Mojo. The life sciences industry has got it back. Not just the biotech sector — they’ve had mojo for some time. And yes, specialty pharma is showing its mojo as well. But now, the old guard — pharma — has it too. After three years of declining revenues, most big pharmas reported top-line growth in Q2. While aggregate annual big pharma sales are projected to decline yet again in 2014, the outlook over the next few years for most big pharmas is much brighter than any time in recent memory, thanks to an increasingly visible renaissance of new product approvals and portfolio rationalization efforts. While big pharma growth was essentially flat through the first half of 2014 (adjusting for the net impact of exchange rates), top-line growth is now projected to accelerate to 3% in 2015. Despite modest revenue growth, the industry has provided a total return to shareholders in excess of the performance of most major stock indices in 2014.
What’s driving new growth? A number of factors over the past few years: accelerating organic growth from major new product launches, exceptional pricing power (for which the Affordable Care Act has provided some new muscle), solid specialty pharma and generic growth, and a healthy measure of inorganic growth as the industry transforms itself. After several years of painful retrenchment, the pharmaceutical industry is now firing on all cylinders and the outlook is good.
The most recent Capital IQ projection shows an overall 5% industry growth in 2015, driven by big pharma’s projected 3% growth, while biotech, specialty pharma and generics maintain strong growth. Some are catching up after falling behind; others are already in the fast lane and racing ahead. Buoyed by rising firepower and management confidence, as well as something not quantifiable — call it mojo — bolder aspirations are altering the competitive landscape and ushering in a new era of transformational M&A.
Can China become a global leader in health care innovation? It may require a leap of imagination, but according to a roundtable discussion among industry leaders who participated in the Future of Health iLab at EY’s recent Strategic Growth Forum (SGF) in Shanghai, imagination is an asset in plentiful supply.
Participants in the iLab — an informal roundtable chaired by EY’s Global Life Sciences Leader, Glen Giovannetti — included leaders from global and Chinese pharmaceutical and health care companies, medical technology and IT firms, food companies, and agrifood businesses.
The iLab session was timely. The Chinese Government has launched a health care reform process that makes other countries’ efforts appear unambitious. More than US$350 billion has already been spent on establishing a basic health insurance system and improving infrastructure, access to care and medicine, with more government investments to come in the next four years. But as we heard from iLab delegates, the reforms take place against big challenges: chronic disease, an aging population, massive urbanization, inefficient infrastructure and imbalanced allocation of resources. The question is, then: where can, and should, the private sector expect to play a greater role in helping to expedite growth and contribute to the sustainability of Chinese health care?
This past year has resulted in numerous publicly announced collaborations and deals in precision medicine. Many times, however, these deals have been forged late — when the diagnostic is already developed or the drug is already without a biomarker, or the clinical paradigm is already too complex or the technology is not accessible in many of the countries in need — and management teams miss opportunities and synergies that a collaborative effort would have yielded if the deal had been pursued earlier. In other scenarios, lack of planning has resulted in deals negotiated in haste which, in turn, has jeopardized the due diligence necessary to protect the investment.
At the 2014 BIO International Convention in San Diego last week, I organized a panel of noteworthy leaders in precision medicine to discuss transaction planning and identify best practices. The panel included John Boyce, President, CEO and Co-Founder of GnuBio/BioRAD; James McCullough, CEO of Exosome Diagnostics; Khosrow Shotorbani, President and CEO of TricCore Reference Laboratories; and Jami Taylor, Senior Director, Global Access Policy, Global Market Access, & Commercial Strategy at Janssen Global Services, Johnson & Johnson.
Each panelist represented a company with very recent inorganic and organic growth in precision medicine, and had tips for the audience:
- Plan well. John Boyce, whose company, GnuBio was just acquired by BioRad, emphasized the importance of building a strong data room with solid commercial and scientific research to support the product and its future potential. For his company, this approach allowed multiple parties to come to the table and understand the value of their DNA sequencing platform so they could then get to the important issues of integration and fit with the potential acquirer. While having a strong dataroom is essential to any deal, in innovative diagnostics and precision medicine this need is heightened by the added complexity of new technology and still burgeoning market access.
- Get creative. James McCullough, whose company Exosome Diagnostics has been involved in multiple deals with biopharma and diagnostics companies over the past two years, stressed that each party must be clear upfront with their expectations for the goals of the transaction and craft a partnership that is agreeable to both parties. Their deal with a specific life science tools company provides the tools company access to Exosome’s novel liquid biopsy technology and in return, Exosome was able to leverage the global reach of the tools company to market their product. In other deals, the question of how to structure to benefit both the pharma and the diagnostics company is of concern. “This is a huge challenge in precision medicine, but some pharma companies are structuring deals to provide more equality to the diagnostic as they recognize the value it brings to drug sales.”
- Be realistic. TriCore Reference Laboratories is a not-for-profit that offers a full spectrum of laboratory services so the medical community has a single provider for diagnostic testing and the supporting records. TriCore’s CEO, Khosrow Shotorbani explained that by giving patients a single provider that meets all their testing needs, TriCore can help identify unnecessary testing, give HCPs the comprehensive patient information needed to make more accurate diagnoses and, ultimately, provide better care. Shotorbani noted that despite all the talk about innovative technology and the importance of longitudinal tracking, basic fundamentals are still missing — there still isn’t a way to bring a complete patient record of testing and health information into one database so that a physician can make the right medical decisions. He added that physicians are facing this complexity, and they are overwhelmed by it. Khosrow also emphasized the financial realities associated with adopting new technology. TriCore has recognized these issues and is investing in a new business model to overcome the reimbursement complexities associated with the US’ bundled payment system.
- Go truly global. Jami Taylor from Janssen Pharmaceuticals shared his insights from Janssen’s global approach to precision medicine. When they were building their business, they realized that they couldn’t just focus on one type of technology, one type of geography, or one aspect of precision medicine. They also were aware that they needed to be open to partnerships and deals that gave them the flexibility needed to broaden their focus and become truly global — moving beyond established markets like the US, EU5 and Japan to the frontier markets. In Rwanda, for example, better diagnostics capabilities are a high priority, but there have been limitations to what the government could afford. It was clear to Janssen that they needed to reengineer their diagnostics and precision medicine to be more affordable and accessible to developing countries without compromising testing capabilities and sophistication.
The panel closed with each panelist discussing strategy and implementation plans over the next six months for their specific deals and partnerships. The consensus of the group was that this was a fantastic time for precision medicine with the road ahead made brighter through pragmatic and well-backed partnerships that can help more and more patients worldwide.
Jeff Stoll and Scott Palmer, who work closely with me on precision medicine transactions and commercial development and lead our key Commercial Advisory project teams, attended this session with me and helped in the development of this blog
For more on precision medicine, see EY’s Biotechnology Report 2014: Beyond Borders – unlocking value.
For those based in the US, May’s Memorial Day holiday weekend is particularly welcome this year after a long, cold winter whose last victim was Q1 GDP. This was evident in the US as big pharma sales fell 6%. While the weather was clearly a major factor, the more secular and perhaps enduring headwinds may be from factors such as the underlying dynamics between payers globally, market access hurdles across Europe, rising government tenders in most of the emerging markets and the launch of the Affordable Care Act, which brings with it a whole host of unknown unknowns. This latest quarter, which kicks off a third year of negative growth, seems to have been the tipping point for pharma companies to finally emerge from a long M&A hibernation. However, what do these recent deals – which were mostly intra-pharma transactions that will do little to grow the top line, at least in the near term – suggest about big pharma’s growth aspirations? Is this focus on portfolio rationalization a stepping stone to the more ambitious M&A that is needed to drive real growth?
With this calendar year not even half over, who would have expected that the M&A values would have already surpassed all of 2012 and 2013? What’s more, should the M&A pipeline fulfill its 2014 potential — a pipeline that includes some high-profile offers and possibly many others rumored in the media and in recent Q1 conference calls — this year’s M&A activity may not only best each of the last few years; it could be greater than the last four years put together.