Discover John’s previous comments on Bayer here
In light of the announcement of AstraZeneca’s preliminary approach to Gilead Sciences, John Rountree, was invited on CNBC to discuss the merits of the merger.
John discusses the merits of potential collaboration, highlighting existing collaborations in the industry, including AstraZeneca’s collaboration with The University of Oxford.
Considering the potential merger, John sides with analysts to question the merits of such a deal.
One of the big concerns of a mega merger is the potential impact on innovation, and John discusses some of the pitfalls R&D might face if the two companies do merge.
The suggestion of a blockbuster pharma merger might be a sign that the industry is getting back to something resembling business as usual. Even successful Covid-19 treatments or vaccines are unlikely to be big moneymakers, meaning drugmakers face the return of old pressures to gain scale and boost innovation, or risk becoming targets.
Speculating on the deal, John Rountree, said “Perhaps AstraZeneca has a belief that antivirals are going to be a much more important domain than previously believed, owing to the recent Covid-19 tragedy, and snapping up one of the clear leaders in that field will give it a platform for future growth beyond oncology”
It will be interesting to see what AstraZeneca offers and whether pharma M&A is still too expensive.
Novasecta provided perspectives for The Economist newspaper on signs of a new wave of strategic collaborations between pharma companies as an alternative to expensive and often wasteful M&A. Our perspective is that the recently announced collaboration between Merck and AstraZeneca in immuno-oncology is great for patients and the industry: working together rather than simply acquiring a company brings out the best in each company. Over the years we have been proactively catalysing such collaborations for many of our consulting clients as they seek better ways than M&A to build their R&D pipelines, as described in our white paper“Better Partnerships, the Alternative to M&A?”
Novasecta was cited several times in The Economist article, first John Rountree commented that the recent disappointing results from AstraZeneca’s Mystic trial “suggest it is still early days for immuno-oncology R&D, not that there is something wrong with the technology.” Then our research earlier this year into expensive M&A and the increasing trend in revenue multiples was cited, and John added later in the article that “working together is an effective way to mix laboratory talent and to bring medicines to patients”. To view the full article, click here.
In light of the announcement of Novartis’ and Pfizer’s Q4 results, John Rountree, was invited on CNBC to discuss innovation in the pharmaceuticals market.
John highlights the continued strategic drive towards traditional innovation, which helps companies avoid the dangers of being a “one product company” and allows them to protect themselves from the risks of patent expiry.
Traditional R&D is not the only innovation Big Pharma is pursuing, with cell and gene therapy being important future technologies that companies must be present in, but are still in the early stages technologically and commercially.
Pharma companies are compelled to innovate in order to survive, and the rewards for successful innovation are substantial. Innovation as a topic we have always focused on and one that companies should consider carefully.
As Big Pharma continues to innovate, John draws attention to the positive correlation between companies investing in innovation and their stock prices. Investors clearly believe in R&D and so do we.
Novasecta was recently asked to do some research for the Financial Times, the pre-eminent UK financial newspaper, exploring trends in pharma M&A. The major finding of this research was that acquisition prices are rising extremely rapidly: the median acquisition value in 2016 was 39X the revenue of the acquired company, compared with 19X in 2015 and 8X in 2014. Moreover, average deal values are growing as well: while the number of deals dropped slightly from 2015 to 2016, the median value almost doubled to $1.97bn.
John Rountree, Managing Partner at Novasecta, commented on these findings, stating that “people are taking more risk and paying for hope — they are paying for growth that cannot be assured”. He goes on to say that “the companies that are being acquired cannot on average be now worth twice as much as they were only five years ago. The pressure for companies to overpay for acquisitions that give short-term growth is intense, and the era of cheap capital has exacerbated this phenomenon”. To view the full article, click here.
The conclusion that we draw from our research is that though some deals will end up being great for both parties, many are at over-inflated prices, and the acquiring companies would do better to focus on fixing their own shops and entering into partnerships where they need extra capability rather than expensive M&A. If you would like to discuss the implications for your company, please contact us or sign up to attend our reception at JP Morgan next week.
Novasecta’s pharma M&A trends research was elaborated on in an article in Endpoints, which can be viewed here. In this expanded coverage, John Rountree noted that:
“The multiple combine the two things going on in M&A, one is the amount you have to pay to acquire a certain amount of revenue, which is clearly up, and the second is that when revenue is lower (i.e. mostly pipeline value) you are taking more risk and betting on the hope that your acquisition will pay off.
To get a good-sized sample and long-term trend we also looked at two cohorts of deal-making – 2009–2011 and 2014-2016 (five years later). This part of our analysis clearly shows that the multiples are up across the board, so even when the company is not taking on the risk of early-stage hope, they are also paying much more for on-market revenue.
So we don’t explicitly value the early-stage programs, this is in the eye of the beholder, the issue is that acquirers are paying more than they used to for early-stage generally across the board.”
Novasecta’s research for the Financial Times was also picked up by FiercePharma. To view the article, click here.
This research was also reported on in a Pharma Letter article, which can be read below:
“People are taking more risk and paying for hope.”
That is the summary of John Rountree from pharma consultant Novasecta on the findings from his report on the value of mergers and acquisitions (M&A) in the pharmaceutical industry since the financial crash of 2008.
The senior consultant titled the research The era of cheap capital has led pharma to over-pay for M&A: This is risking the future of a vitally important industry.
Novasecta examined all pharma M&A activity in two cohorts, from 2009 to 2012 directly after the financial crash, and secondly in the years from 2014 to 2016.
Pharma M&A was costing twice as much last year as it was in 2015, and median deal value to sales multiples were at an extraordinary level of 39 times in 2016.
Those were two of the findings, as were figures showing that the number of high-risk, high-growth pharma deals has increased five-fold in just five years, and in that period, pharma deal value has increased by 2.3 times.
Worth twice as much?
In the comparison, it was clear that pharma is executing radically more M&A deals of significantly higher value, paying much more for revenue, and taking more risk than it used to.
The total volume of major deals worth at $1 billion is driving most of the increases, and has more than doubled, from $170 billion to $420 billion.
USA-headquartered companies have continued to dominate this $1 billion+ deal flow, with 60% of global deal value, while European companies have doubled their share to 33%, largely at the expense of Japanese companies that have almost withdrawn from big deals in the last three years.
The report goes on to say: “Novasecta’s conclusion is that pharma M&A has got out of hand. The companies that are being acquired cannot on average be now worth twice as much as they were only five years ago.
“The pressure for companies to over-pay for acquisitions that give short-term growth is intense, and the era of cheap capital has exacerbated this phenomenon.
Vulnerable to political and economic uncertainty
The report adds: “The short-term shareholders of the acquired companies may well make money as share prices ramp up in the expectation of being bought out at inflated prices.
“But the balance sheets of the acquirers are being raided to fund this, making such companies more vulnerable to the significant political and economic uncertainty that has been unleashed in the last year in Europe and the USA.”
The report suggests that pharma companies stop resorting to so much quick-fix M&A if they are to continue to be able to invest in the innovation required to create new medicines for the world.
Instead companies should focus on returning on their roots by driving value for their shareholders through creating and sustaining distinctive capabilities, while partnering with other companies and institutions to leverage the best skills of each.
The M&A spree does not benefit over-payers in the long term, particularly given that the two main economies driving pharmaceutical profitability, those of the USA and Europe – are facing such political upheaval.
In The Pharma Letter’s own M&A analysis from 2016, it emerged that there were some signs of a slow-down last year, with the number of deals done down on the record total of 2015.
In light of the announcement of Novartis’ and Reckitt Benckiser’s (RB) Q3 results, John Rountree, was invited on CNBC to discuss how their differing approaches affect their Q3 results respectively.
John highlights the continued strategic drive towards an innovative medicine focus at Novartis, with the spin off of Alcon earlier this year and GlaxoSmithKline’s acquisition of Novartis’ stake in their Consumer Healthcare Joint Venture, in 2018.
John touches upon several of the challenges at RB and how its Consumer Health focus is a tougher business model, with tighter margins and higher competition in local markets.
Margins are a topic that is in increasingly on the minds of pharma executives and an issue we have highlighted before.
In terms of where the two companies are on their journey towards strategic focus they again differ. RB has appointed a new CEO and CFO in 2019 but the change in leadership will likely only be felt in the medium to long term. This is where Novartis is now seeing rewards, as the 2017 appointment of CEO Vasant Narasimhan now begins to take effect and his strategic focus delivers results.
Sanofi has appointed a new CEO, Paul Hudson, to revive its slumping stock price and a pipeline that’s been slow to deliver.
Hudson highlighted a few of the areas he will focus on at Sanofi cancer, RSV vaccine and China opportunities, and Bloomberg asked Novasecta for their opinion on how he can achieve his goals:
“I suspect they will double down on specialty care because that’s where the growth is most likely going to come from, that requires making some tough calls, probably doing some M&A and continuing to streamline R&D.”
It will be interesting to see if Hudson can translate his success at Novartis to Sanofi and what lessons can be learnt from the MidPharma sector.
Biopharma is experiencing a wave of new capital from private equity, with the influx of investors bringing exciting possibilities to the sector. Biopharmas need to consider how they can capitalise on private equity’s entrance to achieve their strategic goals by positioning themselves as buyers, sellers or competitors to private equity.
Novasecta has explored for MedNous why the biopharma sector is now an attractive area for private equity. In her article Emma explores:
• How private equity firms are entering the market
• How biopharma can maximise the availability of new capital
• How biopharma should position themselves to private equity
The trend of PE entering the market brings our client work into the spotlight where we help clients form strategies that suit their ownership structure and support clients to protect against market changes and address margins.
© 2019 Evernow Publishing Ltd
Reprinted with permission from Mednous July/August 2019 (www.mednous.com)
The recent announcement of pharma’s latest mega-merger has not been received well by many people, except perhaps Allergan Shareholders. The deal has been highlighted as another defensive mega-merger to protect against patent expiry.
“Continuing to boost top-line growth when patents are expiring on key drugs is very difficult to achieve . . . but it will not stop companies from trying, it is a dynamic that means the merits of such megadeals do not always receive adequate scrutiny.”
Pharma M&A is a topic we have discussed frequently and how greater value can be found partnering and strategic collaborations.
With the announcement of the latest pharma mega-merger, AbbVie’s move to buy Allergan for $63bn, John Rountree, was invited on CNBC to discuss the deal and the continuing trend of pharma mega-mergers.
John questions where the value is in the deal, with Allergan’s shareholders being the only likely benefactors. He highlights the defensive nature of the move and how it is proven that mega-mergers in pharma do not often bring benefits to the acquirer, as they become unfocused, lose innovation, lose growth and ultimately end up in trouble.
Pharma M&A is a topic we have discussed frequently and how greater value can be found partnering and strategic collaborations.
In light of the most recent decision from a US court, ordering Bayer-owned Monsanto to pay more than $2 billion in damages to a couple that sued on grounds the weed killer, Roundup, caused their cancer, Deutsche Welle asked John Rountree for his views on whether Bayer could survive further lawsuits and what they can do to limit the impact on the company.
Discover John’s previous comments on Bayer here
AstraZeneca’s Q1 2019 results were released today (26th April) with their oncology portfolio helping drive profits past analyst’s expectations. Bloomberg asked Novasecta for their thoughts: “They’ve got a whole raft of approvals in the pipeline, their transition from big pharma to big biotech is happening.”
The new initiatives of Pascal Soriot are clearly bearing fruit with relatively high investment in R&D, a reorganisation of their R&D structure, high deal volume (2nd highest over the last 5 years in the Global 100) and focus on increasing R&D programme success, from 4% to 20%.
Download the article in German above or read the English translation below:
“All that just distracts”
Bayer is fighting the lawsuits over the plant protection product Round-Up. But that hides the real problems of the group, says John Rountree.
ZEIT: Mr. Rountree since acquiring the Agrochem Group Monsanto has lost Bayer 150 billion euros in value, threatening billions in billions due to claims for damages because customers claim they have gotten cancer from the use of the crop protection product Round-Up. Was that worth it?
Rountree: Great scientists work at Bayer. But like many other pharmaceutical companies, Bayer is less good at maintaining a strong and trusted public image. The legal proceedings concerning the active substance glyophosate, which was included in the weed killer round-up, are a burden for the everyday business. Within the group, only a small group of employees take care of it, especially from the legal department and the executive board. But every Bayer employee knows about it and follows the proceedings. In this respect, a shadow hangs over the company. It is easy to imagine what the board meetings are talking about: legal risks, the current status of procedures and possible outcomes. It’s not so much about issues like growth, innovation, research, about things that drive a business forward, but about how the process goes. No matter how the proceedings go, Bayer will not break. But the procedures damage the reputation. It does not make it easier to find new talents. These are all side effects that will show in the performance in a few years. They do not settle down immediately. In that sense, the Monsanto acquisition is a burden for Bayer.
ZEIT: So, was it wrong to want to become one of the largest agrochemical companies in the world?
Rountree: At the moment of the takeover it seemed like no alternative. There was a consolidation process in the agricultural sector. Dupont and Dow Chemicals merged into Dow Dupont and Chem China acquired Swiss manufacturer Syngenta. As you thought at Bayer, you will soon have nothing to report, if you stay small. As such, the Monsanto acquisition seemed the right move. It was about economies of scale and cost reduction. It was about defending the status quo. But: the problem with the matter was already at that time, that one did that within the group structure: one did not separate out the own agricultural division from Bayer and a new enterprise. Now you have the problems: Because Bayer is actually a pharmaceutical company and the agricultural sector is a completely different business. It will not be easy for the board and management to bring that together.
ZEIT: Before that, Bayer was also a company that was active in all these sectors. Why should this not work?
Rountree: First of all, there are the customers. In the pharmaceutical sector, they have three types of customers: patients, doctors and those who pay, insurance companies or governments. You have to be prepared for that and you have to work with this not very simple constellation. In the agricultural sector, the customers are completely different: it is the farmers worldwide. This market is a completely different one. And as a corporation, you always have to think about the customer. So it would be better if the board focused on one thing than trying to bring pharmaceuticals, consumer brands, agrochemicals and veterinary medicine under one roof. It becomes very difficult to concentrate on the necessary things.
ZEIT: The broader a company is set up, the more stable it is. In that sense, is not that wrong?
Rountree: Man can see that as a sign of stability. But one has to wonder if it would not be better to have a board that only cares about pharmaceuticals and a board that deals only with agrochemicals. You could work much more concentrated. In addition, Bayer already has problems today. Bayer’s profit margin was 10 percent in 2018, which is the worst of all major pharmaceutical companies. Then sales general and administrative overheads at Bayer are exceptionally high at 39 percent of sales. In addition, debt has risen dramatically due to the Monsanto acquisition.
ZEIT: But there are savings in the millions by the acquisition …
Rountree: … the latter is a matter of expectation. Let’s put it this way: Bayer was not overly ambitious about these goals. And the high debts are a heavy burden on the management. If you have to save and the costs have to be reduced to pay the debts, then it makes investment in growth difficult. Even strategic investments are no longer so easy. High debts dampen one’s own ambitions. Of course, it can be good for a company to cut its own costs, to clean up, to become more profitable. But if you want to invest in growth, if you want to put money into research and development, impede such austerity programs. Not only on the subject of debt, but also on the subject of profitability are competitors such as Pfizer, Johnson & Johnson or Merck are significantly better.
ZEIT: What are they doing differently?
Rountree: They have no agribusiness and focus on what they do well. Above all, the US companies are much less widely positioned. And that’s good with pharma: you want a board that is extremely focused and can focus on the business. An exception might be Johnson & Johnson, which are broader but have a federal structure, meaning that the individual units are more independent. In addition, few pharmaceutical companies still make large acquisitions or form mergers.
ZEIT: How is this an advantage?
Rountree: Instead of taking over competitors, one works rather together on projects. This has proven to be a successful strategy in the pharmaceutical industry and is a trend. Take the example of Regeneron and Alnylam. These are two independently strong science-based US biotech companies. Bringing Alnylam’s RNAi expertise together with Regeneron’s genetics expertise is a win-win for the companies and for patients. For this they cooperate as independent companies. That means both keep their culture, their ethics, their organizational structure. And they can do research without being distracted by lengthy integration process. There is no need to look for synergies, there is no need to merge departments, employees are not secretly looking for a job because they are afraid of losing their jobs – all this is missing. You can just work in peace. Both sides can learn from each other and focus on their strengths. One plus one is more than two in this case.
ZEIT: But you have to share the profits in the end as well.
Rountree: But you also share the research costs and without further obstacles. This is better for the future of companies. And it works not only between big and small companies but also between big and big ones. For example, Merck cooperates with AstraZeneca in the field of cancer research. Both companies want to learn from each other. And they refrain from buying one another. Imagine if both had come together: A gigantic company would have emerged, the merger would have employed and distracted employees for years. The Monsanto takeover by Bayer has been running for two years. A lot of energy is used on it, the employees and the board are distracted, meanwhile others cooperate and can do research and development without being distracted.
ZEIT: What should Bayer do to your opinion now?
Rountree: It’s difficult at the moment. One should outsource the agricultural sector and lead independently. Let me say it again: agrochemicals and pharma are not compatible. But at the moment this is hardly possible .. In the US, the processes are running because of Monsanto and nobody knows how they go out, there are no investors.
ZEIT: You advise pharmaceutical companies worldwide. How much easier is it to be able to express one’s opinion without being responsible for the consequences of the business, like a board?
Rountree: We have a different role as consultants. I feel that our job is to provoke and challenge the board and management. We need to help them to find a different perspective and to think differently so they can make the best decision they can with confidence. And in one, I have to correct you: we have a lot of responsibility, it’s a tough business and our clients won’t ask for our help if they don’t see value from it.
ZEIT: Can you buy a pack of aspirin tablets at the pharmacy without thinking about which company made it, how it is and how profitable the pack is?
Rountree: When I see a pharmaceutical product like Aspirin I always think about the company that made it and the amazing effort and resources that it took to get it to the point where patients can get the benefit of it.
Bayer is a company that we have been asked to comment on several times before, to read our previous views click here
As the timeline for Brexit shifts and no clear statement on the future of trade, Bloomberg, revisits the perennial question for pharma of supply. They highlight Novo Nordisk keeping an inventory of insulin at more than twice normal levels and asked for John Rountree’s opinion on this crucial topic: “Keeping extra supplies on hand is only one of the challenges. Brexit raises questions about new investment in manufacturing in the U.K. and bringing talented people into the country.”
Read the full article here
With the publication of the Novasecta Global 100, John Rountree, was invited on CNBC today to expand on some of the trends in our report, and in particular how attitudes towards M&A are changing in the sector and for investors.
John highlights the low revenue growth for 6 of the top 10 companies and how mega-mergers are no longer the solution to growth, highlighting the recent deal between BMS and Celgene. Instead he underlines the importance of smaller collaborative partnerships, such as the alliance between Regeneron and Alnylam, which allows both companies to focus on their strengths whilst utilising the support of their partners. Since our inception we have held a firm belief in the value of strategic collaborations.
CNBC also delve into the topic of whether tech giants will eat away at various segments in healthcare; to which John emphasises the difference in the approaches of tech and pharma and why tech companies’ consumer focused platforms might gain good traction in the healthcare sector.
John Rountree was asked to comment on the recent share price fall of Bayer in the light of litigation issues with its now subsidiary Monsanto. Bayer made an unsolicited bid for Monsanto in May 2016, then took more than two years to close the deal, a period in which its share price remained broadly flat. Since closing the deal in June 2018 its share price has now fallen by a staggering 40%.
Now with the benefit of additional hindsight it’s even clearer that this type of mega-merger is not suited to pharmaceutical companies. Pharma leaders are increasingly recognising the more powerful benefit of focus and collaboration, and in turn investors have become increasingly wary of mega-mergers. We will be exploring this theme in more depth in our inaugural Global 100 report to be published next month.
AI is one of the hottest topics in pharma at the moment and is already starting to yield results. One area it is making significant impact is in R&D. In the last two years alone there have been several multi million pound deals with leading pharma companies and AI providers, one of the most recent being the GSK collaboration with Cloud Pharmacuticals, who we interviewed earlier this month. R&D has always been a strong area for Novasecta and given our expertise MedNous asked us to think about how pharma companies could approach AI in R&D.
For insight on what the wider pharma industry should do about AI click here
Novasecta’s Managing Partner, John Rountree, was asked by CNBC to comment on the rumours of the sale of GSK’s Horlicks brand to Unilever, in which he reflects on GSK’s continued exploration of ways to refocus its business towards innovative pharmaceuticals.
Novasecta’s Managing Partner, John Rountree, was asked by Reuters to reflect on Christophe Weber’s, CEO of Takeda, comments on the cuts to R&D after their deal with Shire:
“They are cutting quite deep in R&D and it is not clear if the amount of money they are saving is going to be beneficial or harmful. Merging R&D is never easy. There are going to be lay-offs and that creates uncertainty and disruption and sometimes the best talent just leaves.” To view the full Reuters article, click here.
This is not the first time John’s opinion has been sort on the deal having previously been asked for his thoughts by CNBC.
Novasecta’s Managing Partner, John Rountree, was asked by CNBC to comment on Takeda’s takeover of Shire, in which he reflects on “M&A becoming very expensive in pharma” and how the “innovation problem drives M&A in the sector”, both issues Novasecta has previously highlighted.
Novasecta’s Managing Partner, John Rountree, was asked by Bloomberg to comment on GSK pulling their bid for Pfizer Consumer-Health Unit. John commented “this tells you about big pharma’s attitude toward consumer health — the brutal reality is that consumer health is not as profitable as the pharma business. There is something inherently unattractive about consumer health from a profitability point of view.” Elaborating John added “There is a tremendous chance of something big, while consumer health offers the potential for cost savings, it doesn’t offer the same upside.
To view the full Bloomberg article, click here.
Novasecta’s Managing Partner, John Rountree, was asked by Bloomberg to comment on the recent Sanofi and Celgene deals. Reflecting on our experience with listed pharmaceutical companies, John commented “Pharmaceutical companies are increasingly turning to specialty areas like hemophilia because of the opportunities for higher prices.” and that “It’s all about finding niches. Pricing for cell and gene therapies remains more uncertain than some other new treatments”. For more on Novasecta’s perspective on the high prices paid to execute M&A click here. To view the full Bloomberg article, click here.
Novasecta’s Managing Partner, John Rountree, was asked by Bloomberg to comment on the threat AstraZeneca poses to GSK. John highlighted the approach of AstraZeneca’s Chief Executive Pascal Soriot commenting “Soriot took a very bold approach, saying it’s got to be about innovation and the pipeline, which means we’re going to have to take some risks. That also puts you on a more volatile path.” This is not the first time John’s opinion has been sort on the threat GSK feels from AstraZeneca, previous comments in the Daily Telegraph emphasise their different approaches to R&D. To view the full Bloomberg article, click here.
Novasecta’s Managing Partner, John Rountree, was asked by Bloomberg to comment on the perils of pharma M&A in an article that investigated the delays in development of AstraZeneca’s ZS-9 product after AZ had acquired ZS Pharma. Reflecting on our experience with listed pharmaceutical companies in general rather than the specifics of the AZ deal, John commented “The pressure to do a deal is immense” and that “If it looks right, the message on due diligence may just be, ‘just make it work because we’re going to do this deal.’”. For more on Novasecta’s perspective on the high prices paid to execute M&A click here, and on the value of partnerships as an alternative to M&A click here. To view the full Bloomberg article, click here.
In an article in the Sunday Telegraph titled “How do you turn world-leading British science into medicines?”, John Rountree was quoted in the section of the article that referred to the “Brexit elephant in the room”.
Echoing Pascal Soriot’s comments in the article that all AstraZeneca’s new capital investment was on hold due to the current uncertainty, John commented that with supply chains across different countries, if there are extra barriers and paperwork clearly that will be a deterrent to inward investment into the UK.
While it’s great to see the government and industry and academia getting together for initiatives to create great medicines, the direction that is being taken for Brexit is clearly not helpful. Pharmaceuticals is a collaborative industry, and as such the common regulations and relatively frictionless movement of people and trade within the EU has undoubtedly benefited the industry and patients to date.
With GlaxoSmithKline’s new CEO Emma Walmsley presenting her first quarterly results since taking on the new role, investors were seeking signs of her intentions for the company. A renewed focus and attention to the pharmaceuticals business were the highlights, including the planned divestment of selected R&D and on-market assets as well as a strategic review of the rare diseases unit.
In an article in The Daily Telegraph, Novasecta Managing Partner John Rountree noted that “GSK spends a lower proportion of its total pharmaceuticals revenue on R&D, at 15.4pc, than its main FTSE 100 rival AstraZeneca’s 27.6pc”, and that “It all emphasises the importance the new GSK executive team puts on stability and long-term performance, rather than high-risk and high-reward R&D.” He further added that “It does not fit as well with a view that GSK will be a magnet for developing game-changing pharmaceutical R&D innovation.”
Regarding the rare diseases unit, John’s view was that GSK’s potential sale of its rare diseases activities “will ultimately be good for patients”, explaining: “Investors that are more interested in high-upside with risk can take on this unit and give it more focus and space than is currently possible under GSK.”
Brian McGee, Principal at Novasecta, provided his perspective on the recent bids by private equity firms Cinven and Advent on German generics firm Stada in an article in Scrip. Brian stated that “Cinven have a reputation for value creation through industry consolidation, where an initial investment acts as a platform to which other complementary businesses can be booted on”. An example of this that Brian mentions is their acquisition and combination of Labco and Synlab in the summer of 2015, creating the largest clinical laboratory services company in Europe.
Brian goes on to say that as a result of know-how gained from recent investments in the space, Advent “are well positioned to extract value from the Stada business. Equally partnerships or a merger with existing portfolio companies may make sense. So I imagine that the eventual deal for Stada will now come down to a combination of final price, the quality of the post-investment business plan, and an endorsement from management. It could ultimately go to either party.”
To read the full Scrip article, click here.
Novasecta, was recently quoted extensively in an article in Pharmaceutical Market Europe discussing the advantages of being a family- or foundation-controlled pharmaceutical company. Historically a strong focus area, Novasecta has seen first-hand how family- aednd foundation-controlled companies can leverage their unique position by focusing on long-term strategies that often translate into success. The article can be read here, or below:
The austere black and white portrait photos radiate a stability seemingly at odds with a deal-making era crackling with the electrical charge of take-overs, huge share bids and speculation.
Frozen in an age where a myriad of street pharmacies pushed the frontiers of medicine, the starch-collared chemists could be viewed as a simple footnote in history, outrun by the pulsing pace of modern pharma.
But the principles laid down at the dawn of an industry by a gallery of founding fathers still survive in a group of heritage pharmaceutical companies controlled by governance committees and family members. They have been weathering economic and geo-political turmoil for generations.
While industry wrestles with the fission sparked by the $420bn worth of mergers and acquisitions over the last three years, these high-functioning firms – characterised by private, self-generating capital and heritage trading principles – are free from the jeopardy of shareholder calls and avaricious prompts from investment banks.
But they are far from living life in the pharma slow lane.
Many are prospering across Europe with their trademark long-term view and an agility that would surprise many diverted by events in the headline-grabbing M&A arena.
“There are family held and foundation firms that are successful billion dollar companies but are not beholden to shareholders and the stock market because they are run by a governance committee,” says Novasecta. “Their approach is very different from big pharma as they aren’t distracted by quarterly earnings calls and full year results which allows them to place quite big bets that may or not pay off in the short term. They are in it for the long term.
“They can operate slightly under the radar whereas if someone like Pfizer spends £50m it gets pawed over by analysts and shareholders and everyone second-guesses if it is a good or bad idea.”
European pharma has a number of family-run or foundation firms that stick to single condition areas, using generations of knowledge to drive innovation. They include Novo Nordisk, Chiesi, Esteve and dermatology experts LEO Pharma. Founded in 1908 as a pharmacy in Copenhagen by August Kongsted and Anton Antons, LEO now employs 5,000 staff and offers treatment solutions to people with skin diseases in more than 100 countries.
“The main objective for me and everyone in LEO is to pass on a company that is even stronger that what we inherited,” says Gitte Aabo, president and CEO of LEO Pharma. “We are constantly striving to help more patients and help them better. That is the main driver for everything we do.
“Our guiding principles of trust and integrity come from 1908 when pharmaceuticals were made at local pharmacies and could deviate from one to another in terms of safety and efficacy. Our founders believed that when people are sick they must be able to trust their treatments and what they deliver without side effects. That is still ingrained in us.”
LEO Pharma, like many unlisted companies, can plough R&D and target selection at its own pace but financial husbandry is critical as it cannot go looking for top-up funds or angel investors.
“It does limit us to some extent and, in a world where there are many unmet needs in terms of people living with skin diseases, we have an obligation to evolve rather than just protect what we have achieved,” adds Aabo.
“Being self-financing is a challenge and puts a certain limit on how fast we can grow and expand the company. We strongly value partnerships but there is a limit because we need to provide the money for that ourselves. In recent years we have expanded a lot and become a global company but opening in a new market, where you are less well known and cannot offer share options, can make it a little harder to attract the right people which is a frustration.
“But it also strengthens us because we have an ownership structure that means we can take a longer-term perspective than if we were on the stock exchange. It gives us freedom.
“We can stay in markets where other companies might tend to pull out. We have the view that if there are people there who need our treatments then we want to be there even if the economic development may be negative for a few years. We have applied that principle to our presence in the Middle East where we have been for 50 years and have built up a strong standing.
“We entered the Russian market a few years ago and the economics, driven by factors such as decreasing oil prices, worked against us but we stayed because we believe in the market and can use a different lens than if we were just focusing on short-term performance.
LEO Pharma is just an example but that steely gaze has helped other companies such as Novo Nordisk, Chiesi and Esteve carve productive channels rather than stretching themselves across unchartered landscapes.
Novasecta also believes that serial acquisition is not always a Holy Grail. “Companies like M&A business because it can act as a short-term fix,” adds Corbett. “They have a pipeline; they have some cash and some investment bankers knocking on the door saying ‘you should be buying a company or a business unit’. But a lot of data suggests that it can foster a lack of focus because you then have to integrate two new businesses and frequently you have overpaid.
“There is a bit of a gold rush out there, particularly in oncology, even though some of the targets have fairly dubious value propositions. But a foundation company can invest in creating new chemical entities in their field and, if that means revenue drops for a couple of years, so be it. They don’t have to justify themselves to anyone but the foundation board or the family itself.”
Novasecta research showed that the cost of acquisitions doubled in 2016 compared to the previous year, with the median value of the acquisition running at 39 times the value of the bought company, compared to 19 times the value in 2015. A staggering $420bn in large deals was traded between 2014 and 2016, more than double the $170bn recorded for 2009 to 2012.
With political uncertainty across Europe and the world, huge figures and volatility are likely to light up the industry through 2017.
“But there is a lot to be said for going at the same clock speed as it takes to develop a new medicine. This is not Zara pushing out a new clothing line for the autumn and turning a profit the next quarter,” adds Corbett. “Big pharma could learn a lot from the more studious approach of family and foundation firms.”
That view is shared from LEO Pharma’s HQ, just north west of Copenhagen. “I often wonder if sometimes some of what drives M&A generally is the impact on share price and the ability to demonstrate action,” says Aabo, who joined LEO as a financial assistant 25 years ago. “That is not what drives us. Our only measurement is if it will enhance our ability to innovate and provide better treatment to patients, if yes then we will consider it.
“I wonder at the price tags on some partnership acquisitions and how they will be profitable.”
An important factor within the foundation structure is employee engagement, with most recording a low turnover of staff.
“There is a strong sense of purpose that the value we create remains in the company and is invested for the benefit of patients,” adds Aabo. “We want to put the patient at the centre of everything we do and I don’t think you can do that without having a caring culture at the heart of the company. It gives a special trait to the company that is very powerful.”
Research by Copenhagen Business School found that 60% of foundation-owned firms last more than 50 years compared to 10% of comparable companies with different ownership models. Staff retention and board level stability is much more favourable and their capital structure, with lower levels of debt, makes foundation firms less vulnerable to economic crisis.
It is clear the benefits leach into culture as a McKinsey survey of businesses owned by families and founders showed that 90% of board members said that family values were present in the organisation with 70% saying they were part of its day-to-day operations.
The photographs of the founding fathers who started out more than a century ago still have resonance in a world where the eye-watering financials can obscure a sense of purpose and patient focus that underpins most of the industry.
John Rountree, Managing Partner at Novaescta, was asked by Scrip to comment on Sanofi’s recently reported on-target Q4 results and their outlook for the future. While these results likely reassured investors and analysts that their strategic plan is on track, the real test for Sanofi is yet to come, with multiple critical catalysts expected in 2017. These include the launch of Dupixent (co-developed with Regeneron) in atopic dermatitis, as well as the conclusion of a patent infringement case filed by Amgen resulting in an injunction on sales of Sanofi’s Praluent. Additionally, after missing out on acquiring Medivation and Actelion, M&A is likely top-of-mind for Sanofi’s leadership.
John commented that Sanofi are “stable, profitable, but that said, their overall performance is flat, posing the question: where’s the growth going to come from? There’s a lot riding on Dupixent. And while Genzyme and vaccines are doing well, the bulk of the business, representing some 70% of it, aside from Genzyme and vaccines, is either flat or down from previous performances. That’s a big chunk of their business. And it needs to be rejuvenated. Sanofi’s R&D as a percentage of sales in 2016 was 13.6%. That’s pretty low compared with some of their peers. Compare it with AstraZeneca PLC, which okay it’s a pure-play pharma but they’re investing 26% of sales into R&D, while Celgene Corp. is investing 22% of sales into R&D, while GSK [GlaxoSmithKline PLC] ‘s proportion is 16.2%.”
On the M&A front, John added that Sanofi “should resist pressure to do M&A; I don’t think that’s what Sanofi need at the moment. M&A is very expensive, and Sanofi already have a lot of debt. It just increased by €3.7bn during the past year, bringing it now to just under €17bn.” He doesn’t think such a move would be consistent with investing for the future, which is what Sanofi needs. “They’ve really got to keep working on making their R&D engine deliver”.
To read the full Scrip article, click here.
The recent J&J-Actelion deal is great for the pharmaceutical industry, reminding us all of how valuable the capabilities to continuously convert drug discovery activities into fantastic medicines really are.
As well as appearing on CNBC on the morning of the deal (video below) to explain this perspective, John Rountree was extensively quoted in Scrip’s analysis of the J&J/Actelion deal. John described Actelion’s strategy as “a great example of creating a structure to defragment R&D – companies that bring together science, commercial insight and medical skills on a continuous basis, like Actelion did and the R&D NewCo now will, rather than one-shot virtual biotechs”, adding “It will also power up Actelion’s commercialization by having a large and well-funded owner that has access to the important US capital market.”
John also raised the broader implications for the industry, saying “This case really challenges how to think about the value of R&D. It’s a great wakeup call to the industry of the value of really good research and development. And what it shows is that stock market analysts have traditionally not valued discovery assets or discovery capabilities within an organization, because it’s too far away timewise and it’s difficult to affix financial numbers to. The people who really can do strong drug discovery can free the drug discovery from the constraints of being tied to only certain therapeutic areas. That has been the ethos of Actelion – they will go out after where the mechanism of discovery takes them, which is a very powerful ethos in today’s pharmaceutical industry.”
John Rountree, Managing Partner at Novasecta, was today asked to provide commentary in an article in The Telegraph on the challenges of recruitment in the pharmaceutical sector following the UK’s vote to leave the European Union. John stated that “we’ve been hearing quite a lot of anecdotal evidence that [pharmaceutical executives are] not so much worried about the technicalities of labour restrictions, such as filling in visas, but about a general feeling among their peers that they are not very welcome in Britain. People are looking at their futures and saying: ‘Is this a country I will be welcome in and where I will raise my family?’ I have heard examples of people that have turned down jobs because of this kind of malaise.”
John goes on to say that “R&D is about brains, motivation and ambition of your people, so when more than 50pc of them are EU citizens, that clearly has an impact on productivity. All of the UK-based companies I spoke to said they were having to reassure employees that they are still important to the organisation. One senior person was in the middle of a decision cycle. The company was European and looking at its UK footprint in terms of R&D. It has originally considered expanding its development activities here, but it had become less attractive to do so and the company may well revert to building development capacity in its home country of Italy.”
Novasecta’s Managing Partner, John Rountree was asked by Bloomberg to comment on the most recent development for Actelion, that it “has entered into exclusive negotiations with Johnson & Johnson regarding a possible strategic transaction”. He said that J&J, of all the big pharmas, is the best one for Actelion, as it would give the Swiss company access to the U.S. capital market and may allow Actelion to maintain at least some independence. John added that J&J perhaps might be more hands off than some other potential acquirers. To view the full article, click here.
John Rountree provided his earlier thoughts to the Financial Times, a major UK financial newspaper, on the initial potential Actelion takeover by J&J. Amidst reports of Actelion fighting to keep its independence in the proposed deal, John said that “there is still a great deal of value in remaining independent, but they could do a deal in the way that Roche and Genentech [the $47bn deal in 2009] have done. It could be win-win.” To view the full article, click here.
John was also quoted in a Reuters article discussing J&J’s attempted takeover of Actelion. In the article, John states that “a structured transaction allowing Actelion to benefit from J&J’s scale without losing its independence could work for both sides.” He goes on to mention that “one option might be for J&J to mimic Roche, which bought 60 percent of Genentech in 1990, leaving it to operate independently, before acquiring the rest of the biotech in 2009.”
Interestingly, Actelion tied for third in the MidPharma performance rankings in Novasecta’s 2016 European MidPharma Report, perhaps foreshadowing its appeal as a takeover target.
For a more general take on partnerships versus M&A in the pharmaceutical industry, click here.
John’s thoughts were also reported in a Pharma Letter article, which can be read below:
Since Swiss biotech Actelion (SIX: ATLN) confirmed that it was the subject of a takeover bid by US health care giant Johnson & Johnson (NYS JNJ) on Friday, the eyes of the pharma world have been firmly fixed on the Basel-based company.
Shares in Actelion rocketed by an initial 17% on the news on Friday, and on Tuesday they surged up a further 10% to close at 209 Swiss francs, just off a record high, following news of a higher offer, which was reported by Reuters.
Actelion apparently prefers a deal which would see it combine with part of J&J while remaining an independent company, though the US firm favors a takeover and its stance would appear to be confirmed by the higher bid reports.
Despite the reported resistance from Actelion, it might be the company that gains more from the two out of a takeover, said John Rountree, director of pharma strategy specialists Novasecta.
Mr Rountree said that the temptation to overpay for successful companies was one of the impacts of the new era of cheap capital since the financial crash.
“The prices pharma companies are paying for research and development (R&D) assets and for companies with R&D assets have been rising of late,” he said. “This will mostly benefit the shareholders of companies that are acquired rather than vice versa.
“Actelion’s founders including chief executive Jean Paul Clozel and his wife Martine are right to be exploring ways to monetize their share in a frothy market for pharma acquisitions. If they can manage this while retaining independence, they will do well.”
Mr Rountree described Actelion as a highly successful ‘mid pharma’ that has benefited from its independence and focus.
“Unlike many bigger pharma companies it has developed and commercialized its own portfolio rather than resorted to buying it from biotechs or other pharma companies when the pipeline was empty.
“European mid pharmas have been outperforming big pharma on many dimensions, so it is not surprising that big pharma want to acquire them.”
Not many such European mid pharma companies are available to be acquired – except possibly at astronomical prices – because of foundation or family ownership and control, with Netherlands-incorporated drugmaker Mylan (Nasdaq: MYL), for example, paying twice the pre-deal share price for Meda, a European mid pharma previously with major shareholding held by the Olsson family, to acquire it earlier this year.
If Actelion were to be acquired, Mr Rountree said that J&J would be the ‘least worst’ big pharma company to take it over.
“J&J has a relatively decentralized and diverse business model that copes better with diverse companies than the likes of Pfizer (NYSE: PFE),” he explained. “A structured transaction allowing Actelion to benefit from J&J’s scale without losing its independence is more likely to create value for both parties than an outright acquisition.
“The story of Roche-Genentech, where Roche (ROG: SIX) took 60% of Genentech in 1990, left it to be more or less independent, then the rest of the shares 19 years later, is a helpful precedent, particularly as many of the Actelion executives are ex-Roche.”
Uncertainty over the deal continued to affect Actelion’s share price on Wednesday. It had dropped by 2.6% to 203.50 Swiss francs by lunchtime.
It was recently reported that pharmaceutical companies Pfizer and Flynn Pharma may face a damages claim from the NHS related to overcharging, following their fine for substantially increasing the price of phenytoin sodium capsules. In a front page story in the Business section of the Daily Telegraph on this matter, John Rountree, Managing Partner at Novasecta, commented that the entire drug industry was “under massive scrutiny” from regulators over the controversial issue after several high-profile cases in the US. He went on to say that “this is not so much a warning shot across their bow, but a reinforcement that they need to be on their toes. A few high-profile cases have tainted the whole industry.”
The Telegraph has put out an article reporting that Sweden is vying to be the home of the European Medicines Agency (EMA), currently headquartered in London’s Canary Wharf, once the United Kingdom leaves the European Union. John Rountree, Managing Partner of Novasecta, commented in the article that “if Britain really does leave the EU, the message we get from Continental Europeans is very clear that the EMA cannot remain in London, it is a fundamentally an EU institution.” He goes on to state that “some pharma executives in the UK are perhaps still hoping that there will be some way of arranging it to remain.” To view the full article, click here.
John Rountree, Managing Partner at Novasecta, recently chaired a panel at the Labiotech Refresh conference in Paris on the subject of microbial resistance. The panel included Achim Plum, Chief Commercial Officer at Curetis, Franck Lescure, Partner at Auriga Partners, and Derry Mercer, Principal Scientist at NovaBiotics. The conversation was very interesting, and a number of topics were discussed, ranging from up-and-coming disruptive innovation in the field, to R&D incentives, to public markets and venture capital. The panel was followed by a lively Q&A session with the conference participants.
It was recently announced that, to make up for the loss of EU funding for R&D post-Brexit, Theresa May has pledged to increase the UK’s investment in science and technology by £2 billion per year by 2020. In an article in Reuters, Novasecta, said that it is only a “small step” towards calming Brexit nerves in the industry. Putting the investment in perspective, we state that “it is, for instance, significantly smaller than the 26 billion pounds the U.S. government invests in the National Institutes of Health every year, and therefore may not make the UK as competitive as hoped.”
Since the financial crash of 2008 the world has got used to a new era of cheap capital and sustainably low interest rates. This has created a new funding environment for pharmaceutical research and development (R&D), which is the quintessential capital-hungry, long-term and high-risk business endeavour. The new funding environment has in turn had a profound effect on the way pharmaceutical R&D has been prosecuted, mostly for the better.
The most visible consequence of the new funding environment has been a fragmentation in the industry’s approach to R&D. New types of companies and funds are being formed and expanded to meet the needs of investors that are seeking higher returns than are available from bonds and low interest rate investments. Similarly companies and funds are evolving to meet the needs of investors looking for safer returns that are more bond-like in character, but with higher yields. Though the fragmentation has created some inefficiencies in R&D, one of the positive consequences has been the emergence of a new and highly focused breed of integrators that are driving innovation to benefit both investors and patients.
In the 1970s to 1990s when capital was relatively expensive compared with today, a diverse group of integrated pharmaceutical companies essentially funded the bulk of the industry’s R&D themselves from the significant profits they reaped from their successful products. The result was a tremendous wave of new drugs and innovations with huge benefits to healthcare systems and patients.
Yet having essentially satisfied their investors with the significant profitability that came from previous success, sadly many pharmaceutical companies became somewhat complacent. After the market crash of 2008, there was a wave of downsizing, cost-cutting and R&D site closures as companies faced a new level of scrutiny from their investors.
In parallel with the financial uncertainty created by the market crash in 2008, the huge diaspora of ex-Big Pharma R&D scientists and executives needed to find new homes. The result is today’s industry structure: a fragmented and highly connected ecosystem of four types of company: first the surviving massive, integrated, profitable and relatively stable Big Pharma companies covering a broad range of technologies and therapy areas; second a multitude of small pre-revenue Biotechs that typically focus on R&D in a specific technology (small molecule or biologics), therapy area, and/or element of the value chain; third an increasing number of integrated MidPharma companies that are both profitable and focused in some way; and fourth a plethora of Contract Research Organisations (CROs) that operate on a service basis to the Big Pharma, Biotech and MidPharma companies, and do not take on the risk of R&D.
The new ecosystem has increased the transparency of pharmaceutical R&D to investors. No longer is R&D investment hidden in the big campuses and profit and loss accounts of Big Pharma. The industry ecosystem has evolved in concert with the evolution of an expansion in the scale and reach of financial intermediaries between pension funds and the companies that are engaged in pharmaceutical R&D. The most notable has been the resurgence in pharmaceutical venture capital funds, both independent and within corporates, but other private equity funds that have invested in profitable and growing service companies and specialist marketing companies have been similarly influential.
The fragmented ecosystem of pharmaceutical R&D has led some companies to suggest that it is best to leave the small biotechs to do the early stages of R&D and the more well funded Big Pharma to do the later stages of R&D and commercialisation. Today’s most notable exponent of this approach is Allergan, which actively promotes its ‘Open Science’ approach comprising its “best-in-class product development and commercialisation platform” as a “magnet for game-changing ideas and innovation”. The consequence of this line of thought is that the very small biotechs that are providing the fuel for the larger companies to develop and commercialise are becoming extremely expensive to purchase. Allergan’s acquisition of Tobira for an up-front of nearly 500% of the previous day’s closing share price is but one admittedly extreme example.
As the price of external innovation and small biotechs has increased, so has the size of venture capital fund raises that are betting on creating the clinically proven science that will attract a high price from Big Pharma when acquired. This self-reinforcing dynamic can only continue to work while investors in Big Pharma tolerate the prices paid for such science, which indeed when externally acquired have less effect on their quarterly earnings (EBITDAs) than the hard work of internal R&D. This feels eerily like the old days when the relatively cheap capital from inside highly profitable pharma companies went into often inefficient, internally-focused R&D and M&A.
John Rountree is the Managing Partner of Novasecta, a European strategy consulting firm for pharmaceutical and biotech companies.
© 2016 Evernow Publishing Ltd
Reprinted with permission from Mednous November/December 2016 (www.mednous.com)
For biotechnology, the UK capital market is very much driven by its relationship with other international markets, most notably the US and continental Europe. The specific qualities of these larger markets have a substantial impact on the UK, creating a unique landscape of capital and subsequent innovation. This phenomenon is readily apparent in both early-stage and later-stage pre-IPO biotech fundraising. Faced with difficulties raising capital at home, UK biotechs are increasingly relying on funding from their US cousins rather than their more risk-averse, ‘stay-at-home’ continental European neighbours.
In early-stage VC funding, the UK punches above its weight
Early-stage biotech funding is one area in which Europe seriously underwhelms compared to the US. Globally, the US possesses the most significant abundance of venture capital (VC) firms that invest in early-stage biotech companies. From 2013 to 2015, almost $7bn was invested in more than 550 pre-clinical/discovery-stage companies in the US by over 380 different firms, compared to $1.5bn in just over 150 companies in Europe. In the UK, these numbers fall to around half a billion dollars being invested in 34 companies, an average of approximately 10 early-stage UK companies being funded by UK VC investors per year. This may seem small relative to the US, but the UK commands a third of the early-stage capital invested in Europe, with the average early investment size in the UK nearly $15m – larger than the US.
Early-stage UK biotechs are benefiting from US but not continental European investment
Over the last decade, the US has been vastly ramping up its funding of early-stage UK biotechs. In 2006, US-headquartered firms invested in only two early-stage UK-based biotechs. Fast-forward to 2014, and this number had grown to 17, indicating that UK biotechs are increasingly turning to the US for early-stage equity funding, and US VCs are likewise turning to the UK for novel science.
Intriguingly, these biotechs are not turning to continental Europe, which maintained consistently lackluster investment in just two early-stage UK biotechs in both 2006 and 2014. This trend of UK biotechs finding more success with US rather than continental European investors is at least partially driven by a ‘follow the leader’ investor mentality. Although there are a myriad of funds in Europe, there are fewer early-stage VC firms that lead deals in high frequency, with Seventure and Sofinnova Partners being the most notable exceptions. This thereby triggers a quasi-bottleneck of investment funding while interested firms bide their time for a leader to emerge. Another contributor to this trend may be that continental European firms place more of an emphasis on investing in companies in their own countries or regions, whereas US investors have different priorities.
US crossover investors create later-stage investment windows in the UK
Looking towards later-stage companies, one of the more disconcerting remarks often made by biotech folk in the UK is that if Jim Mellon or Neil Woodford aren’t funding a start-up after its first few rounds, it doesn’t have much of a shot. This may be overly dramatic and simplistic, but it encapsulates well the prevalent sentiment that homegrown capital is scarce, especially if one wants to raise £50m+.
Of particular note to UK companies looking for a significant cash infusion are US crossover investors. Over the last few years, when a firm has wanted to raise substantial funds, a growing trend has been for strong contributions to come from hedge funds, mutual funds, sovereign wealth funds (e.g. the lively Alaska Permanent Fund), and other crossover investors – for the most part based in the US. Examples of UK companies recently funded by these sorts of firms include Adaptimmune, Immunocore, and NuCana. The involvement of these funds has pros and cons, with the advantage being that when these players get involved, ‘hard’ (not to mention interesting) science that needs solving tends to get its well-deserved time in the spotlight. Strong IPOs are often the result. On the other hand, these investors tend to stop ‘crossing over’ when general market sentiments are weak, causing vicissitudes of optimal fundraising ‘windows’ in the markets they tend to invest in.
A creative combination of local and US capital is key to UK biotechs
In one sense the UK gets the worst of the European and US markets, having to deal with the risk-averse, isolationist European ethos and the cyclical nature of later-stage US crossover funders. To handle this, a creative and international focus from an early stage is key. Relationships with US investors should be developed and nurtured as soon as possible, for both early-stage and pre-IPO crossover rounds. Additionally, creative and unorthodox strategies should be considered to access US capital, as exemplified by UK companies such as GW Pharma, which utilised a NASDAQ ADR to access public funds, and Astex Therapeutics, which achieved a NASDAQ listing through a merger.
This certainly does not mean that UK biotechs are in a tough position, however. The UK has local green shoots in Woodford’s and Mellon’s funds, a significant improvement from just a decade ago. The US and, to a lesser extent, continental Europe provide biotechs with a ‘second chance’ can they not raise their full round in the UK, with the highly-developed financial services industry helping to leverage these international relationships. In fact, as long as UK biotechs look broader than the UK capital market, they are well placed to benefit from the stronger and larger US and European capital markets.
In an article in The Telegraph regarding GSK, Novasecta Managing Partner John Rountree commented that, for them, “Brexit is both help and hindrance. Sterling’s weakness gives some short term benefit. However longer-term Brexit creates material uncertainties for regulation, supply chain, packaging and manufacturing, that depending on the eventual EU exit may be very costly.”
In terms of Bayer, in an article in Bloomberg, Principal Brian McGee stated that “the story that is being put through by Bayer is, ‘look how great pharma is doing’ and they’ve in some ways underestimated the market sentiment, which is now valuing them as three big businesses. You can’t have two businesses that aren’t exciting, that aren’t doing well, masked by the pharma business, which is doing extremely well.”
John Rountree, Managing Partner of Novasecta, was recently quoted in the Sunday Telegraph, one of the UK’s leading Sunday newspapers. For an article entitled “Ministers snub life sciences industry’s report on Brexit” John was asked for his perspectives on comments received by the newspaper from UK Government sources that a recent industry report “was basically the industry whining about Brexit and it was not very constructive and has gone straight into the hopper”. The UK EU Life Sciences Transition Programme Report that was referred to was issued in September based on work co-chaired by the CEOs of UK Big Pharmas AZ and GSK, and concluded with four priority areas: Innovation (keep access to EU funding for science), Commercial and Trade (maintain free trade with EU), Regulation (maintain alignment with the EU regulatory system), and People (facilitate ease of movement for talented/skilled people). John commented that the points in the report were “fairly non-controversial”. After all, it’s hard to find a pharma business that does not like state funding for science, free trade, a simple regulatory system and easy access to talent. For our initial and more thorough take on Brexit post-vote, click here. We’ve also just completed a series of interviews with 20 top European pharma executives to ascertain their thoughts on what to do about it, which we will publish soon.
Brian McGee, Engagement Manager at Novasecta, was recently quoted in a number of news sources on GlaxoSmithKline’s decision to appoint Emma Walmsley as Chief Executive:
- Reuters: Breaking the mould – GSK picks Big Pharma’s first female CEO
- The Telegraph: GlaxoSmithKline might not be heading for a major shake-up under Emma Walmsley, but she will still forge her own path
- The Daily Mail: Breaking the mould: GSK picks Big Pharma’s first female CEO
- Financial Express: Breaking the mould: GSK picks Big Pharma’s first female CEO
- Scrip: GSK’s New CEO Designate Walmsley Fortifies Volume Growth Strategy
In these articles, Brian comments that Walmsley is an “inside-outsider” who understands how to effectively operate, but with a valuable external perspective on the business through years working in fast-moving consumer goods. He states that this background should allow her to bring a fresh and more commercially astute perspective to investment decisions.
John Rountree, Managing Partner of Novasecta, was recently quoted in The Times, a major UK newspaper. In an article discussing Shire, a highly successful mid-cap pharmaceutical company headquartered in Ireland with strong growth and a high share price rating, John offers a number of cautionary messages. He asserts that Shire is making the risky transition from mid-cap to Big Pharma, and that the complexity of the business and the research pipeline is now more of a concern than it was after Shire’s previous deals, such as the $6 billion purchase of Dyax last year. John states that “they can say they have done integration very well but those have been $4 billion to $6 billion deals: this is $32 billion. They have got to prove themselves. They’re talking about leverage, synergies and savings. This has become a new game.”
John goes on to comment on pricing pressure from governments, insurers and health service providers, another concern for Shire in the long run as it is becoming increasingly dependent on oncology and rare diseases after the Baxalta acquisition. “Rare diseases and oncology are almost by definition high-price markets. How long can it last in the US?” he was quoted as asking.
John Rountree, Managing Partner of Novasecta, was recently quoted in the Sunday Times, the UK’s leading Sunday newspaper. In an article entitled “How to Make Our Scientists Very Mad” John offers commentary on the risks of Brexit to early-stage biotech companies, stating that the potential for decreased funding (from Horizon 2020, for example) may reduce the attractiveness of life sciences “hubs” such as London, Cambridge and Oxford. The article goes on to say that diminished research output of academia and biotechs from these hubs, combined with the likely relocation of the European Medicines Agency (EMA), may delay new medicines reaching British patients by two to three years.
The UK’s recent Brexit referendum will have profound and likely negative consequences for the European economy. Globally-minded pharma companies have less to worry about than other less profitable industry sectors in which the companies are more reliant on the UK and/or Europe consumer economies alone. But all companies of all sectors will face economic headwinds.
Strong pharma companies are used to uncertainty and have the capital and know-how to deal with it: most have emerging markets presence in countries that can be highly volatile economically and politically, and drug R&D and commercialisation itself is a highly risky business.
By contrast pre-revenue and emerging small biotech companies will find themselves more exposed to difficulties in fund raising from jittery capital markets, difficulties with venture funds as an asset class, and potential reductions in European grant/academic funding.
European ‘MidPharmas’ can potentially benefit from their private and more patient family/foundation capital (when they have it) as well as partnerships with biotech companies that need funding and capabilities to advance their assets.
Novasecta believes that pharma/biotech companies alike should increase their degrees of strategic flexibility, by making sure that their commercial, R&D and supply chain strategies are robust to potential economic turmoil ahead:
(a) Commercial: Carefully assess the balance of medium-long term regional commercial footprint across Europe, USA, Asia and the rest of the world, and consider an increased use of commercial partners to mitigate risk.
(b) R&D: Create increased flexibility to scale R&D investment up and down depending on profitability by considering a global R&D footprint with more externalisation, collaborations, and partnerships.
(c) Supply Chain: Increase flexibility and global reach through out-sourcing and partnerships with regional players to mitigate the risk of individual country economic difficulties.
The uncertainties in Europe faced by pharma/biotech will increase the pressure on management to (a) focus on what they are uniquely good at, (b) create flexibility, and (c) make more use of partnerships and organic growth rather than M&A to create value for their shareholders and patients. In the long run this is no bad thing for the industry. In the short run we expect some companies to find life difficult and others to use the headwinds to shape up and thrive.
1. The UK’s referendum vote was a wake-up call to Britain’s political parties rather than a definitive governmental decision to leave the EU:
All of Britain’s major political parties recommended that UK remain in the EU, yet on 23rd June 2016 out of a 46.5m electorate, 17.4m Britons (37%) voted for the UK to leave, 16.1m (35%) voted to remain, and 13m (28%) chose not to vote. Such is the sorry state of the UK’s political parties and democracy today.
The UK populace is far from aligned on the issue: London, Scotland and Northern Ireland voted to remain, the rest of England and Wales voted to leave. Politicians will find it very tough to bridge this divide.
2. UK has not exited from EU yet: full exit may take many years or never happen:
The UK Prime Minister has resigned, and he will not trigger “Article 50” to formally start the exit procedure. This will be the decision of the next Prime Minister, who will be chosen by the Conservative party, not the electorate.
The UK’s two major political parties are in turmoil, so there may be another General Election in the UK before any government feels it has the mandate to either trigger Article 50, delay triggering it, not trigger it, or indeed hold another referendum. This is a UK government decision, not the UK electorate’s or Europe’s. Anything is possible.
If Article 50 is triggered, negotiations to leave the EU will take 2 years, and trade negotiations between UK and Europe could take many more years.
3. There will be significant political and economic headwinds in Europe for many years to come:
As a potential catalyst to political and economic instability in the Eurozone, the UK referendum has been a significant and unwelcome blow to European economic growth and capital availability.
The UK’s deep and global capital markets are important to both Europe and the pharma biotech industry, even though the UK economy only represents less than 3% of global GDP.
It is hard to see the UK’s referendum result creating any short to medium term advantages for the EU, the European “Project” or the Eurozone: more likely it has been a catalyst for isolationist governments, trade-reducing policies, and a capital flight from risk.
Implications for Pharma/Biotech
The “safe-haven” nature of global Big Pharma stocks coupled with such companies’ relatively high levels of profitability compared to other industry sectors allows this part of the pharma/biotech ecosystem to play a long game and as such benefit from a global presence with an associated risk mitigation against regional or local instability. Nevertheless Big Pharmas should continue to create flexibility in their businesses and focus on the areas that they have genuine distinctive capabilities in. Furthermore Big Pharmas that have been more reliant on M&A than building capabilities and partnerships to create growth may face headwinds from jittery capital markets.
Smaller biotechs, particularly those that are pre-revenue, will face increased risks through a likely shortage of risk capital: capital markets will gyrate and to some extent dry up while waiting for more economic certainty. IPOs are likely to be tougher, venture funds are less likely to provide funding as they find it harder to find Limited Partners in a context of capital markets seeking security rather than risk and upside. Smaller biotechs that rely on grant funding and government / EU funding, for example through the EU’s massive Horizon 2020 scheme, will also find it tougher to find the funds required to grow. As has always been the case, smaller biotechs will need to themselves focus down on the capabilities where they have genuine advantage and find pharma/biotech and outsourcing partners to mitigate risk and create flexibility.
European ‘MidPharmas’ are poised to benefit from both European capital market uncertainties and biotechs’ funding difficulties. Those that have global scale and that have already created flexibility in R&D and commercially can reap the “safe haven” benefits that are enjoyed by Big Pharma. Like Big Pharma they can also provide funding and support to biotechs in exchange for some of the upside of their R&D. A further potential benefit comes from the stability and long-term perspective afforded by the family and/or foundation ownership or control that is the characteristic of many European MidPharmas. Such funding does not create pressure on senior management to make strategic moves in haste, and makes the companies less reliant on M&A to satisfy investors, which again makes them less vulnerable to economic uncertainty.
In short the pharma ecosystem will be in shock for some time yet, and the full implications will take time to play out. Novasecta’s belief is that the motto “when the going gets tough, the tough get going” is the one to apply at this time of uncertainty. There are opportunities for pharma to help biotechs be successful and share in the upside, and the European economic uncertainty will create a pressure and capital discipline on all pharma/biotech companies that will ultimately make the survivors in the industry and the patients they serve much healthier.
With the rush of quarterly results from Big Pharma now past, focus moves to UK biotechs. Historically, results from these companies were mixed, frequently eclipsed by transatlantic rivals. But 2016 looks like the year in which the crown jewels of the UK biotech scene will sparkle. The question is how quickly others will join them?
Show me the money
For those that work in life sciences, long lead times and the uncertainty of medicine development are accepted and well understood. The sector has a reputation for providing solid returns over the long term and savvy investors, such as Neil Woodford in the UK, as well as many European families and foundations, realise this and allocate capital accordingly.
This provides the much needed stability and cash flow required to develop innovative medicines – without the ‘noise’ of focusing on quarterly results. Access to ‘patient’ capital, from investors that understand the timeframe and risk associated with investing in healthcare is critical for the success of a nascent biotech.
A long path with multiple steps
As capital is secured, companies can focus on the hard task of moving a product along the value chain, towards commercialisation. This transition from biotech to integrated biopharma company typically has a number of complementary and overlapping phases:
- In-house development
- Technology Access Deals
- Individual Product Deals
- Major Alliance
- Direct Product Sales
- Fully Integrated Pharma
At each stage, executives must make critical decisions that will determine the future success of the company – with each representing a significant value inflection point. In conjunction with major investors, executives must weigh the long-term benefits of such decisions, with the short-term value created. This creates temptation to create a ‘quick buck’ and not realise the full potential of the company.
Success can be substantial
At some point, all big pharma companies were small. Their path to success has been varied, frequently including fund raising, selective acquisitions and building internal capability. One area that is common to successful companies is that of focus. This manifests itself in concentration on specific technology or therapy areas, a determined approach to R&D and only playing where they know they can win – with Gilead as the classic example.
In less than 20 years, it has grown from small biotech into fully integrated pharma-company with a market capitalisation of $110bn. At all points it has remained focused on specialty medicine, particularly HIV and Hepatitis, and has not been tempted to diversify beyond its core capabilities.
Patient investors have been richly rewarded. As a US based company, Gilead has had access to regular capital infusions from investors that understand the timeframes that are associated with investing in the biopharma industry. Unfortunately, Europe has not been as structurally suited to raising risk capital for pharma/biotech. Consequently, the European biotech scene has evolved more slowly and in a different way.
As with so many things, the UK is somewhere in the middle – with 2016 shaping up to be the year where homegrown biotechs demonstrate some European stability with American upside.
Rough diamonds and crown jewels
With its focused approach, selective acquisitions and strong licensing revenue, the UK’s BTG stands out as a company that has the right elements in place for success. CEO Dame Louise Makin is clear that such success is a long-term game, with a strategy to match. It is a similar story with UK’s GW Pharma, in its case focusing on a unique technology platform (cannabinoid science) and finding partners to develop selected products. These two jewels in the crown have been successfully following the steps from biotech to fully integrated pharma – with investors being rewarded accordingly.
Beyond these jewels, there are some companies in earlier stages that can be considered rough diamonds. Adaptimmune, Circassia and Immunocore are typical examples. As yet not generating enough of their own revenue to have the long-term perspective on R&D that is required to succeed, but each possessing the focus, ambition and investor roster which could pivot their performance.
On paper, the UK is the ideal place for UK biotechs to mature into fully integrated pharma companies. The UK biotech scene has matured with a number of companies leading the way, with others following and learning as they grow. 2016 is the year in which we hope to see many of these rough diamonds maturing into the jewels in the crown of UK Plc.
John Rountree’s invited commentary in MedNous Vol 10, No 2 February 2016
The history of relationships between pharmaceutical companies and academic institutions can be cast as one of both success and frustration. There is no doubt that many successes of the industry have been down to excellent scientific discovery within academic institutions. And yet many pharmaceutical companies have been frustrated by the speed of securing tangible output from their collaborations with academia.
The last five years or so have seen some significant changes to both the structure of the industry and complexity of the science involved in drug research and development (R&D). These have been to the benefit of relationships between pharma companies and all other parties including academia. To start with, Big Pharma has realised that discovering and developing new drugs more or less on its own is now truly over.
However, the traditional model of pharma companies passively drawing on insights from academic publications and providing grant-like support to academia, funding students and the like is now simply insufficient. A more recent model of trusting the ecosystem of academia, technology transfer, biotech spin-outs, seed funding and venture capital to do the early drug discovery work while Big Pharma buys the fruits of such nimbleness to bring the drugs to market has therefore evolved. Yet this is again insufficient. Many of the universities’ spin-out biotechs are poorly funded and do not have the resources to accelerate drug discovery to a pharma-quality standard.
So pharma companies are now rethinking how they engage directly with the academic institutions themselves rather than relying on seed funders and willing postdocs to create small biotechs that they can later partner with or acquire. The reality now is not whether pharma should engage seriously with academia, but how.
The first model of pharma and academia engagement has been consortia approaches such as the Innovative Medicines Initiative (IMI), Europe’s largest public-private partnership that aims to speed up the development of medicines. Such approaches enable pharma and academia to engage with each other in pre-competitive research to the benefit of the whole industry. IMI now boasts an impressive 57 projects aimed at driving a better understanding across a range of pharma R&D areas. Similarly the Structural Genomics Consortium (SGC), which is working on three-dimensional structures targeting human proteins that represent potential drug targets, provides a further example of how pharma companies and academia can get together to solve difficult problems. Together with GSK, the SGC identified the potential of Brd4 as a drug discovery target for example.
While consortia approaches continue to be promising, the risk is that the focus and drive required to bring medicines through the drug discovery and development process may get compromised by the need to involve multiple parties with conflicting interests. A more focused one-to-one pharma to academia collaboration model is coming to the fore.
Here in Europe, mid-sized pharmaceutical companies have shown how it can be done. These companies typically have a more focused approach to technology development and drug discovery than their larger peers. They have therefore been engaging in direct relationships with academic institutions to develop both assets and the technologies and capabilities that are needed to accelerate their R&D. This model of engaging with institutions is highly specialised. The scientific area is typically focused and very tailored to the goal of bringing new assets into the pipeline of the pharma company.
Ipsen, LEO Pharma and Grünenthal are three European mid-sized companies that have been aggressively seeking out direct relationships with academia to complement their partnerships with other pharma/biotech companies.
In the neurology area, Ipsen’s relationship with Harvard University was initiated in July 2013 to complement one of Ipsen’s specialist fields: engineering novel recombinant botulinum toxin molecules. Ipsen already had significant expertise in toxins, and this collaboration cemented and broadened that. The success of this relationship resulted in the signing of a further multi-year research alliance agreement in 2015.
In dermatology, LEO Pharma has had similar success through a collaboration with The Scripps Research Institute (TSRI) in one of its specialist areas, in this case the synthesis of ingenol as an enabler for a compound to treat actinic keratosis. After solving this tough challenge with LEO Pharma, Professor Baran of TSRI said, “I think that most organic chemists had considered ingenol beyond the reach of scalable chemical synthesis.”
In the pain field, Grünenthal formed an innovative alliance with the Boston Children’s Hospital to develop a novel anaesthetic for local anaesthesia and post-operative pain management. This alliance was the first fruit of Grünenthal’s Innovative Medicines Unit (IMU) concept, a group with a specific remit to engage in such collaborative activity. The deal was also structured with an upfront and milestone and royalty format related to a specific asset, Neosaxitoxin, and involved a biotech (Proteus SA) in the three-way agreement.
The three European mid-sized companies are exemplars of a highly focused and one-to-one pharma-academic relationship model that has great promise for the industry. For the academic institution this model provides both funding and a direct and practical application for its scientific research. For pharma companies the model enables a strengthening of their own specialist capabilities to direct effect in accelerating drug R&D and/or creating assets for their pipeline and future medicines for patients.
John Rountree is the Managing Partner of Novasecta, a London-based specialist strategy consulting firm for life sciences.
© 2016 Evernow Publishing Ltd
Reprinted with permission from Mednous February 2016 (www.mednous.com)
John Rountree’s invited commentary in MedNous Vol 8, No 3 March 2014
Amid all the excitement about the debut of young biopharmaceutical companies on stock markets in the US, it is worth reflecting on the broader implications for pharmaceutical drug development and commercialisation. Specifically, what kind of company is best placed to develop drugs that patients need and that payers can afford to buy?
It is currently fashionable for innovative biopharmaceutical companies to consider Big Pharma as their potential partners or acquirers once their products reach proof-of-concept stage. But there is another model that may hold more promise for the future: the fully integrated pharmaceutical company. Today there are many mid-sized companies that thrive with this model having commercialised one or more successful products from their own research and development.
All of today’s Big Pharma companies were once medium-sized enterprises. At one time or another they had to focus on a small set of projects with the goal of growing them into sustainable businesses. This industrial focus was behind many of the success stories of the past including the development of medicines such as sitagliptin for diabetes and omeprazole for peptic ulcer disease.
From the 1960s onward everything seemed possible for these companies. They were productive, cash-generative and profitable. But in many cases this success led to a combination of complacency and a focus on simply creating scale through mergers and acquisitions. This left them poorly prepared to deal with the loss of exclusivity on their most profitable products. Facing pressure from investors, many subsequently responded by cutting spending, including outlays for research into new medicines. Fortunately for the industry as a whole, this coincided with the emergence of new biotech companies eager to out-license their innovative technologies. A division of labour within the industry gradually emerged: Big Pharma focused on in-licensing and late-stage drug development, while biotech took the lead in generating new products.
Only time will tell whether these symbiotic relationships will sustain the industry as a whole. In the meantime, an interesting phenomenon has been evolving in Europe: that of the profitable and highly successful mid-sized pharmaceutical company. Such companies are often family or foundation controlled and typically have annual revenue of between €50 million and €2 billion. They are tremendously diverse, just like the European countries in which they are based. Examples include Grünenthal and Merz of Germany; Ipsen and Pierre Fabre of France; Almirall and Esteve of Spain; Chiesi and Recordati of Italy; and LEO Pharma and Lundbeck of Denmark.
At my company, Novasecta, we have been tracking and working with these companies, which we call ‘MidPharmas’, for many years. These companies are not so large as to be cumbersome, nor so small as to be dependent on a single project for their survival. Lundbeck for example is large enough to be fully integrated with discovery, development and commercialization capabilities all built into a single entity. Yet it is specialised within neurology. And it has been able to create a global business from this speciality.
Lundbeck and many other MidPharmas benefit from a scale that creates sustainability while enabling passionate focus, as well as a stable ownership, whether this is through full ownership or majority control by a family or a foundation. These companies are neither dominated by short-term earnings pressure from analysts like their fully listed counterparts in Big Pharma nor set up for an exit like their venture-funded counterparts in the biotech community. Most MidPharmas therefore have time to develop the deep and focused expertise that is necessary for excellent drug research, development and commercialisation.
Unsurprisingly MidPharmas are not immune to merger fever: over the last years several have been acquired by other MidPharmas or larger concerns. Examples include Serono of Switzerland, which is now part of Merck KGaA of Germany; Schwarz Pharma of Germany and Celltech of the UK, which are now part of UCB of Belgium; and Altana of Germany and Nycomed of Denmark, which now belong to Takeda of Japan. Moreover Solvay Pharmaceuticals of Belgium is now owned by Abbvie of the US; and Organon of the Netherlands is now owned by Merck & Co Inc. of the US.
Despite this, a significant number of MidPharmas in Europe remain independent: they are a remarkably resilient bunch, often many decades old.
While it is now accepted that the industry as a whole must collaborate more and practice ‘open innovation’, this does not discredit the concept of the integrated pharmaceutical enterprise. In fact, the integrated pharmaceutical concept is more relevant today than it has ever been before. It means having pharmacologists and scientists really working with clinicians like they used to in the pharmaceutical companies of old. And it means encouraging entrepreneurs, who have come up with breakthrough medicines and built relationships with physicians in the process, to build companies that commercialise these breakthroughs.
The future lies with companies that know what they are good at and evolve and adapt from that – and if that ‘good at’ includes research, development and commercialisation then it makes sense to keep it together.
We believe that MidPharmas are very well placed to be the future stars of the industry. Of course like all companies they also need to constantly learn, adapt and change – being a profitable pharmaceutical company can create some bad habits. But if they add the best of the biotech-like mentality to the best of sustainable pharmaceutical companies, they have the foundation for success without the hubris of the giants.
John Rountree is the Managing Partner of Novasecta, a London-based specialist strategy consulting firm for life sciences.
© 2014 Evernow Publishing Ltd
Reprinted with permission from Mednous March 2014 (www.mednous.com)