The past 25 years has witnessed an unparalleled consolidation of the pharmaceutical industry, and some predict a fate similar to the agchem industry where currently six companies control some 75% of the global market. Certainly, there are some parallels: increasing regulatory burdens resulting in escalating costs of new product introductions; price sensitivity in the customer base (admittedly, farmers have always been price sensitive, but healthcare purchasers have certainly caught up); and both slower and lower returns on investment in biotechnologies, to name but three. But we would like to project an alternative future, characterised by extensive deconstruction to produce a diversity of strategically independent participants along an extended value chain. In brief, there will be a split between innovators, service providers and marketers, representing a wholesale adoption of the biotech model.
There have been several distinct trends, some overlapping, of pharmaceutical industry strategy:
The modern pharmaceutical industry evolved from the growth of national family owned businesses which built international franchises in their given therapeutic fields. This was arguably the first Golden Age of the industry, and was massively boosted during the antibiotic era which started in the 1950s, the cardiovascular era of the 1960s and the anti-ulcer/asthma era of the 1970s and 80s.
Throughout the 1980s, research-based ethical companies such as Beecham, Glaxo and Roche diversified, adding diagnostics, consumer health, veterinary health, generic pharmaceuticals and even fine chemicals interests. This produced mirror images of those diversified companies which had evolved from a purely chemical industry base (e.g. Hoechst, BASF, Ciba-Geigy). In parallel, companies built multiple, parallel sales forces (e.g. ICI and Stuart) to maximize franchise power in an era when detailing – and other approaches to influence prescribing practice – provided a very healthy return on investment.
Back to Basics
Starting at the beginning of the 1990s, there was a move back to pure play pharma led by Glaxo, involving the divestment of veterinary medicines, diagnostics and other ‘non core’ interests. The alternative strategy of the day was to create pure play ‘life science’ entities such as Zeneca (demerged from ICI) and Aventis (the life sciences vehicle formed following the merger of Hoechst and Rhone-Poulenc – both of which had been the product of multiple mergers).
In parallel with the pure-play life sciences focus, many companies sought approaches to defend and extend their therapeutic franchises. A key strategy involved bolt-on acquisitions, often of activities that had been divested in the past, such as drug delivery, injectables and generics. For a brief period, Rx-to-OTC switching was viewed as a franchise saviour, although it became clear that the dynamics of a consumer product business were radically different from the traditional pharma space. In addition, national and regional players were acquired to fill gaps in the globalization jigsaw.
The mid 90s saw mergers with pharmacy benefit managers to create ‘integrated health care organizations’. This trend, ultimately to be revealed as an expensive sideshow, was initiated by Merck’s acquisition of Medco, hailed at the time as a game changer. This was followed by the acquisition by SB of Diversified Pharmaceutical Services, and Eli Lilly/PCS Health Systems). These ‘game changers’ were reversed after the collapse of the Clinton healthcare plan.
Although M&A had been a feature of the pharmaceutical industry since its inception, 1995 ushered in the first wave of merger mania, triggered by Glaxo’s dramatic acquisition of Wellcome; during the ensuing five years, the pace and scale of dealmaking accelerated, culminating with Glaxo-Wellcome’s merger with SmithKline Beecham (see table below).
|Dec-99||Monsanto||Pharmacia & Upjohn||26|
|Dec-00||Glaxo Wellcome||SmithKline Beecham||76|
For the majority of the history of the pharma industry, the key driver has been new products depending on innovation, and up to the 1990s this approach reliably underpinned double-digit growth and profitability. The strategies described above have been responses to increasing pressures as R&D productivity declined, patent cliffs loomed and healthcare cost-containment escalated. We are currently in a second wave of mega merger which has seen the combination of Merck/Schering Plough, Roche/Genentech, Pfizer/Wyeth and Sanofi-Aventis/Genzyme over the recent three years. The giants of the industry have found that R&D has not been able to support the sales force, and these have been significantly downsized. However, as noted in Burrill & Co’s recent report (Biotech 2011-Life Sciences: Looking Back to See Ahead, Burrill & Company, 2011), these aggressive M&A strategies do not seem to have paid off, at least judging by the spectacular ~$1 trillion loss in market value by some of the industry’s most active acquirers over the past decade.
Franchise areas have evolved unpredictably: anti-infectives have gone from boom to bust while vaccines and (companion) diagnostics have gone from bust to boom; oncology was found to be blockbuster-capable after all, while cardiovascular is facing partial saturation in more than moderately satisfied markets. New therapeutic areas have emerged including anti-virals, obesity, neurodegeneration and lifestyle drugs. Some areas have been effectively forgotten, though given inherently cyclical industry behaviour patterns, some are once again coming back into focus (e.g. anti-malarials, selected anti-infectives).
Technology continues to promise new products (but delivery has been unreliable). Following the breakthrough success of HerceptinÒ, monoclonal antibodies gained respectability and now biologics (antibodies, Ab fragments, siRNA, etc) are central to the R&D strategy of almost every innovative pharma company worldwide. Tomorrow’s great white hope may be personalised, or at least stratified, medicine, offering the prospect of better matching therapy to patient and making for more efficient, targeted clinical trials (at the expense of deliberately smaller market opportunities).
When times got tough in the past for the multinationals, it was possible to strip costs by sweeping away entire levels of management. In the face of today’s pressures, headcount reductions have certainly accelerated, but no one imagines that cost cutting alone will come anywhere near to solving tomorrow’s problems. Likewise, the internal R&D engine has proven severely underpowered, unable to accelerate the majors out of the morass. Instead, we have a period of heightened activity in franchise management in which Business Development (now fully established as a profession) and Corporate Venturing have taken centre stage. Accordingly, portfolios are being vigorously reshaped through a combination of product/company acquisition, licensing and partnering on the one hand, and project terminations and divestments on the other.
The new perceived wisdom is let’s all be like biotech. How is this achieved? Applying the model to big pharma has already shifted pipelines toward 50% in-house molecules and 50% externally-sourced molecules. This trend is not confined to big pharma – middle size companies have also announced “strategic adjustments”: Lundbeck is eliminating approximately 50 positions in research to be offset by a greater emphasis on external partnerships in its areas of specialization. Pharma has also been busy shedding non-core assets/functions to service providers, exemplified recently by Sanofi Aventis’s disposal of two CMC sites to Covance in September 2010 in a deal reported to be worth up to $2.2 billion in revenues to the CRO over the next ten years. Outsourcing to an ever growing cadre of contract service providers in low cost centres has been accelerating and shows no sign of abatement. Headquarters allocates resources within a global capital market, shifting funds to activities/functions which add the greatest value. If “greatest value” requires a function to be carried out by an external party, so be it. The philosophy is based on a belief that anything that introduces competitive pressures will help drive performance. The model has arguably been successful in the automotive sector where car manufacturers are really now just ‘assemblers’; manufacturing of parts is outsourced through very sophisticated just-in-time procurement networks and car sales are outsourced through dealer networks.
We are already witnessing renewed questioning of the ‘bigger is better’ strategy. During the analyst call following its acquisition of King Pharmaceuticals, Pfizer’s CFO was asked whether the corporation would be worth more if it was split into several parts. Tellingly, the response was that Pfizer has “no preconceived notion” about its future, only that the company will be managed “from a total shareholder return perspective”.
If the major pharma players are no longer the one stop FIPCO shop, they are transforming themselves into a series of smaller enterprises. Where is this heading? In the first instance, there could be restructuring into three types of company by big pharma divesting all in-house research, i.e.
- Research and early development companies (‘EarlyCos’)
- Late stage development, marketing and sales companies (‘LateCos’)
- Functional service providers (‘FSPs’) which undertake preclinical development, pharmaceutics, process development/manufacturing, etc.
For each EarlyCo and LateCo, deciding what and how much they want to outsource becomes a key strategic parameter. Market dynamics and multiple rounds of dealmaking could reshape and further fragment the industry landscape into pure-play ventures each selling products and services to each other. At this point we will have the full and complete buy-in to the biotech model. Gone is the security blanket of knowing if the product goes down the company does not go with it – instead, we have the cutting edge of the need to survive – indeed that key evolutionary tool, survival of the fittest!