The future of the pharma industry 11.07

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  1. 1. * excluding title page, table of contents and in-text references The future of the pharmaceutical industry The good times of billion dollar blockbusters are far behind us. What are large pharmaceutical incumbents doing, or what can they do to innovate and transform the sector business model for the future July 2015 Word Count*: Submitted by: Maria Zaritskaya CID: 01011573
  2. 2. 2 Abstract Market share in the pharmaceutical sector is inexorably shifting from former denizens of the industry (Eli Lilly, GSK), to rivals that have adopted drastic changes to their business models (Allergan, Valeant). In many ways, pharmaceutical companies are victims of their own success. Heavy reliance on blockbuster drugs, immense past financial success, significant in-house R&D investments these factors contribute to the reservations involved with innovating business models and identifying novel ways of creating value. Although there can be no single recipe for success in the pharmaceutical industry, understanding key trends, and applying them to particular companies profiles can result in novel and lucrative value-creating business models. This report can be logically divided into two parts: chapters 2-3 analyse what pharmaceutical incumbents are currently undertaking to distance themselves from the blockbuster mind-set, the advantages, drawbacks and risks of their strategies; chapters 4-5 explore future trends in the industry and evaluate changes to business models that can be implemented to adapt to the changing social and market environment. 6 pharma companies with largest revenue decline rates 2013-2014 Company Decline rate % Eli Lilly -18% Daiichi Sankyo -14% Boehringer Ingelheim -12% GlaxoSmithKline -11% Merck KGaA -9% Pfizer -5% 5 pharma companies with largest revenue growth rates 2013-2014 Company Growth rate % Gilead Sciences 127% Actavis (now: Allergan) 51% Biogen Idec 41% Johnson & Johnson 15% AbbVie 8% Data by: Global Data (PMLiVE, 2014)
  3. 3. 3 Table of Contents Abstract 1. Introduction 1.1. Subject overview 1.2. Report objectives 1.3. Research resources 1.4. Clarification of terms 2. Mergers and acquisitions does bigger really mean better? 2.1. Acquisition of generic drug manufacturers 2.2. Acquisition of biotech companies 2.3. Precision M&A and specialty drug development 3. Diversification supplementing the core business 4. Collaboration: within the sector and beyond 4.1. Industry trends a case for increasing co-operation 4.2. Forms of collaboration 5. Key routes for business model innovation Conclusion
  4. 4. 4 1. Introduction 1.1. Subject overview The golden age of the blockbuster drug seems to be over. Gone are the days, when a pharmaceutical company could develop a promising molecule, battle through the difficulty-wrought path of obtaining the necessary approvals to successfully launch the drug, and generate billion-revenue streams from the blockbuster, directing profits in the search for the next cash cow. As outlined in Pharma 2020: The vision, until recently the established pharmaceutical business model has been to undertake all steps of drug development in-house: from R&D to commercialization (PricewaterhouseCoopers, 2007). However, by 2020 this model is predicted to lose its efficacy for most industry incumbents (PricewaterhouseCoopers, 2009). In this respect the veracity and clairvoyance of J. P. Garnier, former CEO of GSK, as cited by K. Phelps, naming the blockbuster-development drug model: a business model, where you are guaranteed to lose your entire book of business every 10 to 12 years, cannot be disputed. (Phelps, 2007). In the past blockbuster drugs were targeted towards treatment of chronic diseases and used in primary care (Rickwood, 2012). Yet, there has been a shift in the share of primary care blockbusters in favour of specialty therapies: drugs targeting ailments affecting an increasingly smaller population are achieving billion-sales due to niche positioning and high prices, effectively becoming modern-day blockbusters. Many lucrative blockbuster drugs have recently lost patent protection, further exacerbating their rapid market share decline. Furthermore, certain segments of the pharmaceutical industry are increasingly being dominated by innovative biotech start-ups and large acquisitive entities amassing significant drug portfolios through M&A. Given these developments, it is inevitable that pharma incumbents must identify ways to modify their business models to remain profitable in the rapidly changing tides of the pharmaceutical industry.
  5. 5. 5 1.2. Report objectives This report represents an analysis of how pharma industry players are adapting to the shifting business environment and innovating their business models. The aim is, drawing on real life examples and recent industry developments, to establish the benefits and drawbacks of the paths currently taken by incumbents, to explore industry trends and suggest potential courses of action to secure a promising future for companies, its investors and patients. 1.3. Research resources To fully develop the report topic and relate it to the present-day business environment, a wide variety of sources have been consulted: from up-to-date newspaper articles (Financial Times, The Economist, Fortune Magazine) and specialist publications (Pharma 2020 series, The Pink Sheet) to statistical data and video interviews with industry experts. 1.4. Clarification of terms Before proceeding with the analysis, a clarification of terms used must be sought. Blockbuster drugs are drugs with sales of 1bn or more (Caroll, 2009), specialty drugs are defined as high-cost, scientifically engineered drugs used to treat complex, chronic conditions that require special storage, handling, administration and involve a significant degree of patient education, monitoring and management (Robinson, 2014). Orphan drugs are a subset of specialty drugs developed to treat a rare medical condition affecting a small number of patients (U.S. Food and Drug Administration, 2015). Furthermore, 2 distinct types of pharma incumbents: Big Pharma and specialty pharma must be defined, due to, as shall be seen further, fundamental differences in their business models and paths to innovation. Largest Specialty Pharma by market capitalization Company Market cap., USD Allergan Inc. $120.45B Valeant Pharmaceuticals International, Inc. $78.17B Shire plc. $47.82B Endo International plc. $16.55B
  6. 6. 6 The definition of what constitutes specialty pharma is debated upon. An excellent classification is provided in the Financial Times (Crow, 2015), whereby specialty pharma consists of 2 parts. One are highly acquisitive entities that have marginal investment in in-house R&D, but depend on M&A to grow their business. These companies are aided by current low debt interest rates and potentially lower tax rates due to tax inversions. Another are acquisition targets for the first group: biotech companies with a focus on a particular drug or specific area of research. Such is the example of Salix a takeover target for Allergan. Another, is NPS Pharma, recently bought by Shire. The criteria to determine whether the company belong to Big Pharma have been excellently summarized by M. Rosen (Rosen, 2005): Sales exceed $2 billion/annum International exposure to the main 3 markets: U.S., Europe and Japan R&D in minimum 5 various therapeutic areas A fully integrated pharmaceutical operations models, that encompasses in-house R&D, operations, clinical trials, a regulatory department, sales and marketing Only ~30 companies globally are estimated to meet all 4 criteria to qualify as Big Pharma (Rosen, 2005). Mallinckrodt plc. $14.07B Data: Yahoo Finance, 02.07.2015
  7. 7. 7 2. Mergers and acquisitions does bigger really mean better? Over the past year pharmaceutical companies have undertaken M&A deals worth 300bn (Financier Worldwide Magazine, 2014). The first quarter of 2015 has already seen deals of 95.2bn, making up 12% of all M&A and accounting for a 70% increase on the same period from the previous year (Massoudi&Fontanella-Khan, 2015). Pharma incumbents are adopting several distinct stances in terms of M&A deal-making: 2.1. Acquisition of generic drug manufacturers One is the acquisition of generic drug manufacturers to, firstly, deliver efficiencies through cost-cutting. Given potential patent expirations, this path can, furthermore, be seen as an attempt to retain decreasing revenue streams from off-patent blockbusters. Another reason for acquiring generics manufacturers is gaining fast exposure to emerging markets with millions of patients, unable to afford high-price branded medicines Such is the 8.05bn deal, where Endo seeks to acquire drug maker Par, careering the company to top-5 generic drug makers by U.S. sales (Paton, 2015). 5 years ago the company was heavily reliant on a single blockbuster Lidoderm, and derived almost half the revenues from it. Using the M&A strategy Endo successfully adapted and is valued more than 3 times as much. (Financial Times, 2015). Another pharma player to acquire a generics drug-maker is Pfizer with its 16.8bn acquisition of Hospira, the world leader in biosimilars genetic copies of biotech drugs (Fortune Magazine, 2015). Ian Read, the company CEO, has justified the deal by claiming excellent alignment with Pfizers business and a strong exposure to growing developing markets (Pfizer, 2015). However, modifying the business model to focus more on generics carries inherent risks. To increase revenues from low-margin generics, companies have been selling drugs at different prices in developed and developing markets. This approach has recently
  8. 8. 8 erupted in a scandal enveloping Gilead, a US company, over the sale of U.S. hepatitis-C Sovaldi and its generic version Sofosbuvir (Kazmin, 2015) in developing markets at j