. The industry is having to adapt to healthcare systems that demand greater value for money in response to ageing populations and diminishing healthcare budgets.

The more effective emerging commercial models that we see in MidPharmas do not accept functions operating in silos, but instead tightly integrate medical, scientific and commercial skills. These critical functions are then further integrated into powerful strategic marketing to build strategies and engagement that are underpinned by true, holistic customer insights and understanding. Those insights no longer focus on physicians alone, being cognisant of a complex ecosystem where payers and patients are exerting greater influence.

So though the MidPharmas we profile in this report have mostly managed to sustain commercial growth, the difficulties of market access in Europe particularly require a renewed focus on evolving commercial models and capabilities for the future. Our sense is that the focus of some MidPharmas is a significant benefit in this respect, while other more diverse players are somewhat behind their Big Pharma “franchise-focused” peers in applying customer insight to commercialise their products more effectively.

Corporate 

Profitability: Healthy, with some signs that MidPharmas are catching up with Big Pharmas

With MidPharmas still growing at a faster rate than Big Pharma, albeit from a much lower base, the focus now shifts to the metric where the “rubber hits the road” – profitability. We examine the EBIT of each company, which by its nature and unlike EBITDA includes somewhat the potential cost of over-paying for buying external companies and assets.

There has been a convergence in the profitability range of all segments – apart from private

Notes − Novasecta Analysis: Each dot represents one company, those companies with insufficient public domain data are excluded

Profitability across the sector has fallen since our last report in 2016; median EBIT as a percentage of revenue in Big Pharma has decreased from 20.4% to 15.9%, whilst in listed MidPharmas it has dropped from 16.7% to 15.5%. Private MidPharmas have, at face value, suffered more, plummeting from a median of 15.2% in 2015 to just 8.4% in 2016. However, this is based on a small sample size, with very few private companies publishing their figures this year. Conversely, listed privately controlled MidPharmas have enjoyed a slight upturn on 2015 figures – growing from a median of 10.2% to 13.1% in 2016. Once again, with a small sample.

Despite the general fall in EBIT, the sector as a whole remains highly profitable. Interestingly, there appears to be a convergence in the median profitability range across all segments outside of private MidPharmas. Whereas last year we saw the median 2015 profitability for Big Pharma (20.4%) was double that of listed privately controlled companies (10.2%), for 2016 that gap narrowed to just 0.4% as MidPharmas improved and Big Pharmas declined.

There are, of course, success stories in each MidPharma segment. Genmab, as previously highlighted, has performed well, translating its revenue growth into an impressive 58% profit. Similarly, Actelion – ahead of its 2017 takeover by J&J – recorded profits of 33%. Privately controlled and listed companies, Recordati (28%) and Ipsen (22%) also posted solid results.

As in previous years, we believe that Big Pharma’s relatively higher profitability compared to some of the smaller mid-sized peers is where the financial discipline of stock markets is most apparent. Big Pharmas remain ‘safe haven’ stocks for the financial markets, with relatively high and reliable dividends. CEOs of such companies have been aggressively protecting dividends, executing share buy-backs and sustaining major cost-cutting initiatives to reinforce these. These are hallmarks of financial discipline and are generally less apparent in European MidPharmas. It remains an interesting question as to how such activities create long-term value. The catching up we are seeing in MidPharmas this year may be an important early signal that it is not. Cutting R&D, for example, yields short-term profitability benefits but risks long-term damage. Similarly, as we have seen with Valeant, a desperate quest for acquisitions to boost earnings and provide synergy cost benefits can have serious negative implications.

For MidPharmas, there are undoubtedly economies and cost-saving opportunities that come from both scale and market discipline. As we have already observed, listed companies are typically more amenable to shedding R&D headcount than their privately held counterparts as a means of cost reduction. In terms of R&D intensity, the impact on profitability is harder to call. The companies that have increased their R&D investment may well have experienced a dent in profitability, though there is a clear argument for tolerating it short-term. The risk for many MidPharmas is that insufficient cost discipline creates complacency, which ultimately stunts R&D and commercial progress. That said the contrasting risk in Big Pharma is that the constant cycle of M&A and synergy cost cutting will harm the focus and sustained investment in R&D that brought much of their success and will sustain them in future. As ever the optimum position is one of balance: maintaining cost discipline while investing for the long-term.

M&A Activity: Pulling back as the price has been simply too high

In early 2017 we carried out some deep-dive research into M&A prices and concluded that pharmaceutical M&A was too expensive for most pharma buyers. Our findings were published in the Financial Times and are also detailed in our White Paper – Pharma M&A is Too Expensive: Now What?

The escalating price of M&A has been a natural consequence of the combined effect of an abundance of cheap capital and a relentless ticking clock of patent expiries. As we outline in our White Paper, cheap capital puts pressure on larger firms to ‘do something’, and in most cases acquiring companies – at a price – can appear quicker and easier than building them.

For most MidPharmas, the price has been too high for M&A in 2016

Notes − Novasecta Analysis of mergers, 100% and majority acquisitions by MidPharmas from GlobalData deal database

Our analysis shows the stark reality of M&A for MidPharmas in 2016: a massive drop in both the number of deals and deal value. They pre-date the later phenomenon observed in deal-making across the sector in the first half of 2017 – perhaps the more long-term oriented and mostly private companies can see a bubble more quickly than their listed counterparts that are under relentless pressure by their analysts and investors to buy growth.

Reflecting on the diminished M&A activity in 2016 within the MidPharma segments, we have seen low levels of activity throughout, though the listed companies have been able to pay more through ready access to capital markets.

Listed MidPharmas spent more on M&A than their private peers in 2016

Notes − Novasecta Analysis of mergers, 100% and majority acquisitions by MidPharmas in 2016 from GlobalData deal database

In the listed segments, Recordati continued its past form with two out of the four M&A deals carried out by pure and privately controlled listed MidPharmas in 2016. Fully privately owned MidPharmas were also active, though their average deal value was considerably lower. Unlike their Big Pharma counterparts, few MidPharmas have applied M&A as a routine part of doing business. The case of listed company Shire’s acquisition of Baxalta catapulting it out of the MidPharma space is an exception rather than the rule, particularly for those MidPharmas that are privately owned or controlled.

Partnering: The preferred alternative to M&A for most MidPharmas

Moving from M&A to licensing, we now examine partnering and strategic alliances across the MidPharma sector. In contrast with the picture for M&A, privately owned and controlled companies have paid more in deal value and upfronts than their listed MidPharma peers.

Private MidPharmas are still more willing to partner than their listed peers

Notes − Novasecta Analysis of strategic alliances by MidPharmas in 2016 from GlobalData deal database

The evident preference for partnering over M&A by privately controlled companies is a phenomenon with profound implications for the industry. While other industries consolidate for scale, the pharma industry remains relatively fragmented, with an appetite for partnering and alliances that preserves and builds on the strengths of the parties involved rather than putting them through the disruption of post-merger integration and culture clash. It is not an accident that the “mega-mergers” of the last two decades in pharma are drying up – albeit there will always be the exceptions to the rule. They have become expensive and with dubious value.

Creating partnerships and alliances is a force for good in the industry, and in this sense the mostly privately controlled MidPharmas, where capital is deployed carefully and necessity is often the mother of invention, are leading the way.

MidPharma Performance Ranking

We conclude with our annual MidPharma Performance Ranking, in which we rank MidPharmas on three fundamental attributes that we believe provide long-term strength: focus on R&D, attention to partnerships, and global commercial reach. We take public-domain data on proxies for each of these attributes and rank the companies based on the combination of all three.

Novasecta’s European MidPharma Ranking 2017

Notes

− R&D ranking uses 2016 data except in selected companies where only 2015 data available, the 42 companies are then 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 2014-2016 deals divided by average revenue for 2014-2016, assigned to equal groups as with R&D ranking

− Commercial footprint ranking is the number of regions with subsidiaries (from 1 to 5) counted from GlobalData database. Regions used are Canada/US, EU/EEA, Japan, BRICS (Brazil, Russia, India, China, South Africa), Rest of World

− In a tie, companies are listed in alphabetical order

Our normal caveats still apply to our ranking: the R&D measure favours R&D-based companies, the partnership measure does not favour those that have taken a selective M&A approach to bringing in assets and capabilities, and the commercial measure favours larger companies that have had time to develop their global footprint. That all said, the ranking shows a clear clustering of groups of companies.

In the top-scoring group of 10 companies, the presence of Actelion is no surprise in the light of our discussion earlier, though being part of J&J now it won’t appear next year. The other listed companies are Genmab, again discussed earlier as a success story, newly commercialising Pharmamar, focused vaccine player Bavarian Nordic, and UCB. There are also five privately controlled or owned companies – all of which have chosen a focused therapeutic approach – Ferring, Grünenthal, Ipsen, LEO and Stallergenes. All provide inspiration for the industry’s future, as do companies in the second and third groups, that tend to follow a similarly focused approach.

The lower ranked groups partly suffer from our methodology that favours R&D intensive companies, with business models that require less R&D being more focused on generics and/or consumer markets. However some of the companies have suffered through a relatively low ranking on business development too, owing to fewer partnership deals as a proportion of revenue than other companies. This more closed model can work in some cases, but may hinder future growth and access to innovation. We remain convinced that focus and an open-ness to strategic partnerships will mark out the industry success stories in the years to come.

Conclusion: A bright future for focused and collaborative MidPharmas

The European MidPharma sector comprises a highly diverse and mostly privately controlled group of companies that point the way to a successful future for the industry as a whole. Combining up-and-coming stars that dare to be different to Big Pharma with long-established privately controlled players that can take a longer view than their listed counterparts, the sector is rich with insights on how to be successful in pharma/biotech today.

The trends that we have shown in this report that MidPharmas are growing faster and catching up in profitability to Big Pharmas are encouraging. They demonstrate that more focus and a careful use of strategic partnerships are valuable for an industry that has to develop the innovative medicines of the future. These qualities will become even more valuable as the industry embraces new digital and other technologies from non-pharma companies. Furthermore while the future global economic outlook remains uncertain, the long-term view that characterises the mostly privately controlled MidPharmas is also a sound reminder that investing in the future pays off better than over-paying for acquisitions and cost-cutting.

Successful marketing is based upon a deep understanding of the customer and positioning products to meet their needs. In the mid 1990’s pharmaceutical companies embraced strategic marketing to differentiate their products beyond clinical data and maintain competitive advantage. Though traditionally slower than fast moving consumer goods (FMCG) in adopting new commercial practices, in recent years the pharmaceutical industry has embraced ‘digital marketing’. Done well, this can generate significant benefits – but in the rush to ‘go digital’ many companies have forgotten many of the fundamentals of strategic marketing and are wasting money on initiatives that don’t add value to healthcare professionals (HCPs). To regain their commercial edge, companies must not be overly seduced by digital, and must return to the fundamentals by re-building their strategic marketing muscles.

Pharma has been constantly building on its core marketing strengths

For much of the last 50 years, pharmaceutical commercialisation has been based upon the view that doctors are primarily driven by clinical data and always prescribed rationally. As competition within the industry increased, companies had to challenge this traditional view to ensure they continued to remain commercial successful – with many executives looking to fast moving consumer goods (FMCG) companies for inspiration. The primacy of marketing and brands in these organisations drove growth and many executives sought to emulate their approach. To build equivalent marketing capabilities, pharmaceutical companies invested in training, processes and teams to create highly effective marketing machines, as illustrated by the ‘statin’ wars of the late 90’s/early 00’s. Though at times some companies broke industry guidelines in pursuit of commercial return, taken as a whole, marketing in the pharmaceutical industry has enabled greater prescriber and patient choice. In more recent years, the industry has had to adapt to healthcare systems that demand greater value for money due to aging populations and healthcare budgets that cannot keep pace with the increased demand from patients and consumers. Nearly all companies have therefore now established market access and health economic capabilities, and have integrated these critical functions into the strategic marketing planning process. With a stronger market access focus, companies can create and implement stronger marketing strategies.

Starting to flex the digital muscles

Like market access, ‘digital’ has caused pharmaceutical companies to re-look at their commercialisation approaches in pursuit of greater marketing effectiveness. As society has ‘gone digital’, so have the ways in which HCPs chosen to acquire information that will support their prescribing decision. With no prior blueprint on how to ‘go digital’ in their marketing, early pioneer companies such as Merck & Co. and Eli Lilly took a ‘commercial R&D’ approach to digital, characterised by ‘fast fail’ approach – invest in new ways of working, learn what works, and kill what doesn’t. The creation of dedicated teams has enabled these companies to build core capabilities that are now the envy of their peers. For many pharmaceutical companies however, the conservative and highly regulated nature of the industry has slowed digital adoption due to a combination of regulatory and confidentiality concerns and issues around promotion of prescription medicines to patients. In parallel with the industry beginning to flex its ‘digital marketing’ muscles, an eco-system of agencies have emerged that promise superior gains if a particular digital channel is used. This combined with the industries limited experience in the area, has meant some pharma companies have unfortunately wasted their shareholders’ money. Having spent years building core marketing strengths, the pharmaceutical industry is now being seduced by unproven ‘supplements’ to continue to grow.

The dangers of allowing strategic marketing to atrophy

At its heart ‘digital marketing’ is marketing. When done well marketing creates a customer experience that drives behavioural change and alters prescribing habits – with digital an increasingly key part of this. However, when ‘digital marketing’ is done poorly, it is little more than a distraction and at worst a waste of time and money that drives little commercial return. Novasecta’s experience is that at some level, all companies are flexing their digital muscles – with some more than others. In the last two years, all of the brand plans we have reviewed have possessed some element of ‘digital marketing’ within them. However, we have observed three key trends that senior commercial leaders tell us are cause for concern:

1. Focus on ‘digital initiatives’
Marketing plans that are anchored on one or two digital tactics e.g. an app or social media campaign

2. Weak marketing capability
Team members unable to answer fundamental marketing questions and/or make the link between tactical choices and marketing strategy

3. Reduced resource in strategic marketing
Teams responsible for delivering strategic marketing reduce budgets in preference for digital activities

These trends are indicative of organisations that are losing their core marketing strengths. While in the short term this may not affect performance, a lack of up-to-date customer insight eventually means products lose relevance to customers and commercial performance is affected. Companies must have a solid strategic marketing base if subsequent ‘digital marketing’ is to be effective.

Re-build the strategic marketing muscles

Thoughtful senior leaders in the pharmaceutical industry have realised that in many cases the pendulum has swung too far towards ‘digital marketing’, and they must now come back to marketing fundamentals. Novasecta’s experience is that for companies with a heritage in strong strategic marketing, re-building the marketing ‘muscles’ can be achieved relatively quickly by following a five-step process:

Re-build strategic marketing muscles through a five-step improvement process

A key element of embedding great strategic marketing in any organisation is having a framework of key questions that anchors teams and individuals. Though these questions may appear superficially simple, thoughtful and comprehensive answers demonstrate that the organisation has the right core strategic marketing principles in place: The key marketing questions that require insightful answers

1. What is your market?

2. Who are your target customers and patients?

3. What do they currently do and why do they do it?

4. What are your competitors doing and why?

5. What do you want your target customers and patients to do?

6. What is your product positioning?

7. What are your key activities that require investment?

8. How will you know they work?

Though it can be hard and time consuming, the pharmaceutical industry has enormous capacity for change and reinvention. As patients and HCPs have changed, then the industry has adapted to meet their needs, be it by creating strong brands, developing value/outcomes based propositions or engaging with them across multiple channels. Strong strategic marketing is at the heart of all these, as it places the customer at the centre of the organisation and focuses teams on understanding and meeting their needs. Having lost some of their strategic marketing strengths, leading companies are beginning to flex their muscles and see real gains. Time to hit the gym.

The realities of unrelenting price pressure and patent expiries put a special pressure on pharmaceutical companies to consistently create new and differentiated medicines. Pharma companies are compelled to innovate in order to survive, and the rewards for successful innovation are substantial. To understand the magic of innovation in pharma today, we have explored the lessons that can be learned from the FDA’s breakthrough innovation scheme. This relatively recent scheme provides a good indication of compounds that have the potential to become game changers, and through that the habits and behaviours of the companies that are achieving this, for some the “ultimate” level of innovation. So in this paper we review and analyse the granted breakthrough approvals from the scheme’s initiation in 2012 until the end of 2016, and explore the companies that are leading the way in the scheme. We conclude by exploring the lessons learned for would-be breakthrough innovators, defining the criteria and parameters that enable the discovery and development of game changing drugs.

A new measure of innovation for the pharmaceutical industry

The FDA’s introduction of its breakthrough designation scheme in July 2012 provided a new standard and benchmark for innovation in the pharmaceutical industry. The scheme aims to fast track and expedite the development and review of drugs for serious or life-threatening conditions. More specifically the criteria for breakthrough therapy designation require preliminary clinical evidence that demonstrates the drug may have substantial improvement on at least one clinically significant endpoint versus existing therapy. Once a drug has been designated as a breakthrough therapy, the FDA will then work with the sponsor (applicant) to ensure the design of the clinical trials is efficient and practical. Regulatory standards to demonstrate safety and efficacy must still be met to support final marketing approval. Nearly five years in, the scheme therefore now provides a comparative framework between the different products in development stage and a consistent indication of products’ potential of becoming game changers.

Between 2013 and 2016, the FDA’s CDER (Centre of Drug Evaluation and Research) and CBER (Centre of Biologics Evaluation and Research) have received 387 small molecules and 81 biologics breakthrough designation requests respectively. Of these requests, 36% have been granted by the CDER and 30% by the CBER. There has been a consistent year on year increase of granted breakthrough designations, coupled with a slow decline of failed requests that are either denied or withdrawn by the applicant.

As the Breakthrough Designation scheme is maturing, more designations are being granted and fewer are failing for both small molecules (NDA) and biologics (BLA)

Source: Novasecta analysis of the FDA’s Breakthrough Designations List. NDA is New Drug Application through CDER, BLA is Biologic Licence Application through CBER. Failed = Denied + Withdrawn

While the number of granted designations has been increasing, it is also encouraging to note that in the last three years an average of 10 breakthrough approvals per year have also been granted. For an industry with research and development timelines that can stretch to 12 years, this represents an important achievement for the companies that have made it happen.

FDA granted an average of 10 breakthrough marketing approvals per year from 2014 – 2016

Source: Novasecta analysis of the FDA Breakthrough Approvals List (2013 – 2016)

While the number of granted small molecule (NDA) breakthrough designations is almost six times the number of granted biologics (BLA) designations, the story for breakthrough designations that have subsequently been translated into marketing approvals is very different: the percentage of granted designations that subsequently obtained full marketing approvals is 50% for BLAs and only 15% for NDAs.

The chance of securing a marketing approval after a breakthrough designation is significantly higher for biologics than for small molecules

Source: Novasecta analysis of the FDA Breakthrough Approvals List (2013 – 2016)

In summary, the year on year increase of granted breakthrough designations will with time surely translate into a higher number of breakthrough approvals. The fact that biologics are delivering a higher ratio of approvals compared with small molecules points to a more biologics-oriented innovation landscape for the future.

So far breakthrough innovation is a Big Pharma – Biotech phenomenon

Now we take a closer look at the companies that are taking the lead in breakthrough innovation in the pharmaceutical industry.  We considered both size (using revenue as a measure) and geographical presence of these companies, for both designations and approvals, also noting the originators of the innovation. In terms of the breakthrough designation applicants that subsequently achieved marketing approvals, 73% were big pharmas/biopharmas (defined as revenue greater than $10bn) and 27% were biotechs (defined as revenue up to $3bn). Note we are using the term “biotech” to mean smaller and earlier stage companies rather than the nature of the molecule (biologics or small). So far companies with revenues between $3bn and $10bn have been notably absent from the breakthrough approvals list.

73% of breakthrough approvals have been achieved by Big Pharma applicants (n=33)

Source: Novasecta Analysis of the FDA Breakthrough Approvals List (2013-2016) and GlobalData for companies’ revenues

Though it is still in its early days for the scheme, it is interesting to note that in last two years smaller biotech companies have started to take an important share of approvals in comparison to Big Pharmas, taking their drugs all the way from discovery to regulatory approval.

From a geographic perspective, breakthrough approvals have been an exclusively US and European domain, with 73% of the total granted breakthrough approvals from 2013 to 2016 being to companies located in the US, and 27% to those located in Europe. Many reasons may explain these regional disparities, including the fact that it is the US’s FDA that has the scheme. US companies also have better access to funds for high-risk innovation, are close to thriving scientific hubs with access to exceptional talent, and a long tradition of entrepreneurship.

So far US companies have led the way in achieving breakthrough approvals (n=33)

Source: Novasecta Analysis of the FDA Breakthrough Approvals List and Companies’ websites

By contrast with the granted approvals being so far dominated by Big Pharmas, when considering the originators of the breakthrough approvals (the companies that created the initial compound before it was acquired or partnered for further research and development), the majority are biotechs, comprising 67%, with only 33% coming from the internal R&D of Big Pharma. It therefore appears that many Big Pharmas have been acquiring or partnering with small biotech innovators prior to requesting a breakthrough designation that they hope will subsequently result in an approval.

67% of the companies that originated the drugs that then achieved breakthrough approvals are Biotechs (n=33)

Source: Novasecta analysis of FDA Breakthrough Approvals and GlobalData for companies’ revenue

Of the Big Pharma companies that have led the way in originating the 11 breakthrough drugs that have subsequently been approved, Roche comes first with three approvals, all from its wholly owned subsidiary Genentech, followed by MSD, Boehringer Ingelheim, and Gilead with two approvals each, and Novartis and AstraZeneca with one approval each. It is also worth noting the US vs. Europe origination phenomenon for Big Pharmas. The European-headquartered Big Pharmas have originated eight breakthrough drugs internally compared to four for their US-headquartered counterparts. This also corresponds to the trend we observed in previous research of US Big Pharma companies being involved in more M&A and partnership activities than their European counterparts.

By contrast with those that originated the breakthrough molecules, of the sponsors that applied for breakthrough designations that subsequently achieved approvals, Gilead, Genentech and Abbvie have taken the lead, with four, four and three respective approvals obtained between 2013 and 2016. In the case of Gilead and Genentech this represents an impressive rate of one breakthrough approval per year.

In summary, the typical breakthrough innovator profile so far appears to be companies based in the US or Europe that are very entrepreneurial and have access to funds either through their own financing as a Big Pharma or through external investments as a smaller biotech.

The lessons for Pharma R&D

The good news is that companies do not necessarily need to undertake expensive M&A activities to increase their innovation output. Indeed, only 27% of breakthrough-approved drugs between 2013 and 2016 came from M&A, while 73% came from internal R&D and partnerships. As far as breakthrough innovation is concerned, M&A represents a quick fix and not a strategy for the long term. This is even more relevant in an environment where M&A prices are reaching new highs.

Partnerships and strong internal R&D are more sustainable paths to innovation than M&A

Source: Novasecta analysis of FDA Breakthrough Approvals and press releases

Our analysis of the breakthrough approvals confirms our prior research (M&A versus Partnerships, Defragmenting R&D) that strong internal R&D and partnerships represent the best way to innovate in today’s pharmaceutical environment. 73% of breakthrough approvals so far were achieved through this path. Developing internal know-how and capabilities is a sound strategy to build the foundations that will enable continuous excellent innovation. This can be achieved by:

  • Focusing on the company’s strength and capabilities
  • Collaborating strategically with other pharmaceutical companies, exchanging capabilities and assets that can create increased value for both parties involved
  • Fostering an entrepreneurial spirit and biotech mentality internally, with self-directed and motivated entities that entrepreneurially secure funding by understanding the commercial and business rationale for their innovation.

M&A has become an increasingly expensive method of securing new assets, capabilities and growth for pharmaceutical companies. This has been a natural consequence of the combination of an abundance of cheap capital with the relentless ticking clock of patent expiries. Cheap capital puts pressure on large firms to “do something”, and in most cases acquiring companies (at a price) can appear quicker and easier than building them. Patent expiries create the constant need for pharma companies to find profits from new products to replace those lost to genericisation. In this paper we argue that for most companies the price required to secure a company through M&A is now too high. We then suggest focused entrepreneurship as the response that will create value for the pharma companies’ owners and great medicines for patients and consumers.

Pharma M&A is too expensive for most

Over the last few years, Novasecta’s conversations with its diverse range of C-suite clients and members of its networks have been pointing to a common theme: for all but the very largest and most well capitalised companies, the amount required to pay for acquiring companies has become almost prohibitively expensive. CEOs and BD executives lament the fact that the price expected by a company to be acquired tends to make the corresponding business case involving expected future net cash flows extremely difficult to add up. So as 2016 drew to a close we initiated some deep-dive research into what is really going on with M&A prices.

To examine the trends over a five year horizon, we explored all global pharmaceutical M&A deals for which the deal size was disclosed from 2009-2011 and from 2014-2016, amounting to 254 deals and 316 deals respectively. We also analysed a subset for which the annual revenue of the acquired company was available, in order to examine the sales multiples (price paid by the acquirer company divided by the last year’s published revenue of the acquired company) as a broad proxy for the “price” a company has to pay to buy another company.

The conclusions from our research validated the insights we had drawn from our client conversations: pharma companies are executing more M&A deals of significantly higher value, paying much more for the revenue they acquire, and taking much more risk than they used to.

Deal Volumes and Values: More and Much Bigger

While deal counts have modestly increased (+20%) in the last five years, the total value of executed deals has more than doubled (2.3x), amounting to $466bn in 2014-2016. The median deal size has correspondingly jumped by 2.4x from $48m to $114m. A further indication of the increasing amount that is being paid for acquisitions is the number and size of “larger” deals, which we define as >$1bn. These represented 90% of the total deal value ($420bn) from just 19% of the deal count in 2014-2016.

Pharma M&A deal values have increased significantly, with US and EU acquirers leading the way

 The dominance of US and EU headquartered acquiring companies in recent years is striking, with US companies responsible for 60% the total value of the larger $1bn+ deals. More recently European companies have joined in, having doubled their share of the larger deal value to 33% largely at the expense of Japanese companies that almost withdrew from large deals in the last three years. Takeda’s early 2017 announcement of its acquisition of Ariad for $5.2bn was therefore a rare exception to this trend. J&J’s announcement later in January 2017 of its $30bn acquisition of Actelion is more in line with the trend: the US’s combination of deep and hungry capital markets with large listed companies that have strong balance sheets and cash to spend is hard to compete with when assets become expensive.

Pharma has to pay much more to secure revenue through M&A

We explored sales multiples as they have the advantage of capturing two related phenomena: (a) the “premium” amount that a company has to pay to acquire a given annual revenue stream, and (b) the degree to which the company is buying “hope” in the form of expected future revenue from either growing revenues from on-market products or adding revenue from R&D pipeline assets or both.

In addition to the more than doubling of deal values, our research shows that sales multiples have been starkly increasing, both over the five-year comparison period we chose (2009-2011 vs. 2014-2016) and more recently in every year from 2014 to 2016. Importantly the sales multiples have increased all deal size cohorts, which further reinforces the concept of “over-paying”, as it is not just that acquirers are taking more risk on by acquiring companies that have more to do to grow revenues.

Median sales multiples are up for all sizes of deals

It is notable from this analysis that the median sales multiples for acquiring companies that already had revenue of $1bn+ per year have increased from 2.7x to 5.2x. So it is not just that pharma companies are acquiring more risk than before: when acquiring a company that has revenues of $1bn+, one is typically acquiring on-market revenue, and pharma now has to pay almost twice as much for this privilege than they had to only five years ago. Again the more recent J&J-Actelion deal illustrates this phenomenon very well, with J&J paying around 15x revenue for a company with ~$2bn of reported revenues.

Pharma is taking much more risk in M&A than it used to

The sales multiple that acquirers pay for the companies they buy is a good proxy for how much risk that the acquirer is taking, as in addition to the “price” effect discussed above, very high multiples also suggest that the acquired company has either strong growth potential or earlier stage assets or both. In each case this means more risk for the acquirer. And acquirers are taking it on: the number of deals with 100x+ sales multiples has increased five-fold in just five years.

This has been at the expense of deals where the acquiring company has revenues and therefore usually less commercial or scientific risk. The number of lower-risk deals with less than 5x sales multiples is now a third of what it was five years ago.

The number of deals involving the acquisition of pre-revenue and early-stage companies has significantly increased at the expense of those involving on-market products and later stage assets

 In sum, M&A has become an increasingly expensive way to grow pharma businesses. If it can genuinely catalyse and improve the performance of the acquiring company, through some synergistic effect that is more than short-term cost saving, then it can make sense. But the sheer volume and value of deals being done at prices that are substantially more than only five years ago suggests this is not always the case.

Now what? Focus and Strategic Collaborations

One response to the inflation in M&A prices is to simply pay up and think very long in terms of potential return. Our experience with a diverse range of companies, particularly those that are privately held or controlled, is that this is insufficient. We live in highly uncertain political and economic times, and raiding the balance sheet for hope is a risky strategy even in good times.

The good news is that necessity is the mother of invention. Entrepreneurial pharma companies, are already responding to the M&A issue in two ways: First by focusing on what they can really do best, and second by looking to strategic collaborations with other pharma companies, where capabilities and assets can be “traded” in ways that create strength for both parties. In both cases, bespoke is best: building distinctive R&D and commercial capabilities in chosen areas of focus, and finding the right strategic collaborations to complement these, is a more reliable path to sustainable advantage than over-paying for M&A.

The business uncertainty that was created by the UK’s referendum vote on 23rd June 2016 will be felt for many years to come. The result of the vote was certainly an unwelcome surprise to the pharmaceutical industry. Novasecta privately interviewed 20 top executives from leading European pharmaceutical companies to ask how they are dealing with it. Their perspectives do not make cheerful reading for the industry. With the exception of short-term currency gains for some, the executives did not cite any clear benefits for their companies. And though most companies are watching and waiting, those that are at a point of considering new or increased long-term investment in European R&D or manufacturing footprint are less enamoured by the UK now that its relationship with the EU has become so uncertain.

Novasecta systematically researched the implications of the Brexit vote over the three-month period since the UK referendum vote on 23rd June 2016. In this paper we share the insights from our research and suggest what can be practically done about it.

We carried out 20 in-depth private individual interviews with top executives from the European pharmaceutical industry. The 20 companies that we covered all have pan-European and global interests. 75% of the interviewees were members of the corporate management team (“C-suite”) of their companies. Half were from companies headquartered in the UK, half were from companies headquartered in other European countries.

All of our interviews were carried out on the basis that none of the comments made would be attributed to any individual or company. This approach has yielded a unique insight into what is actually being discussed and decided upon in the top management teams of leading pharmaceutical companies across Europe.

We interviewed a diverse set of top European pharmaceutical executives

An unwelcome surprise

Pharmaceuticals is a long-term business. The executives we interviewed were therefore universally reluctant to make immediate decisions to reverse any prior commitments that were made to the UK when it was firmly part of the EU.

“The Board and Executive Team didn’t believe we’d leave”

The stages of dealing with the vote are familiar to dealing with any political/economic shock. Since none of our sample expected the UK to vote as it did, once the vote had occurred they moved swiftly to consider the implications more deeply. Almost all had assigned responsibility to a senior executive or team to report out to the top management and sometimes Board of their companies on the implications of the vote and what to do about it. In some cases, executives were assigned to assess implications before the vote, and almost all did post-vote.

Three months in, executives are getting used to the new uncertainty. For some this is down to straight pragmatism:

“We can waste a lot of time speculating on all the aspects”

From a commercial perspective, when compared to other countries in the world the UK has always been a tough market for pharmaceutical companies with its relatively difficult pricing environment and small size in terms of GDP compared to more attractive and larger markets such as the USA. This is unlikely to change much as a result of Brexit, so our executives are typically taking a more or less “business as usual” philosophy to their UK commercial operations.

However the R&D and Manufacturing implications are potentially more profound. The UK has traditionally been one of the strongest companies in the EU from the point of view of science base, clinical/regulatory ecosystem and funding environment. While no hasty actions are being taken by the companies in this area, those that are making decisions on R&D or manufacturing footprint are already factoring Brexit-related uncertainty into their decision-making.

People have been the biggest immediate impact so far

Clearly there have been some exchange rate benefits or losses so far depending on the company’s individual footprint, but these were not considered to be strategically significant or warrant any specific response. Executives have had to deal with global exchange rate fluctuations for many years and will do so for many years to come.

The only effect that has already been felt, and to be clear only by some in our sample, is on people and talent. Executives have had to deal with current non-UK employees of their companies who are now located in the UK, and of those that are or were considering moving themselves and their families to work with their companies in the UK.

“Companies are people, and our people are pretty rattled”

The effect on people is not something that can be measured in a business case of profit and loss account, but it is not welcome in an industry that has traditionally been highly international and globally minded. The innovation that is required for success in pharmaceuticals ultimately comes from motivated people. Executives expressed concern about both their employees in the UK and the potentially contagious effects of xenophobia and isolationism across Europe that may have been triggered by the UK’s vote.

For current employees located in the UK, a perceived atmosphere outside of work of “non-UK citizens not welcome here” that has been stirred up by the vote itself, and by much of the political and media noise around it, is already taking its toll according to the executives that employ a significant body of non-UK EU citizens in the UK.

“A potential senior hire from outside the UK had second thoughts, saying it is too
difficult to take a big decision [to move to the UK] based on the uncertainty”

The negative impact for recruiting into the UK has also started. More than one executive gave an example of a senior-level potential hire who would have moved to the UK to join their companies but withdrew his or her application having heard of the vote result. Others reported that they knew other companies that had experienced the same. While such examples are not universal, after all the industry has traditionally been international with executives locating seamlessly between many EU and non-EU countries, they are real.

Rationally choosing where to work on the basis of whether UK ends up in the EU or not may not make logical sense compared to choosing on the basis of the nature of the work and people in the company itself. But emotions can trump rational decision-making. The toxic effect of Brexit on people living in the UK will sadly be felt for many years to come.

Fiscal effects will require careful management

Pharmaceutical companies typically have complex supply chains in Europe for both their on-market products and for their clinical trial supplies. The fiscal rules on tax treatment of profits, tax relief on activities such as clinical trials, and the tax treatment of royalties on Intellectual Property (IP) in the various non-EU and EU European countries will likely change. Similarly companies are considering the effect on their supply chains and the potential extra costs of transferring goods between their various European locations, even if such supply chains are with contract manufacturing organisations. Detailed issues such as transfer of goods, packaging and registering need to be considered by every company with a pan-European footprint.

While our sample of executives were not considering changing anything immediately on the basis of fiscal effects as a result of the vote, these issues were high on the agenda for one that happened to be already in a process of decision-making concerning its UK operations in the context of the company being headquartered in a non-UK EU country. No-one can predict how the tax, exchange rate and potential tariffs and regulations will evolve over the years, but the uncertainty and risk of the UK as a potential non-EU county is adding a negative weighting to business cases that involve investing in it.

Increased regulatory complexity, costs, and delays

The Brexit topic that inevitably comes high on the list for pharma companies in Europe is that of the European Medicines Agency (EMA). Based in London, this institution has been responsible for making the registration and regulation of drugs in the European Union much more straightforward for pharma companies than having to register individually in each European country. However the institution is currently located in London, and if the UK is not part of the EU, the pharmaceutical executives we interviewed found it hard to envisage this most European of institutions residing in a non-EU country.

“EMA is a fundamentally EU institution: it cannot remain in the UK”

Related to the EMA issue is the future of the UK’s Medicines & Healthcare products

Regulatory Agency (MHRA). MHRA prides itself on being one of the most influential country regulatory bodies in EMA, indeed in terms of the number of Committee for Medicinal Products for Human Use (CHMP) rapporteurships/co-rapporteurships, the UK was the largest country contributor in 2015 with 40 compared to next largest Sweden (34), Germany (27) and the Netherlands (22), according the EMA’s 2015 annual report. If the EMA moves out of London (Sweden, Italy and Denmark have already made no secret of their desire house the EMA) the MHRA is highly unlikely to disappear entirely, but its reach will be diminished and it is hard to see its influence in Europe increasing.

Our research revealed the two fundamental issues for the industry regarding EMA. First the prospect of more complexity in European registrations: yet another body to get approval from in addition to the Swiss and other non-EU countries. Inevitably companies expect additional cost and potential delay in getting their medicines approved in the UK. Delays are bad for the companies in terms of revenue and bad for patients in terms of access to medicines.

The second issue relating to EMA is the clinical/regulatory ecosystem that has evolved around the EMA and MHRA in London. European and non-European companies that have located in the UK admit to one of the main reasons for having done so being the proximity to this ecosystem and network. The risk long-term is that the UK clinical/regulatory ecosystem may wither if EMA moves to another country and consequently talent and business migrates to where the EMA is.

“We have subsidiaries in other countries, at a certain point we could move
[our clinical and regulatory capability] from the UK to the country where EMA is” 

New inward investment to the UK will be delayed or not made

It is the convenience of the UK as an EU country that is now in question for non-UK companies wishing to locate R&D footprint in the UK. Those in our sample that already have R&D footprint are committed to staying: it typically takes years to set up all of the relationships and talent required to be successful, and one vote does not remove that.

“We are riding the wave of good relationships developed in the UK over 25 years, but once the rest of the world catches up we could be very limited” 

“Many Big Pharmas have left the UK already [before the vote]”

The issue is therefore longer term. The new investment commitments to the UK and increases in commitments to the UK are being questioned much harder than they used to be: yes, the international English language and London as an attractive global city will remain, but the whole talent pool and system of MHRA, EMA, and clinical trials in the UK requires a strong network, close relationships and a hub location. Our research revealed that executives do not see this as favourably as they used to.

When it comes to investing in any European country, almost all the executives are pursuing a “watch and wait” approach. Those that are questioning the value of the UK as an R&D and/or manufacturing destination are limited to those that were in a corporate decision cycle for such matters anyway. The conclusion from our research is that we will not likely see any immediate effects like companies exiting the UK as an R&D or manufacturing (or commercial) location.

“Will Brexit stop us [investing in] the UK in the future? Absolutely not,
but now Europe is hard to predict, and the UK is harder”

While watch and wait does not create immediate downside for companies, corporate decision cycles do have a habit of coming round. Over the next three to five years companies will inevitably be confronted with decisions regarding European footprint. At that point, if the current uncertainty persists on what the relationship between the UK and Europe is at a practical level (i.e. trading, regulatory, fiscal arrangements), the UK will inevitably be at a disadvantage compared to other EU countries, particularly if EMA is known to be moving. Our sample of executives were resigned to persistent uncertainty, and none had confidence that the UK’s relationship with the rest of Europe will be resolved completely for many years yet.

The UK’s science base will remain strong

Of all the Brexit topics we explored, the one where we found our executives to be relatively sanguine was the UK’s science base. This was in spite of significant concerns being raised by the smaller UK biotechs and academic communities involved in the earlier stages of research, who for example cite the prospect of reduced access to EU funding such as the Horizon 2020 programme and other grant/government funds.

By contrast the pharma companies (and indeed investors we have asked) are comfortable seeking out science from all over the world, and in that context consider any Brexit-related impact on the UK science base to be minimal. This is partly because there is plenty of good science around the world for them to choose from, and has the added reason that ultimately good science relies more on people, universities and science than the vagaries of grant funding.

Our conclusion is that for pharmaceutical companies the earlier preclinical stages of R&D will not be significantly affected by the Brexit vote, whereas the impact of later clinical and regulatory stages could be more profound, particularly if a relocation of EMA precipitates a brain drain away from the UK.

European contagion is a real risk

A final concern raised by the executives we interviewed was the potential contagious effect of the Brexit vote on the rest of Europe. Uncertainty is never welcome in any business, and the future political and economic context that the industry operates in has now become more uncertain, not just for the UK. A further concern raised by executives in our sample was that Europe will become weakened as a pharmaceutical hub compared to increasing strength of the US and Asia.

“ The European project is absolutely a bigger worry”

One of our executives explained that an Asian company he was in touch with had postponed their planned European entry because of the Brexit vote. For sure, from the outside Europe now looks more divided and less attractive than it did before the vote. We will not directly see the delayed and postponed decisions that companies like this are making until it is too late, or indeed see the decisions to not increase investment in Europe. As with the effect on talent, these relatively invisible but real delays and decisions not made will be the lasting legacy of the Brexit vote for many years to come.

Our conclusion: watch, wait, and factor the uncertainty into decision-making

The perspectives of the top executives that we interviewed do not make cheerful reading for the industry. They see the Brexit vote as an additional nuisance, complexity and cost to manage as they build their European businesses, as well as a contributor to further European uncertainty. But these executives and the pharma companies they represent are used to long-term thinking and uncertainty, so they are taking it in their stride.

“Nobody says it will be positive, it’s more how to limit it and make sure we manage it” 

“We started hot and heavy, now we feel more secure”

The executives that sought out connections with the politicians and negotiators who are dealing with Brexit at a practical level report that they are now coming to terms with the vote. This may be because they are hoping that those that are responsible for converting the vote into practical decisions will come to the conclusion that the UK in the EU is preferable to a hard exit. The Swiss experience since a referendum vote in 2014 requesting more clampdowns on immigration is instructive here. As one executive explained “2 years later there is no political will to implement it”. Or it may be that they realise that the real effects of Brexit are likely to take many years to appear, and there are plenty of other global uncertainties to deal with in the meantime.

Our conclusion for pharmaceutical companies is therefore to watch and wait. Of course some will in parallel wish to step up their lobbying efforts to governments to encourage the free trade and free movement between countries that has contributed to their success to date. In the case of UK companies they may also wish to ensure that the Life Sciences industry gets the priority it deserves as the UK government evolves its industrial strategy. But the Brexit vote in itself is not a credible reason to downscale or upscale UK pharmaceutical operations, or indeed operations in the rest of Europe. That said, the uncertainty caused by the vote in the UK and the whole of Europe is for sure a factor that should be carefully built in to any future decision-making regarding European footprint, particularly in clinical development, regulatory and manufacturing.

Over the next years the politicians and negotiators from the UK and the EU and the other European countries will continue to talk with each other and make general, and sometimes conflicting, statements to the media regarding what Brexit is and what it is not. The best response from pharmaceutical companies of all nationalities should be to keep their focus on developing and commercialising great medicines for patients. The Brexit vote was indeed an unwelcome surprise, but the business ramifications for the companies in the industry are manageable for those with an open mind to both Europe and the entire global pharmaceutical ecosystem.

The digital revolution has been transforming and disrupting different industries from media and retail to finance and automotive. It is now the time for the pharmaceutical industry to be disrupted. To stay competitive and bring value to patients, pharmaceutical companies need to have an understanding of what digital means for them, define long-term strategies for the digital era, and commit to implementing the strategies by shifting their mindsets towards more patient-centric approaches.

In this paper we first argue that the time is now for pharmaceutical companies to embrace digital, then help frame what digital means to them by identifying the relevant applications and areas of interest for pharma. Finally we provide a step-by-step approach for the successful implementation of digital initiatives.

The time is now

While digital means different things to different people, in the context of this paper we consider the application of information technology in its broadest sense (excluding internal administrative and accounting systems) to the pharmaceutical industry. By this definition, when considering deal flow, only few pharma companies have so far taken the leap to experiment with digital initiatives such as apps, wearables and combinations of smart devices and drugs.  This can be explained partly by the fact that the pharmaceutical industry is highly regulated, traditionally very protective, and treats IP (Intellectual Property) as its main value-generating asset. By contrast the technology and digital companies are typically less regulated and generate value by moving fast into market rather than capitalising on their IP. This difference in mindsets and ways of working between these industries makes it harder for the pharmaceutical companies to take the leap into digital, or to see their tech counterparts as potential viable partners. Indeed, between 2010 and 2015 only a small percentage of the eHealth deal flow involved pharmaceutical companies, despite total deal volume increasing by 228% in that period according to a report by StartUp Health.

Few pharmaceutical companies have started experimenting with digital

Pharma is therefore clearly behind other industries and faces the challenge of bridging between early adopters and early majority. It must address this chasm if success is to be achieved.

Pharmaceutical companies have yet to cross the chasm with Digital

We can already see early adopters shaping the market. Next, the first movers (i.e. early majority) will contribute to shaping the market and will increase their chances of achieving important market shares. More risk-averse companies (i.e. late majority and laggards) are deciding to wait and see which initiatives are more successful. This positioning may avoid failure but at the expense of market position and competitive edge.

Digital starts with the patient

As the pharmaceutical industry ultimately serves patients, they should form the core of digital initiatives: from enhanced prevention and detection of disease through to R&D that is better focused on patient needs, to the provision of integrated patient services, and ultimately towards pricing drugs and services in a way that is affordable and provides real value outcomes that are approved by payers and reimbursement bodies.

All digital initiatives need to be centred around the patient

Based on Novasecta’s analysis and review, companies approach these four segments in a variety of ways, all of which can stimulate choices and inspiration in other companies:

1. Enhanced Prevention and Detection

Pharmaceutical companies can engage patients early on before their condition progresses and gets complicated. For example, through continuous monitoring using apps and wearable technologies diseases could be prevented and detected.

Furthermore, patients are increasingly willing to engage with their doctors through technology and are looking to monitor their health better. A recent online survey conducted by Ketchum on smartphone owners in the US has found that 58% of this group uses their phones to communicate with a medical professional.

2. Better R&D

So far, data available to clinicians and researchers is typically discrete and only gathered during episodic appointments. This makes it hard for researchers and clinicians to grasp the full picture of disease mechanism and evolution. With continuous monitoring there is a big potential to better understand disease progression and improve the quality of clinical trials or even find better ways to use existing treatments.

A new study presented at DPharm Disruptive Innovations by Validic based on interviews with 166 executives at pharma, biotech companies, and CROs, showed that 64% of executives have used digital technology in clinical trials and that 97% plan to for the next five years.

For Rare Diseases clinical trials, Aparito (a UK based digital start up) aims to capture meaningful patient-data and end-points to make clinical decisions easier, and to improve the outcome and speed of clinical trials. It also gives clinicians access to a source of data that contributes to the natural history of a disease, which is especially valuable where no therapies are currently available.

3. Integrated patient services

With increased generic competition, reduced innovation and limited new blockbusters, pharmaceutical companies can use digital technologies to repurpose their existing drugs or differentiate and add value to otherwise non-differentiated products. This way, patients will benefit from more valuable products and services that fully manage their condition.

This could be through a number of services such as apps to monitor adherence and/or a combination of drugs and smart medical devices

In this area, pharmaceutical companies can do more to develop integrated care services for patients. The initiatives so far are at very early stage and the gap needs to be filled by more innovative approaches for holistic patient care.

4. Value-based outcome pricing

Faced with increasing drug prices, payers and reimbursement bodies are rightly demanding evidence that pharmaceutical products deliver value for money for patients. Payers increasingly want to transition from a “Volume” based reimbursement (i.e. providers receiving a payment for providing a particular service or product, regardless of the outcome) to a “Value” based reimbursement structure. In this context value explicitly incorporates patient, clinical and functional outcomes. This new approach strengthens the incentive to provide care that only has a measurable positive impact on patient outcomes.

In line with these changes in the reimbursement space, digital technologies can help gather real-world data to demonstrate treatment value. Evidence can be gathered during clinical trials to support reimbursement dossiers and commissioning decisions. As an example, the Aparito app has these kinds of capabilities for Rare Diseases.

Set the foundations and secure the capabilities

Given that digital is a growing trend in the industry and that pharmaceutical companies have an opportunity to expand their services and footprint, the question facing many is how best to implement digital initiatives. Part of the answer lies in setting strong foundations and thereby enabling capabilities that generate value.

Novasecta’s framework for guiding the adoption of digital initiatives in Pharma

Foundations

Develop a patient-centric mindset: All digital health initiatives should be centred on patients, while keeping the treatment and service outcomes in mind to demonstrate value to patients and payers.

Focus initiatives and set a clear strategy: To succeed companies should be crystal clear about the type of services they want to provide, and how these complement their existing products and thereby integrate into a clear long-term digital strategy. 

Drive investment from leadership: Senior leadership should commit time and money for investments in digital initiatives. They must also ensure that the implementation is integrated across all departments of the pharma company from R&D, to commercial and BD. Companies should even consider having a digital officer seat at the executive table, to enable holistic governance across all departments.

Capabilities

Collaborate and partner: It is important to collaborate and partner with the new players rather than reinvent the wheel and attempt to compete directly with them. As the industry is being disrupted, the competitor landscape is also changing with non-traditional competitors emerging, for example technology and medical devices companies. 

Stay on top of regulation: Companies should be proactive to reflect the regulatory changes related to health and patients data. The latest example is the new General Data Protection Guidance by the EU to strengthen and unify data protection for individuals in the EU with considerations for export of personal data outside of the EU. It will enter into application on May 2018, which will extend the scope of the EU data protection laws to all non-EU companies processing data of EU residents.

Take data protection seriously: Trust should be gained from patients and patient groups by demonstrating high standards of compliance for successful digital initiatives. Patient-related data is even more critical than financial data, which requires best practices and good governance. If not properly protected the risks to patients are high. For example Johnson & Johnson released a warning in October 2016 that their OneTouch Ping pump for diabetes is vulnerable to hacking, and may result in an overdose. However even if no attacks have been reported and the risk is “extremely” low, it may impact negatively on patients’ trust in the product and tarnish the company’s reputation.

In summary, the pharmaceutical industry is being disrupted by digital, and companies need to address this challenge to avoid future irrelevance. Putting the patient at the centre, and understanding the different digital applications and how these will complement their existing R&D and products will be critical for future success. Companies should therefore set their digital strategies, invest funds and build their capabilities now.

Effective Research and Development (R&D) is the lifeblood of the pharmaceutical industry. The funding of this highly risky and long-term activity had until the last decade or so been primarily left to well-capitalised and integrated global Big Pharma companies. A more recent era of cheap money has now changed all that. Since the market crash of 2008, a combination of ultra-low global interest rates and quantitative easing have changed how pharma R&D is funded, which has in turn changed how R&D is done. Products that take many years to research and develop are now passing through the hands of a multiple and fragmented set of investors, companies and individuals. Yet the complexity of today’s R&D requires an integration of many skills, perspectives and experiences. In this paper we explore how a new breed of leading pharmaceutical companies have been responding to the new funding environment, by defragmenting R&D to the benefit of the patients they develop medicines for and the investors that fund their businesses.

From ‘Big Pharma does all the R&D’ to a highly fragmented R&D ecosystem

Over the last 50 years the pharmaceutical industry has created tremendous value for both patients and investors. In the 1970s to 1990s, all that was required for a pharma company to become a success was the creation of a single revolutionary product. The rewards for such products were substantial: a combination of patent laws and tight regulation led to an environment where a single product could command annual revenues of $10bn+ with enviable gross margins in the 80-90%+ range. Faced with the prospect of sustained and substantial cash flows from such products, pharma companies typically felt that spending 15-20% of that revenue every year on R&D was a reasonable sum to put aside to create the next product. Investors typically complied – after all the profits and dividends were great, and management had demonstrated success before.

Yet even after investing a substantial chunk of free cash flow in R&D, the cash kept coming in, so pharma companies turned to additional ways to spend their investors’ money, more often than not M&A. The consolidation of the industry in the late 20th Century is well documented: companies like today’s GSK are the result of a series of M&A activities involving previously successful and integrated companies like Glaxo, Allen & Hanburys, Burroughs Wellcome, Affymax, SmithKline & French, and the Beecham Group. Almost all of todays’ Big Pharmas have followed the same path.

The combination of substantial profits and M&A activity inevitably led to a hangover. Big Pharmas became too big and too comfortable. R&D was seen as a necessary P&L expense, but somehow it wasn’t delivering the next great product fast enough to replace the previous one on patent expiry. Eventually investors in Big Pharma and market analysts started to complain. To cap it all Morgan Stanley urged pharma to “Exit Research and Create Value” in 2010, and the days of large R&D campuses and a substantial and relatively unquestioned evergreen funding of Big Pharma R&D were over.

As with many investor-led adjustments to industries, the solution to complacency was brutal, as waves of cost cutting and R&D site closures swept the industry. A huge diaspora of ex-Big Pharma R&D scientists and executives found new homes in a combination of service companies and a plethora of small and nimble “biotech” companies. The industry therefore fragmented: Big Pharma acknowledged that “outside” was sometimes better than “inside”. New and rapidly growing service companies filled the gap left by pharma companies, first in clinical trial execution, then earlier in the value chain into discovery, and finally towards fully integrated R&D services. And they found willing customers in the virtual and flexible biotechs funded by Venture investors to advance assets to a point where they could be sold to their former colleagues in Big Pharma.

Cheap money has reinforced R&D fragmentation

The restructuring and fragmenting of the pharma industry into small biotechs, Big Pharma, and multiple Contract Research Organisations (CROs) seeded a very different R&D landscape to the previous era of integrated and mid-sized pharma companies that created the successes and wealth that then led to Big Pharma consolidation.

The ultra-low interest rate era since 2008 has in turn now created and cemented an investor environment that encourages and reinforces industry fragmentation. Today’s “cheap money” era has led to an increasingly diverse set of methods for institutional investors to put capital to work in the pharmaceutical industry. At the highest level, depending on their various appetites for risk, institutions can invest in:

  • Private Equity funds (rapid profit growth) which in turn take stakes in:
    • Lower-risk often mid-sized pharmaceutical companies with relatively established product ranges, little R&D and reasonably reliable cash flows
    • Service companies and CROs with reliable cash flows from contracts with a diverse range of pharma/biotech companies
  • Venture Capital funds (high-risk, high-return) which in turn invest in:
    • Small and virtual biotech companies with promising assets that require a few years of funding to reach a point where they can be sold to pharma companies
    • Platform discovery biotechs with a unique technology that can create multiple assets of interest to pharma companies
  • Hedge funds (medium-risk, medium-return):
    • Take advantage of risk asymmetries in the market
    • Take stakes in private and listed pharma/biotech companies
  • Stock-market listed companies (stable returns and/or upside):
    • Big Pharma with sustainable and reliable income streams with good prospects for dividends
    • Early but more established biotech companies with potential for massive value increase on success of their products
    • Mid-cap pharma/biotech companies with sustainable prospects from a mix of own and partnered products
  • Privately held companies (medium risk and return):
    • Small to mid-sized companies that choose to invest for the long-term development and commercialisation of niche products

The flow of money into these asset classes is undoubtedly shaping the way R&D is both funded and executed. For example a resurgence of Venture Capital investing in pharma/biotech over the last decade has driven the creation of small and virtual companies that fit the model of delivering a potential exit for investors in 3-5 years. Meanwhile Private Equity funds have seen the pharmaceutical services sector as an interesting way to generate reliable and growing profit streams from pharma/biotech companies that do not like investing in fixed costs. The small biotech and service sectors are therefore both here to stay while investors are seeking the type of higher returns that the era of cheap money demands.

Fragmentation has increased the price and risk of external R&D

In a sense the newly fragmented world of eager and nimble small biotechs producing innovative products to be bought at huge prices by Big Pharmas that need to replenish their R&D pipelines is a repeat of history: profitable Big Pharmas are now spending their excess cash on the external hope that a nimble biotech will provide them with their next product rather than the old internal hope that their own R&D organisations will deliver. And while frothy stock markets allow them to pay inflated prices, this will continue. For recent examples we need look no further than Pfizer’s acquisition of Medivation for 40% more than any other pharma company was prepared to pay after a series of negotiations, or Allergan’s acquisition of Tobira for an up-front of nearly 500% of its previous day closing share price. Cheap money has therefore created a world of inflated external R&D expenditure. Pharma companies are under constant pressure to increase profitability, so are looking to reduce the internal R&D expense that hits their P&L accounts every quarter. At the same time they need innovation, so are taking on external expenditure on assets and companies that can be charged to their Balance Sheets without any effect on EBITDA. The prices of external assets rose to match such demand.

Correspondingly Venture Capital companies have been eager to invest their Limited Partners’ enthusiasm for higher returns in companies that can subsequently be bought at these inflated prices. By contrast family and foundation held companies are unable to keep up with paying these kinds of prices for external innovation. And the sheer volume of external opportunities that are now available for in-licensing or acquisition (many more hope than reality) is creating a real problem for companies trying to sort the wheat from the chaff.

Whether the inflation in asset prices caused by the double dynamics of Big Pharma internal cost cutting and venture funds’ appetites for creating small companies that can be bought has peaked yet or not, one thing is for sure: Pharma R&D is too long-term and risky an endeavour to leave solely to the short-term volatility of investors’ appetites for risky asset classes. So a number of smaller and mid-sized pharma companies are stepping in to carry out the kind of integrated R&D that does not require constant purchasing of external assets and companies.

Pioneering a newly integrated R&D model

A new breed of entrepreneurial R&D integrators are now emerging to challenge the dogma of “fragmented is beautiful” that the new funding landscape has created. Such companies recognize the value of continuity and integration of highly diverse skills and understanding from science, medical, commercial, and partnership disciplines among others. They know that in order to buy the right external assets when they need to, they need to be excellent pickers and excellent partners post-deal or the knowledge residing in their partners will be lost.

We explored the companies that appear to be getting R&D right by analysing a set of companies’ market capitalisation to revenue multiples as a proxy for how confident investors are in the future for each company. A high multiple generally reflects market belief in the company’s R&D model, because either (a) revenues will grow, which will often be a result of good R&D creating new valuable products or (b) the R&D pipeline appears to be healthy and valuable. More specifically we compared European ‘MidPharmas’ with their global Big Pharma peers, as though capital has been plentiful in a global era of cheap money, European companies have found it tougher than their USA counterparts to access funds.

A new generation of integrated mid-cap pharma companies is out-performing Big Pharma

Note: For each company market cap was recorded end of Q1 2016; annual revenue is as stated from 2015 for all companies

The two common features of all the companies that have higher market cap to revenue multiples are focus and integration. For focus, some “Platform Pharmas” choose a technology platform that provides multiple shots on goal through own-development or partnerships, and other “Specialist Pharmas” choose a particular disease area, usually associated with intimate knowledge of the science and medical elements of the disease and strong connections with relevant physicians and patients. For integration, all companies have retained internal capability from discovery through to late stage development, with most already in commercialisation and the others very close.

1. Platform Pharmas (Genmab, Cosmo Pharma, Galápagos, MorphoSys)

Genmab, with it’s impressive 48X market cap-revenue multiple (compared to a MidPharma average of 3X), is a Danish company that was founded in 1999 to develop and commercialise a portfolio of human antibodies. Genmab now has two on-market products, ofatumumab and daratumumab, and multiple proprietary technology platforms for antibody production. Genmab’s antibody expertise and technology platforms are expected to provide a stream of future product candidates – the likely reason for Genmab’s high value.

We had comparable findings in Cosmo Pharma (30X multiple), Galápagos (24X multiple) and MorphoSys (11X multiple). MorphoSys is similar to Genmab in terms of its antibody focus, owning the rights to several proprietary techniques for human antibody production. Cosmo Pharma has a proprietary MMX technology platform for gastroenterology drug delivery. Galápagos is a bit different – it has a proprietary discovery machine that makes use of patients’ cells to discover new drug targets, meaning its ability to convert disease targets into therapeutics is its value driver. Its business model is less about straight out-licensing its technology, and revolves more around working with larger MidPharmas and Big Pharma partners to obtain patient expertise and provide access to its proprietary discovery system.

Remarkably, in the span of 2009 to 2015, none of these company’s revenues has grown by more than 15% CAGR – good, but not spectacular. This goes to show that the value assigned to these companies is undoubtedly based on future potential, and not past performance. Additionally, this suggests that these ‘Platform pharmas’ are focusing more on long-term growth, and their investors are not necessarily seeking quick wins from single product bets.

2. Specialist Pharmas (Sobi, Actelion, Novo Nordisk, Bavarian Nordic)

The second group of pharma companies identified through this analysis is made up of Sobi, Actelion, Novo Nordisk and Bavarian Nordic, having market cap-revenue multiples ranging from 7X (Bavarian Nordic) to 10X (Sobi). The interesting trend that we see here is that all of these companies have focus: they are choosing to build a dominant presence in a specific domain. Sobi focuses exclusively on rare diseases. Actelion recently started emphasising rare diseases with its small molecule platform, supported by continuing life cycle management of its pulmonary arterial hypertension franchise. Novo Nordisk is synonymous with diabetes and, to a lesser extent, haemostasis and hormone therapy. Bavarian Nordic focuses on immuno-oncology and infectious diseases, which may not seem similar upon first glance but which share an underlying virus-based technology platform.

Defragmenting R&D creates value

While the market cap to revenue multiple is only one (relatively crude) measure of R&D success, our experience from both privately held and publicly listed companies is that there is real value from a continuity of knowledge and perspective that comes from being integrated in R&D. However the nature of the integration, between new functions and disciplines, is fundamentally different to where Big Pharma was decades ago. Rather than creating huge internal R&D machines, strong innovators now seamlessly integrate R&D, commercial and Business Development (BD) perspectives throughout the value chain. Through this, they can pick the best assets to bring in and develop them in a way that matches ever-changing commercial realities.

The challenge is that the new integration practised by the pioneers requires a very different culture from the old integration that created success for pharma companies in the past. Old habits die hard, and many pharma companies are wrestling with a legacy of highly functional and specialist skill-focused R&D organisations that do not have the culture or mindset of the modern integrators: New habits such as relentless external wiring, seamless joint working with BD and commercial colleagues, fast decision-making and capital discipline do not come naturally to traditionally siloed R&D organisations.

The good news is that leading pharma companies are now restructuring their R&D organisations to suit the new fragmented reality of a plethora of small biotechs and plenty of strong R&D service organisations that has resulted from the era of cheap money. These defragmenting pioneers are creating organisational and governance forms that instil dynamism into those that are responsible for innovating (typically through smaller multi-discipline project/portfolio teams or units) and instil operational excellence into those that are responsible for delivering output on time to high quality, such as clinical operations, where there are clear options to outsource and get the benefits of external experience and capabilities.

Since looking outside for pipeline replenishment is likely to remain expensive and risky while global money is cheap, pharma companies must re-invent their R&D organisations in ways that they can genuinely innovate and execute. This requires a mix of clever partnering skill, profound multi-disciplinary knowledge, and operational excellence to deliver the right project results with the efficiency and quality required to bring great products to market.

Pharmaceutical companies spend considerable sums on marketing to drive growth of their brands. Few, however, take enough time to thoroughly understand the strengths and weaknesses of their approach. As channels to market become more complex, and pricing and access challenges impede product uptake, excellent marketing is more important than ever for commercial success. Companies must therefore critically challenge their marketing plans and apply a level of rigour to brand reviews that is similar to that applied to R&D initiatives. In this Novasecta Note we explore why marketing matters, our perspective on the most important gaps in marketing practices and how companies can enhance brand reviews so that they build more successful brands.

The pharmaceutical industry makes significant investments in discovery and development to develop medicines that improve the lives of millions of people around the world. These investments typically receive significant scrutiny from both investors and top management. However, the resulting new medicines will not get to the patients that need them because of good science alone. Strong and thoughtful marketing is necessary in order to communicate the patient benefits in a way that is compelling to healthcare professionals.

In the US alone, the pharmaceutical industry spends approximately $24 billion each year marketing its products to health care professionals (Source: Cegedim Strategic Data 2013). In contrast to the analytical rigour and drive for efficiency that is applied to R&D, and indeed the efforts made to understand the effectiveness of their sales teams, only a small number of companies invest to understand the impact of their marketing approach. Novasecta’s experience in helping companies to improve the impact of their strategic marketing suggests that much of the available investment is deployed sub-optimally: less than a third of companies adopt a rigorous and systematic approach to assessing the impact of their marketing spend. The implication is that much of the marketing investment is spent without a clear understanding of its contribution to success. At the same time few areas of pharmaceutical activity receive such limited investor and top management scrutiny. For executives, investors and employees this should be a concern, as there will be significant opportunities to improve marketing and deliver results from those improvements.

Beware the echo chamber

Unlike in other industry sectors, it can be extremely challenging for pharmaceutical companies to meaningfully link sales and marketing activities directly to revenue generation. So proxy measures are frequently used as surrogates for sales performance. For sales teams, often the largest single cost driver of a commercial operation, greater clarity can be generated through scrutiny of call quality, coverage and frequency metrics, resulting in useful management information. However a similar metric-driven approach to marketing is rarely applied beyond launch. This can present a significant issue, as what the sales teams are saying to customers should be informed and shaped by marketing. Instead, marketing performance is often discussed and graded more subjectively. This creates a risk that what one sees depends on individual perspective, and that of colleagues, all of whom frequently have a vested interest in reinforcing the status quo. This  ‘echo chamber’ can reinforce poor behaviours and limit the potential for improvements in brand performance.

Foster objective voices in the organisation

Despite similar levels of investment, the relative performance of marketing teams across different companies, or indeed of affiliates within a company, can be highly variable. Global franchises and standardised frameworks can support a more consistent approach, but they are insufficient to convey a distinct competitive advantage or to highlight the elements of marketing investment that are driving success in individual markets. Partnering with a well-equipped marketing excellence function is therefore critical for brand success, especially at the affiliate level.

Most companies operate an annual review cycle where senior leaders appraise plans. The danger is that this becomes little more than a “tick-box” exercise to agree funding, rather than a fundamental assessment of performance and intended future investments. The most successful organisations embrace annual reviews as an opportunity to drive critical thinking and appraisal of plans, identify and test exceptional ideas, and make interventions that accelerate growth. Powerful reviews start with creating the right environment, where objectivity reigns, with the goal firmly focused on identification of improvement areas, rather the allocation of blame for any shortcomings.

Too few pharma marketers are both evidence-based and orientated towards action:

Source: Novasecta Analysis of dominant company marketing behaviours

A robust review process can play a foundational role in creating the conditions necessary for continuous improvement. Brand leaders themselves must be open to scrutiny before subsequently seeking to understand where growth opportunities lie. This can be achieved through asking the right questions of their teams in order to drive honest conversations around performance, rather than taking a perfunctory glance before approval. As one senior executive told us:

“I seek out bad news, as it is usually where you find what can be improved most quickly – but what I normally get are the sunny highlights and successes”

Return on marketing investment can be substantially improved by seeking a deep, objective, external assessment of marketing and commercial activities: through benchmarking to industry standards, peer comparison and analytic assessment against validated frameworks, companies can identify priority opportunities for excellence in commercialisation.

Get to grips with what works

Marketing in the pharmaceutical industry grew from some of the same principles established in fast moving consumer goods (FMCG) sector. The low margin, high-paced, rapid turn-around nature of the sector behoves companies to embrace marketing to remain successful and to determine quickly which elements of the marketing mix are most successful. Frequently, a metric of success is required is a pre-requisite of funds being granted – without it, investment is not made. Experimentation, measurement and ruthless elimination of low-return approaches are second nature to consumer marketers: activities that don’t generate value are quickly terminated and funds re-deployed elsewhere. Similar, measurement-heavy, approaches are uncommon in the pharmaceutical industry.

External marketing audits are also commonplace in the FMCG arena. An external perspective is valued both to validate that commercial investments are likely to deliver as expected, and to highlight remaining opportunities for improvement. Interestingly, despite substantial marketing investments and high commercial stakes, commercial auditing remains uncommon in the pharmaceutical industry with the notable exception of the sales force channel.

A complete marketing audit can systematically evaluate the totality of a marketing operation: its structure, capabilities, strategic activities, objectives and plans. Such an activity can identify where and how performance improvements can be made even for high-performing brands, and how precious resources can be most efficiently deployed. To be truly valuable, any attempt at auditing must be independent and use a reproducible methodology. Ideally, it should also be repeated on a regular basis to track progression against internal and external benchmarks.

Find the courage to look in the mirror

The majority of leaders are open to learning about opportunities for generating growth, but for some the idea of an external review of their team’s marketing is a step too far. For others, the process is cathartic – offering reassurance that the focus and efforts of the organisation’s team are aligned with the realities of the market and exhibit a strong level of quality and thoughtfulness, all the while fostering an ethos of continuous improvement.

Perhaps more so than any other leadership attribute, a mind-set of continuous improvement – of acknowledging that no matter how good one is, or how much effort one applies, there is always room for improvement – is highly correlated with reproducible excellent commercial outcomes. This could not be more true or important for pharmaceutical marketers. Notably, setting out on this kind of introspective activity requires managing the culture and mentality of the team, so that they see the project as a helpful opportunity to gain perspective and a chance to improve, rather than an exercise in attributing blame for any uncovered weaknesses.

Novasecta regularly helps clients to identify opportunities for growth by applying our proprietary ‘Brand Compass’ methodology through the systematic assessment of brand plans. This supports existing marketing activity by providing an external, peer comparison that companies cannot achieve alone.

Conclusion

For greater success and continual improvement, marketing teams must:

In summary, Commercial leaders have a duty to leave no stone uncovered in the search for growth, particularly as the competitive intensity of the pharmaceutical market intensifies. This dynamic is likely to be exacerbated by the long-running decline in the industry’s R&D productivity. To start, leaders must become aware of existing shortcomings in the brand planning process and have the courage to take a fresh, objective view of activity. An external, peer based review enables true growth levers to be identified and subsequent growth achieved. Leaders with this approach are those that are seeing the greatest gains in the shortest amount of time.

Putting customers at the centre of businesses is common practice in many industry sectors. Though the pharmaceutical industry has multiple customers, including healthcare professionals and payors, the ultimate customers are always patients. For many in the industry however, embedding the views of patients across the value chain is stuck at strategic intent rather than a practical reality that guides decision-making. Our experience with a number of pharmaceutical companies highlights a range of approaches to this challenge, and in this paper we explore ways in which some are changing their business models to move from worthy words to Practical Patient Centricity.

Almost all industries are customer centric. They gain a deep insight into what matters to their customers, what they look for in a product or service and what they are prepared to pay to receive it. Companies then invest in sales and marketing to ensure that their product is the one that is purchased ahead of competitors.

In principle, the pharmaceutical industry is no different. Whilst its customers can be considered to be healthcare professionals (HCPs), or even governments, the ultimate true ‘customer’ is the patient and by addressing unmet medical needs, lives are improved and extended. However the practical reality is that for many companies, customer, or patient centricity remains limited to words on mission statements, rather than the day-to-day activity. Through our work across the pharmaceutical value chain, we find that executives almost always agree with the goals of patient centricity, but the daily pressures and processes of their roles constricts them in making it happen. The reality is that the patient is infrequently or never consulted at key points in the development of medicines – as one executive described it:

“The idea of talking to a patient about their medicine is alien to us”.

It is not just company strategy and intent that is the driving force for a more patient centric approach: external pressure is also building for the industry to change. The British Medical Journal requires companies to indicate the level of patient involvement in manuscripts for example. Should the FDA require patient input to be included in trial design, then companies will be forced to adapt rapidly and bring the patient’s perspective into the development of medicines.

Why patient centricity matters

A strong rationale for why patient centricity matters is the foundation from which companies can begin to embed the views of the patients across the value chain. In our experience, companies typically have three key reasons to embrace patient centricity:

1. Patients are more knowledgeable than ever

Healthcare is evolving from being paternalistic to discursive, with patients having greater choice than before. When diagnosed, patients frequently seek information online to enable informed discussion with their healthcare professionals. Companies that understand this ‘choice agenda’ can provide relevant information to patients and engage them early in their treatment options.

2. Companies can develop therapies that have a greater impact on patients

Most patients just want to be better – mode of action, robust clinical trials and health economic models are not relevant to them (but are to payers and HCPs). By understanding what really makes a difference to a patient’s life, companies can explore therapies that meet these needs, rather than developing drugs that are simply different or novel.

3. Drug development costs can be reduced

Patient-derived data drives the development of medicines. Patients frequently are not forthcoming with their experiences of a condition, with the potential loss of valuable data that could improve a development programme. Cost effective wearable technology can gather this data, enabling the ‘silent patient voice’ to be heard – coupled with regulatory changes, clinical trials can be shortened and costs reduced.

Companies such as Merck & Co, Sanofi and UCB have identified the competitive advantage that patient centricity brings and are leading the way in its practical implementation. Given that this is a relatively new area for the industry, there has clearly been a degree of trial and error, but there are already signs of what works and what doesn’t – for one executive:

“Patient centricity is the next market access – and will take 10 years to embed”.

Steps towards Practical Patient Centricity

There are four critical success factors for embedding patient centricity, each with some important ‘watch-outs’ to be aware of.

Practical Patient Centricity requires a systematic, consistent and stepwise approach.

Start internally

Though patient centricity is ultimately externally facing, companies should initially focus internally to achieve gains. Appointing a senior accountable individual, such as a Chief Patient Officer is an example of an important first step. By doing so, commitment and investment is demonstrated. Clearly commitment must start at the very top, but the real work starts at the level of senior management. Combined with strong internal communication, employees can and should be engaged early in the process.

Map the patient journeys

Most employees are not patients for the condition they work on – engaging with them on what it is like to have the condition is critical for patient centricity to stick. Employees from across the value chain can work with patients and patient groups to map the patient journey from being well to getting treatment and beyond, to help understand the impact of the condition. Once completed, both improvement opportunities and points of failure where companies can add value can be identified and explored. These may be outside the current scope of the company’s business, so a robust decision framework needs to be implemented to prioritise appropriate actions.

Celebrate success and failure

There is no definitive way to embed patient centricity, so new approaches will create both successes and failures – both should be embraced and shared widely. It is highly like that new opportunities will present challenges to existing processes and practices, particularly in legal and regulatory spheres. An open minded, ‘can do’ mind-set enables gains to be achieved, with acceptable levels risk embraced. 

Invest to win

Patient Centricity is like other transformation initiatives, requiring investment to win. Companies should commit time, money and people to patient centricity over a minimum of five years, as genuine change like this requires a medium term horizon to achieve successfully.  Leaders also need to calibrate their definition of success to incremental gains, rather than big leaps forward. Agreeing and tracking measures that are key in the patient journey, rather than traditional ‘return on investment’ metrics mitigates against early termination of relevant initiatives.

Why patient centricity can fail

Though well intentioned at the outset, patient centricity efforts can stall or fail – here are the top three from our experience:

New against old

Patient centricity activities receive greater scrutiny than current programmes and can often be strangled at birth. Leaders must accept that like any other new initiative, patient centricity will take time and requires nurturing in the early days to increase the chance of success.

Limited practical guidance

Companies engage employees on an emotional level (patient centricity is the ‘right’ thing to do) but fail to provide practical guidance on what do to – employees can default to old habits, rather than embracing new approaches. Providing employees with a decision framework and ‘guard rails’ enables choices to be made at all levels. Patient centricity should be emotionally grounded, but rationally led.

Jumping to solutions

Solutions to patient problems that don’t exist or are not well defined can waste time and effort and lead to disengagement. Deeply understanding the patient journey and engaging all employees across the value chain mitigates against this.

The future of patient centricity

Patient centricity is being adopted across the pharmaceutical industry with varying results. Companies that take a structured, rigorous approach that engages employees across the value chain and welcomes both success and failure are seeing the biggest rewards so far. However our experience shows that companies like this are in the minority. For those yet to embrace patient centricity, the greatest barriers are internal, but there are external pressures that are increasingly meaning it is a question of if, not when, patient centricity takes centre stage.

Pharmaceutical companies are increasingly entering into R&D collaborations with external parties that create Intellectual Property (IP) and competition law considerations. The pharma companies’ legal teams have a critical and important role for the success of such collaborations. They are the “risk gatekeepers” between the internal and external worlds, ensuring success through a balanced approach to risk mitigation. An excessively risk-averse approach can hinder the potential outcomes of a collaboration or at worst terminate it before an agreement can be reached. On the contrary, limited effective risk assessment and mitigation can endanger the company’s unique advantages. To explore good practice in this area we have explored the “voice of legal” based on a set of targeted interviews with internal and external lawyers and our experience. Our conclusion shows that if innovation teams partner with legal up-front, “legal” can be a force for success in R&D collaborations rather than the stereotypical obstacle to closing partnership deals quickly and effectively.

In this paper, we cover the important legal considerations that R&D teams must consider as they engage with external parties such as industry consortia, academic institutions and other pharma/biotech companies. First we review how best to manage and own the Intellectual Property (IP). Then we explore how to deal with contamination and spillovers, and finally we will look at compliance and jurisdiction laws that can have an impact on R&D collaborations. We have based our paper on a set of interviews with lawyers at pharmaceutical companies and external lawyers who work across industries including pharma/biotech.

Clarify IP ownership and licence arrangements early on

In the Pharma industry, the management and ownership of Intellectual Property (IP) can be highly complex and challenging issues for companies and their partners when embarking on R&D collaborations. Pharma companies tend to hold on to their IP very tightly as it is considered to be its main value creator and an entry barrier to other competitors. In that respect, Pharma companies can be quite traditional when it comes to IP: they are very IP rich, aware of it and are not willing to share it or open it easily. To address this frame of mind, companies need to look at their IP with fresh eyes and draw the line between sharing and giving access to what is not critical while retaining a competitive advantage by protecting what is considered their own and should therefore remain a black box to the partners. This can require a change of mindset with regards to what is important IP and what is not.

When initiating a partnership it is critical to start with the difficult discussion first and agree with all parties how new created IP will be managed and who will own it. Questions to answer include: who is responsible of filing the patent? Who is going to pay for the costs? Who is protecting it? Will it be used in different fields of activity between the partners? What happens when it is licensed to others? What are the rules and royalty payments? What happens when it is sold? The innovation team needs to think about all aspects of the collaboration and have a discussion with the partner upfront about such matters.

It is also important to note that IP ownership is not always necessary, especially if a broad and strong license is negotiated. A licence can be good enough and in some cases may be better than ownership, as it carries lower risks. This is often the case when partnering with academia: pharmaceutical companies can prefer to access IP through licensing or options from the academic scientists to build trust. Academics are motivated by doing cutting edge research, publishing papers, filling patents and accessing funds, while sharing the risks and rewards, which should be considered when negotiating the partnership. The fear over IP is increased if the partnership involves parties of different sizes: it is important to be transparent to nurture a trusted relationship with the partners of all types. In the special case of co-ownership of IP all details from the logistics of the filling to the split of the potential reward should be defined, clarified and settled early on.

Some companies prefer to work with the same partner once the trust and ways of working are agreed, as it makes the following collaborations easier. In the case of multiple parties partnering with an academic institution or centre, it is important that the industry partners have a common approach to simplify the complexity from having multiple parties involved.

For IP, pharma companies should therefore ensure alignment across the organisation regarding IP considerations as follows:

  1. Involve the legal and patent team early on in partnership discussions
  2. Develop a clear risk mitigation plan and share it with the senior management and the partnership team to make sure that the IP risks are clearly understood and accepted
  3. Ensure that good internal governance is in place to address IP risks

Manage contamination risks proactively

A commonly mentioned risk when working with external partners is contamination. In the excitement of research and motivation to solve problems, won’t scientists divulge more than what it is in scope for the collaboration?

For this specific risk, the legal team has the opportunity to play an important role in helping the company to protect its critical secret sauce, its value creation engine and its technological differentiation. Education of the innovation team and the scientists working directly with the partners on the legal risks associated with the specific project is indeed the first safeguard to be put in place against spill-overs and contamination.

Scientists need to be on top of what is specifically in scope for the partnered project and what is not. The awareness should cover all workforce and not be restricted to senior staff. In the case of technology transfers, the confidentiality agreement needs to define and clarify the remit and set up good working practices. The Stevenage Labs is a good example of successful collaborative research between GSK scientists and external scientists that can come and use the lab. One of the reasons for its success is the dedication of space to the specific scope of planned collaborations to avoid contamination. A data repository related to each collaborative project can also be separated and ring-fenced from other proprietary data.

To avoid contamination and negative spill-overs:

  1. The legal team should be very proactive, drafting policies, frameworks and procedures
  2. The organisation should be clear from the start of the collaboration about what information data, methodologies, processes, capabilities and technologies are to be shared and how
  3. Scientists should record and track their work to ensure traceability in the case of future litigation

Stay on top of competition law changes and jurisdiction variability

Competition laws are designed to ensure competition between companies, so R&D collaboration agreements between pharmaceutical companies can raise compliance issues. This is therefore a dimension that needs to be considered carefully when entering into an R&D collaboration. Even if EU competition law and US antitrust law are similar, it is important to understand national competition law subtleties when partnering outside of those geographical areas.

As an example, the European Commission document “Intellectual property and legal issues in open innovation in services” raises a number of questions in connection with Open Innovation and competition law. The use of intense networking between companies to develop the creative commons and positive spill-over effects implies a concentrated market structure, and significant cooperation between companies. This prompts legitimate antitrust concern and can result in calls for a competition analysis. The document does also recognise the complexity of Open Innovation projects and generally does not have a problem with research and specialisation agreements, and in fact positively encourages them in the framework of research programmes (e.g. Horizon 2020). Competition law will always be modernised as new creative partnership agreements are signed, and innovation teams need to work closely with their legal teams to ensure that the agreements are compliant with the latest competition laws in place. For example one such modernisation of competition law occurred with the European Community Merger Regulation adopted in 2004.

There is a perception from some pharmaceutical companies that the UK politically has always pushed for innovation, and promoted partnership and collaboration with academia. This is probably a reflection of the UK succeeding in creating a ripe environment to bring academia and industry together by facilitating access to funding from non-governmental organisations (such as Cancer Research UK and Medical Research Council, as well as the European Commission. On the other hand, US regulation is typically perceived to be less favourable, though this may change in the future. The Leahy–Smith America Invents Act (AIA) was implemented in 2013 and it switches the US patent system from ‘First to invent’ to ‘First inventor to file’. This aims to reduce the patent protection but potentially reduce the number of IP litigations.

In summary, the innovation teams of Pharma companies should work closely with their legal and patent teams to understand and keep up to date of the regulation of the territories in which their R&D collaborations will be active, be it for competition laws or patent regulations or both.

Conclusion

Many Pharma companies are now seeing the benefits of R&D collaborations, and those that have not yet done so are typically looking for ways to do more. Pharma companies tend to be more comfortable with taking higher risks as they have more funding and money than their smaller biotech counterparts. Smaller biotechs tend to be less well funded and are therefore more protective, using R&D collaborations and consortiums to plug their funding gaps. In this context he biggest challenge for Pharma companies is to accept that in R&D collaborations some control may be lost, and to put in place mechanisms to mitigate the risks.

Pharma companies’ innovation teams therefore need to collaborate with their legal teams early on. If teams are not able to collaborate internally with each other effectively, external collaborations become even more challenging. Nurturing a collaborative mindset across functions and departments is critical: with this mindset, the legal team can be a force for good in delivering successful R&D collaborations through:

  • Clarifying IP ownership and licence arrangements early on
  • Managing contamination risks proactively
  • Staying on top of competition law changes and jurisdiction variability

European MidPharmas are a class of companies that Novasecta has been working with intensively since its foundation. These R&D-based pharmaceutical companies with annual revenues of €50m to €5bn are tremendously diverse, just like the European countries in which they are based. Working closely with such companies for over a decade has provided us with a unique perspective and a substantial body of practical insight into how pharmaceutical and biotech companies of all sizes can survive and thrive.

Introduction

In our second annual European MidPharma Report we explore the nature and evolution of European-headquartered mid-sized pharmaceutical companies, and examine pertinent trends and topics of the last year. Through this we aim to provide our readers with non-standard and thought-provoking insights into the highly diverse global pharma/biotech industry.

We segment the pharmaceutical sector across three dimensions: ownership, scale, and R&D intensity. For ownership, the preponderance of families and foundations rather than stock markets or venture funds sets European MidPharmas apart in the global pharma/biotech community. We therefore segment them in terms of ‘pure’ listed, i.e. publicly-traded companies with no majority shareholder, listed privately-controlled, i.e. publicly-traded companies with a majority shareholder, and private, i.e. companies that are wholly owned by families or foundations or funds. We combine the ownership dimension with revenue, which we classify €50m-€5bn as “mid-sized” and R&D intensity, which we classify in terms of R&D investment as a proportion of revenue:

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

40 MidPharmas have both R&D and revenue data available for 2015 (or 2014 if not available), so appear on this chart. 5 companies are excluded from this chart as R&D spend >40% of revenue: Galapagos (61, 214%), Genmab (152, 43%), Medivir (70, 42%), MorphoSys (106, 74%) and Vectura (72, 62%). 20 companies are excluded from this chart due to insufficient disclosed data (Acino, AMco, Angelini, Debiopharm, Desitin, Dompé, Ferrer, Ferring, Galderma, Helsinn, HRA, Italfarmaco, Menarini, MundiPharma, Norgine, Pharmstandard, ProStrakan, Riemser, Sigma-Tau and Zambon).

The one characteristic of European MidPharmas to note compared to last year is resilience. None of the 65 companies we profiled in our last annual report was taken over or dissolved in 2015. Since the end of 2015 a notable exception to this “rule” has been Meda, but this took a highly unusual 92% premium on its share price for it to be sold to Mylan early in 2016.

There is something about the scale and ownership of the European MidPharmas that confers sustainability, a valuable characteristic to have in an industry with long time horizons that has to operate in an uncertain and volatile economic environment.

We believe that corporate sustainability can be a force for good in the industry: the focus on being excellent in a particular area as a way to succeed and prosper is one we see a lot of in European MidPharmas, and indeed some of their larger peers that have entire or substantial private shareholdings such as Novo Nordisk, Boehringer Ingelheim and Roche. We therefore believe that combining the attitude of patient long-term capital that is a characteristic of privately controlled companies with a bias towards financial discipline that is a characteristic of pure listed companies is a sound approach for success in pharma/biotech companies.

In the remainder of this report, we explore and contrast MidPharma companies’ performance with each other and with their Big Pharma peers across a variety of business drivers:

  • Revenue Growth
  • Profitability
  • R&D Intensity
  • R&D Externalisation
  • M&A Activity
  • Partnering Activity

We finish the report with our proprietary ranking of MidPharmas based on R&D, Business Development and Commercial Reach performance, with a comparison to last year’s ranking.

Revenue Growth

In revenue terms, MidPharmas’ revenues of €50m-€5bn sit them squarely between small Biotech on one side and established Big Pharma on the other. Comparing the growth of the various types of MidPharma with their Big Pharma peers yields interesting insights:

MidPharmas are growing revenue faster than their Big Pharma peers 

27 MidPharmas excluded due to insufficient data (Acino, AMCo, Angelini, BTG, Debiopharm, Desitin, Dompé, Esteve, Ferrer, Ferring, Galderma, Grünenthal, Helsinn, HRA, Indivior, Italfarmaco, Kedrion, Krka, Menarini, MundiPharma, Pharmstandard, Pierre Fabre, ProStrakan, Riemser, Sigma-Tau, Vectura and Zambon). The Big Pharma population is made up of 20 global pharmaceutical firms with revenue >€5bn (Amgen, AstraZeneca, Bayer, Baxter, Biogen, Boehringer Ingelheim, Bristol-Myers Squibb, Eli Lilly, Fresenius, GlaxoSmithKline, J&J Pharmaceuticals, Merck & Co, Merck Serono, Mylan, Novartis, Novo Nordisk, Pfizer, Roche, Sanofi-Aventis and Teva).

Notably, all MidPharma ownership segments are beating Big Pharma in median four-year top-line growth. This is in contrast to our 2015 report, where Big Pharma was topped only by listed, non-privately-controlled MidPharmas. This year, it appears privately-controlled MidPharmas have ‘stepped it up a notch’. Some prominent examples of privately-controlled companies having increased their 4-year growth rate by growing their revenue significantly in the last financial year include Ipsen (14% growth) and Octapharma (18%).

Profitability

So MidPharmas are growing revenue faster than Big Pharmas, but are they more successful where it really matters – profitability?

MidPharmas tend to be less profitable than Big Pharmas

29 MidPharmas excluded due to insufficient data (Acino, AMCo, Angelini, BTG, Chiesi, Debiopharm, Desitin, Dompé, Esteve, Ferrer, Ferring, Galderma, Grünenthal, Helsinn, HRA, Italfarmaco, Kedrion, Menarini, MundiPharma, Norgine, Pharmstandard, Pharmstandard, Pierre Fabre, ProStrakan, Riemser, Servier, Sigma-Tau, Vectura, and Zambon). Galapagos (-148%) is not included on this chart as proportional EBIT <–50%.

Examining earnings before interest and tax (EBIT) for the companies that publish this figure shows that MidPharmas as a whole are holding on to less of their hard-earned revenue than Big Pharmas. Listed, privately-controlled MidPharmas in particular seem to be taking a hit on profitability, although our data points may be too few to draw any definitive conclusions on this group.

We believe that Big Pharmas’ relatively high profitability compared to its smaller MidPharma peers is where the financial discipline of stock markets is most apparent. For the financial markets Big Pharmas are “safe haven” stocks with relatively high and reliable dividends: CEOs of such companies have been aggressively protecting dividends, executing share buy-backs and sustaining major cost-cutting initiatives to reinforce this. These activities are the hallmarks of financial discipline and are less apparent so far in European MidPharmas. The interesting question is how such activities create long-term value: cutting R&D in particular provides short-term profitability benefits with the risk of long-term damage. And the almost desperate quest for acquisitions to boost earnings and provide synergy cost benefits that characterised some Big Pharmas last year demonstrates that short-term profitability is not all that is required to create long-term value.

For MidPharmas, achieving the level of profitability of their larger peers is an issue that needs to be confronted. There are undoubtedly economies and cost-saving opportunities that come from both scale and financial-market discipline. For example we observe that listed companies are typically more amenable to shedding headcount than their privately held counterparts as a way of reducing costs. And as we observe below in exploring R&D intensity, the relatively poor profitability of MidPharmas in not typically caused by high R&D investment, which might be an argument for tolerating it in the short-term. The risk for many MidPharmas is that insufficient cost discipline creates complacency, which stunts R&D and commercial progress. That said the contrasting risk in listed Big Pharma is that the constant cycle of M&A and synergy-cost-cutting will harm the focus and sustained investment in R&D that brought much of their success and can sustain them in future. As ever the optimum position is one of balance: maintaining cost discipline while investing for the long-term.

R&D Intensity

For R&D intensity, we consider each company’s R&D spend as a percentage of revenue. We find this to be a highly instructive proxy of the corporate business model – to what extent are companies looking to grow organically through R&D, or looking to buy their way to growth?

As we showed in our initial graphic showing the ownership, scale and R&D intensity of all MidPharmas, the proportion of revenue that MidPharmas invest in R&D is highly variable. There do however appear to be two clusters: those that show a significant commitment to R&D, investing 15-25% of revenue sustainably, and those that invest 5-15% of revenue in R&D for whom R&D is perhaps more an investment necessity for Life Cycle Management and commercial success than a source for future earnings and growth.

A further measure of R&D intensity is the extent to which R&D investment grows year on year. We have always seen R&D investment growth to be a reasonable indicator of company health: those that increase investment in R&D year on year have either been succeeding at it (later stages of drug development cost more than early stages) or have confidence in its ability to create value for the organisation. In that spirit we explore the four-year R&D investment growth rates for the various company segments:

Listed big and mid-sized pharma companies have typically
grown R&D investment by more than their privately controlled peers

29 MidPharmas excluded due to insufficient data (Acino, AMCo, Angelini, BTG, Debiopharm, Desitin, Dompé, Esteve, Ferrer, Ferring, Galderma, Grünenthal, Guerbet, Helsinn, HRA, Indivior, Italfarmaco, Kedrion, Meda, Menarini, MundiPharma, Norgine, Pharmstandard, Pierre Fabre, ProStrakan, Riemser, Sigma-Tau, Vectura, and Zambon).

Last year, we observed that ‘pure’ listed MidPharmas were growing R&D by approximately the same amount as Big Pharmas, with privately-controlled MidPharmas lagging behind. This year, we observe a fairly similar phenomenon in terms of ‘pure’ listed MidPharmas and Big Pharmas being quite similar. Taking a look at the other two MidPharma segments, however, we see that listed, privately-controlled MidPharmas are exhibiting remarkable volatility in investment in R&D. This really demonstrates the plethora of different business models that pharmaceutical companies can employ.

Fully private MidPharmas, on the other hand, are for the most part hovering just above zero growth in R&D investment (similar to last year), with two notable exceptions: Chiesi and Octapharma. Chiesi in particular evidently has big plans for growth, as demonstrated by its growing investment in R&D. Looking at its impressive revenue growth over the last several years, it appears that it is well on its way to accomplishing this.

For most of the privately held or controlled MidPharmas, the combination of not growing R&D investment while not sustaining a profitability level that matches its listed counterparts is a cause for concern. Is R&D investment being cut or held back because it is the “easiest” way to cut costs and increase short-term profitability, particularly if such investments are the external sort, such as progressing drugs through clinical trials? Or is there genuine concern that R&D will not deliver, with the corresponding reduction in funds to this vital activity for sustainable success?

The perennial question of “is my R&D worth it” never goes away, and it is not easily answered. The better question is “how can I get more from R&D”, and the answers to that seem to be broadly consistent across all company types. We summarised our angle on this topic in our white paper “Manage R&D to Create Value” in which we emphasise such essentials as the need for focus, the benefits of flexibility and diverse sources of innovation, and the need for strong leadership and governance.

We showed last year that historical R&D spend is strongly correlated with future revenue across all pharma segments. This year, inspired by the above conclusion, we take this analysis one step further and explore whether past R&D drives future profitability.

Historical R&D investment has been more correlated with
current profitability for Big Pharmas than it has been for MidPharmas

31 MidPharmas excluded due to insufficient data (Acino, AMCo, Angelini, BTG, Debiopharm, Desitin, Dompé, Esteve, Ferrer, Ferring, Galderma, Grünenthal, Helsinn, HRA, Indivior, Italfarmaco, Kedrion, LFB, Meda, Menarini, MundiPharma, Norgine, PharmaMar, Pharmstandard, Pierre Fabre, ProStrakan, Riemser, Servier, Sigma-Tau, Vectura, and Zambon).

Interestingly, the answer to whether past R&D means current profit appears to be a fairly strong ‘yes’ for Big Pharmas, where higher levels of R&D investment over the last four years have been correlated (R2 = 67%) with higher levels of EBIT in 2015. Admittedly correlation is not cause and effect, but even so it is encouraging that those that invest more in R&D are being rewarded with higher profitability than those that invest less. However with MidPharmas the correlation is less clear: while most of those that have invested more in R&D have achieved higher EBIT levels, there are more companies that have kept R&D spend low while sustaining profitability. Perhaps the size of the Big Pharmas means that a more predictable EBIT and R&D spend proportion of revenue can be set, without fear of too much volatility. MidPharmas, on the other hand, may be more susceptible to market forces due to their smaller size and strong exposure to a limited number of geographies, meaning that EBIT has been influenced more by other factors than by R&D alone.

R&D Externalisation

New this year, we decided to report on R&D business models. One proxy measure for this is the number of R&D-focused employees that an organisation has, as when normalised for R&D investment. This indicates how intensive internal R&D activities are, compared to external.  It is no secret that the industry has been moving towards more “virtualised” R&D – using external contractors and partners is generally considered (rightly or wrongly) to be faster than internal activity, and certainly enables more flexibility in R&D. We therefore explored how our different pharmaceutical segments are balancing internal versus external R&D:

MidPharmas externalise less of their R&D than Big Pharmas

28 MidPharmas have both R&D spend and R&D heads data available for 2015 (or 2014 if not available) so appear on this chart. Evotec (47.2) is not included on this chart as proportional R&D heads >15. 36 MidPharmas excluded due to insufficient data (Acino, Allergy Therapeutics, Almirall, AMCo, Angelini, Bavarian Nordic, BTG, Debiopharm, Desitin, Dompé, Ferrer, Ferring, Galderma, Grifols, Grünenthal, Helsinn, HRA, Indivior, Italfarmaco, Krka, Medivir, Menarini, Merz, MundiPharma, Norgine, Octapharma, Orion, PharmaMar, ProStrakan, Recordati, Riemser, Shire, Sigma-Tau, Sobi, Vifor and Zambon).

MidPharmas as a whole therefore have more proportional R&D heads than their Big Pharma counterparts, with a huge amount of variability seen amongst them. Companies such as Stada, Gedeon Richter and Rovi have significant internal R&D staffing, while others such as Biotest and Kedrion appear to rely much more heavily on external providers for their R&D needs. Part of this variation in companies is location – for instance, labour costs for Gedeon Richter, a Hungarian company, are much lower than in the much larger Western European countries where their peers are headquartered.

Big Pharma, on the other hand, shows far less scatter, settling at around 2.4 R&D heads per €1m spend on average. Part of the difference between MidPharmas and Big Pharmas is due to the latter conducting more and larger Phase III trials, which are generally outsourced more significantly than earlier pre-clinical and discovery activities.

Paradoxically, Valeant, the well-known supporter of super-externalised R&D that prefers to acquire companies and products rather than invest in pharmaceutical R&D, sits at the top of our Big Pharma list in terms of R&D heads per €1m of R&D investment. However this is more a feature of its very low R&D investment as a proportion of revenue (3%), with its avoidance of costs that are often external like clinical trials. And its business model is not one that pharma companies are now rushing to replicate. The other Big Pharma with a relatively high number of R&D heads per €1m of R&D investment is the more successful Novo Nordisk, that over the years has rocketed from being a classic MidPharma to one of the top 10 pharma companies by value in the world. Its focus and belief in its own capabilities is a lesson to Big Pharma and MidPharma alike. Reducing internal R&D to increase external R&D investment is not the only solution to R&D productivity issues.

We next examined the trend in R&D externalisation over time for MidPharmas:

MidPharmas are slowly decreasing internal R&D headcount

R&D head data was taken annually, when available. For each year, the number of R&D heads was divided by R&D spend, and then the median was calculated. At the time of publication, 2015 had too few data points to be conclusive, so was not used.

From 2011-2014, the median number of R&D heads in MidPharmas has declined by approximately 15%, demonstrating that there is scope to increase productivity and flexibility by externalising effectively. Indeed, MidPharmas are following the Big Pharma trend towards externalisation, although they continue to lag behind Big Pharma in absolute terms.

Our sense is that externalisation in R&D is a positive and necessary trend: the issue is its speed and nature. There is no doubt that some of the aggressive R&D cost-cutting in Big Pharma in the last years has caused significant disruption to the R&D activities of those companies. The more gradual approach typically taken by MidPharmas may mean that external opportunities are missed, but it also means that internal activities can be capitalised on more effectively, and the knowledge that created past successes is retained.

M&A Activity

As we mentioned earlier, the 65 MidPharmas we track have been very resilient in terms of not being acquired or dissolved in 2015. But a longer time horizon recognises that some MidPharmas have indeed been acquired over time, remember Altana, Serono, Solvay, and Organon for example. The “being acquired” phenomenon has been most prominent at the larger end of the MidPharma scale, where the next wave of growth becomes harder for private companies that are not as amenable to leverage as their listed Big Pharma peers.

At the other end of the M&A wave are the MidPharma acquirers: many MidPharmas have grown through selective acquisition or merger, with examples including acquirers UCB (e.g. Schwarz, Celltech), Shire (e.g. TKT, Viropharma, Dyax), and Nycomed (e.g. Altana, though combination was later acquired by Takeda). More recently the announcement of the merger between the UK’s SkyePharma and Vectura, indicate that consolidation for scaling up is a strategy that is still alive and well for MidPharmas.

A curious trend has overcome the MidPharma sector over the last ten years: while the number of M&A deals being completed has been declining since the peaks of 2006-2008, the aggregate value of deals done has shown a sharp increase in the last two years. Perhaps the declining volume is a by-product of a reluctance to purchase when the price of assets, and therefore the companies that hold them, has been increasing. However the increase in deal value suggests that some companies are prepared to take on the substantial risk of M&A. Either way, M&A is here to stay as a mechanism for MidPharmas to grow:

M&A deals involving MidPharmas are becoming bigger but less plentiful

Source: Analysis of GlobalData data. Criteria searched for were mergers, majority acquisitions, and complete acquisitions involving the 65 MidPharmas. Deal Value is headline value of deal including contingent payments if any. 

Taking a more detailed look at the nature of M&A deals at the MidPharma company level, a major change that we see from last year is that pure listed MidPharmas are doing substantially (over 2x) bigger deals than their privately held and controlled counterparts, often through back-loading. This focus on back-loaded deals (paying in “biodollars”) is a likely contributor to the rising deal values seen above for MidPharmas as a whole.

The other interesting feature of this analysis is that the pure private MidPharmas are doing significantly fewer deals than their counterparts that have access to the capital markets. M&A is essentially where the ‘rubber meets the road’ for ownership model: remember whose capital is being spent on it, your family/foundation or the more anonymous capital market?

Private MidPharmas use M&A less than their listed counterparts

Source: Analysis of GlobalData data. Criteria searched for was M&A and asset transactions that have been announced/completed/filing/planned in 1st January 2013 – 28th April 2016.

Partnering Activity

Now we turn our sights from M&A to licensing. Judging by deal flow, this seems to be the domain of privately-controlled companies – private MidPharmas are closing the most licensing deals, and privately-controlled listed MidPharmas are doing the biggest deals by far. Partly this is a consequence of all pharma companies recognising that innovation and products should be sought from outside the company as well as from internally, and that if this is not to be done through M&A it has to be through partnering and more specifically some kind of licensing arrangement.

The notable large size of upfront payments in deals by the listed privately-controlled MidPharmas is one that we first reported last year, and it has grown to be even more sizeable this year, with the average upfront payment involving listed privately-controlled MidPharmas increasing by a third. The tendency towards this segment of MidPharmas signing licensing deals almost an order of magnitude larger than their peers reinforces our observation related to M&A: ownership structures can substantially impact the chosen business models of pharma companies.

Private MidPharmas prefer licensing to M&A

Source: Analysis of GlobalData data. Criteria searched for was licensing deals that have been announced/completed/filing/planned in 1st January 2013 – 28th April 2016.

MidPharma Performance Ranking

To get a sense of the growth and development of the individual companies in the MidPharma sector, we rank them on three fundamental attributes that we believe provide long-term strength: focus on R&D, attention to partnerships, and global commercial reach. We take public-domain data on proxies for each of these attributes and rank the companies based on the combination of all three.

Our caveats from last year still apply: the ranking does not fit every business model as the R&D measure favours R&D-based companies, the partnership measure does not favour those that have taken a selective and sensitive M&A approach to bringing in assets and capabilities, and the commercial measure typically favours the larger companies that have had time to develop broader commercial reach.

This year we have also compared each company’s ranking with last year’s, with some interesting developments. The top 10 companies have all retained their positions in the top 10 this year, comprising a diverse mix of MidPharmas with all ownership models: private (3), listed privately-controlled (3) and pure listed (4). The highest climber in this year’s ranking is Pierre Fabre, moving up ten places to a tie for 22nd propelled by an increase in deal-making following a new corporate strategy and R&D transformation. Through an increased commercial reach (it now markets products in all five major regions), Shire has gained six places and is now tied for 10th place in our ranking.

All in all the ranking does broadly fit our qualitative view that the stronger companies are those that are focused on what they are good at, believe in R&D, and take a strategic approach to partnerships. But of course being ranked high does not make a company immune to getting even better.

Novasecta’s European MidPharma Ranking 2016

20 MidPharmas excluded due to insufficient data (Acino, AMCo, Angelini, Debiopharm, Desitin, Dompé, Ferrer, Ferring, Galderma, Helsinn, HRA, Italfarmaco, Menarini, MundiPharma, Norgine, Pharmstandard, ProStrakan, Riemser, Sigma-Tau and Zambon). 9 MidPharmas excluded due to lack of own marketed products (Cosmo Pharma, Evotec, Galapagos, Genmab, Guerbet, Medivir, MorphoSys, Orexo and SkyePharma) – these companies have enormously different business models and cannot be compared to companies with a direct sales approach. Three more companies are excluded this year than last year (29 compared to 26). For revenue data, the mean from 2013-2015 was used except for BTG, Esteve, Grünenthal, Pierre Fabre and Vectura, where only 2013 and 2014 data was available; Kedrion, where only 2014 data was available; and Indivior, where only 2015 data was available. For R&D spend data, the mean from 2013-2015 was used except for BTG, Esteve, Grünenthal, Meda, Pierre Fabre and Vectura, where only 2013 and 2014 data was available; Kedrion, where only 2014 data was available; and Indivior, where only 2015 data was available. The number of partnership deals in the last three years were counted using MedTrack. This includes product/technology acquisitions, commercialisation and distribution deals, joint ventures, licensing, manufacturing and supply deals, R&D collaborations and options agreements, but not M&A. The number of regions with marketed products were counted using GlobalData for the commercial ranking. Regions used are Canada/US, EU/EEA, Japan, BRICS (Brazil, Russia, India, China, South Africa), Rest of World. In a tie, companies are listed in alphabetical order. 

Conclusions

The European MidPharma sector represents a highly interesting microcosm of the global pharma/biotech industry, with lessons for companies of all shapes and sizes.

Firstly, our report this year demonstrates again the enormous variation in MidPharma business models, with vast differences between companies’ ownership structures, R&D intensity, profitability, M&A and licensing activities. This diversity is encouraging: if every pharma company took the same approach as each other there would be a worrying “group-think” concerning the right thing to do, with all the downsides of risk aversion and regression to the mean. So though there is no “right” business model for pharma/biotech, and in the European MidPharmas there are patterns of success that can and should be applied to improve performance in pharma/biotech companies of all sizes.

Secondly, we’ve really seen this year that MidPharmas are, as a whole, successful in what they do. We were encouraged to see that MidPharmas are growing revenue faster than Big Pharmas, and we look forward to keeping an eye on this in the future. However our new analysis of profitability this year demonstrates that for whatever reason MidPharmas have some way to go on improving cost discipline, as the mostly listed Big Pharmas are beating MidPharmas across the board in profitability.

In today’s uncertain political and economic times the pharma/biotech industry remains an essential one for the world’s health and the world economy. Within the European MidPharma companies that we have explored in this report there are important precedents and lessons for the global pharma/biotech community. The value of focus, flexibility and strong partnerships exemplified by some MidPharmas and some larger and smaller companies has never been more apparent. So at Novasecta we continue to be committed to helping pharma/biotech companies be better and create more value for the patients they ultimately serve and for the owners who provide the funds for them to do so.

The orthodox thinking for commercialising pharmaceuticals is that the sales trend established in the first six months post-launch determines the product’s performance in the long-term. For those accountable for on-market products, this can be dispiriting – what can I do to ‘beat the trend’ if the evidence says that it is impossible? In this paper we first discuss how this ‘Trend Orthodoxy’ stifles innovation and limits thinking. Then we describe how commercial leaders can create the habits that enable their organisations to consistently beat the trend for their products.

A great product launch has many benefits, not least strong revenue in early months. So it not surprising that launching important products typically involves heavy upfront investment, an assignment of top talent, and frequent executive oversight. Yet conventional wisdom suggests that the trend for the product is set after this early post-launch period, so little can be done to change it. Companies can therefore reduce focus after the initial six months post-launch: top talent can move, teams can be re-assigned, and investment can decrease.

The focus on the trend set by the early launch period risks creating self-fulfilling prophecies. Pre-launch there are no facts about future market uptake, only assumptions and forecasts. Yet because the initial forecasts are the numbers that commercial organisations are motivated to hit, the numbers to hit can implicitly drive the actual sales performance. It takes a brave marketer to use the customer insight that is gathered post-launch to change the forecast either upwards or downwards. So the trend can stick simply because of organisational habits rather than because of any particular commercial insight.

Novasecta firmly believes that commercial leaders have the potential to get much more value from their products, but to do so requires first a mindset shift to actively break free from the trend orthodoxy and second new habits in commercialisation.

Management of commercialisation requires attention to strategy, action plans, and the management system

Beating the trend requires a clear view of what success must look like. Developing a dynamic product strategy is the starting point, but it is only when a strategy is translated into action plans with concrete measures and goals that it becomes effective. And such action plans need a coherent management system to move the action plans into reality. It is these three layers of managing commercialisation that ultimately drive performance. The new commercial habits that are created when the three layers are integrated successfully will deliver the best possible performance from products, both post-launch and thereafter. Below we discuss these in turn.

1. Create dynamic product strategies based on existing strengths

Aligning a commercial organisation behind a new strategy requires a good sales job – the strategy must be clearly understood, credible and realistic – so that relevant employees accept and support the approach. Commercial strategies, therefore, must account for the strengths and weaknesses of the organisation and its products, and leverage the strengths in the pursuit of realistic commercial gains. Simply demanding growth is not a strategy; it is akin to telling Tiger Woods to ‘hit the ball into the hole more often’. Good strategy provides the details of how.  Too often we see organisations that have left their products to be sold without fresh and dynamic strategic consideration: the trend orthodoxy and flat performance have combined to sustain mediocre revenue outcomes and lost opportunities.

An example of how new strategic clarity delivered increased performance for a product that had been flat for a number of years was the transformation of a dermatology treatment for a global pharmaceutical company. By asking fresh questions concerning the product and how it was commercialised, leaders found a summary of sales force activity measures and marketing messages masquerading as strategy, such as ‘The strategy is to see three doctors per day and help them understand our brand messages of efficacy, tolerability and patient preference’.

Following an exploration and deepening of understanding of the business’s strengths, product benefits, and the market context, a new and more focused commercial strategy was then developed: to win share of initiations from the strongest competitor, by establishing faster onset of action and linking this to the suggestion that a patient seeing rapid results would be more likely to make the necessary long term commitment to therapy. This brand strategy was then supported operationally by targeting physicians who were existing heavy users of the strong competitor.

Importantly, this product strategy leveraged underlying capability in the primary care sales force, and within six months enabled the brand to return to growth and sustain double-digit growth through to patent expiry.

2. Develop insightful action plans and commercial models

The consistent habit of customer curiosity that is characteristic of successful commercial organisations is always reflected in clear action plans that enhance the understanding of the market, patients, customers and competitors. These clear action plans are practical sets of activities that the organisation wishes to do differently.

The first requirement for successful action plans is deep commercial insights. With these, teams have the spark necessary to define the practical actions that continually optimise product strategy. The second requirement of great action plans is a sound commercial model that clearly defines how the product will go to market. This often requires new skills and habits, which must be defined and then embedded in the commercial organisation.

The good news is that modifying the go-to-market commercial model in pharma today is becoming increasingly feasible, supported by a broader set of channels and greater operational flexibility. With variable sales forces, dynamic territories, remote detailing, and real-time targeting it is possible to pilot new commercial models and thereby adapt the go-to-market approach to drive great brand performance.

As one example of getting more from an already high performing speciality product, a large pharma company identified a cohort of physicians who became brand loyal after receiving positive feedback from patients and an endorsement from peers. To accelerate product performance beyond the trend, action plans were created to alter the balance between direct physicians detailing in favour of hosting virtual roundtable webinars that allowed physicians to discuss their clinical experience of the brand. These meetings were found to be almost five times more effective than then a product detail in terms of generating new business.

3. Create management systems that drive performance improvement

A clear strategy and a robust set of action plans are in themselves insufficient to deliver performance improvement. The people who make up the organisation must begin to behave and act differently. Strong product leadership is central to the task of motivating an organisation to do things differently, whether through an individual or a collection of leaders. The key leadership habit and skill in this context is a strong capability to explain, convince and cajole the broader organisation to get behind a new strategy and set of action plans.

Fit-for-purpose governance is the second critical feature of the management systems in excellent commercial organisations. The old adage of ‘what gets measured, gets done’ is indeed important here, if managed carefully. Organisations need to define what gets measured in the form of key performance indicators (KPIs), and check frequently that these measures are reinforcing the desired actions and behaviours throughout the organisation. Done the wrong way, measures can sadly drive the opposite behaviour to what is desired. However with fit-for-purpose governance, individuals and teams align behind the activities that bring the strategy and action plans to life.

Beating the trend orthodoxy through new commercial habits

‘Trend Orthodoxy’ in the pharmaceutical industry says that once launched, drugs are set on a sales trend that cannot be exceeded. This creates self-fulfilling prophecies of products for which performance is measured by how closely sales revenue tracks the forecasts rather than whether revenues grow beyond what is expected.

We therefore urge commercial leaders to instil new habits that enable their organisations to ‘beat the trend’ through an integrated combination of dynamic strategies, clear and practical action plans, and great management systems.

After years of success from fully integrated, huge and relatively closed R&D centres in the 1970’s and 80’s large pharmaceutical companies have slowly but increasingly embraced the concept of leveraging innovation from external sources to build and balance their internal R&D pipelines. This has coincided with plenty of statements of how “Open Innovation” adds value for pharma and a massive increase in partnering and networking activities and departments within companies. And yet. Open innovation is easier to put into a box and assign to a new group of executives than integrate culturally into proud and established internal R&D organisations. Management systems that are geared to progressing internal assets struggle to cope with the challenge of dealing with outside parties. In this paper we explore this integration challenge and how companies can have the best of both worlds by applying an Integrated and Open Innovation approach to their R&D and Commercial activities.

In Pharma, Open Innovation needs Closed Innovation and vice versa

The Pharmaceutical industry’s interpretation of “Open Innovation” now embraces two mindsets: an original “combine internal/external capabilities” philosophy and a more recent “open-source/free” approach. For the original idea of combining the best of two parties’ capabilities, pharma Open Innovation can legitimately be argued to be old wine in new bottles: the industry has always relied on partnerships with pharma, biotech, academic institutions and others to innovate. However the open-source/free concept is newer to pharma than it is to the software industry from which it came. Unlike with software, the basis for advantage and value creation for a pharma company is more driven by intellectual property (IP) rather than speed to reach huge critical mass. And since IP is by its nature closed not open, pharma companies are constantly wrestling with being both open and closed. We believe that pharma needs to master this open/closed dichotomy by integrating the two. It is the combination of the best that is outside with the best that is inside the company that enables the best innovation.

Since the lifeblood and biggest opportunity for value creation for the pharma industry is Intellectual Property (IP), pharma companies must find ways to gain or create IP from external partners, for example biotechs, technology providers, and academic institutions. Often the simplest path to achieve this from an IP point of view is for the pharma to acquire a biotech or academic spin-out company outright. While this is a relatively quick and clean way of accessing external assets and/or capabilities, it is not Open Innovation in its purest sense, as it basically just scales up a closed innovation system.

We define the essence of Open Innovation to be art of partnering with others rather than acquiring them. Furthermore the approach to Open Innovation can and should be highly open in terms of searching for the right partners that have external expertise and IP that could be of high value, then potentially more closed as two parties create and sign legal contracts with each other to divide up the responsibilities and value captured from the envisaged innovation. This requires an “Integrated and Open Innovation” approach, which successfully integrates innovation from outside with innovation from the inside.

Open Innovation is attracting attention and investment

Pharma companies have committed significant resources to experimenting and establishing a plethora of approaches to Open Innovation that reach beyond traditional one-to-one partnering/licensing into the world of pre-competitive consortia, sharing assets and capabilities, and investing in venture funds.

Pre-competitive Consortia

Participating in pre-competitive consortia is the form of Open Innovation that is most analogous to the open-source software concept favoured by some in the Tech industry. Institutions such as the Structural Genomics Consortium (SGC) bring companies and institutions together in an open fashion to solve tough scientific problems, while not pre-granting any IP rights to the outcomes. Similarly the European Innovative Medicines Initiative is Europe’s largest public-private initiative for speeding up the development of medicines and includes companies and institutions of all sizes. Pharma companies are also present in the Biomarkers Consortium and Pistoia Alliance and are founding members of the Italian Drug Discovery Network. As well as the shared generation of data, these consortia have been identified as a good way to grow a company’s network of academics, KOLs, and start-ups.

However since these activities are truly open, the path to IP, assets and value is less direct than other Open Innovation methods. So though it is of great benefit to scientific progress, it is harder for pharma companies to directly monetise. The consequence is that participation in terms of resources and money is generally skewed towards the largest pharma companies that have the scale that allows them to provide in-kind resources and funding for such efforts. By contrast mid-sized and smaller players have less resources and a harder time justifying the return on investment given the typically very long-term outcomes from the work as well as difficulties in securing IP.

Shared Assets and Capabilities

Many Big Pharmas are promoting direct interaction of internal scientists and biotech start-ups by locating them together in open campuses. Examples include Pfizer’s €145m investment in its Grange Castle site in Dublin and GSK’s Stevenage Bioscience Catalyst hub in the UK. Smaller and mid-sized companies are following in their footsteps.

As is the case with pre-competitive consortia, the directly monetisable outcomes from openly sharing assets and capabilities are not as clear as they are with traditional partnering arrangements. However they do have “softer” benefits in exposing scientists to outside models and thereby developing internal capabilities, as well as improving visibility for the company in the pharma ecosystem. So mid-sized companies are following their Big Pharma peers by now initiating Open Innovation efforts in this way. In December, Pierre Fabre launched its Open Nature Library that will share Pierre Fabre’s private plant collection, as well as its “expertise of the phyto-industrial value chain”. Additionally, LEO Pharma established an Open Innovation platform that provides non-binding, no-questions-asked access to a suite of their cell-based in-vitro assays.

Investing in Venture Funds

Venture funds have a window on innovation that some pharma companies can only dream of. Biotechs and academic spin-out companies are particularly interested in getting attention from such funds, and pharma has to compete with the funds for access to such innovation. So although corporate venturing has been going on somewhat under the radar for decades, but more latterly the concept of pharma working with venture partners has ramped up significantly. 19 of the top 25 pharmaceutical firms are investing directly, or as limited partners in, venture funds. These funds predominantly make strategic investments to secure access to external innovation. Like Big Pharma, a number of Europe’s mid-sized pharmaceutical companies have more latterly chosen to establish venture funds as one way of understanding what is available. Examples of such funds include Norgine, Morphosys, Lundbeck, Merz and Pierre Fabre; interestingly, all have gone it alone so far rather than investing as a Limited Partner in other funds, as some Big Pharmas have chosen to do in addition to their own corporate venturing activities.

Three important challenges for effective Integrated and Open Innovation

The reality of pharma R&D today is therefore one of a spectrum of activities with partner companies or institutions involved in almost all innovative activity, and diverse partners providing value in different ways across the spectrum:

The Integrated and Open Innovation Spectrum for Pharma Companies

The key to success is integrating these diverse methods of innovation in a way that gets the most out of each. This presents three important challenges: finding quality, embracing the outside, and managing the integration of outside and inside. All require skills and expertise internally to the organisation that have not necessarily been developed through the organisation’s history, where a culture of “success-from-inside” can take a long time to adjust.

The first challenge of finding the external quality that is needed is significant. It is often hidden in an abundance of companies and institutions and service companies that are more than happy to promote their perceived advantages but less willing to discuss their “Achilles Heels”. The sheer abundance can create complexity and overload in search and evaluate activities, both in terms of the capacity to search and the skilled internal R&D/Commercial capabilities to triage and evaluate.

Secondly, to secure value from partners that have been found in an “open” way, internal pharma executives must genuinely embrace the value of external innovation and the associated notion that innovation performed outside of their own organisations can be of higher value than innovation performed inside. If this is not a widely shared and reinforced cultural belief, internal organisations can directly or indirectly stifle partners’ innovation.

Finally to be fully integrated, pharma executives must manage the realities of multiple partners that are not fully controlled and have very different cultures, management systems and points of view. This requires leadership and influence skills as well as bespoke processes to make sure that the best is brought out of every partner that the company engages with.

Embedding Integrated and Open Innovation successfully

Addressing the three challenges of embedding truly Integrated and Open Innovation that are described above is easier said than done. The leadership, project management and partner-oriented competencies required are very different to the competencies that are traditionally developed through moving up the ranks in large R&D centres. To add to this, the sheer volume of external opportunities creates organisational complexity.

One solution to the challenges is to create entirely separate and dedicated open innovation business units or entities such as Johnson & Johnson’s JLabs and Pfizer’s Centers for Therapeutic Innovation. With Big Pharma scale this can be done, and the philosophy of creating focused and dedicated teams with all the skills needed to address the challenges is sound. However the question is how this leverages the internal capabilities that can understand and create more value from the external partners’ capabilities or assets or technologies. If these are separated organisationally, the company risks working at two speeds, internally and externally. Without internal and experienced eyes on external opportunities the risk is first that external efforts are not triaged well or given the best chance to succeed and second that internal capabilities are not constantly enhanced by wiring to the external world.

Companies must therefore foster a strong external/open innovation culture throughout R&D by carefully managing the interfaces between external innovation groups/entities and internal groups/entities, as well as the R&D-Business Development interfaces when both parties are involved in searching for partners. The interfaces challenges are particularly acute in mid-sized and smaller companies that do not have the scale to create large internal units dedicated solely to open/external innovation. But the opportunity for integrated internal/external innovation is greatest when these challenges are addressed head on rather than separated organisationally.

We expect pharma companies to continue to apply their significant R&D resources and financial muscles to search for and bring in external innovation, going out of their way to be seen as both open to outside sources of innovation and partners of choice for other companies. Not all of the investments will pay off and the integration with internal resources will be difficult, but the competition for quality innovation is so intense that the Open and Integrated Innovation that is required to succeed is here to stay.

In a world of low-cost capital and investor pressure for earnings growth, M&A is still top of the agenda for senior pharmaceutical executives. But it is the more creative world of partnerships – through the likes of licensing, co-development, capability and risk sharing, technology collaborations and joint ventures – that has been a potent force in the industry’s successes in recent years. Partnerships can truly bring out the best in both sides of the deal, if each party is prepared to re-think how they operate and create the right balance of trust and control. In this paper, we explore what companies are spending and getting for their external investments, how they are partnering to create value, and what is required to succeed with partnerships. We conclude by contrasting partnerships with M&A as sources of sustainable business growth.

Pharma is increasingly spending and finding value externally

Following years of diminishing R&D productivity and rising pressure on revenues and margins, most pharma companies have now found ways to downsize their internal R&D activities and experiment with more externalised models, favouring the option of accessing innovation from outside sources. As early as 2010, investor pressure to disinvest from discovery research became louder, with the example of Morgan Stanley Research publishing an industry viewpoint urging companies to “Exit Research and Create Value”. Companies have consequently reallocated invested capital to external assets, and in-licensed more compounds, particularly after clinical proof of concept.

Five years later, the reality is more complex. As predicted, the drive towards greater externalisation has led to an inflation of the price of acquiring or licensing assets, which has been manifested in deal values over the years.

Partnership deal values have grown steadily since 2012, while M&A deal values continue to be volatile year on year

Total disclosed deal value (including contingent payments) of announced and completed deals from 2006 to 2015 by deal type. (source: Novasecta proprietary analysis of MedTrack data).
Note: Partnerships include research, co-development, and licensing deals, and exclude M&A and Other Financing. Other Financing consists of Initial Public Offering, Private Equity, Private Placement, and Venture Funding

In M&A, from a base of announced deals of $100-$200bn per year between 2011 and 2014, 2015 marked a real spike to more than $600bn of announced deals – with a major contribution from Pfizer-Allergan ($160bn) coupled with other acquisitions designed to keep share prices and post-tax earnings moving upwards for investors, sometimes successfully, sometimes not.

Nevertheless, compared to other investment-heavy major industries such as oil and gas or automotive, the pharma industry remains highly fragmented, with the top 4 pharmas accounting for only 25% of the top 100 pharmas’ revenue in 2014. A purely “buy” model “of driving revenue growth in the short-term through the acquisition of commercial portfolios without investing in R&D does not seem to be as sustainable as a more organic and focused approach, as explored in our previous white paper ‘Business growth: Bespoke strategists lead the way’. In that paper, we highlighted the key role that focusing on best-in-class capabilities (be they science, commercial or business development) plays in creating sustainable growth. With such focus, high quality partnering is essential.

Yet as capital is flowing towards external sources, the question is always “is it creating value”? Our analysis suggests yes. As one measure of this (not a perfect one, as some approvals are worth more than others), we explored the origin of FDA approvals for New Molecular Entities (NMEs) in the last ten years, and it is clear that the recent growth in number of approvals has been driven more by external R&D activity (including M&A, partnerships and licensing agreements) than by fully internal R&D. From 2006 to 2015, the number of annual approvals from externalised R&D has doubled to 34, now representing 76% of all approvals.

Acquired and partnered assets are driving the growth of FDA NME approvals

Origin of New Molecular Entity Approvals from 2006 to 20013 and of New Molecular Entity and New Therapeutic Biological Products Approvals for 2014 and 2015 as published by the FDA (source: Novasecta proprietary analysis of MedTrack and FDA website)

It is worth noting that though a high number of NME approvals is one measure of the success of innovation, it is not necessarily correlated with a high value creation: the ‘fourth hurdle’ of achieving prices and market access that compensate for the investment required to bring products to market is clearly relevant. However, with pharma’s increasing awareness of this, we envisage that the approval number trend is strong enough to demonstrate value creation too.

The question then is what type of external innovation is creating value? Recent research has suggested that it is the myriad forms of partnerships rather than M&A alone that is driving value:

65% of externally-sourced pipeline value comes from co-development, joint ventures and licensing, with only 35% from M&A

 

Source of late stage pipeline valuation for external innovation, 2010-2013 (source: Novasecta proprietary analysis of data from Deloitte Consulting and Thomson Reuters research “Measuring the return from Pharmaceutical Innovation 2013”)

The increased number of NME approvals and value generated from partnerships and agreements where both sides share risks and rewards is an encouraging sign for companies with limited cash. Investing further efforts and resources in originating creative deals and building strategic collaborations from early discovery stages can bring value to all involved parties.

We also anticipate that as the prices of quality assets continue to increase, the marginal return on investment in acquisition will reduce, so partnering in a creative way will be a lasting feature in the market for years to come.

Yet partnering well is not easy, especially for ‘MidPharmas’

The scarcity of available assets either on-market or in later confirmatory stages of R&D makes it very difficult for companies that are short on capital and less visible in the market to compete with their larger and more deep-pocketed competitors. For M&A, the appetite for debt in the pursuit of deals often further limits mid-sized companies (‘MidPharmas’), particularly those that are privately held or controlled. Privately held companies do not have the option of issuing stock to do deals, or indeed paying with their own inflated shares for assets. This difficulty feeds into other partnerships too: upfronts for good assets are trending upwards, particularly in “hot” areas.

The difficulties in finding and executing transactions for quality assets mean that companies need to think differently about how to originate deals beyond the traditional approach of operational business development through licensing and M&A. R&D departments too need to respond to pressure to ramp up their efforts in scouting for opportunities to partner, for example through creating dedicated early stage scouting offices within R&D. The challenge now is to widen access to innovation and new drug programs, while limiting the capital, risk and resources required. Partnerships are increasingly key to this.

Pharma companies and more particularly MidPharmas have the most to benefit from partnerships to generate downstream gain while minimizing up-front risk. Benefits can be shared between partners through finding unique opportunities for value creating partnerships, and building the capabilities to successfully establish, nurture and sustain mutually beneficial relationships with partner organisations.

As the challenges described above are more related to companies with limited funds and visibility in comparison to Big Pharmas, we explore below how various MidPharmas are creatively using the various asset and capability deal types in both corporate and R&D fields.

MidPharmas are increasingly partnering both assets and capabilities to achieve their strategic goals

R&D in-licensing / Co-development: to exploit late stage pipeline assets

MidPharmas have collaborated for many years to build value from their own and others’ assets. One of the pioneers was H. Lundbeck, which in 1995 entered into a strategic alliance with Forest Labs (before Actavis acquired Forest) to build value from the US market. Lundbeck followed this deal with a collaboration deal with Merck & Co Inc. in 2004. The deal with Merck was also used as a stepping-stone to build up Lundbeck’s own sales force in the US market.

In Europe, Lundbeck licensed the rights to Memantine from Merz in 2000, in an agreement also comprising the rights to the indications vascular dementia, neuropathic pain and AIDS-related dementia. While Forest Labs held the rights to the US market, Merz also co-developed Memantine in Japan with its partner Suntory.  This agreement is a good example of co-development collaborations across different geographies to create value for multiple companies, each with its own unique set of capabilities.

Commercial in-licensing / Co-promotion: to rapidly expand geographical coverage

MidPharmas have also been creative in finding more immediate collaboration deals to generate value from assets in non-core geographies. For example, in October 2012, Astellas launched Gonax (degarelix) in Japan after it entered into a license agreement with Ferring in January 2006. The agreement gave Astellas exclusive rights to develop and market degarelix for the treatment of prostate cancer in Japan. Astellas made upfront and milestone payments as well as royalties to Ferring, enabling Ferring to secure value from the Japanese market.

Another example of exploiting the commercial capabilities of others without the need for M&A is that of Teijin and Ipsen, who entered a successful agreement that saw the launch of Somatuline® in Japan in January 2013. The agreement entitles Teijin to develop and commercialise Somatuline in Japan, while Ipsen will manufacture and supply the finished product to Teijin. This partnership allows Ipsen to penetrate the Japanese market through its partner.

In the other direction, in June 2015, Servier bought the rights to TAS-102, an oral anti-cancer drug from Taiho, in a $130m deal made of upfront payments and near-term milestones on top of royalties. Servier will commercialise TAS-102 in Europe and other markets excluding Asia and North America. The two companies will also collaborate on the development of the drug globally, sharing costs and research.

Commercial partnering: to exploit unique local capabilities

At the capability end of partnerships, MidPharma Helsinn is a good example of a company that leverages the commercial capabilities of external partners. It in-licenses early-to-late stage new chemical entities, completes their development by performing pre-clinical/clinical studies as well as associated manufacturing activities, and then prepares the necessary regulatory filings in order to achieve marketing approvals worldwide. Helsinn’s products are out-licensed to its global network of marketing and commercial partners that have been selected for their local market knowledge.

Through this capability sharing rather than M&A approach, Helsinn has built a large product portfolio of cancer care products that are sold through alliances with around 70 global partners. One of those latest partnerships is Helsinn’s collaboration with Mundipharma in March 2015, where it entered into a distribution and license agreement for the exclusive rights to sell anamorelin in China.

Research collaboration: to create new assets through exploiting shared capabilities

An earlier stage example of how MidPharmas can work together to create value lies in Orion and Richter, who in March 2013 entered into a comprehensive and long term collaboration agreement for the discovery and development of new chemical entities in the field of cognitive disorders. The partnership agreement provides an opportunity whereby the two companies jointly select and bring forward three discovery phase candidates and share all the development related expenses on an equal base.

This type of partnership will strengthen the research outcome of both companies in a cost and time efficient way, adding to current knowledge and experience, resulting in mutual benefit for both parties. At the time, the Senior Vice President of R&D at Orion stated: “A fundamental pillar of our R&D model is to seek collaborations that leverage the strengths of both organisations, and at Richter we have found scientific skills and an organisational culture that will likely result in a successful partnership. This collaboration increases the probability to succeed in this challenging therapeutic area.”

The above examples are a very small but illustrative selection of the variety of potential deals that companies can originate. Other paths can be explored that can bring mutual benefits to both parties involved. In the remainder of this paper we therefore explore in more detail the key drivers of successful partnerships.

Driving sustainable partnering success

There are plenty of historic deals that went wrong in one way or another, suggesting that many companies have still not reached the point where partnering is a natural and successful complement to internal activity. The first important point is that partnering success is not just about pushing harder on business development. Organisations need to be clear about what partnering is for, why it is essential in their unique context, and how their own organisation can embrace it and benefit from it. This requires attention to three important areas.

For successful partnering, pharma companies need to think differently about what they do and how they work

 Bespoke Strategy

Creating excellent partnerships is a highly strategic activity. So a tailored and bespoke partnerships strategy that is rooted in a deep understanding of company’s capabilities and selling points in the eyes of potential partners is essential. Companies must choose their business and product portfolio strategies to match corporate goals and capabilities, and determine the right balance between internal and external sources for their future success: opportunistic deals made with little clear strategic vision have a habit of ending early or being terminated as the realities set in post deal signing.

“Knowing thyself” in a profound way enables companies to understand their own unique and differentiated capabilities and selling points, and thereby be both more attractive to potential partners and able to create synergistic and adjacent opportunities with partners. Articulating this understanding of capabilities and aligning behind the vision for improving it through a bespoke partnerships strategy can create significant benefits downstream.

Creativity in Deal Making

Due to the increasing capital required to acquire or license high quality assets, companies need more than ever to think creatively about deal structures and look for non-obvious synergistic and adjacent opportunities with partners. Deal structuring has to set clear win-win deliverables and milestones in partnership agreements, which should be discussed early on during the negotiation phases, with a good assessment of the financial, scientific and clinical risks involved.

Based on their own risk appetite and capital at hand, companies can then identify strategically the best partnership models that fit their needs. Early discovery projects tend to carry more risks and may require specific technologies and capabilities, models such as risk-sharing and capability swapping may be attractive. Exploratory development projects (from preclinical through to clinical proof of concept) are typically less risky than discovery projects, and companies that want to spend more on compounds that have passed the candidate stage can benefit from cost-sharing and asset swap deals in this phase.

Companies can also consider setting up corporate venture funds, when capital is available, to invest in interesting small biotech companies early on, with options to in-license if assets meet key milestones. We show below a non-exhaustive table of potential deal types to illustrate the plethora of possibilities companies can now create. Partners can and should tailor their deal structures based on their synergies and their mutual needs, so creativity in deal-making can be a real source of advantage.

The capital at hand and risk appetite of shareholders should drive the choice of deal type

Re-configured Capabilities

The hardest yet arguably most important part of creating successful partnerships lies in re-configuring internal capabilities. Partnering for many pharma veterans is sadly not a natural act. Culturally, companies can prefer the control and comfort of doing things themselves (or acquiring and absorbing companies to effectively do the same) to the uncertain and more messy world of dealing with other companies and associated stakeholders and investors. For a company to successfully embed a partnership culture in the organisation it also needs to address its own “silos”, which can have major implications on the internal organisation and the interfaces between major functions such as Commercial, R&D and Business Development.

To add to the complexities of internal cultural issues, “virtual fences” can be inadvertently established between the internal and the internal/external partner’s teams, often driven by a resistance to partnering or outsourcing or lack of trust in the partner’s capabilities. Time should therefore be invested to first remove any internal barriers to collaboration in the organisation, then to genuinely know the partner and build strong inter-organisation bridges to cement ties at all levels of the organisation.

Collaborations can also be used as a platform for the transfer of knowledge in complementary areas, ensuring a constant flow of information and transparency. Consideration of the cultural fit with the partner is therefore also very important for the success of the partnership and for the improvement of internal capabilities that can and should result from good partnerships.

Partnerships are mission critical and certainly not ‘business as usual’

In summary, partnerships are both mission critical for the pharmaceutical industry and a potentially stronger alternative to immediate M&A for getting the most out of other companies’ assets and capabilities. Furthermore, companies that engage in partnerships as a potential prelude to a later M&A can get a double benefit from giving the partner company room to develop and giving the acquirer a taste of what they will acquire.

Sadly as yet many pharma/biotech companies, and mid-sized pharma companies in particular, are missing out on potential value-adding strategic partnerships, either because they have not actively considered or found other companies with non-obvious synergies or adjacencies that could be great partners, and/or because they are not visible enough in the right way to other potential partners.

Both short and long term internal changes are required to enable organisations to be ever more successful in partnering. The three foundations for successful partnerships that bring mutual benefits to the parties involved are a bespoke strategy, creative deal making and re-configured capabilities. Companies that get this right will benefit from well-crafted partnerships as an extremely attractive alternative, or at least complement, to organic growth with focused M&A.

In 2010, Morgan Stanley urged pharmaceutical companies to “Exit Research and Create Value”: an attractive proposition for those executives who had been seeing R&D consume enormous resources while generating limited returns. The reality today is more complicated. Integrated pharmaceutical companies remain dependent on R&D to create their future products, but they know that their R&D model can always be better. For all but the very largest pharmaceutical companies the option to acquire de-risked or near-market assets is unattractive given prohibitive capital requirements. So excellent R&D is as essential to pharmaceutical companies’ success as it always has been. It is simply too dangerous to hope that others will constantly produce compounds and drugs in your chosen commercial area at a price that is affordable to in-licence or acquire. Pharma companies need to manage R&D to create value.

Managing pharmaceutical R&D is hard. It is a complex system that integrates science, people and money in the hope of creating amazing medicines. Potential products can and do simply fail completely after years of work and tens or hundreds of millions of Euros of investment. This makes R&D both extraordinarily valuable when it works, and frustratingly disappointing when it doesn’t. Every pharmaceutical company knows deep down that its R&D could be better, and wants it to be better. The temptation is then to see the “grass as greener” outside the internal organisation, and somehow solve the R&D problem by buying it from outside. Novasecta firmly believes that an excellent internal R&D organisation has the potential to create better products faster than leaving R&D to others. Pharma companies need to actively manage R&D to create value.

Management of R&D requires attention to strategy, action plans, and the management system

Managing R&D effectively requires us to find ways to “eat the elephant in bite-sized chunks”. Clearly having a reality-based and dynamic strategy is pivotal, but it is only when strategy moves from fine words to action plans with concrete measures and goals that it becomes effective. And such action plans need a coherent management system to move the action plans into reality. Through these three layers of managing R&D we see five particularly difficult dimensions that drive R&D productivity, as illustrated in the figure above. Below we discuss these in turn.

1. Create a dynamic R&D strategy in your own reality

Great strategies are clear, communicated and understood within the organisation. They are also realistic and feasible. It is imperative that an R&D strategy accounts for the strengths and weaknesses of the organisation, so that strengths can be fully leveraged and weaknesses addressed acknowledged and dealt with. It must also constantly adjust to rapid changes in the market environment. Dynamic strategy is the hallmark of sustainable success.

The Swiss mid-sized pharmaceutical company Actelion is one example of a company with a clear R&D strategy that was built on a deep understanding of its distinctive R&D capabilities. Actelion’s R&D was built from combining world-class expertise in rational drug design, cardiovascular research, an understanding of the endothelium, and small molecule development. This was initially successfully applied to develop strong product offerings in the pulmonary arterial hypertension (PAH) space. On the back of commercial success in PAH with Tracleer and Opsumit, Actelion then dynamically changed: leveraging its R&D platform to develop assets across multiple new therapy areas through a single R&D centre that uses a high degree of medical input to select attractive future franchises. Such a repurposing and amplification of an organisation’s existing strengths are the foundation of effective R&D strategy, and can significantly improve the chance of repeating single-product successes.

2. Good strategy must cascade to action plans

The two most important areas where translating R&D strategy into action plans can be most effective are portfolio balance and sources of innovation. The focus on a balanced portfolio is deliberate: an R&D organisation that is not centred around and constantly planning its portfolio and projects is one that will have difficulty bringing products to market. And the importance of engaging diverse sources of innovation internally and externally cannot be underestimated.

Clear action plans, practical things that the organisation will do differently, are therefore required to define the set of activities that will enable the R&D organisation to access multiple sources of innovation and place them into an appropriately balanced portfolio.

One example of an organisation that has sought and brought in ideas from a multitude of sources is family-owned Boehringer-Ingelheim. Following successes through external collaborations, in November 2015, Boehringer-Ingelheim publicly pledged an investment of €11 billion into R&D over five years, with 30% of its planned €5bn pre-clinical investment earmarked for collaborations with external partners. Taking action with a clear goal to increase collaborations through open innovation while maintaining internal R&D capabilities increases speed, flexibility and provides rapid access to new technologies and therapeutic areas.

Shaping the fruits of innovation into a well-balanced portfolio is crucial to managing risk and productivity in R&D. Genmab has built a balanced portfolio on the back of its recognised strength in antibody technologies. This consciously planned technology platform approach has generated numerous unique assets at each phase of clinical development, and almost all have multiple additional indications. The intention is to partner these assets during later stage development, capitalising on a partners experience in various medical areas.

The actions of companies like Boehringer-Ingelheim and Genmab are evidence that inspiring strategic words can and do get translated into action plans that drive action to create value. Whether sourcing external innovation of building a balanced R&D portfolio, pharmaceutical companies can and should specify concrete action plans to make sure this happens.

3. The management system will make or break any strategy and action plan

The best strategies and plans need a management system that enables them to get done. A management system is a complex combination of organisation, processes, culture, governance and people. But there are two dimensions that have the potential to make or break good strategy and action plans: project leadership and governance.

Successful companies have broken the perhaps inexorable habit of people in organisations creating functional silos by putting in place strong project leadership. This is certainly easier said than done: old habits die hard and the comfort of a line management position with functional responsibility is a different world from the uncertainty and accountability of project progression.

Successful R&D organisations therefore adopt a project-led mindset, recognising projects as the source of true value in R&D. In these organisations, functional resources are deployed on an as needed basis to secure project success. Creating a culture that recognises the inherent value of projects over functions is crucial. Without naming names we have helped several pharmaceutical companies to make this mindset shift, for example through a lean R&D model with significant levels of externalisation and very senior and capable project leaders. These leaders are fully supported by slim senior governance bodies to get the necessary resources required to drive projects forward. Importantly the whole organisation appreciates that this flexibility is an absolute prerequisite for speed and success.

Similarly fit-for-purpose governance may sound simple but is frustratingly hard to pull off. Even the word “governance” has overtones of bureaucracy, too many people, and endless committee meetings and powerpoint. Fit-for-purpose governance on the other hand brings only the right people to the table at the right time, and has a dynamic flavour that enables decisions to be made with the speed and quality that they deserve. Done right this can drive continuity, reinforce the R&D strategy and measure progress against the agreed action plans. We have worked with several companies to re-create and simplify R&D governance mechanisms to maintain clear oversight of progress and speed-up decision-making. Crucial to the success of these new decision-making groups is an extremely focused remit and buy-in and communication with senior corporate management.

Addressing the five dimensions of managing R&D will increase value

The essential job of managing R&D to create value means (a) creating a reality-based strategy, (b) making it real through action plans for the portfolio and sources of innovation, and (c) creating a management system with strong project leadership and fit-for-purpose governance.

So managing R&D to create value is not as quick or simple as “exiting research to create value”. But it is for sure a more powerful way to create the fantastic medicines that will benefit patients and sustain the future of a pharmaceutical company. It is well worth the effort.

Aligning R&D activities with commercial realities is an issue as old as the pharmaceutical industry itself. The importance of a commercial perspective in R&D is increasing as the downward pressure on drug prices and limitations on market access from private and public payers continue to increase. This is particularly pressing in areas where medicines do not offer differentiated advantages over existing treatments. In parallel, as pharmaceutical organisations have become more complex, regions have become more fragmented, and organisational functions have become larger, it has become increasingly difficult to ensure integrated and holistic commercially-oriented behaviour in R&D. Our experience is that this causes significant frustration in both R&D and Commercial functions, not to mention unrealised value creation. In this Novasecta Note we explore the R&D-Commercial interface and what can be done to improve it.

Introduction

Every year, the pharmaceutical industry spends in the region of $140 billion in the pursuit of innovation, yet productivity has fallen consistently over the last 60 years. Much has been made of this decline, with Scannell et al. proposing Eroom’s Law –  “the number of new U.S. Food and Drug Administration (FDA)-approved drugs per billion U.S. dollars of R&D spending in the drug industry has halved approximately every nine years since 1950, in inflation-adjusted terms” (Nature Reviews Drug Discovery 11, 191-200, March 2012). Regardless of where one stands on the productivity debate, most will agree that opportunities for improvement exist within any R&D organisation, and internal effectiveness is paramount to preventing the already-high cost from soaring out of control. In this Novasecta Note, we ask how can pharmaceutical companies ensure that the increasingly expensive costs of drug development will result in assets that get patients, physicians, and payers excited?

Novasecta believes that improvements can be made by actively fostering better relationships between the right Commercial and the right R&D colleagues. Solidly connecting the R&D organisation to the realities of the market and customers can seed the development of products that will meet stakeholder needs in the future. This requires persistence and patience: it is as much a people issue as it is a technical issue, and as such delivering impactful change requires appropriate effort, focus, and a long-term perspective.

A Conversation Culture

Despite significant investments and substantial experimentation with different R&D models, the delivery from R&D of value-enhancing products that are commercially successful remains inconsistent. That is not to say that reorganisations or operational excellence initiatives lack merit – they can, of course, add value. It is simply that these approaches often fail to address the underlying problem: the culture and ethos of the organisation. How do the people who make up the company interact with one another, seek input from colleagues, and approach decision-making?

In our experience, critical decisions are often left unaddressed until a development checkpoint is reached. While these milestones are necessary for good governance, they should never become the sole forums for decision-making. Rather, major milestone gates should serve to ratify decisions made by an on-going series of conversations between the people with the relevant expertise and perspectives, armed with relevant commercial and scientific data and insight. This will create an organisational understanding of the end-to-end process of R&D and commercialisation and, crucially, bring that understanding to day-to-day decision-making.

Speaking the Same Language

It is possible to create better commercial instincts and capabilities for decision-making in any R&D organisation. This involves bringing clear commercial thinking into the process at the very early stages, well before clinical proof of concept. Importantly, this dialogue must flow in both directions, for commercial functions to understand the R&D process and future assets.

Across the pharmaceutical industry, many intelligent and well-intentioned employees operate in systems that consign them to generate sub-optimal outcomes. Insight into the commercialisation process and deep corporate knowledge of payers, regulators, clinicians, and patients is lost in translation between the often highly diverse and somewhat disconnected market-facing functions where these insights are captured, and the R&D organisation that must apply them to capture future value.

Commercially-Oriented R&D

In our experience, commercially oriented R&D requires three core enablers:

These enablers are deliberately focused on people, process and capabilities; as we have found these are the ultimate keys to success. Deep knowledge of, and existing relationships with, external stakeholders is the foundation. To unlock the power of this knowledge, companies must systematically translate and incorporate the explicit and implicit knowledge into the thinking and decision-making processes of the organisation. This way, sizable investments can generate outcomes that are relevant to, and valued by, the market place.

In time, organisations can be evolved to make better choices related to both R&D and commercialisation. R&D can be better enabled to generate more products of value, while commercial functions can be afforded the time necessary for optimal launch planning. There are many benefits from making the effort to understand one another.

European MidPharmas are a class of companies that Novasecta has been specialising in since its foundation. These R&D-based pharmaceutical companies with annual revenues of €50m to €5bn are tremendously diverse, just like the European countries in which they are based. Working closely with these companies for over a decade has provided us with a substantial body of insight into how these companies and their larger and smaller competitors can sustainably grow and improve performance.

Introduction

In this our first annual European MidPharma Report, we assess the general health of European MidPharmas, and further home in on interesting trends. We also provide a MidPharma ‘performance ranking’ to track the characteristics of prominent MidPharmas in R&D, business development and commercial disciplines over time.

Novasecta segments the pharmaceutical sector by revenue, ownership, and R&D investment. In revenue terms, MidPharmas clearly sit between Big Pharma and the pre-revenue small Biotech segments. For ownership, we distinguish the ‘pure’ listed MidPharmas that have issued shares to the public but have no majority shareholder, the private companies (solely owned by families or foundations or funds), and the ‘bit of both’ listed privately-controlled companies that have a market listing as well as a dominant (>50%) private shareholder. For R&D investment we consider each company’s R&D spend as a percent of revenue, which broadly reflects the approach to ‘make or buy’ innovation.

For the remainder of this report we will use the term ‘MidPharmas’ to mean European-headquartered, mid-sized, R&D-based pharmaceutical companies with annual revenues between €50m and €5bn. We explore the characteristics and trends of MidPharmas as they relate to some of the key drivers of pharmaceutical business success in turn:

  • Ownership
  • Revenue
  • R&D
  • Business Development (BD)
  • Commercial

We will conclude by exploring the market valuations of MidPharmas (where they exist), sharing our own performance ranking of MidPharmas on the key dimensions of R&D, BD and Commercial reach, and discussing the implications for pharmaceutical companies of all sizes.

Ownership

Of the 65 MidPharmas that we track, 55% are privately-controlled. This is a uniquely European phenomenon – for example, in the United States mid-sized pharmaceutical companies are almost all publicly listed, biotechs are also typically listed or venture funded, and family/foundation control or ownership is the exception rather than the rule.

We believe that ownership is fundamental to the choice of business model, strategy and success, and that the private nature of many MidPharmas can be applied to create relative advantage. That said, private ownership has its challenges. Looking at the ‘bit of both’ privately-controlled companies allows us to explore how capital market discipline marries with long-term shareholder stability. Our snapshot of the revenue, R&D and ownership characteristics below demonstrates the huge diversity in MidPharma business models:

 

Of 65 European MidPharmas, 45% are listed, 41% are private, and 14% are listed privately-controlled. 45 MidPharmas have both R&D and revenue data available for 2014 (or 2013 if not available), so appear on this chart. 4 companies are excluded from this chart as R&D spend >40% of revenue (Galapagos (90, 123%), Genmab (114, 59%), MorphoSys (64, 87%), Vectura (72, 62%). 16 companies are excluded from this chart due to insufficient disclosed data (Acino, AMco, Angelini, Debiopharm, Desitin, Dompé, Ferrer, Ferring, Italfarmaco, Menarini, MundiPharma, Pharmstandard, ProStrakan, Reckitt Benckiser, Riemser and Zambon).

From this snapshot, it is clear that the diversity of models spans all ownership types. Furthermore there is no clustering around what is considered to be the “right” amount to invest in R&D as a proportion of revenue, unlike the more homogeneous Big Pharmas.

A further phenomenon that has been the case for several years now is that with the notable exception of Servier (and the much larger Boehringer Ingelheim) there appears to be a “glass ceiling of €2bn-€2.5bn in scale beyond which a capital markets listing (and associated M&A activity) seem to be required to survive as a pharmaceutical company in Europe.

The issue of ownership is the one that makes the European MidPharma sector particularly interesting: family and foundation ownership and control are widely prevalent and do not appear to be diminishing. The long timelines and high risks of pharmaceutical R&D require some stability and patience that stable ownership can provide. Yet all companies need outside discipline, and there is no doubt that public listing creates pressure on top management to deliver value in the eyes of capital market analysts and investors.

Revenue

Vast Big Pharmas and ultra-innovative small biotechs may show up in the mainstream news more than their MidPharma brethren, however that certainly does not mean that MidPharmas are any less successful. In fact, the pure listed MidPharmas as a group have been outperforming Big Pharma in top-line revenue growth rates since 2009:

17 MidPharmas excluded due to insufficient data (Acino, AMCo, Angelini, Debiopharm, Desitin, Dompé, Ferrer, Ferring, Galderma, Helsinn, HRA, Italfarmaco, MundiPharma, ProStrakan, Reckitt Benckiser, Riemser and Zambon). The Big Pharma population is made up of 24 global pharmaceutical firms with revenue >€5bn (Actavis, Amgen, AstraZeneca, Baxter, Bayer Pharmaceuticals, Biogen, Boehringer Ingelheim, Bristol-Myers Squibb, Eli Lilly, Fresenius, Gilead, GlaxoSmithKline, Johnson & Johnson Pharmaceuticals, Merck & Co., Merck Serono, Mylan, Novartis, Novo Nordisk, Pfizer, Roche, Sanofi, Takeda, Teva and Valeant).

Though the pure listed MidPharmas lead the pack with a 7.7% median revenue compound annual growth rate (CAGR) from 2009-2014, their privately-controlled listed peers have a lower CAGR, and the pure private MidPharmas have the lowest median revenue CAGR of 4.9%.

It is also notable that Big Pharmas and the pure listed MidPharmas have experienced more significant revenue volatility, whereas the privately-controlled companies have had more stable (albeit mostly slower) revenue growth. Indeed in contrast with MidPharmas, we see that quite a few Big Pharmas have had a negative revenue CAGR over the last five years. Private ownership or control has therefore brought with it a degree of apparent stability to the MidPharmas we track. We have also observed this qualitatively in the shape of a generally very strong focus on incremental commercial top-line growth and (mostly) a reluctance to engage in major M&A.

The exception to the relatively low propensity for M&A, which comes normally once the companies reach a reasonable size, is the private MidPharmas that we don’t see any more because they have been acquired/merged, for example Altana, Fournier, Nycomed, Organon, Rottapharm, Schwarz and Serono. And by contrast the MidPharmas that have done the acquiring/merging themselves using their access to capital markets, for example Meda, Merck KGaA, Shire and UCB. For the future, it will be interesting to see what happens to the companies that are now coming up to or around the €2bn revenue level.

Research and Development (R&D)

In one sense, the R&D investment trend mirrors the revenue trend for MidPharmas: tightly clustered slow-and-steady for privately-controlled companies and more diverse and volatile for pure listed MidPharmas and Big Pharmas. But there are interesting differences too. Since 2009, Big Pharmas have been rapidly accelerating investments in R&D at a median CAGR of 6.2%, with pure listed MidPharmas right behind them at 5.1%. Private MidPharmas have grown R&D at a more stable 2.5% CAGR and – fascinatingly, considering their not-insignificant revenue growth rate – the privately-controlled listed MidPharmas have grown R&D investment at a meagre 0.7% CAGR:

21 MidPharmas excluded due to insufficient data (Acino, AMCo, Angelini, Debiopharm, Desitin, Dompé, Ferrer, Ferring, Galderma, HRA, Helsinn, Italfarmaco, Menarini, MundiPharma, Norgine, Pharmstandard, ProStrakan, Reckitt Benckiser, Riemser, Sigma-Tau and Zambon).

As with all of our analysis, there are some interesting outliers, for example privately-held Servier persistently investing around 25% of revenue in R&D, and listed Medivir growing R&D investment by some 650% from 2013 to 2014.

However, as a whole perhaps these data illustrate the essence of being both listed and privately-controlled – slimming R&D spend to please the capital markets while sustaining incremental top-line growth to please the long-term dominant shareholder? In any case, our concern for all MidPharmas is the risk that the innovation that is required to deliver future long-term growth is being squeezed while existing older products are being protected. The phenomenon of reducing innovative research to fund life cycle management of on-market products (often demanded by commercially-focused management) is one that we do not see going away any time soon.

Considering the revenue and R&D trends together, it is interesting to note that the pure listed MidPharmas tend to have strong but volatile top-line growth, with high and rapidly increasing levels of R&D investment. By contrast, most of the private MidPharmas have more steady but relatively slow top-line growth with reasonable and modestly growing levels of R&D investment.

The revenue and R&D performance of the different MidPharma segments suggest a link between R&D investment and revenue growth, and indeed our analysis suggests that past R&D investment is positively correlated with future returns. Taking mean 5-year R&D spend for 2009-2014 as a proxy for R&D investment, and mean revenue for the two year period of 2013-2014 as a proxy for the ‘return’ of that R&D, we see evidence of strong correlation for both Big Pharmas and the two groups of privately-controlled MidPharmas, with R2 correlation values of more than 88% in each case. The correlation for pure listed MidPharmas is less strong, as there are so many with relatively low revenues:

Due to limited space, most Big Pharmas are not shown on this chart, as the focus is on MidPharmas. However, the trend line is representative of all Big Pharmas. 21 MidPharmas are excluded due to insufficient data (Acino, AMCo, Angelini, Debiopharm, Desitin, Dompé, Ferrer, Ferring, Galderma, Helsinn, HRA, Italfarmaco, Kedrion, Menarini, MundiPharma, Norgine, Pharmstandard, ProStrakan, Riemser, Sigma-Tau and Zambon).

Suggesting a positive ‘return’ for R&D is of course controversial – we could debate at length the period over which the R&D is spent and the period in which a company benefits, and the reality that revenue does not always translate into profit, and whether the absolute level of the return is acceptable or not and so on. However, it is undeniable that higher levels of R&D investment have typically been associated with higher levels of revenue for a wide range of companies.

Then there is the tough issue of correlation and causation – is high R&D investment driving high revenue or is it the high revenue that enables the ‘luxury’ of high R&D investment? Our sense is that there is a case to be made for the R&D investment driving revenue, as for many MidPharmas although R&D spend is often budgeted as a specific percentage of revenue, if management feels that R&D is not delivering it will generally cut back spending, and vice versa.

We believe that companies tend to grow their R&D investment over time either because their pipelines have reached late stages (i.e. R&D has delivered promising compounds) or because they have confidence that R&D will deliver in the future, or both. So good R&D begets more good R&D. The converse is not as evident: companies that have been slimming R&D over time are generally those that are struggling profitability-wise or are losing confidence in R&D or both. So bad R&D will generally wither. However the segment of privately-controlled listed MidPharmas show that revenue can grow strongly while R&D has been slimmed. This either means that there is still some waste in the system or that there is a long-term negative revenue consequence to come that is caused by insufficient innovation. Time will tell.

Business Development (BD)

As mentioned in our analysis of R&D investment and revenue, the listed privately-controlled MidPharmas have had consistent and good revenue growth with the lowest level of R&D spend and R&D spend growth. So where is their revenue coming from? We explored the possibility that these companies are responding to an abundance of relatively cheap capital (and market analysts’ approval of externalising R&D), and are becoming buyers of outside innovation to complement their internal R&D. It seems to be the case, as can be seen below by their average M&A deals per company being 3.4 over the last 3-4 years compared to 1.7 for the private MidPharmas:

Source: Analysis of GlobalData data. Criteria searched for was M&A and asset transactions that have been announced/completed/filing/planned in 1st January 2012 – 30th September 2015.

Furthermore, the privately-controlled listed companies have been executing much bigger deals, with upfront payments that are over 30% higher than pure listed MidPharmas, and four times as high as the private MidPharmas. Taking into account the larger quantity of M&A/asset transaction deals and higher upfront payments, and the fact that they have very low R&D spend and reasonable revenue growth, it appears that the listed privately-controlled MidPharmas have indeed been actively ‘buying’ revenue rather than relying solely on internal R&D.

The partnerships and licensing picture is notably different. While private MidPharmas have typically stayed clear of major M&A, they have engaged in just as much licensing than their listed MidPharma peers, albeit putting much less cash at risk, as illustrated by the average upfront payment being only $17m compared to $90m for the listed privately-controlled companies:

Source: Analysis of GlobalData data. Criteria searched for was licensing deals that have been announced/completed/filing/planned in 1st January 2012 – 30th September 2015.

The relatively small upfront payments and deal values of the private companies is partly caused by an industry-wide trend towards pharma companies taking on earlier and more risky projects. This phenomenon resonates strongly with our experience with privately held MidPharmas – a reluctance to pay the perceived-to-be-inflated prices for buying or licensing in innovation is driving the companies to earlier and more risky R&D deals with uncertain returns. The listed MidPharmas are similarly going for low upfront payments, but the high average deal values suggest that they are significantly backloading their deals with milestone payments.

In summary, for BD there are some fundamental shifts in the ‘make-buy’ balance of innovation still to come for MidPharmas and throughout the industry – we believe that partnerships rather than M&A will continue to be the favoured model for MidPharmas that are averse to the high prices of acquiring assets. The challenge will be to integrate R&D and BD successfully in these efforts.

Commercial

Internationalisation and commercial reach have become the key characteristics of most successful MidPharmas – few have managed to sustain growth by staying in one country. Over the last years, most MidPharmas have now expanded from their home country to create pan-European presence, though few still have genuinely strong presence in every European country.

We explored the countries that MidPharmas disclose they hold the market authorisation for, which normally means a sales footprint or distributor, and split these into five large regions:

Source: Analysis of GlobalData data. The BRICS region refers to Brazil, Russia, India, China and South Africa. To market a product in a region, a MidPharma must have at least one approved product in at least one country in that region. 26 MidPharmas excluded due to insufficient data or lack of own marketed products (Acino, AMCo, Angelini, Cosmo Pharma, Debiopharm, Desitin, Dompé, Evotec, Ferrer, Ferring, Galapagos, Genmab, Guerbet, Helsinn, Italfarmaco, Medivir, Menarini, MorphoSys, MundiPharma, Orexo, Pharmstandard, ProStrakan, Riemser, Skyepharma, Zambon and Zeltia).

More than half of MidPharmas are now marketing their products in the big regions (EU/EEA, United States, and the emerging BRICS countries). The privately-controlled companies tend to prefer emerging markets like BRICS and Rest of World, including Australia, South Korea, and Mexico. Our sense is that there has been an entrepreneurial and long-term spirit in many of the privately-controlled MidPharmas that have prioritised geographic expansion for many years in markets that value high quality branded medicines. The rewards for breakthrough innovation are less strong in emerging markets than in the US, so it is no accident that many privately-controlled MidPharmas over the years have looked outside the US for international expansion.

Over 90% of pure listed MidPharmas have a presence in the United States and/or Canada. This is a natural consequence of capital markets seeking the highest returns from innovation, but it is interesting to note that the privately-controlled companies are catching up. Only a few deliberately choose to focus geographically on Europe and rely on partners for USA, with many more are in various stages of expansion in this important market.

The notable exception to global presence for MidPharmas is Japan – very few have a marketing presence there. Perhaps Japan now for European MidPharmas is like Europe used to be for US companies – perceived to be complex, different, far away, with language barriers etc., and Japan has a history of significant Japanese pharma companies with local advantage. Interestingly, many of the Japanese companies are still mid-sized and have similar characteristics to the privately held European MidPharmas, though there has been some consolidation in the last years. These companies could become good partners for European MidPharmas. Either way, Japan represents a country that MidPharmas cannot ignore in their commercialisation efforts, whether it is a market for local presence or for partnerships with like-minded peers.

Valuation

The market capitalisation of MidPharmas provides a guide as to how investors perceive the value of such companies. For fully private companies there is no such number as the shares are not traded. But the listed privately-controlled companies can be valued in comparison with their pure listed peers. And the median market cap-revenue multiple of the listed privately-controlled companies is less than half that of pure listed MidPharmas and Big Pharmas, even though revenue growth has been comparable:

Market capitalisation multiple derived from 2014 annual revenue. 4 MidPharmas excluded from chart as market capitalisation multiple >12 or revenue CAGR>80% (Allergy, Genmab, Cosmo and Medivir). 32 MidPharmas excluded as not listed or insufficient data (Acino, AMCo, Angelini, Chiesi, Debiopharm, Desitin, Dompé, Esteve, Ferrer, Ferring, Galderma, Grünenthal, HRA, Helsinn, Italfarmaco, Kedrion, LEO, LFB, Menarini, Merz, MundiPharma, Norgine, Octapharma, Orion, Pierre Fabre, ProStrakan, Reckitt Benckiser, Riemser, Servier, Sigma-Tau, Vifor and Zambon).

For the privately-controlled MidPharmas, not only is the median market cap-revenue multiple lower, but it appears they suffer a valuation “cap”. There are many examples of pure listed MidPharmas achieving higher market cap-revenue multiples and higher revenue growth than their privately-controlled peers. This may be a result of the market not considering the privately-controlled companies to be as easily acquired as the pure listed companies, or perhaps a lack of faith that the dominant owner will act in other investors’ short-term interests. It may also be due to the focus on growth by acquisition instead of internal R&D – perhaps considering this unsustainable for companies that do not have the significant access to cheap capital enjoyed by the likes of Valeant or Actavis.

It will be interesting to see how the market cap-revenue multiples of companies evolve as and when the current bullish M&A market subsides. There is no doubt that having a market listing creates a layer of discipline and ‘check and balance’ on management that the private companies need to find a way to achieve.

Performance Ranking

To get a sense of the changing fortunes of the various MidPharmas, Novasecta has created a performance ranking of these companies that does not require a market capitalisation, so can include private companies. We will track this over time, and for our first such ranking we have assessed the companies on the basis of three key attributes where public domain data can provide a useful proxy for characteristics that are ‘positive’ for any MidPharma, that is 1) investing in R&D, 2) carrying out multiple partnership deals, and 3) a global commercial reach:

Novasecta’s European MidPharma Ranking 2015

16 MidPharmas excluded due to insufficient data (Acino, AMCo, Angelini, Debiopharm, Desitin, Dompé, Ferrer, Ferring, Helsinn, Italfarmaco, Menarini, MundiPharma, Pharmstandard, ProStrakan, Riemser and Zambon). 10 MidPharmas excluded due to lack of own marketed products (Cosmo Pharma, Evotec, Galapagos, Genmab, Guerbet, Medivir, MorphoSys, Orexo, Skyepharma and Zeltia) – these companies have enormously different business models and cannot be compared to companies with a direct sales approach. For revenue data, the mean from 2012-2014 was used except for Galderma, HRA, and Norgine, where only 2013 data was available, and Kedrion and KRKA, where only 2014 data was available. For R&D spend data, the mean from 2012-2014 was used except for Galderma, HRA, and Norgine, where only 2013 data was available, and LFB and Kedrion, where only 2014 data was available. The number of partnership deals in the last three years were counted using MedTrack. This includes product/technology acquisitions, commercialisation and distribution deals, joint ventures, licensing, manufacturing and supply deals, R&D collaborations and options agreements, but not M&A. The number of regions with marketed products were counted using GlobalData for the commercial ranking. Regions used are Canada/US, EU/EEA, Japan, BRICS (Brazil, Russia, India, China, South Africa), Rest of World. In a tie, companies are listed in alphabetical order.

Our MidPharma performance ranking reflects our qualitative experience that focus and specialisation are essential to success as a MidPharma. For example, the top two companies – UCB and Stallergenes – focus on immunology/neurology and allergies, respectively. The companies lower down in the ranking, on the other hand, tend to have multiple therapeutic areas of focus without a strong positioning in any specific one. We’re conscious that the ranking does not fit every MidPharma business model – for example the R&D measure favours R&D-based companies, the partnership deal-making measure does not favour those that have taken more of an M&A approach to deal-making, and the commercial reach measure typically favours the larger companies. So companies that are outliers in one or more of these factors rank more poorly than their market capitalisations suggest – BTG and Reckitt Benckiser being two examples. That all said, the ranking does give pointers to which of the companies are potentially further down the track of creating sustainable pharma businesses, particularly those that are privately-controlled. We look forward to seeing how it evolves over time.

Conclusions

The European MidPharma world is undoubtedly varied and dynamic, with no single formula or template for success. This is reassuring, as each company has found a space where it can be successful, and at this scale in the pharmaceutical industry it is clearly not possible for a single company to cover all of the technology platforms and commercial franchises and geographical regions that comprise the industry. The same is indeed becoming true for Big Pharma, with many either considering or practising splitting into business units, spinning out, and swapping assets/units.

We believe that the specialism, focus, willingness to partner, and global perspective are the hallmarks of the most successful MidPharmas. We say this with an important caveat: the focus, specialism and partnership model must constantly evolve as competitive conditions change: standing still is not an option. We are strong advocates for MidPharmas doing and evolving what they are best at, rather than following a ‘small Big Pharma’ approach.

In summary, we see a bright future for MidPharmas. The pharmaceutical industry needs the diversity, focus, innovation and combination of flexibility and stability that many of these companies possess. MidPharmas are also interesting partners for pharma/biotech companies of all sizes, and our experience is that MidPharmas’ partnering appetite is certainly increasing. The opportunities for further growth and performance improvement therefore remain, and we at Novasecta look forward to continuing to support industry leaders in achieving this through choosing the right strategic focus, building genuinely distinctive capabilities, and originating the right partnerships.

In a context of significant industry restructuring, cost-cutting and patent expiries, 26 of the world’s top pharmaceutical companies have managed to grow their top-line revenues by more than 50% over the last 5 years. Some of the companies have achieved this growth highly profitably, some have sacrificed profits to grow top-line revenue. Some have invested heavily in R&D, some have chosen to avoid heavy R&D investment. So what can we learn from their diverse successes? In this paper we identify the 26 top-growing companies and classify them into three segments to illustrate the contrasting dominant strategic philosophies that have been applied to achieve business growth. We explore the success stories of selected companies within each of the three segments, and then conclude by examining the common theme that we believe has had a key role in driving business growth: that of ‘bespoke strategy’.

Introduction

The last five years has been one of significant evolution for the pharmaceutical industry. In terms of new drug product approvals, the trend is upwards in terms of both number and quality, yet the largest companies have been ruthlessly cost-cutting and reducing investment in both commercial and R&D infrastructure. Furthermore the cost of making new drugs is escalating: whatever you think about the most recent $2.6 billion[i] estimate for developing a drug (the many assumptions behind this figure can be debated at length, and are outside the scope of this paper), there is no doubt that the trend in cost per new drug is up. Furthermore the pharmaceutical industry continues to face pressure to defend its stance on R&D investment and still remain profitable. This is especially true when considering that R&D decisions made today take time to be fully realised in the future. So is R&D investment still central to achieving business growth, and if so what is its role in securing business growth?

In this paper we explore the roots of growth for the top-growing pharmaceutical companies for the last five years. We specifically explore Revenues, EBITs (profitability), R&D investment[1], NME[2] Launches and Acquisitions[3] for each of the companies and draw conclusions of relevance to all pharmaceutical companies seeking to grow their businesses over the next five years.

We identified the top pharmaceutical companies that have grown revenues by over 50% in the past five years (2008-2013).  Utilising Scrip Intelligence’s “The Scrip 100 List,” Novasecta’s proprietary database and Forbes’ “Worlds Biggest Public Companies List” we selected 118 companies.  From this list we excluded 19 companies that: (a) are wholesalers, service organisations and other service providers, (b) publish minimal or no financial data and (c) had less than $500m in revenue during 2013.  From the remaining companies, we chose the 26 companies that have had a revenue growth from 2008 to 2013 greater than 50%.

Three strategic philosophies of the top growers

As a proxy for the R&D investment philosophies that are currently applied by the 26 top growing companies, we examined the relationship between each company’s R&D Spend as a % of 2013 Revenue and its revenue growth over the last five years (Figure 1). Three segments of companies are evident, which we have characterised according to the dominant strategic philosophy that they have been applying to grow their businesses:

  • ‘Build’ companies typically invest 10-25% of revenue in R&D and have maintained excellent profitability through focusing on what they uniquely do well.
  • ‘Breakthrough’ companies have typically invested more than 25% of revenue in R&D and have achieved success from a limited number of highly innovative products.
  • ‘Buy’ companies have taken a primarily acquisition-oriented approach to growth, typically investing less than 10% of revenue in R&D and achieving relatively low annual profitability as a % of revenues.

Figure 1 – R&D Spend as a % of 2013 Revenue against Revenue Growth over the five-year period; The Build pharmas typically do not invest more than 25% of Revenue in R&D spend, represented by the dotted line; Source: Financial data obtained from GlobalData and Novasecta Proprietary Database.

The results and value drivers by segment show clearly contrasting strategies in relation to how the companies have chosen to grow their businesses – and the consequences of those choices in terms of profitability and growth (Table 1):

 

Table 1 – Summary of key business results and value drivers for growth for each segment; Profitability measured by EBIT (data available for all companies except for Galderma); NME Revenue relates to the 2013 Revenue generated from sales of NME products launched between 2004-2013 where available (NME revenue data availability by segment: Build – 16/22, Breakthrough – 14/16, Buy – 0/3); Source: Medtrack, Novasecta Proprietary Database, GlobalData and Scrip Intelligence.

The Build companies conform to the classic pharmaceutical model: moderate R&D investment as a % of revenue with little investment in acquisitions compared to the revenue they generate – and a 12% share of revenues from NMEs that were launched in the last 10 years. By contrast the Breakthrough companies invest and receive more from R&D, often complementing this with significant acquisitions. And the Buy companies spend significantly on acquisitions, invest little in R&D, do not rely as much on their recent NMEs for revenue, and have much lower profitability than the Build and Breakthrough companies.  In the remainder of this paper we explore the companies within each of the three segments then draw some conclusions and implications for pharmaceutical companies seeking growth now.

Build: Focused strategies for growth and consistently strong profitability

The Build companies have grown through a variety of strategies: organically, inorganically or international expansion all with R&D at its core. This group typically invested 10%-25% of revenues in R&D whilst maintaining a respectable revenue growth of 50%-100% over the five-year period. Notably, a mixture of public and private companies based in Europe dominates this segment. Companies in this segment have launched on average 2.4 NMEs in the last ten years, but do not rely on these for their 2013 revenue.  Indeed half of the Build companies had no NME launches and Merck’s 11 launches during the period skews the average.  These companies typically have portfolios of historical products such as LCM products and other legacy products that are still generating top-line and growth. The group also invested less than half of their 2013 revenue into acquisition deals. By maintaining both revenue and R&D growth, this group has remained profitable with EBIT as a percentage of revenue (2013) typically ranging between 20%-40%.

Focused strategies bound by commitment to R&D and innovation

This is a diverse group with respect to drivers for growth, yet each has focused on a particular strength and built carefully from that, as illustrated by the following four examples:

  • Novo Nordisk has shown a strong commitment to R&D that has been reflected in its output, launching four NMEs during 2004-2013. The company is primarily focused in developing insulin treatments for diabetes, both patented and generic products. The CEO of Novo Nordisk has stated that “the insulin market is big enough and growing fast enough that Novo Nordisk does not need to make acquisitions.”[ii] As such, there is room for innovation in this field to fuel organic growth for the company. Establishing presence in obesity is now complementing this field in addition to expanding the haemophilia and growth disorders franchises.
  • Chiesi has been growing internationally, stating that international sales outgrow national: 75% of 2013 revenue represented international sales. Chiesi also stated that 70% of 2013 revenue is due to internal growth (i.e. generated from products developed in the internal R&D pipeline), the remainder is a result of acquisitions.  Chiesi strives to capture value from existing brands through an LCM pipeline (“Foster and Nexthaler and related brands continue to be the main driver behind the company’s development”), as well as investing in innovative technologies.
  • Shire recently underwent an R&D transformation, resulting in an R&D strategy centered on rare diseases. Consequently, Shire’s commitment to its new strategy is illustrated by the plethora of acquisitions it has secured; a total of six acquisitions in the last five years, four of which were completed in 2013. These acquisitions brought in a portfolio of commercial and pipeline products to strengthen Shire’s position in the rare disease field.
  • The Medicines Company focuses on providing solutions in three areas: acute cardiovascular care, surgery and perioperative care and serious infectious disease care. More recently it has pursued growth aggressively with three acquisitions being completed in 2013 alone (four in total over the last five year period).  These have enabled The Medicines Company to complement its existing marketed portfolio and facilitate its entry into the European market.

Breakthrough:  High-risk innovation driving growth when it pays off

The Breakthrough companies have clearly been driven by R&D and innovation; typically committing over 25% of revenue to R&D in 2013. Simultaneously they have achieved high revenue growth within the last five years (greater than 100%).  Impressively seven out of nine of these companies had at least one NME launch over the last ten years, feeding substantial revenue growth.  For Regeneron, Celgene and Vertex, over 70% of their 2013 revenues relates to these NME launches thereby highlighting their revenue-dependence on 2-3 key products on the market.  Certainly for Regeneron and Vertex revenue has grown year-on-year with significant increases observed between 2011 and 2012 for Regeneron and 2010 and 2011 for Vertex. Both increases in revenue can be attributed to the launch of NME products Eylea and Incivek respectively.

It is notable that all of the Breakthrough companies are stock-market listed companies headquartered in the USA. This reflects the history of successful biotechs in the USA over many years (Genentech, Amgen et al.) and the capital market’s willingness to invest in innovation and R&D in USA, which contrasts significantly with Europe and Asia, at least for now. Clearly the scientific and technology capabilities are what ultimately create innovation and growth, but it is hard to imagine a company that is not publicly-listed in the USA replicating the Breakthrough phenomenon.

For the future, additional stakeholder pressure to remain innovative and launch new products could be driving these companies to maintain high investment in R&D, raising concerns about the sustainability of this business model. When considering profitability (measured as EBIT as a percentage of revenue in 2013) the group is varied, possibly a consequence of the scale and/or stage of the company.  Moreover while almost all of the companies completed acquisition deals over the past five years, investment in such deals totalled less than the 2013 revenue.  This is a relatively small investment and emphasises that R&D is still a strong driver for growth for this group with a focus on making targeted acquisitions.

Transitioning from the US Biotech model to more a established Pharma Company

With scale and maturity and the need to continuously create new products and manage the lifecycles of existing products, we believe that the Breakthrough group will inevitably transition over time into either Big Pharma or Build companies or both.  Meanwhile the commitment to R&D is impressive. For example despite rapidly bringing five products to the market (four in-house), Biomarin continues to invest up to 65% of revenues in R&D with a respectful revenue growth of 85%. By contrast Alexion’s high revenue growth relates solely to one product, Soliris, which is marketed for two ultra rare diseases.  Its clinical pipeline is dominated by Soliris label expansion and LCM studies and has a low R&D spend relative to the group – more like a normal pharma company – but is this sufficient for future sustainability and growth? Finally Gilead has built its business through a mixture of in-house innovation in infectious diseases (HIV/AIDs) and targeted acquisitions, more recently moving into oncology. It is now transitioning into Breakthrough company to more of a Build company, achieving a steady R&D spend as a percentage of revenue; 19% in 2013 compared to 79% in 2001.

Chasing breakthrough innovation leads to more creative investment

Another example of how the Breakthrough companies have pursued growth is through their eagerness to accelerate drug development. Both Regeneron, with its collaborate Sanofi, and Gilead have bought FDA priority review vouchers to fast-track regulatory reviews of late-stage assets. The former bought a voucher from Biomarin for $67.5m[iii] in July 2014 while the latter paid $125m[iv] to Knight Therapeutics in November 2014. The voucher entitles the holder a regulatory short cut where the FDA completes a six-month review of a new drug application.

Buy: An acquisitive approach to growth

Acquisition is clearly the key driver for this segment of companies; typically these companies made low investments in R&D (less than 10% of revenue) whilst achieving revenue growth of greater than 100% during the past five years. This highly acquisitive approach is demonstrated by a significant investment in deals and not only by the number of the deals concluded (typically more than four deals made in the last five years). Valeant, Actavis and Endo Pharma have completed 28 acquisition deals between them and invested more than double their 2013 revenue into these deals between 2008-2013. Such significant investment is now reflected in the long-term debt that these particular companies have accumulated; taking long-term debt as a percentage of revenue (2013) gives 172%, 62% and 48% for Valeant, Endo and Actavis respectively.  Predictably, the three companies above have not performed positively with respect to profitability, which ranges between -5% to -15%.  These companies have achieved high revenue growth in the short-term through the addition of commercial portfolios but the key question is whether this growth can continue mid- to long-term?

Generic players are building R&D credibility in speciality pharma

This segment also features a number of growing generic players that are building a presence in speciality pharma, such as Lupin and Sun Pharma. Teva can also be classified in this category. All three of these companies have pursued growth from generics businesses while moving into speciality pharma through acquisitions.  Moreover, Teva states that it “pursues robust organic growth” applying its R&D capabilities in the generics/OTC field into NME. For these particular companies, a gradual move into specialty pharma through this route allows them to build credibility in R&D while simultaneously continue to be profitable.

Jazz Pharma: the top grower of our sample

The largest revenue growth amongst the top 26 pharma growth companies over the last five years was achieved by Jazz Pharma, which represents a unique example of growth within this segment. Incorporated in 2003, Jazz now sells just two main products, Xyrem and Luvox CR, for narcolepsy and obsessive-compulsive disorder respectively. Jazz has exploited the orphan disease status of the former drug, which was obtained through the acquisition of Orphan Medical in 2005, enabling it to increase prices. Astonishingly Jazz has raised the price of Xyrem at an annual average rate of nearly 40%[v]. Coupled to the fact that R&D spend decreased between 2008 and 2011 and now represents just 5% of revenues means that Jazz achieved a highly respectable profitability of 39% of revenues in 2013. The question, as with all the Buy companies, is what next? By seeking innovation from acquisitions, the risk is lack of availability or overpaying or both. With the notable outliers of Valeant and Actavis, the other Buy companies are transitioning in some way to sustain themselves and mitigate the risk of being acquired themselves. It will be interesting to see how they all evolve over the next five years, but we believe that they do not represent a model that more conventional pharmaceutical companies can follow easily.

Is R&D required for pharmaceutical business growth?

The Breakthrough companies show that growth is contingent on NME launches that require significant R&D investment – still with the possibility of growth and high returns albeit with high risk. We believe that such companies cannot survive indefinitely by investing such a huge proportion of revenues into R&D, so will evolve to become established pharmaceutical companies with levels of R&D investment that are much lower as a proportion of revenues, as has been more recently achieved by Gilead and Alexion.

In contrast the Buy companies have shown that embracing an acquisitive approach can lead to immediate revenue growth without the need to invest in R&D. However the long-term sustainability of this business model is also questionable as demonstrated by the fluctuating and sometimes negative profitability of these companies over time. In short, chasing after acquisitions is an expensive game and though at an industry level it may be an efficient way to accelerate (arguably necessary) cost-cutting, sustainably profitable business growth may be more elusive. Indeed, a relatively recent example of this reality is that following Allergan’s strong defence against a takeover, Valeant has visibly cooled off its buying spree in an effort to relieve its debt and increase internal R&D output.

So perhaps the most valuable lessons can be learned from the Build companies. These companies have achieved not only respectful revenue growth year-on-year but also remained consistently profitable. They have leveraged their strengths to accomplish their goals, albeit by following different paths.

Bespoke Strategy: The common thread

The Build companies have demonstrated that significant growth does not necessarily depend on the new NME launches of the Breakthrough companies or the major acquisitions of the Buy companies. There is therefore hope and inspiration for all pharmaceutical companies that cannot realistically expect many NMEs or acquisitions. And the common thread to the success of the Build companies is their smart and focused choices. For example, Shire recently announced that its current pipeline is estimated to generate sales of $3 billion by 2020[vi], a pipeline that was constructed from a number of targeted acquisitions during the past five years.

The common thread that we therefore believe has had a key role in driving business growth for the Build companies in particular (and the Breakthrough and Buy companies in a different way) is that of ‘bespoke strategy’. Bespoke strategists focus on exploiting and evolving from the unique and distinctive capabilities that they each alone possess – whether these are related to customer/stakeholder relationships, science/technology skills or financial market relationships/skills. The successful growing companies typically have best-in-class capabilities in one of these areas, for example Build companies typically have excellent customer/physician relationships and networks in focused domains, Breakthrough companies often have incredible science in specific fields, and Buy companies typically know and work their investor community better than even the financial institutions. So each of the 26 top growing companies has successfully developed and executed bespoke strategies that exploit their relative competitive strengths while ensuring that they have access to the necessary capabilities for growth for all other areas. They are indeed inspiration for successful pharmaceutical companies world-wide.

Notes

1. Financial data between 2008-2013, including R&D spend, obtained from GlobalData and Novasecta Proprietary Database.

2. NME: New Medical Entities defined as “chemical and biological entities with therapeutic effects marketed for the first time, excluding new formulations, combination products and generics/biosimilars.”  NME Launch data between 2004-2013 obtained from Scrip Intelligence.

3. Acquisitions deals classified as 100% acquisitions and majority acquisitions only.  Acquisitions obtained from Medtrack.

References

i) Tufts Center for the Study of Drug Development (http://csdd.tufts.edu/news/complete_story/pr_tufts_csdd_2014_cost_study)

ii) http://www.wsj.com/articles/novo-nordisk-ceo-has-no-plans-for-big-acquisitions-1409059977

iii) http://www.fiercebiotech.com/story/sanofi-regeneron-seize-regulatory-shortcut-blockbuster-pcsk9-race-amgen/2014-07-30

iv) http://www.fiercebiotech.com/story/go-go-execs-gilead-nab-fda-priority-review-voucher-125m/2014-11-19

v) http://opinionator.blogs.nytimes.com/2013/06/30/the-orphan-jackpot/?_r=0

vi) http://www.shire.com/shireplc/en/media/shirenews?id=1046

Dilraj Judge, John Strafford, John Rountree

While our industry continues to find diverse ways to ensure cash is applied to early-stage R&D – for example venture funding, option-based partnerships, acquisitions, and more recently IPOs again – funding clinical development is becoming tougher, particularly the later and more expensive stages. We are beginning to face a new funding shortage: pharmaceutical companies and their investors appear to be less willing to finance clinical development through their P&L accounts than they are to find cash for deal-making and M&A. How can pharmaceutical companies secure funding for their most important clinical development projects? Alternative funding models have started to emerge in recent years that can provide access to capital with control over the asset and its development. In this paper we classify the available funding options today, and then discuss the key attributes and risk implications of each. We offer our views on how MidPharmas can explore funding arrangements which are best suited to their stability, scale and long-term strategic goals, ensuring the right balance between accessing capital today and giving up value tomorrow.

Introduction

The capital-intensive nature of drug development means that securing adequate funding for R&D remains a central challenge for the pharmaceutical industry. Published average R&D costs per new medicine indicate an upward trend over the last decade, with the most recent estimate from Mestre-Ferrandiz et al.1 standing at approximately $1.5 billion. While such figures are full of debatable assumptions regarding capital costs and attrition, there is no doubt that the cost trend is upwards. Coupling this trend with the ongoing concerns related to R&D productivity places companies under constant fiscal pressure to justify their R&D expenditures.

Whether return on investment or NPV or other measures are used to assess the value of clinical projects and prioritise between them, two fundamental issues must now also be considered: the source of funding and how to mitigate the associated risks. Are there sufficient internal funds to support the development activities? Alternatively, what are the additional sources of finance that can help to relieve P&L pressure?

In this paper we classify the various types of available funding for clinical development in the pharmaceutical industry. We also discuss the key attributes and nuances of these options, and what they mean in practical terms for companies in search of capital flexibility and de-risked clinical development.

Alternative ways to fund clinical development

Historically, sources of additional funds for clinical development were limited to debt, sale of equity and/or out-licensing assets through deals that share the value of the innovation with a partner. Alternative models have emerged in recent years that offer more tailored financing and risk management solutions for pharmaceutical companies. There are now five main types of clinical development funding for pharmaceutical companies (Figure 1):

  1. Internal budgets.
  2. Conventional finance.
  3. Revenue-based finance.
  4. Asset-centric finance.
  5. Asset-centric entity.
Figure 1. Five types of funding for clinical development.

We describe the characteristics of each funding type in turn:

Internal budgets: Financing from within the organisation is usually preferred in cash-rich companies with a steady profitability stream from marketed products. In this instance, the core functions of R&D, Corporate and Commercial need to be aligned on budget allocation, balancing strategic goals with appropriate use of internal cash, and avoiding excessive burden on the company’s P&L.

Conventional finance: This comprises borrowing with potentially high interest costs or raising funds by selling equity. A number of implications arise for both private and public companies including dilution of equity, financial risk spread over the entire organisation, and whether the increased R&D spend that would result is an acceptable rationale for the financiers providing debt or equity.

Revenue-based finance: This involves selling some or all of current or expected product revenues in exchange for capital to invest in either clinical development or other priorities. The most familiar form of this funding is termed ‘royalty financing’, involving the sale of an existing royalty stream, which would have been created as part of a separate licensing or partnership deal. Another variant includes creating a synthetic royalty where none had previously existed, also known as ‘revenue interest financing’. A synthetic royalty is derived from revenues for products that are developed and marketed internally (as opposed to by a licensee or partner), and the revenue interest is sold to the capital provider. In both instances, the capital provider assumes a share of the commercial risk whilst the royalty seller retains full control over the product(s). The products in question are usually near or at commercialisation stage. Although revenue-based finance provides a non-dilutive source of capital, the seller may risk losing substantial upside in cases where the products that create the revenue or royalty streams exceed sales expectations.

While revenue-based financing is technically feasible for companies to use on any product’s revenue stream, transactions to date have been most common for supporting well-defined and near-term capital requirements, as exemplified in the AstraZeneca – Royalty Pharma deal2. In 2006 AstraZeneca acquired Cambridge Antibody Technology (‘CAT’) including its passive royalty interest related to Abbott’s Humira. The $1.3 billion transaction triggered mixed reactions from industry analysts and investors, questioning the balance between strategic fit and the seemingly high price premium that was paid. AstraZeneca’s subsequent move to sell the Humira royalty stream to Royalty Pharma effectively reduced the net acquisition cost to $300 million (after adjusting for $300 million existing cash in CAT and the $700 million value of the Humira royalty stream).

Asset-centric finance: This encompasses most archetypal licensing and co-development partnerships to further develop specific clinical assets. In addition to securing funds, this enables the licensor to leverage the licensee’s expertise and development resources, as both parties have a vested interest to progress the product’s development. Although upfront payments provide cash infusions to fund existing operations and defer the need to obtain capital from the equity or debt markets, such transactions also involve giving up all or partial control over product development and downstream financial benefits. Often deals can be designed to incorporate option terms, thereby increasing flexibility in managing risk profiles and providing leeway for unexpected strategic decisions by either partner.

Though the providers of asset-centric finance have traditionally been larger pharma/biotech companies, over time various types of clinical research organisations (CROs) have experimented with this model. Solvay’s pioneering risk-sharing deal with NovaQuest (then part of the Quintiles group) in 2004 was one example3. More recently SFJ Pharmaceuticals (‘SFJ’) has entered the area. With capabilities rooted in both financing and providing CRO services, SFJ provides funds and resources to assist with Phase 3 trials in exchange for future royalties4. However providing finance means taking risk, and SFJ recently announced mixed results from their two partnered Phase 3 trials in oncology. The disappointment and potential loss in investment from its Pfizer trial (dacomitinib) may be offset with the good news from its Eisai partnership (lenvatinib) with anticipated downstream rewards once marketing approvals are achieved. To maintain momentum, SFJ will need to recoup a hefty premium from future successful programmes.

Asset-centric entity: In this model, a company places the rights to an asset in a separate entity that is part or sole funded by other investors. Asset development is carried out in the new entity, and the donor company can have the option to re-acquire the asset and the entity after a pre-determined milestone, usually after achieving proof-of-concept. Each party benefits: the investor can have a pre-determined exit strategy to obtain sufficient returns, and the donor company obtains funding for development that does not hurt its P&L yet retains an option to re-acquire the asset and thereby replenishes its R&D pipeline. The lean and nimble setup of an independent entity can also reinforce objective decision-making in driving asset development.

This type of model is well illustrated by Arteaus Therapeutics (‘Arteaus’)5. In 2011 Lilly granted rights of its monoclonal antibody drug LY2951742 to Arteaus. Established as a private company with $18 million investment from Atlas Venture and Orbimed, Arteaus’ sole purpose was to investigate the drug’s potential in preventing migraines. Following promising results from a Phase 2 study, Lilly exercised its option to re-acquire LY2951742 in January 2014. Here the investors successfully exited from their initial investment and Lilly can now accelerate the subsequent development of a promising drug candidate.

Though the concept of asset-centric entity is sound, it is tough to execute. The initial suspicion of external investors is generally that they only get to invest in the projects that pharma/biotech does not want, which increases perceived risk. A strong and credible strategic rationale for creating the entity (rather than own-development or licensing) is therefore essential. This is arguably easier for MidPharmas that have to be commercially focused and by definition create valuable non-core assets than it is for Big Pharmas that can usually fund and commercialise any asset with potential.

MidPharma experiences with new funding models

Despite the almost universal P&L pressure we are hearing from our R&D clients, the number of published examples of more novel alternative clinical development funding activities has been limited to date. We suspect this is simply a matter of time: there is no imminent sign of a return to the days of pharmaceutical companies generating reliably high profits that allow internal funding of a wide variety of promising projects. However there are already interesting examples that provide some pointers to the future (Table 1).

The reasons for each of these deals are diverse, just like the companies that are executing them. It is interesting to note that in each case the proportion of revenue that was being spent on R&D at the time of the deal was generally higher than conventionally assumed to be the appropriate level in the industry. This points to more usage of external financing in future as companies increasingly face pressures to reduce R&D spending and move clinical development spending off their P&Ls.

Table 1. Published examples of different financing options.

Source: Company annual reports and 10-k forms. Currency conversion with annual average exchange rate from www.oanda.com.

How should MidPharmas address funding issues?

In our previous white paper15, we discussed how MidPharmas could benefit from combining their ambition and stability with the mentality of biotechs to achieve R&D efficiency and productivity. Could MidPharmas embrace a biotech-like mentality when it comes to financing? Inherently the funding requirements and long-term strategic goals differ considerably from their biotech counterparts: MidPharmas, often privately held or family owned, can be averse to public markets and corporate acquirers.

For MidPharmas there is a fine balancing act to deliver value from the internal portfolio while satisfying financial budgets. In some instances this can lead to the misallocation of funding between projects due to misalignment of organisational goals. Critical financing decisions must be made to ensure that the most value-generating projects flourish and those that are not are discontinued on a timely basis. To supplement traditional business case analysis, five core drivers must be considered when making financing decisions:

  1. Financial resources.
  2. Risks.
  3. Revenue impact.
  4. Control of the asset.
  5. Development capabilities.

We describe each of these drivers in turn below:

Financial resources: Each company must constantly assess the best use of all its financial resources, including how these are allocated to R&D projects (linked to portfolio management). From the perspective of a CFO, one concern could entail the best use of surplus cash reserves; retain cash for future acquisitions or expense it in additional R&D efforts? On the other hand, increased borrowing could relieve a lack of sufficient cash reserves in the short-term but could result in the company being vulnerable during a recession or susceptible to takeovers. Transactions for funding clinical development can affect the health of the company’s balance sheet and P&L, and such implications should be considered carefully.

Risks: These include (but are not limited to) regulatory risks, financing risks, execution risks and reimbursement risks. Can the most relevant risks associated with a particular business model be identified and mitigated accordingly? How much of these risks can be shared with a partner? Conventional financing (debt and equity) could lead to financial risk being spread over the whole organisation. Revenue-based financing allows a portion of the commercial risk to be transferred to a capital provider. In asset-centric financing, depending on the deal terms, all or part of the development risk can be mitigated to a partner, financial risk can be reduced, and option terms can offer flexibility in terms of risk sharing. In asset-centric entities, financial and development risks can be mitigated by transferring them to a new entity.

Revenue impact: Selling part or all of future sales revenues in exchange for capital today will improve cash reserves in the short-term but at the cost of future upside potential, i.e. reducing future profits once the product is commercialised. This approach is particularly advantageous to cash-starved companies and minimises commercial risk, however corporate sustainability is consequently put at risk.

Control of the asset: In exchange for funding, the loss of ownership of an asset and IP can often occur. The extent of this loss must be considered in the context of several factors, for example whether the asset represents a core or a non-core asset, the company’s strategic focus, and the company’s culture.

Development capabilities: In addition to gaining funds, it is advantageous to simultaneously gain access to development capabilities that may be lacking in-house. A suitable partner will both provide those capabilities and set a platform for potentially later integrating new capabilities to ensure future commercial success.

A flexible and integrative approach to funding

To date the creativity that has been applied to financing early-stage projects and companies has not been as widespread in the more expensive area of clinical development. Companies should continue to exploit multiple financing models to provide options and flexibility in funding. Assets should be valued using appropriate and rigorous methods to facilitate negotiable deal terms and risk profiles. Creative alternatives should be identified and explored, and the key R&D, Corporate and Commercial functions must align behind clear and justifiable choices. This all represents a significant technical and managerial challenge. And as funds for R&D become tighter, pharmaceutical companies that need to fund their next product breakthroughs must confront this challenge head on.

 

References
  1. Jorge Mestre-Ferrandiz et al. “The R&D cost of a new medicine” Office of Health Economics, December 2012
  2. Royalty Pharma Press Release, 26 October 2006 (www.royaltypharma.com)
  3. NovaQuest Press Release, 1 September 2004 (www.novaquest.com)
  4. SFJ Pharmaceuticals website (www.sfj-pharma.com)
  5. Eli Lilly Press Release, 13 January 2014 (www.lilly.com)
  6. Eisai Press Release, 7 September 2011 (www.eisai.com)
  7. Exelixis Press Release, 5 June 2008 (www.exelixis.com)
  8. Symphony Capital LLC website (www.symphonycapital.com)
  9. Paul Capital Press Release, 1 April 2008 (www.paulcap.com)
  10. Paul Capital Website (www.paulcap.com)
  11. Paul Capital Press Release, 21 December 2009 (www.paulcap.com)
  12. UCB Press Release, 9 January 2009 (www.ucb.com)
  13. Vertex Press Release, 20 November 2013 (www.vrtx.com)
  14. Healthcare Royalty Partners Press Release, 3 June 2008 (www.healthcareroyalty.com)
  15. “A biotech-like mentality in MidPharmas: The winning combination?” Novasecta White Paper, January 2014 (www.novasecta.com)

Dilraj Judge, Euvian Tan, John Strafford, John Rountree

In an effort to address declining R&D productivity in the pharmaceutical industry, many companies have looked to the innovative entrepreneurialism that characterised the original “biotech” companies of the 1970’s and 80’s. This has resulted in numerous restructurings and changes to processes and culture. But what is the real “biotech-like” mentality that the industry is seeking? In this paper we offer our views on what sets the best biotechs apart: focus, flexibility, capital discipline, external oversight, project orientation and culture. We then use a simple, directional set of parameters to assess a group of MidPharmas on these attributes, with some expected and unexpected outcomes and plenty of interesting questions. We offer our views on why MidPharmas provide the ideal environment in which stability and scale can complement the dynamism of the original biotechs, providing a winning combination for long term success.

Introduction

The pharmaceutical industry as we know it today is rooted in the pharmacies, fine chemicals and dye trades of the late 19th century. The following years saw an era of unprecedented growth as the industry pioneers revolutionised the face of medicine and reaped the rewards. The industry agglomerated, benefiting from economies of scale and giving rise to some of today’s Big Pharma. In the 1970’s and 80’s the breakthroughs in molecular biology and genetic engineering then gave birth to biotechs, causing a splintering of the industry and the biotech bubbles of the 1990’s and 2000’s.

40 years on from the biotech revolution, we are in the midst of another major turning point for the industry. Despite increased spending on R&D, productivity is down, resulting in extensive introspection and reassessment. In simpler industries, increased scale and process optimisation are enviable attributes because they promote efficiencies. Unfortunately, in the pharmaceutical industry these same attributes appear to stifle innovation.

One solution would be to disaggregate the industry into smaller, “biotech-sized”, organisations. Many Big Pharma have adopted this approach, with varying levels of success. Unfortunately structure is only part of the solution, it is mentality and not just size that creates real impact. We see evidence of this among the “grown-up” biotechs, some of which have managed to retain high levels of innovation and productivity despite their large size.

The innovative entrepreneurialism of the industry pioneers and the early biotechs continue to be an aspiration, and to be more like a biotech has now become an industry mantra. In this paper we therefore discuss the issue of scale and provide our definition of the “biotech-like” mentality. We also use publicly available information to rank European MidPharma on their “biotech-like” attributes.

Is scale inversely related to R&D productivity?

Many analyses have sought to establish whether there is a connection between scale and productivity in pharmaceutical R&D. Unfortunately, long development timelines, high attrition rates and the wide variety of business models make such analyses incredibly complex and challenging. Not surprisingly results have been mixed and inconclusive.

Despite these challenges, we were struck by a recent analysis by Matthew Herper1 that took a very simple approach to the problem. This analysis sought to measure the cost of bringing a new drug to market by taking the total spent on R&D over a ten-year period and dividing this by the number of new drugs launched. This was carried out for 100 companies with striking results. Companies that spent over $20bn on R&D over the period spent a median of $6.3bn per new drug launched (14 companies in total). Those that spent between $5bn and $20bn on R&D spent just $2.9bn per new drug launched (11 companies in total).

Although such analysis is crude and fraught with pitfalls, these limitations cannot explain the huge difference in cost between the two groups. All of these companies include R&D spend on post marketing safety studies, and all carry the weight of failure in their R&D costs. Bigger companies chasing larger indications may drive some of the difference, but we don’t believe that this explains all of the increase. It seems more likely that as companies grow to huge scale, innovation and efficiency in R&D suffer.

Big Pharmas appear to agree that size has limited their productivity and ability to innovate and most have already taken steps to attempt to be more “biotech-like” (Table 1). This has often involved disaggregation of the large R&D organisation into smaller biotech style units.

Table 1. Strategies adopted by Big Pharma to be more “biotech-like”.

Sources: Novasecta analysis of company websites and press releases, ordered by sales 2012.

For smaller companies the solutions are not so obvious. European MidPharmas typically spend between €50m and €1bn on R&D, a small amount relative to the Big Pharmas described above. Yet despite their smaller size, many still lack the innovative entrepreneurialism of true biotechs. Many of these companies represent the vestiges of the old pharmaceutical industry, with similar origins in the pharmacies and fine chemicals trades. Unlike “grown-up” biotechs that had to fight for capital, many are still family owned. Such stability has advantages, for example providing a long-term outlook, but it also creates a sense of comfort that can lead to complacency. For these companies we need to look beyond scale to understand the more fundamental aspects of a “biotech-like” mentality.

What is a biotech-like mentality?

What “biotech-like” means in practical terms is open to interpretation as it is used to denote a multitude of metrics, processes and cultural norms.

When George Scangos, then the CEO of a small biotech Exelixis Inc., was recruited by Biogen Idec to be the new CEO in 2011, he swiftly executed a series of steps to “revitalise” the company and make it “more like a biotech”. Some of the key issues he raised were the limited interactions between employees in large companies, the lack of correct incentives and a risk-averse culture 2.

Frank Douglas 3 identified similar themes when he interviewed 26 former and current leaders of R&D departments at major pharmaceutical and biotechnology companies to discuss entrepreneurship in R&D. This research identified several common themes that limit entrepreneurial behaviour in the R&D departments of large organisations. These included: a focus on “shots-on-goal”; inflexible and bureaucratic R&D groups; homogenised rewards systems; underperforming middle management; and a lack of interaction between R&D Heads and the CEO.

Through extensive experience with European MidPharma companies, Novasecta has identified, in practical terms, the six key attributes that are required to achieve a “biotech-like” mentality in a pharmaceutical company context:

  1. Focus.
  2. Flexibility.
  3. Capital Discipline.
  4. External Validation.
  5. Project Orientation.
  6. Culture.

We describe each of these attributes in turn below:

Focus: Focus in biotechs relates to two aspects: that of focusing on distinctive capabilities, and that of having a focused organisational structure. Biotechs will focus on a single or selected number of activities in order to reinforce and build up a selected set of distinctive capabilities. This allows the biotech to differentiate itself from competitors and also attract the top talent within its chosen area of expertise. Focus also applies to the organisational structure. The co-localisation of employees at a single site creates opportunities for employee mingling, the easy exchange of ideas and an energetic culture formed around a single purpose.

Flexibility: Biotechs consist of lean R&D headcounts with smart balancing of internal and external capabilities. This allows for flexibility around capacity arising from pipeline demands without the burden of large fixed costs or the temptation to “make work” for internal employees. Lean organisations also generally result in less bureaucracy, greater ownership and the freedom to act entrepreneurially.

Capital Discipline: Often funded by venture capitalist / private equity companies, biotechs must operate extreme capital discipline in order to survive to the next funding round. Not only this, they must ensure the capital spent produces the type of result that will continue to impress the investor community. A “% of sales” is not allocated routinely into R&D and it is not viewed as a “right” by the R&D organisation.

External Validation: The presence of external advisors and investors on the Boards of biotechs brings valuable external viewpoints and expertise. It provides sparring partners for the management, challenging and championing programmes and increasing the value of the final output. This minimises potential impact from promoting pet projects and limited viewpoints, and forces each program to be assessed more objectively.

Project Orientation: The fate of biotech employees is closely linked to that of projects and the company itself, creating a driver for success. In contrast to function-focused structures found in larger organisations, the internal structures and processes of a biotech are oriented around projects and geared towards supporting progression with a “project is king” mentality. There is a high level of accountability, with an individual with considerable clout usually leading projects and taking ownership of their progress. Further, employees will typically have an equity stake in the company through share options, adding to the sense of “skin in the game” and further promoting a sense of ownership and a desire to push for project success. With increased scale the personal accountability and sense of urgency diminishes and can result in complacency setting in.

Culture: aside from structure and process, the culture of a biotech plays a significant role in its success. This encompasses attitudes stemming from the attributes described above, for example, from a lean structure arises less hierarchy, greater empowerment and decision-making flexibility. The capital discipline means every experiment is significant and project prioritisation becomes paramount, resulting in the direction of resources towards performing the “killer experiments”. These rigorous checks coupled with dispassionate decision-making ensure the fast-cull of assets that do not deliver. This is a stark contrast to resistance to change from “how we have always done R&D” at times found in pharma companies. These aspects, coupled with a can-do attitude are often at the heart of successful biotechs.

How “biotech-like” are European MidPharmas?

Understanding the extent to which a company possesses these attributes requires a detailed exploration of company structure, governance, culture and strategy. This level of analysis is impossible from public sources of information; however, we have identified three directional “biotech-like” parameters that can be assessed from publicly available data:

  1. Deal count: the number of out-licensing deals and joint ventures for internal products per R&D spend over the last five years.
  2. Visibility: newsflow per R&D spend over the last five years.
  3. R&D flexibility: R&D headcount per R&D spend in 2012.

These are classic “biotech-like” behaviours and represent proxies for some of the attributes we describe above. Deal count and visibility both reflect the drive to gain external validation and/or financing through deals and enhanced newsflow. A lower R&D headcount relative to R&D spend suggests increased flexibility and smart balancing of internal and external capabilities. All three parameters have been normalised by R&D spend to account for the wide variation in the companies evaluated.

Using these parameters, we ranked 30 MidPharmas with diverse ownership structures, business models, histories, capabilities and cultures for their “biotech-like” mentality (Table 2). Although it is impossible to draw definitive conclusions from such a crude approach, we believe that the ranking provides plenty of food for thought and raises some important questions for all companies to address.

The high ranking of the top two companies – Denmark-based Genmab and Swiss-based Helsinn – seem to us to represent well the success that comes from a biotech-like mentality. Founded in 1999, Genmab is a quintessential “grown-up” biotech that recently saw its stock price soar due to the progress of flagship oncology products ofatumumab (Arzerra®) and daratumumab, the latter a recipient of the FDA’s Breakthrough Therapy Designation. Family-owned Helsinn, with its lean internal structure and an interesting business model that requires in- and out-licensing, has also grown its business strongly and has demonstrated both a strong track record in FDA approvals as well as confidence in its R&D: 32% of sales were invested in R&D in 2011, with an R&D investment CAGR of 23% over the period from 2007-2011.

Table 2: MidPharmas ranked by biotech-like mentality measured from an external perspective.

Sources:Novasecta analysis of Medtrack, company websites and annual reports.
Notes: 30 selected revenue-generating MidPharmas (2012 revenues below €4bn) were analysed on three parameters as proxies for a biotech-like mentality. The companies were ranked on each parameter independently, and aggregated to provide the final score. Deals analysis was based on Medtrack data on Partnership deals within the last five years where company of interest was listed as Target/Source company. The number of out-licenses for products (each product included once) and joint ventures were counted from this. Visibility was measured through a manual count of the number of press releases (excluding regulated releases) over the last five years. Number of deals and newsflow over the five years was normalised to the total R&D spend over a five-year period. R&D headcount data was taken from company websites and annual reports where publicly disclosed. For the total ranking a median R&D headcount / €1m R&D in 2012 spend was allocated to companies where figures were not available for ranking purposes (marked as n/a in table).

However, other rankings were more unexpected, including those of Shire and Actelion. Low ranked on our parameters, UK-based Shire is well regarded by the markets and continued growth in R&D investment (15% CAGR, 2007-2012). However Shire started with a search-and-develop model prior to acquiring and then developing its own R&D, which is not incorporated in our quantitative assessment. Similarly, Swiss biotech Actelion has been a biotech to pharma success story since its founding with ex-Roche assets in 1997, and had a successful 2013 with the FDA approval of Opsumit® (macitentan) for pulmonary arterial hypertension. However it did come under significant investor pressure in 2011, and its revenue growth appears to be slowing down (1% CAGR 2010-2012). We were also surprised to see UK-based Oxford Biomedica being so highly ranked, yet having decreased its R&D investment over the last five years (-12% CAGR, 2007-2012) and having had a share price drop by almost 70% over the last 5 years.

Our simple ranking methodology of course has its flaws. Counting disguises the fact that some deals and press releases (and indeed R&D heads) clearly have more quality and importance than others. Counting the number of outlicensing deals and joint ventures also favours business models that place a strong emphasis on business development and we can only count those deals that are published. We have included deals for developmental as well as commercial products so our normalisation by R&D spend will favour companies with more commercial deals. Although we excluded regulated releases, visibility still favours public companies. However, we believe all companies should strive to do deals with suitable partners and maintain their visibility and communicate value inflection points. Comparing R&D spend and headcount between different companies is complicated by multiple factors including: tax incentives driving R&D cost inflation, differing commitments to post marketing safety studies, different costs per R&D head in different countries, and different classifications of an R&D head. Finally, as all of these parameters are normalised by R&D spend, our ranking favours companies that spend less on R&D.

Despite these limitations, we believe that our ranking demonstrates well the diversity that we experience in MidPharmas in how biotech-like they really are. It also raises some interesting questions. For example, would companies that are ranked low benefit from behaviour that appears to be more biotech-like to the external world? Would more flexible capacity support their growth ambitions? Could more deals be struck to gain external financing and validation for in house projects? Similarly, are the high ranked companies capitalising enough on their apparently biotech-like behaviours and translating this to increased productivity in terms of both quantity and quality?

Biotech-like mentality in MidPharmas?

While Big Pharma may benefit from being more like biotechs, it is our belief that MidPharmas are better positioned to use biotech-like attributes to their advantage. A difficulty faced by most biotechs is the constant need to raise financing, often putting a strain on management energy and effort. Financial pressures and focus on single asset or technology can also mean that good structure, processes and attitudes are wasted in biotechs.

In MidPharmas, revenue from own sales or royalties, relatively smaller scale, a surviving entrepreneurial spirit and often-family ownership can be combined to provide greater financial stability, amenability to adapt to change and a longer-term outlook. Harnessed properly, this can be the ideal environment for a biotech-like mentality to thrive. While care must be taken to adapt for scale, for example excessively flexible organisations may lose alignment and overly lean structures may lose critical mass, the best aspects of biotechs and MidPharmas can be leveraged to build highly efficient organisations. Some MidPharmas may already appear to be in possession of biotech-like attributes, however, as our ranking shows, the key is using these for greater output. Therefore MidPharmas should explore how to apply the attributes in their own unique contexts, and then drive the changes required to do this. The answer to industry’s constant search for R&D efficiency and productivity may lie in combining the ambition and stability of such MidPharmas with the mentality of the original biotechs.

 

References:
  1. Matthew Herper “The cost of creating a new drug now $5 billion, pushing big pharma to change” Forbes 11th Aug 2013.
  2. Tony Clarke “Biogen Idec CEO shakes up culture as stock price soars” Reuters, 10 May 2011.
  3. Frank Douglas et al “The case for entrepreneurship in R&D in the pharmaceutical industry” Nature Reviews Drug Discovery 9, 683-689 September 2010.

Hasini Wijesuriya, John Strafford, John Rountree, Tony Sedgwick

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