Europe is home to 85 ‘MidPharmas’ that invest in developing and commercialising pharmaceutical products – each company generates €100m-€3bn in annual revenue. Ambitious pharma and biotech leaders can learn a lot from them.

In our sixth annual report into this sector, we look at this microcosm of the global industry and examine how its companies survive and thrive.

What To Expect In The Report

MidPharmas are an exemplar of what it takes to be successful in the pharmaceutical industry. In this report, we examine the roots of this sector’s success, which primarily lie in two dimensions: product innovation and commercial innovation.

We first cover ownership – three-quarters of MidPharmas are privately controlled, which creates its own dynamics and requirements. For product innovators, we explore the companies that rely on R&D to define their future. We look at how a clear focus on a technology platform or therapeutic area can drive growth and profitability, so long as the operating model is fit for purpose. For commercial innovators, we delve into the diverse world of those creating value from on-market medicines, often past their patent expiries. In this case with the focus on finding product portfolio, geographical and patient journey niches that lend themselves to an innovative operating model.

We conclude with optimism. Since we started working with and tracking MidPharmas many years ago, we’ve seen big improvements in both growth and EBIT margins. This isn’t yet universal but it shows what is possible at this scale, and demonstrates that necessity is indeed the mother of invention.

Download your free copy of the 20-page report via the button above or below.

Effective cross-functional collaboration is essential for the future of pharma and biotech firms.

Nurtured and encouraged correctly, it stimulates creative thinking that can boost the success of your entire firm – which makes implementing it into your company’s processes an absolute must.

In this on-demand webinar, Andrew Bell of Novasecta is joined by three leaders experienced in cross-functional collaboration. Andrea Bizzi (Chiesi Group), Jenn Bonilla (Gilead) and Danie du Plessis (Kyowa Kirin International) discuss their experiences of successful collaboration and demonstrate how collaborating across functions delivers superior results.

We also look at how to sustain these collaborations, and the challenges you may face along the way.

The expert panel take an in depth look at a range of topics including:

  • Why cross-functional collaboration is so important for successful pharma and biotech companies, particularly in driving creativity and efficiency
  • How it has evolved in recent times, and what aspects are considered to be state of the art.
  • How to measure effective cross-functional collaboration.
  • Examples of effective collaboration and outcomes.

As well as listening to a valuable discussion and gaining insights, you will also have the chance to listen to the panel answer questions asked during the session.

If you are a functional leader in a pharma or biotech company, this on-demand webinar is a must-watch.

Click the image below to watch now.

The Novasecta Global 100 is a comprehensive look at how the world’s top pharma companies are shaping the future of healthcare.

Our report analyses the companies as whole entities rather than pharma business alone in order to fully explore the impact of their diverse business models and choices. We cover their performance across multiple dimensions, their capital allocation choices, their innovation models, and their commercial models. We explain how the Global 100 is:

• Highly diverse: headquartered in many different countries, with very different business models

• Innovative: with many alternative approaches to investing in new solutions for patients

• Commercially successful: achieving impressive profitability and revenue growth through value or volume, yet finding it harder to sustain top-line revenue growth at the top

• Collaborative: with partnerships across country boundaries becoming more favoured than M&A to develop and provide access to medicines

In our report we touch upon how companies are dealing with many of the issues currently facing them, including patent expirynew commercial modelsthe changing role of Medical Affairsapproaches to innovation and whether to pursue M&A or strategic collaborations.

Download our report here or via the button above.

European MidPharmas are a fascinating, diverse, and resilient group of companies, holding a unique position in the industry. We define the sector as R&D-based pharmaceutical companies, headquartered in Europe with annual revenues between €50m and €5bn.

In our fifth annual MidPharma report we examine these companies across corporate, R&D and commercial domains to delve into what makes them special, how the best are leading the way and why the sector needs to be alert to changing industry dynamics.

This year we highlight and explore the four key needs for companies in this sector:

• Acknowledge vulnerability to changes in capital markets and payers

• Pursue purposeful and selective corporate development

• Reinvent the R&D model to adapt to a changing innovation ecosystem

• Increase commercial profitability and customer orientation

We believe these are vital topics for MidPharmas and we have explored some of them before in our White Papers, including reinventing the R&D model, M&A being too expensive, the benefit of strategic collaborations and the vulnerabilities produced by ownership structure

This is our second sector-focused report this year on the pharma sector. Read our Global 100 report to explore how the wider pharma industry is accessing capital to drive effective R&D and commercial efficiency and how a non-European mindset influences their approach.

Download the MidPharma report to explore the key needs of the sector and find out which companies are thriving

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

Ownership matters: impact on growth

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

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

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

The data: comparing private and listed performance

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

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

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

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


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

How Ownership Influences Pharma Strategies

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

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


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

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

Private companies are more efficient with their R&D spend

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

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

Listed companies generate more revenue per NDA and per NME

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

Creating R&D value

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

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

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

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

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

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

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

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

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

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

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

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

Creating commercial value

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

One size doesn’t fit all

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

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

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

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


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

Pharma M&A is too expensive for most

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

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

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

Deal Volumes and Values: More and Much Bigger

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

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

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

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

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

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

Median sales multiples are up for all sizes of deals

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

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

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

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

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

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

Now what? Focus and Strategic Collaborations

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

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

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

Pharma is increasingly spending and finding value externally

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Commercial partnering: to exploit unique local capabilities

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

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

Research collaboration: to create new assets through exploiting shared capabilities

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

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

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

Driving sustainable partnering success

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

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

 Bespoke Strategy

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

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

Creativity in Deal Making

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

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

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

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

Re-configured Capabilities

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

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

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

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

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

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

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

Private equity investment in biopharma

Private equity investment in biopharma is surging. Although private equity firms have been investing in biopharma for years it is the nature of this surge that is interesting.

Private equity is increasingly focusing on two activities:

• Providing growth capital – biopharma companies reaching critical late-stage development or growth juncture seeking substantial capital

• PE-backed acquisition and buyouts of biopharma companies

Opportunities for biopharma

These activities bring opportunities for enterprising biopharma companies to achieve their strategic goals and accelerate growth. How biopharma companies should position themselves to private equity depends on their strategic objectives. We see three clear opportunities for biopharma:

• Sellers – biopharma can spin-off or out-license non-core assets to enable greater strategic focus

• Buyers – biopharma can see private equity firms as a rich source of assets to support portfolio growth

• Competitors – biopharma can differentiate themselves clearly from PE firms and provide attractive alternative M&A opportunities for other biopharmas

Find out how you can seize the opportunity from private equity and develop strategies to suit your strategic goals

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.

The European pharmaceutical market is the second largest globally after the US. In 2017 the markets accounted for 22.2% and 48.1% of world pharmaceutical sales, respectively, and for sales of new medicines launched between 2012-2017 the trend continues – 64.1% for US compared to 18.1% for the top 5 markets in Europe (France, Germany, Italy, Spain and UK), and the size of the market is set to grow by 25% by 2022.

Europe clearly presents an excellent opportunity for many pharmaceutical companies and biotechs, but it can be a confusing market to enter.

The European market has a unique structure with the majority of countries, those in the EU, having a common regulator which provides a single pathway to allow products to be marketed in all 28 EU countries. The market is however fractured at a country level and each country can decide its own market access, pricing and also individually grant marketing authorisation, so it is imperative that companies understand the markets they wish to enter.

Europe poses challenges that other markets don’t so the question for many companies is how to access these markets and this depends on their ambition. Do you want to create a geographic footprint of your own in Europe or do you want to access the Market but keep your main focus on home markets? At Novasecta we help companies with two defined approaches:


Strategic Collaborations and partnering

These are both great strategies to enter Europe, but each company needs to evaluate which is best for them.

Contact us to see how we could help you realise your potential in Europe:

Download our White Paper to explore European entry in more detail

Pharmaceutical margins have, until recently, not been a great cause of concern for many companies but as the healthcare landscape changes we believe margins will be an area that companies cannot ignore.

In our white paper, we look at why pharma needs to rethink its approach to day-to-day spending and start to foster a culture that connects spending with return on investment. To download our white paper, click here or read the article in full on the The Pharma Letter.

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

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

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


An enduringly private group of companies

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

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

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

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

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

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

The MidPharma signature: resilience

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

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

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

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

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

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

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

A decade of MidPharma evolution

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

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

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


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

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

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

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

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

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


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

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

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

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


– Companies with insufficient public domain data are excluded

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

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

MidPharmas have increased R&D intensity in the last year

– Companies with insufficient public domain data are excluded

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

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

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

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

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

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


Commercial success: the virtue of capital discipline

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

Although private MidPharmas are growing, listed companies are outperforming them

– Companies with insufficient public domain data are excluded

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

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

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

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

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

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

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

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


Profitability sustained across the board

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

The pharma industry generated healthy profitability across the board in 2017

– Companies with insufficient public domain data are excluded

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

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

Continued decline in the use of M&A

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

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

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

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

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

Strategic alliances: falling but still favoured

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

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

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

MidPharma Performance Ranking

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

Novasecta’s European MidPharma Ranking 2018

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

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

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

Conclusion: resilience through focus

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

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


Since our inception, we have held a strong belief in the value of strategic collaborations, and our whitepaper below and case studies demonstrate the value they bring to pharma.

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

New paradigms for pharma growth required

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

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

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

Global deal volume declined sharply over the last year



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

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

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


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

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

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


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

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

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

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

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

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

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

Strategic pharmaceutical collaborations: trade, swap, or share

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

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

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

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

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

The strategic collaboration pioneers

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

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

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

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

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

Reasons to strategically collaborate

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

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

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

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

 Making strategic pharma collaborations happen

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

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

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

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

Step One: know thyself

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

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

Illustrative asset and capability matrix

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

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

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

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

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

Step Three: make your move

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

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

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

Catalysing strategic collaborations

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

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

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

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

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

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

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

We interviewed a diverse set of top European pharmaceutical executives

An unwelcome surprise

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

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

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

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

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

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

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

People have been the biggest immediate impact so far

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

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

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

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

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

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

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

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

Fiscal effects will require careful management

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

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

Increased regulatory complexity, costs, and delays

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The UK’s science base will remain strong

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

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

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

European contagion is a real risk

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

“ The European project is absolutely a bigger worry”

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

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

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

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

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

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

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

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

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


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

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

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

Three strategic philosophies of the top growers

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

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

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

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


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

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

Build: Focused strategies for growth and consistently strong profitability

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

Focused strategies bound by commitment to R&D and innovation

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

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

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

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

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

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

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

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

Chasing breakthrough innovation leads to more creative investment

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

Buy: An acquisitive approach to growth

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

Generic players are building R&D credibility in speciality pharma

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

Jazz Pharma: the top grower of our sample

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

Is R&D required for pharmaceutical business growth?

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

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

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

Bespoke Strategy: The common thread

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

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


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

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

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


i) Tufts Center for the Study of Drug Development (






Dilraj Judge, John Strafford, John Rountree