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

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

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Novasecta, 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.”

Strong inheritance

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.

Self-financing

“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.

Gold rush

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.”

Caring culture

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.

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.

The good news this time is that another consequence of the industry’s fragmentation is a new breed of focused and integrated MidPharmas that are breaking the rules of the ‘Big Pharma acquires Small Biotech’ dogma. These entrepreneurial R&D integrators recognise that R&D is a long-term endeavour that requires a deep integration of commercial, medical, science and partnership skills in a chosen focus area. These companies typically command a higher market rating than their Big Pharma peers because of their deep and integrated focus on a platform and/or specialty area. In Europe, such companies include Genmab, Cosmo Pharma, Galápagos, MorphoSys, Sobi, Actelion and Bavarian Nordic. Such companies are the paradoxically integrated consequence of the industry’s fragmentation, and are the ones to watch in terms of creating value for investors and patients alike.

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.

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.

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)

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.

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)

We are pleased to announce that Novasecta’s survey and in depth analysis covering how Brexit will affect the pharmaceutical industry has been published in In Vivo. To view the article, click here. To see an earlier version of our research, 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.