Is Diversification the Right Strategy for Big Pharma?

Top pharma companies may be well-advised to look beyond their core business – prescription branded pharmaceuticals – to other healthcare sectors as a hedge of protection against looming threats including:

  • Declining revenues as a result of patent expiries
  • Impending launches of biosimilars
  • Slow R&D productivity
  • Pricing pressures
  • Payer restrictions

A new trend report from Datamonitor Healthcare by analyst Amanda Micklus, Big Pharma Diversification Strategies, evaluates opportunities in 10 healthcare sectors by looking at indicative profit potential (IPP), a metric derived by multiplying the total market value of a sector by its average profit margin.

Using this calculation, the prescription branded pharmaceuticals sector has the highest IPP by a factor of almost five compared to the next highest sector, but other sectors such as medical devices and diagnostics, and OTC/consumer health also have high profit potential. “The Big Pharma companies that have already diversified into this area, and are remaining there, have done well in terms of growing revenue,” says Micklus.

The report classifies the top 15 pharmaceutical companies into three categories based on strategy:

  • Focused – 90 percent of revenue from pharmaceuticals (ex. Bristol-Myers Squibb)
  • Intermediate – 50 to 90 percent of revenue from pharmaceuticals; balance from non-pharmaceutical businesses (ex. GlaxoSmithKline)
  • Diversified – < 50 percent of revenue from branded pharmaceuticals; more than half of revenue from non-pharmaceutical businesses (ex. Johnson & Johnson)

Here, we’ll recap highlights from three case studies that illustrate each of the strategies.

Bristol-Myers Squibb – Focused Strategy

Bristol-Myers Squibb put a stake in the ground in 2007, shifting its focus to specialty medicines and biologics after a restructuring. “Our unique BioPharma strategy … leverages the reach and resources of a major pharma company paired with the entrepreneurial spirit and agility of a biotech firm,” the company’s website touts.

To accumulate the cash needed to support M&A activity in its new focus areas, the company divested several businesses, including ConvaTec, its wound care business, and Lantheus, which produces nuclear and ultrasound cardiovascular diagnostic imaging agents. The acquisition of Medarex, an antibody drug discovery firm, added two key immuno-oncology products to the company’s biologics portfolio.

Between 2013 and 2017, revenue from biologics increased (CAGR +30 percent) relative to small molecules (CAGR -2 percent). Small molecules today represent a decreasing portion of the pie relative to biologics.

GlaxoSmithKline – Intermediate Strategy

GlaxoSmithKline’s (GSK) pharmaceutical business dropped to 74 percent of total revenues between 2016 and 2017, down from 80 percent between 2013 and 2015. Revenue from the pharmaceutical business is largely comprised of small molecules, with vaccines a growing category.

GSK’s consumer health brands include household names such as Sensodyne, Nicorette, and Theraflu. The consumer health business has been growing as a proportion of total revenue, taking share away from small molecules, according to Datamonitor Healthcare. The consumer health sector averaged 21 percent of the company’s total revenue from 2013 to 2017.

Solidifying its position further, GSK recently cut a deal for $13bn with Novartis, it’s partner in a consumer health joint venture, to take over the entire project. Emma Walmsley, GSK CEO, stated that the proposed deal would “allow GSK shareholders to capture the full value of one of the world’s leading consumer healthcare businesses.” (Scrip, March 27, 2018).

Johnson & Johnson – Diverisified Strategy

Dominic Caruso, Johnson & Johnson’s  (J&J) chief financial officer, says the company should not be described as a pharma, devices, or consumer company. Rather, it is a healthcare company. Consistent with this view, on average, only 44 percent of the firm’s revenue over the past five years came from prescription pharmaceuticals.

The company’s consumer health business is large part of its overall strategy, in spite of some setbacks including a major recall of OTC analgesics in 2010. Since then, J&J has been gradually regaining market share from private labels. CNN reported in May that the company was hit with a $25.75 million verdict related to its Baby Powder product after a patient contracted pleural mesothelioma.

J&J plans large-scale marketing campaigns focused on six core areas: OTC, oral health, women’s health, wound care, baby care, and beauty, hoping to rebuild its consumer business back to its previous standing. It also plans to ramp up direct to consumer sales through digital channels.

These examples illustrate three distinct approaches that Big Pharma may employ for maximum growth and competitiveness. Companies must continue to respond to the challenges facing the industry as a whole, and craft flexible strategies that capitalize on their strengths while minimizing risks.

US Tax Reform Jump-Starts M&A Activity in 2018

The passage of the Tax Cuts and Jobs Act of 2017 paves the way for US corporations with large stockpiles of cash overseas to repatriate their capital at a one-time rate of 15.5% vs. the new corporate tax rate of 21%. Prior to the passage of the new law, the corporate rate of 35% and potential tax liability made it less than attractive for companies to bring their assets back to the US.

Big pharma companies are among those with the largest accumulated cash outside the US, including Amgen ($38.9bn), Gilead Sciences ($32.4bn), Bristol-Meyers Squibb ($9.6bn), and Celgene ($6bn).[1]

According to PharmaVitae’s M&A Outlook 2018 report, “A host of companies, led by Amgen and Gilead, have noted their intention for repatriation.” Many of these companies plan to use the windfall to ramp up M&A activities in 2018.

The report identifies more than two dozen potential acquisition targets, categorized by estimated deal size: up to $2bn, $2-10bn, and $10bn+. Companies may engage in dealmaking to fill strategic gaps, strengthen core capabilities, enter new markets, or complement overall goals with targets that generate strong returns.

Activity undertaken so far this year sheds light on some of the M&A strategies pharma companies may follow to strengthen their positionsin the coming months:

  • Sanofi acquisition of Bioverativ for $11.6bn, and Ablynx for $4.8bn
  • Celgene acquisition of Juno for $9bn
  • Roche acquisition Flatiron for $1.9bn

Offsetting Losses from Patent Expirations

Sanofi’s acquisition of Bioverativ is illustrative of the type of targeted deal-making pharma companies may engage in to offset patent expirations. The patents for Sanofi’s best-selling diabetes drug Lantus are set to expire between 2023-2028.[2]

With the Bioverativ deal, Sanofi is betting that factor replacement therapy will remain the standard of care in hemophilia for many years, although other innovative therapies such as gene therapy are gaining ground. The hemophilia market is valued at $10bn.[3]

The acquisition of Bioverativ was successfully completed on March 8.

Countering Competitive Pressures

With its single-domain antibody fragment, or “Nanobody,” the Ablynx acquisition gives Sanofi a strong foothold in rare blood diseases including the ultra-rare autoimmune blood clotting disease acquired thrombotic thrombocytopenic purpura (aTTP). In specialty areas such as aTTP, the competition is less intense and drug prices are higher.

There are approximately 7,500 new cases of aTTP a year in the US, EU and Japan. Ablynx’s late stage asset caplacizumab is the first drug approved for treatment of aTTP in both US and EU.

On May 14, Sanofi announced the successful results of the initial tender offer period for Ablynx.

Setting New Standards Through Innovation

Celgene’s acquisition of Juno Therapeutics establishes the company as a major player in the field of cellular immunotherapy. It also gives Celgene a hedge of protection against the upcoming expiration in the mid-2020s of its blockbuster cancer drug, Revlimid, which accounted for over 60% of its sales in 2017.[4] PharmaVitae’s M&A Outlook 2018 report states: “The pace of cellular immunotherapy innovation is repidlyrapidly evolving, and Celgene has bet that cellular immunotherapies have the potential to become a standard component of cancer care.”

Real-World Evidence Through Big Data

In February, Roche expanded its equity stake in Flatiron, a healthcare technology and services company, agreeing to acquire the remaining shares for $1.9bn. Flatiron’s cloud-based analytics platform is focused on cancer analytics and uses natural language processing to extract insights from unstructured data in electronic medical records tailored to the needs of oncologists.[5]

In announcing the acquisition, Roche Pharmaceuticals CEO Daniel O’Day stated, “This is an important step in our personalized healthcare strategy for Roche, as we believe that regulatory-grade real-world evidence is a key ingredient to accelerate the development of, and access to, new cancer treatments.”

These acquisitions foreshadow M&A activity in the coming months and years, as pharma companies seek to rebalance their portfolios, offset losses from patent expirations, and acquire high-value assets that provide stability in the short term, as well as growth potential long term.

[1] http://fortune.com/2018/02/22/us-companies-overseas-cash-tax-cut/
[2] https://www.accessdata.fda.gov/scripts/cder/ob/patent_info.cfm?Product_No=001&Appl_No=021081&Appl_type=N
[3] https://www.fool.com/investing/2018/01/24/will-sanofis-big-hemophilia-deal-pay-off.aspx
[4] https://www.investors.com/news/technology/celgene-rises-on-potential-it-could-settle-over-generic-revlimid/
[5] https://healthitanalytics.com/news/roche-buys-flatiron-cancer-analytics-ehr-tools-for-1.9b