Estate agents, traffic wardens, management consultants, wheel clampers. Love them or hate them, they're going to be around for a while so perhaps we should get over our dislike and work out how to get the best out of  any encounter. Management consultants can trace their lineage back to the greats like Adam Smith and Gilbraith and the more modern Deming, Drucker and others have all contributed to an enormous body of great ideas. Isn't that what w … Read More

via Consulting – a con or not?

Affecting over 15 million men over the age of 50 years in the seven major markets (US, Japan, France, Germany, Italy, Spain, UK), BPH is a non-cancerous enlargement of the prostate. Symptoms increase almost linearly with age and with the aging population and the increase in life expectancy this condition is an interesting opportunity for pharmaceutical companies. In 2009, the BPH market was valued at $4 billion across the seven major markets.

This new drug potentially displaces the current leading Flomax (Merck & Co), combining its active ingredient tamsulosin with GSK’s existing BPH drug, Avodart (dutasteride) in a single capsule.

GlaxoSmithKline will need to overcome potential side effects which could hinder uptake, but given the expiry of Flomax’s patent in the US in 2009, the main challenge will be ensure the reimbursement of the new drug.  Pricing carefully to appease payers and shareholders will be no easy task.

Nonetheless, Datamonitor expects sales for Jalyn to offset generic erosion and the product will become the market leader by 2018 with sales in excess of $1 billion across the seven major markets.

Jefferies International said ‘Following a review of this pharmaceutical and consumer health goods giant, the broker has upgraded its stance from hold to buy. With a period of drug patent expires due to end, Jefferies believes a period of more sustainable earnings growth from long duration assets such as vaccines and asthma drug Advair need to be considered. Some 40pc of revenues now come from such products, whilst a 5.6pc dividend yield and emerging market growth cannot be overlooked.’

A major wave of M&A driven consolidation swept the industry in 1999–2001 resulting in the creation of AstraZeneca and GlaxoSmithKline headquartered here in the UK, together with large corporate additions to Pfizer and Sanofi. Ten years later, we are witnessing a parallel wave of M&A, this time concerning Pfizer & Wyeth, Merck & Schering-Plough, Abbott & Solvay and of course Roche finally taking 100% ownership of Genentech.  

Rather than simply listing M&A events and observing their scale & frequency Datamonitor suggest it is possible to quantify exactly how much of Big Pharma’s sales growth has been driven by M&A versus how much has been self-produced through organic growth.

It is true that only relatively small acquisitions have demonstrated subsequent fast growth and the three examples of this type all represent the purchase of a leading player in the explosive-growth monoclonal antibody (mAb) market (Johnson & Johnson’s acquisition of Centocor, Abbott’s acquisition of Knoll and Roche’s acquisition of Genentech). Furthermore, these acquisitions were all ‘early plays’; subsequent ‘late play’ moves for mAb companies (Eli Lily’s acquisition of ImClone and AstraZeneca’s acquisition of MedImmune will most likely only provide medium sales growth).

In fact, each of Big Pharma’s largest M&A events have resulted in flat sales growth for the target company, indicating that such moves are primarily driven by the strategic goal of increased scale and not rapid revenue growth. There are of course a number of examples that go against the general trend; both the Warner-Lambert and Zeneca acquisitions (by Pfizer and Astra, respectively) did provide access to high-growth products (statins).

Looking more deeply at the financial impacts of the different strategies shows that they do not differ profoundly at the level of Profit Margin and in any case all three strategies deliver superior results over other healthcare sectors.  In contrast, analysis of Capital Turnover reveals a very poor performance for Scale players and this poor Capital Turnover drags down the Investor Return for Scale players. The unsurprising reason for this lies simply in the need to pay a large premium to take control of a large target company.

The observation that ‘Growth’ has a superior RoCE versus ‘Scale’ strongly suggests that long term buy-and-hold investors should favour ‘Growth’ over ‘Scale’. There is a BUT though which is how long will it take to realise the growth and then there is the looming patent famine to worry about.

The looming patent cliff switches the strategic imperative behind M&A from the pursuit of sales scale and/ or growth towards the pursuit of cost savings. Indeed the patent cliff has necessitated the sharpening of company cost structures in 2009, 2010 and beyond and the biggest ‘Scale’ mega-M&A events have both been very clearly and publicly positioned to include additional M&A-driven savings on top of the ‘standard’ cost savings.

The Roche-Genentech merger was the consummation of a long-standing 60% holding to ownership. In strategic terms, it is completely distinct from the other three mega-M&A events of 2009 in that it was primarily motivated by Roche’s desire to secure complete access to the highly significant profit flows from Genentech’s monoclonal antibody (mAb) portfolio. So the Roche-Genentech mega-M&A remains the definitive example of ‘Buy Growth’.

Pfizer-Wyeth, Merck-Schering-Plough and Abbott-Solvay mega-M&A events are clear ‘big & flat growth’ merger events intended to yield a one-off immediate boost to scale and both are strategically necessary in face of the approaching patent cliff

In addition to standard cost-savings programs already announced at most Big Pharma companies, these three 2009 mega-M&A events provide huge scope for additional M&A-driven cost savings although the auxiliary benefit of portfolio diversification into new therapy areas and vaccines should not be overlooked.

Bringing it all together – how well do we think the three distinct mega-M&A

strategies will serve Big Pharma companies going forward to 2014?

‘Growth’  Not enough time for it to work and it missed out on mAbs.

‘Scale’  The only strategy which can deliver in time. Will provide a phasing and therefore dilution of patent drought’s impact. It will also provide additional M&A cost-savings.

‘Organic’ It remains the rational strategy to ‘endure patent drought’ and create a smaller more nimble organisation, but will companies be able to resist investor pressure to remain BIG?

Well what do you know, big really is better, at least it is if you want to survive the patent drought and maintain investor confidence.

For GSK, still the world’s second largest drug maker by revenue, this move continues the realignment of its portfolio as it attempts to deal with heightened generic competition, particularly in the United States. This realignment is leading the company to move toward selling its own branded generic drugs in emerging and existing markets to break its traditional reliance on blockbuster medicines in traditional Western markets.

This latest move announced today comes on top of last month’s announcement that it was buying American dermatology business Stiefel Laboratories Inc. in a $2.9 billion deal. It also sold rights to antidepressant Wellbutrin XL in the United States to Canadian drug developer Biovail Corp. for over $0.5 billion.

This diversification is creating a very different GSK from the one Witty took over and has, in my view, created a much more robust business model and platform for growth.

Amgen has always been a US-focused company that has sold by developing strong relationships with specialist clinicians. Going to market in Europe with a large partner like GlaxoSmithKline is a smart move, as GSK has the necessary sales and marketing capability to successfully target key prescribers. GSK already has some experience of the market through co-marketing Bonviva and this deal provides a good opportunity for GSK to grow its market presence while protecting future franchise revenues in anticipation of Bonviva’s patent expiry.

The press announcement uses a great deal of flowery language, such as ‘openness toward outside entities to strengthen creativity’, but at its heart contains some solid and sensible proposals that bode well for the company’s future.

In essence, sanofi-aventis are continuing their consolidation of R&D facilities, while restructuring the R&D organisation to reflect the changed nature of discovery processes, particularly in biopharma. sanofi-aventis spoke of deploying reactive “entrepreneurial units” to encourage the emergence of innovation and accelerate the marketing of innovative products.

This transformation should be complete by 2013, a relatively short timescale given the complexity and scale of the proposed changes which sanofi-aventis describe as reinventing R&D.

Collaboration in many different forms is clearly at the centre of this strategy. There will be much closer and earlier links between R&D and Marketing internally. Externally, I think we can expect to see a steady stream of tie-ups announced over the coming months. The real challenge in the increasingly crowded and competitive pharma/ biopharma market will be selecting the right deals and putting together the offers to secure them.

In an interesting footnote, sanofi-aventis are also looking at cost reduction within their strategy. Part of this exercise will look at back office simplification and even Group functions located in Paris will be reevaluated. Mr Viehbacher clearly means business…