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.

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

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

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

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

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

Why patient centricity matters

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

1. Patients are more knowledgeable than ever

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

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

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

3. Drug development costs can be reduced

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

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

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

Steps towards Practical Patient Centricity

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

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

Start internally

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

Map the patient journeys

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

Celebrate success and failure

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

Invest to win

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

Why patient centricity can fail

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

New against old

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

Limited practical guidance

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

Jumping to solutions

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

The future of patient centricity

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

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.

Commercial models in pharma have evolved over the last few decades moving from brand focused to access led and now the future is one of personalisation, where all aspects of an organisation’s commercial approach are tailored to individual patients, HCPs and payors based on their unique needs. To achieve this, companies and commercial teams will need to change.

We consider how:

• Pharma’s future commercial model use machine learning (ML) and agile marketing to make the most of multiple data sources to bring personalised messages to physicians and payors

• Companies need to combine products with ‘beyond the pill’ solutions that support product use such as wearable technology, patient support services and digital adherence programmes

• The threat of complete disruption from other sectors is unlikely due to the highly capital intensive and risky nature of the pharma business

• Achieving personalisation requires substantive change to processes, capabilities and culture – such change is hard, and history teaches us that this can be slow in the pharma industry

• Companies that embrace the opportunity of personalisation are those that will see the greatest results

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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

Medical Affairs is in the midst of an exciting metamorphosis. The global shift towards evidence-based care is creating new opportunities for the function to play a more strategic role within pharmaceutical companies.

As medicines become more targeted and the evidence base more nuanced, Medical Affairs has the potential to become one of the key influencers of the future. To download our white paper click here or on the button above.

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

Ownership matters: impact on growth

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

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

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

The data: comparing private and listed performance

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

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

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

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

 

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

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

 

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

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

Private companies are more efficient with their R&D spend

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

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

Listed companies generate more revenue per NDA and per NME

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

Creating R&D value

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

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

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

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

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

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

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

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

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

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

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

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

Creating commercial value

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

One size doesn’t fit all

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

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

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

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

 

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

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

The time is now

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

Few pharmaceutical companies have started experimenting with digital

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

Pharmaceutical companies have yet to cross the chasm with Digital

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

Digital starts with the patient

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

All digital initiatives need to be centred around the patient

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

1. Enhanced Prevention and Detection

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

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

2. Better R&D

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

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

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

3. Integrated patient services

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

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

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

4. Value-based outcome pricing

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

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

Set the foundations and secure the capabilities

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

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

Foundations

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

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

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

Capabilities

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

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

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

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

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.

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

In Pharma, Open Innovation needs Closed Innovation and vice versa

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

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

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

Open Innovation is attracting attention and investment

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

Pre-competitive Consortia

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

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

Shared Assets and Capabilities

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

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

Investing in Venture Funds

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

Three important challenges for effective Integrated and Open Innovation

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

The Integrated and Open Innovation Spectrum for Pharma Companies

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

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

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

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

Embedding Integrated and Open Innovation successfully

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

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

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

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

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

Pharma is increasingly spending and finding value externally

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Commercial partnering: to exploit unique local capabilities

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

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

Research collaboration: to create new assets through exploiting shared capabilities

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

Self-commercialisation

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: info@novasecta.com

Download our White Paper to explore European entry in more detail

Strategic collaborations and partnering are a fantastic way to access new markets. 42 of the top 100 pharma companies are headquartered in Europe and this only scratches the surface.

The European pharma sector is much more diverse than the common perception of dominant Big Pharmas. Europe has a fascinating collection of Mid-sized pharma companies with unique therapeutic area focus, deep geographical expertise and a need to collaborate. These European MidPharmas provide non-EU companies with an excellent route into the European market but why are they such good partners?

75% of the European MidPharmas are privately held and therefore do not have the access to capital that some of the larger companies have. This makes it challenging for them to pursue game changing innovation and as such they manage and grow their portfolios inorganically, which is becoming harder as the cost of mergers and acquisitions rises.

The benefit of their need to grow inorganically through collaborations is your assets are of tangible benefit to the them, so are nurtured with an attention that can be absent in larger companies. This is amplified by their therapeutic focus, geographic expertise and deep understanding of customer needs, which make them excellent partners to support non-EU companies in Europe.

Through our experience in the European pharma sector we have helped many companies access strategic collaborations in Europe by understanding their assets and needs, assessing partner profiles to ensure optimum fit and leveraging our unique network to facilitate meaningful business conversations.

Contact us to understand how we could help you find the ideal partner in Europe: info@novasecta.com

Discover how you can establish your commercial footprint in Europe

Download our White Paper to explore European entry from a US Biotech’s perspective

Establishing a commercial footprint in Europe is a great approach for companies with global ambition. The European market presents unique challenges, which non-EU companies may not have experienced, so launching in Europe is often seen as a complex task.

Although there are challenges to enter the market the rewards are there for companies who understand their markets and utilise European expertise to navigate them, such as Gilead which is now one of the world’s biggest pharma companies.

Many US and Asian companies enlist local European support to traverse the landscape which combines centralised EU bodies and individual countries, who have their own unique processes for regulation, market access and pricing, to produce a diverse market with individual needs.

There are many steps to self-commercialisation and they require deep expertise in the European market to execute:

  • Opportunity assessment
  • Go-To-Market model
  • Assess and design launch planning
  • Affiliate establishment
  • Ongoing regional support

Contact us to understand how we could help you establish your presence in Europe: info@novasecta.com

Discover how strategic collaborations and partnerships can be an alternative route into Europe

Download our White Paper to explore European entry from a US Biotech’s perspective

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.

One of the pharmaceutical industry’s longest-held mantras is that the first six months of a product launch defines future success. This can lead to too much focus on performance compared to a forecast, rather than building for future success by seeking a deep understanding of why a product is performing.

In this month’s white paper, we argue that while the first six months of a product launch is clearly important, it shouldn’t be the sole determinant of the future. By contrast, leading companies are using it as an opportunity to gain deep insight into how customers perceive the product and act quickly to achieve success. To download our white paper click here or on the button above.

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

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

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

Ownership

An enduringly private group of companies

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

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

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

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

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

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

The MidPharma signature: resilience

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

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

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

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

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

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

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

A decade of MidPharma evolution

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

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

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

 

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

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

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

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

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

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

R&D

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

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

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

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

 

Notes
– Companies with insufficient public domain data are excluded

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

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

MidPharmas have increased R&D intensity in the last year

 Notes
– Companies with insufficient public domain data are excluded

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

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

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

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

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

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

Commercial

Commercial success: the virtue of capital discipline

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

Although private MidPharmas are growing, listed companies are outperforming them

 Notes
– Companies with insufficient public domain data are excluded

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

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

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

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

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

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

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

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

Corporate

Profitability sustained across the board

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

The pharma industry generated healthy profitability across the board in 2017

 Notes
– Companies with insufficient public domain data are excluded

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

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

Continued decline in the use of M&A

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

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

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

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

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

Strategic alliances: falling but still favoured

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

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

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

MidPharma Performance Ranking

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

Novasecta’s European MidPharma Ranking 2018

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

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

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

Conclusion: resilience through focus

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

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

 

The 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.

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

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

Clarify IP ownership and licence arrangements early on

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

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

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

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

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

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

Manage contamination risks proactively

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

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

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

To avoid contamination and negative spill-overs:

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

Stay on top of competition law changes and jurisdiction variability

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

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

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

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

Conclusion

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

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

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

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

Introduction

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

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

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

Three strategic philosophies of the top growers

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

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

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

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

 

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

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

Build: Focused strategies for growth and consistently strong profitability

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

Focused strategies bound by commitment to R&D and innovation

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

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

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

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

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

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

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

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

Chasing breakthrough innovation leads to more creative investment

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

Buy: An acquisitive approach to growth

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

Generic players are building R&D credibility in speciality pharma

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

Jazz Pharma: the top grower of our sample

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

Is R&D required for pharmaceutical business growth?

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

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

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

Bespoke Strategy: The common thread

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

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

Notes

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

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

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

References

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

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

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

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

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

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

Dilraj Judge, John Strafford, John Rountree

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

Introduction

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

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

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

Alternative ways to fund clinical development

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

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

We describe the characteristics of each funding type in turn:

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

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

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

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

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

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

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

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

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

MidPharma experiences with new funding models

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

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

Table 1. Published examples of different financing options.

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

How should MidPharmas address funding issues?

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

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

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

We describe each of these drivers in turn below:

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

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

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

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

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

A flexible and integrative approach to funding

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

 

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

Dilraj Judge, Euvian Tan, John Strafford, John Rountree

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

Introduction

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

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

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

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

Is scale inversely related to R&D productivity?

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

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

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

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

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

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

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

What is a biotech-like mentality?

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

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

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

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

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

We describe each of these attributes in turn below:

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

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

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

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

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

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

How “biotech-like” are European MidPharmas?

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

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

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

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

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

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

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

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

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

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

Biotech-like mentality in MidPharmas?

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

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

 

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

Hasini Wijesuriya, John Strafford, John Rountree, Tony Sedgwick

The UK’s recent Brexit referendum will have profound and likely negative consequences for the European economy. Globally-minded pharma companies have less to worry about than other less profitable industry sectors in which the companies are more reliant on the UK and/or Europe consumer economies alone. But all companies of all sectors will face economic headwinds.

Strong pharma companies are used to uncertainty and have the capital and know-how to deal with it: most have emerging markets presence in countries that can be highly volatile economically and politically, and drug R&D and commercialisation itself is a highly risky business.

By contrast pre-revenue and emerging small biotech companies will find themselves more exposed to difficulties in fund raising from jittery capital markets, difficulties with venture funds as an asset class, and potential reductions in European grant/academic funding.

European ‘MidPharmas’ can potentially benefit from their private and more patient family/foundation capital (when they have it) as well as partnerships with biotech companies that need funding and capabilities to advance their assets.

Novasecta believes that pharma/biotech companies alike should increase their degrees of strategic flexibility, by making sure that their commercial, R&D and supply chain strategies are robust to potential economic turmoil ahead:

(a) Commercial: Carefully assess the balance of medium-long term regional commercial footprint across Europe, USA, Asia and the rest of the world, and consider an increased use of commercial partners to mitigate risk.

(b) R&D: Create increased flexibility to scale R&D investment up and down depending on profitability by considering a global R&D footprint with more externalisation, collaborations, and partnerships.

(c) Supply Chain: Increase flexibility and global reach through out-sourcing and partnerships with regional players to mitigate the risk of individual country economic difficulties.

The uncertainties in Europe faced by pharma/biotech will increase the pressure on management to (a) focus on what they are uniquely good at, (b) create flexibility, and (c) make more use of partnerships and organic growth rather than M&A to create value for their shareholders and patients. In the long run this is no bad thing for the industry. In the short run we expect some companies to find life difficult and others to use the headwinds to shape up and thrive.

Context
1. The UK’s referendum vote was a wake-up call to Britain’s political parties rather than a definitive governmental decision to leave the EU:

All of Britain’s major political parties recommended that UK remain in the EU, yet on 23rd June 2016 out of a 46.5m electorate, 17.4m Britons (37%) voted for the UK to leave, 16.1m (35%) voted to remain, and 13m (28%) chose not to vote. Such is the sorry state of the UK’s political parties and democracy today.
The UK populace is far from aligned on the issue: London, Scotland and Northern Ireland voted to remain, the rest of England and Wales voted to leave. Politicians will find it very tough to bridge this divide.
2. UK has not exited from EU yet: full exit may take many years or never happen:

The UK Prime Minister has resigned, and he will not trigger “Article 50” to formally start the exit procedure. This will be the decision of the next Prime Minister, who will be chosen by the Conservative party, not the electorate.
The UK’s two major political parties are in turmoil, so there may be another General Election in the UK before any government feels it has the mandate to either trigger Article 50, delay triggering it, not trigger it, or indeed hold another referendum. This is a UK government decision, not the UK electorate’s or Europe’s. Anything is possible.
If Article 50 is triggered, negotiations to leave the EU will take 2 years, and trade negotiations between UK and Europe could take many more years.
3. There will be significant political and economic headwinds in Europe for many years to come:

As a potential catalyst to political and economic instability in the Eurozone, the UK referendum has been a significant and unwelcome blow to European economic growth and capital availability.
The UK’s deep and global capital markets are important to both Europe and the pharma biotech industry, even though the UK economy only represents less than 3% of global GDP.
It is hard to see the UK’s referendum result creating any short to medium term advantages for the EU, the European “Project” or the Eurozone: more likely it has been a catalyst for isolationist governments, trade-reducing policies, and a capital flight from risk.
Implications for Pharma/Biotech
The “safe-haven” nature of global Big Pharma stocks coupled with such companies’ relatively high levels of profitability compared to other industry sectors allows this part of the pharma/biotech ecosystem to play a long game and as such benefit from a global presence with an associated risk mitigation against regional or local instability. Nevertheless Big Pharmas should continue to create flexibility in their businesses and focus on the areas that they have genuine distinctive capabilities in. Furthermore Big Pharmas that have been more reliant on M&A than building capabilities and partnerships to create growth may face headwinds from jittery capital markets.

Smaller biotechs, particularly those that are pre-revenue, will face increased risks through a likely shortage of risk capital: capital markets will gyrate and to some extent dry up while waiting for more economic certainty. IPOs are likely to be tougher, venture funds are less likely to provide funding as they find it harder to find Limited Partners in a context of capital markets seeking security rather than risk and upside. Smaller biotechs that rely on grant funding and government / EU funding, for example through the EU’s massive Horizon 2020 scheme, will also find it tougher to find the funds required to grow. As has always been the case, smaller biotechs will need to themselves focus down on the capabilities where they have genuine advantage and find pharma/biotech and outsourcing partners to mitigate risk and create flexibility.

European ‘MidPharmas’ are poised to benefit from both European capital market uncertainties and biotechs’ funding difficulties. Those that have global scale and that have already created flexibility in R&D and commercially can reap the “safe haven” benefits that are enjoyed by Big Pharma. Like Big Pharma they can also provide funding and support to biotechs in exchange for some of the upside of their R&D. A further potential benefit comes from the stability and long-term perspective afforded by the family and/or foundation ownership or control that is the characteristic of many European MidPharmas. Such funding does not create pressure on senior management to make strategic moves in haste, and makes the companies less reliant on M&A to satisfy investors, which again makes them less vulnerable to economic uncertainty.

In short the pharma ecosystem will be in shock for some time yet, and the full implications will take time to play out. Novasecta’s belief is that the motto “when the going gets tough, the tough get going” is the one to apply at this time of uncertainty. There are opportunities for pharma to help biotechs be successful and share in the upside, and the European economic uncertainty will create a pressure and capital discipline on all pharma/biotech companies that will ultimately make the survivors in the industry and the patients they serve much healthier.

As Bayer’s troubles continue, Die Zeit interviewed John Rountree to understand what is going on at Bayer and how they should proceed.

Download the article in German above or read the English translation below:

“All that just distracts”
    Bayer is fighting the lawsuits over the plant protection product Round-Up. But that hides the real problems of the group, says John Rountree.

    ZEIT: Mr. Rountree since acquiring the Agrochem Group Monsanto has lost Bayer 150 billion euros in value, threatening billions in billions due to claims for damages because customers claim they have gotten cancer from the use of the crop protection product Round-Up. Was that worth it?

    Rountree: Great scientists work at Bayer. But like many other pharmaceutical companies, Bayer is less good at maintaining a strong and trusted public image. The legal proceedings concerning the active substance glyophosate, which was included in the weed killer round-up, are a burden for the everyday business. Within the group, only a small group of employees take care of it, especially from the legal department and the executive board. But every Bayer employee knows about it and follows the proceedings. In this respect, a shadow hangs over the company. It is easy to imagine what the board meetings are talking about: legal risks, the current status of procedures and possible outcomes. It’s not so much about issues like growth, innovation, research, about things that drive a business forward, but about how the process goes. No matter how the proceedings go, Bayer will not break. But the procedures damage the reputation. It does not make it easier to find new talents. These are all side effects that will show in the performance in a few years. They do not settle down immediately. In that sense, the Monsanto acquisition is a burden for Bayer.

    ZEIT: So, was it wrong to want to become one of the largest agrochemical companies in the world?

    Rountree: At the moment of the takeover it seemed like no alternative. There was a consolidation process in the agricultural sector. Dupont and Dow Chemicals merged into Dow Dupont and Chem China acquired Swiss manufacturer Syngenta. As you thought at Bayer, you will soon have nothing to report, if you stay small. As such, the Monsanto acquisition seemed the right move. It was about economies of scale and cost reduction. It was about defending the status quo. But: the problem with the matter was already at that time, that one did that within the group structure: one did not separate out the own agricultural division from Bayer and a new enterprise. Now you have the problems: Because Bayer is actually a pharmaceutical company and the agricultural sector is a completely different business. It will not be easy for the board and management to bring that together.

    ZEIT: Before that, Bayer was also a company that was active in all these sectors. Why should this not work?

    Rountree: First of all, there are the customers. In the pharmaceutical sector, they have three types of customers: patients, doctors and those who pay, insurance companies or governments. You have to be prepared for that and you have to work with this not very simple constellation. In the agricultural sector, the customers are completely different: it is the farmers worldwide. This market is a completely different one. And as a corporation, you always have to think about the customer. So it would be better if the board focused on one thing than trying to bring pharmaceuticals, consumer brands, agrochemicals and veterinary medicine under one roof. It becomes very difficult to concentrate on the necessary things.

    ZEIT: The broader a company is set up, the more stable it is. In that sense, is not that wrong?

    Rountree: Man can see that as a sign of stability. But one has to wonder if it would not be better to have a board that only cares about pharmaceuticals and a board that deals only with agrochemicals. You could work much more concentrated. In addition, Bayer already has problems today. Bayer’s profit margin was 10 percent in 2018, which is the worst of all major pharmaceutical companies. Then sales general and administrative overheads at Bayer are exceptionally high at 39 percent of sales. In addition, debt has risen dramatically due to the Monsanto acquisition.

    ZEIT: But there are savings in the millions by the acquisition …

    Rountree: … the latter is a matter of expectation. Let’s put it this way: Bayer was not overly ambitious about these goals. And the high debts are a heavy burden on the management. If you have to save and the costs have to be reduced to pay the debts, then it makes investment in growth difficult. Even strategic investments are no longer so easy. High debts dampen one’s own ambitions. Of course, it can be good for a company to cut its own costs, to clean up, to become more profitable. But if you want to invest in growth, if you want to put money into research and development, impede such austerity programs. Not only on the subject of debt, but also on the subject of profitability are competitors such as Pfizer, Johnson & Johnson or Merck are significantly better.

    ZEIT: What are they doing differently?

    Rountree: They have no agribusiness and focus on what they do well. Above all, the US companies are much less widely positioned. And that’s good with pharma: you want a board that is extremely focused and can focus on the business. An exception might be Johnson & Johnson, which are broader but have a federal structure, meaning that the individual units are more independent. In addition, few pharmaceutical companies still make large acquisitions or form mergers.

    ZEIT: How is this an advantage?

    Rountree: Instead of taking over competitors, one works rather together on projects. This has proven to be a successful strategy in the pharmaceutical industry and is a trend. Take the example of Regeneron and Alnylam. These are two independently strong science-based US biotech companies. Bringing Alnylam’s RNAi expertise together with Regeneron’s genetics expertise is a win-win for the companies and for patients. For this they cooperate as independent companies. That means both keep their culture, their ethics, their organizational structure. And they can do research without being distracted by lengthy integration process. There is no need to look for synergies, there is no need to merge departments, employees are not secretly looking for a job because they are afraid of losing their jobs – all this is missing. You can just work in peace. Both sides can learn from each other and focus on their strengths. One plus one is more than two in this case.

    ZEIT: But you have to share the profits in the end as well.

    Rountree: But you also share the research costs and without further obstacles. This is better for the future of companies. And it works not only between big and small companies but also between big and big ones. For example, Merck cooperates with AstraZeneca in the field of cancer research. Both companies want to learn from each other. And they refrain from buying one another. Imagine if both had come together: A gigantic company would have emerged, the merger would have employed and distracted employees for years. The Monsanto takeover by Bayer has been running for two years. A lot of energy is used on it, the employees and the board are distracted, meanwhile others cooperate and can do research and development without being distracted.

    ZEIT: What should Bayer do to your opinion now?

    Rountree: It’s difficult at the moment. One should outsource the agricultural sector and lead independently. Let me say it again: agrochemicals and pharma are not compatible. But at the moment this is hardly possible .. In the US, the processes are running because of Monsanto and nobody knows how they go out, there are no investors.

    ZEIT: You advise pharmaceutical companies worldwide. How much easier is it to be able to express one’s opinion without being responsible for the consequences of the business, like a board?

    Rountree: We have a different role as consultants. I feel that our job is to provoke and challenge the board and management. We need to help them to find a different perspective and to think differently so they can make the best decision they can with confidence. And in one, I have to correct you: we have a lot of responsibility, it’s a tough business and our clients won’t ask for our help if they don’t see value from it.

    ZEIT: Can you buy a pack of aspirin tablets at the pharmacy without thinking about which company made it, how it is and how profitable the pack is?

    Rountree: When I see a pharmaceutical product like Aspirin I always think about the company that made it and the amazing effort and resources that it took to get it to the point where patients can get the benefit of it.

    Bayer is a company that we have been asked to comment on several times before.