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.

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.

In light of this the Financial Times asked John Rountree for his views on the deal:

“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.

GSK’s Q1 2019 results were released today (1st May) with their vaccine business driving growth past analyst’s expectations. Reuters asked John Rountree for his thoughts: “They are really refocusing into oncology and that’s going to take some time – to make that transition – so I think its going to be a difficult time for the pharma business,” adding that the vaccine business is growing.

John has been asked for his thought before on GSK, speaking to CNBC about the recent divestiture of the Horlicks brand and the focus on innovative pharma led by Emma Walmsley.

AstraZeneca’s Q1 2019 results were released today (26th April) with their oncology portfolio helping drive profits past analyst’s expectations. Bloomberg asked Ed Corbett for his 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%.

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.

Follow the links to read the Novasecta Global 100 or to learn more about achieving growth through strategic collaborations.

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.

To view the full Bloomberg article, click here or for our views on M&A 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.

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

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

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

 

To read our insight into the cost of pharma M&A click here

 

Takeda CEO prescribes R&D cuts after Shire deal

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

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.

To read our insight into the cost of pharma M&A click here or for R&D innovation click here.

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.

 

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.

 

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.”

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.

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 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, Ed Corbett, Principal at Novasecta, said that it is only a “small step” towards calming Brexit nerves in the industry. Putting the investment in perspective, Ed states 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.”

 


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.”

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:

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.

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.

Context
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.

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