PRESS BRIEFING Otb 2010 October 2010 Fight or flight? Fight or flight? Diversification vs. R x -focus in big pharma's quest for ti d th sustained growth
May 16, 2015
PRESS BRIEFINGO t b 2010October 2010
Fight or flight?Fight or flight?Diversification vs. Rx-focus in big pharma's quest for
t i d th
1
sustained growth
Contents Page
A. Executive Summary 3
B. Context and study approach 9
C Study findings and discussion 19C. Study findings and discussion 19
2© 2010 Roland Berger Strategy Consultants GmbH
E ti SA Executive SummaryA.
PRESS BRIEFING
3
Executive Summary
Data basis• Study is based on a global quantitative survey supported by in-depth desk 1. y g q y pp y p
research. The survey results were validated in over 50 CEO and board level face-to-face interviews with top decision makers of leading pharmaceutical groups
• Participating companies cover 40% of global pharma revenues and include7 t f th l b l t 10 l7 out of the global top 10 players
Pharma in the midst of a strategic crisis2 Pharma in the midst of a strategic crisis• According to 65% of pharma executives, the pharmaceutical industry is currently
experiencing a strategic crisis• Changing healthcare environments, budget pressures, challenging market
2.g g , g p , g g
access as well as massive patent expiries ask for a review of the traditional business model focusing exclusively on high margin, patent-protected innovative medicine
4
• 57% of 2008 global pharma sales will be going off-patent within the next three years; 75% within the next five years
Executive Summary
Diversification – a potential way out of the crisis?• 67% of pharma executives think of diversification as a potential way out of the 3 p p y
strategic crisis• For those currently pursuing diversification, the study distinguishes three
alternative dimensions: the de-risk path, the innovation path and the integration th
3.
path• At the moment, the industry seems to be focusing on the rather conservative de-
risking strategy. By acquiring particularly generics and consumer health companies the industry aims at top line growth while also preparing for thecompanies, the industry aims at top-line growth while also preparing for the opportunities emerging markets offer
• Diversification along the innovation path ranks second. It results from the trend towards personalized healthcare and diagnosticsp g
• Integration strategies along the healthcare value chain would turn pharma into active healthcare solution providers – they are not yet in the focus of today's strategies
5
Executive Summary
The art of managing a diversified business• Leveraging existing capabilities and realizing related synergies is key to any 4. g g g p g y g y y
successful diversification• The largest overlaps of innovative patent-protected pharma with alternative
diversification areas are identified with Generics (45%) followed by Diagnostics (43%) d V i (37%)(43%) and Vaccines (37%)
• Pharma executives see only very limited functional competencies of their innovative business model which can be leveraged in other diversification areas
• In particular despite huge investments customer skills such as access to• In particular, despite huge investments, customer skills, such as access to prescribers or even branding, are not seen as key competencies to be leveraged in an effort to diversify
R&D d ti it i i d i di ifi tiR&D productivity crisis drives diversification• Over 60% of executives are re-evaluating their traditional strategy which was
focused on patent-protected, high margin products due to two reasonsFi tl i t i t th i f i ti di i t d
5.
6
• Firstly, interviewees expect the margins of innovative medicine to come under tremendous pressure as public household deficits need to be managed across the globe
Executive Summary
R&D productivity crisis drives diversification (Continued)• Second, massive R&D investments are no longer expected to bring the required 5 g p g q
level of return• As many as almost 50% of executives expect a negative return of invest for
today's R&D investmentsI ti h ill i i l h t j tif th i hi h l l f R&D t
5.
• Innovative pharma will increasingly have to justify their high level of R&D spent. Many top-players have already started to reassess their R&D operations and reduced the internal investment level significantly
7
Executive Summary
Financial community and shareholders support diversification• The financial community has already acknowledged this fundamental change – it 6 y y g g
no longer penalizes diversified companies• With over USD 400 billion of market capitalization lost over the past 10 years
among innovative pharma, investors are now linking high growth expectations to di ifi d i
6.
diversified companies• Price-to-earnings ratios of diversified companies are already higher than those of
focused players
Diversification is here to stay• Over 80% of executives believe diversification is a long-term trend that will be 7. g
pursued irrespective of R&D productivity• For the rest, it will be a bridging strategy needed to compensate for profit and
growth shortfalls
8
• The future will bring a more diversified picture: ranging from highly focused, innovative players to fully integrated healthcare conglomerates
C t t d t d hB Context and study approachB.
PRESS BRIEFING
9
Top pharma leaders recognize the existence of a looming strategic crisis in the industry
… fuel a potential strategic crisis in pharma1)
Today's challenges…p
Q: Given reduced top-line growth and margin pressure, do you think the
Public cost containment measures resulting in margin pressure
pharmaceutical industry is facing a strategic crisis?
g g p
Looming patent cliff and R&D productivity crisis
No35%Restricted market access and health
economic requirements
productivity crisis
Yes65%
economic requirements
Value of innovative Rx drugs i i l ti d
10
increasingly questioned
Source: Roland Berger Survey 2010
Consequently, we observe two different strategic business models in the pharmaceutical industry
Diversification as a way out of the strategic crisis?
Top management point of +140%Top management point of view1)
Q: Do you think diversi-fication is a potential
140%
+120%
+100%
ED B
USI
NES
S1) Diversification
fication is a potential way out of the strategic crisis for pharmaceutical companies?
+80%
+60%
%RO
M D
IVER
SIFI
E++
3)
No33%
+40%
+20%
0
ON
OF
SALE
S FR
2)
Yes67%-20%
-40%
-100%
PRO
POR
TIO
Rx Focus 3)
11Source: Roland Berger Survey 2010; Annual reports
2004 2005 2006 2007 2008 2009100%
1) All sales not resulting from pure innovative Rx business 2) Incl. Sandoz 3) Preliminary data
BACKUP
While many big pharma companies are currently diversifying, others are strongly focusing their businesses
Recent diversification/ focus actions in pharma
Diversification R -focusDiversification Rx-focus • Mega merger with Wyeth (Consumer
Health, Nutritionals, Vaccines)• Acquisition of RFCL-Vetnex Animal
Health
• Clear focus strategy on diagnostics and Rx pharma
• Sale of Roche Consumer Health to BayerHealth
• Acquisition of Ebewe Pharma (Generics)
• Announced acquisition of Alcon (consumer vision care, surgical equipment & devices)
• IPO and split-off of Mead Johnson Nutrition
• Monetization of non-pharma businesses, e.g. sale of BMS Branded to GSK(G i )
FIGHT
or
• Numerous Generics acquisitions worldwide
• Acquisition of Chattem Inc. (Consumer Health) and Merial Ltd. (Animal Health)
f
• SHAPE program to focus on indication areas Neurology and Immunology, e.g. divesting primary care organization and
l f E OTC b i
equipment & devices) (Generics)FLIGHT
??• Increase of Vaccine presence through joint venture in China
• Investment in Aspen Pharmacare(Generics)
Additional diversifiers
sale of European OTC business • Acquisition of Schwarz Pharma AG
(Neurology)??12Source: Roland Berger
Additional diversifiers
Three dimensions of diversification can be distinguished
Roland Berger diversification framework
• Continue on path of medical INNOVATE
INNOVATE
pprogress by investing into adjacent medical disciplines
INNOVATE
"High risk, high fun"
INTEGRATE• Defend existing top-line by forward
integration along the healthcare value chain
INTEGRATE"Maintain
fun" value chain
Reduce dependency on R businessDE RISK
fun
Rx
Focus DE-RISK
• Reduce dependency on Rx business model by investing into other non-Rxlife science businesses
DE-RISK"Low risk, still fun"
13Source: Roland Berger
Focus DE RISK
Three dimensions of diversification can be distinguished
Roland Berger diversification framework
INNOVATE
H lthMedical
Diagnostics Wholesale/ Retail bus.
INTEGRATE
INNOVATE
Healthcare provision
devices
Consumer health
Vaccines
Animal health
GenericsRx-Focus
DE-RISK
14Source: Roland Berger Survey 2010
In our current study, we investigate the strategic rationale behind diversification decisions and generate an outlook to the future
Goals of our current
Understand drivers behind diversificationour current study
Analyze status quo and recent evolution with regard to diversification
Determine most attractive areas for diversification
Evaluate options for management of diversified businesses
Analyze diversification from a stakeholder's perspective
Generate an outlook and suggest next steps
15Source: Roland Berger
Generate an outlook and suggest next steps
The survey covers the majority of global pharmaceutical companies producing patented prescription drugs
Survey population
• Over 25 Geographic focus of Global revenues of respondents' O 5participating companies
• Participating i
G g prespondents [% of respondents]
G pcompanies [% of respondents]
AboveBelowGlobalNational companies cover over 40% of global pharma revenues
• 7 out of top 10 40%29%
Above USD 15 bn
Below USD 5 bn
Global focus
Nationalfocus
out o top 0pharmaceutical companies included(based on 2009
40%47% 46%
Regional focus
(revenues)13%
25%
Between USD 5 and 15 bn
16Source: Roland Berger Survey 2010
Top executive interviews represent the most important input to validate findings and to derive strategic implications
High level survey results Desk research
Fight or Flight?
R&D, scientific conversion and novel approaches to healthcare management are seen as the key drivers for diversification
Q: What are the most important drivers for diversification (select top 3)?
Survey results [% of respondents selecting area within top 3] Key finding
• The most important drivers of diversification are those related to R&D / scientific conversion and novel approaches to healthcare management
Scientific conversion trends
R&D productivity crisis
47%
50%
I DRIVERS
Diversification vs. Rx focus in big pharma's quest for sustained growth
1510_06_20 - Fight or flight - Top Executive Interviews_v5.pptx
g
Source: Roland Berger Survey 2009
General uncertainty about evolution of healthcare system
Rx pharmaceutical budget restrictions
Consumerization of healthcare
Shifts in stakeholders/novelapproaches to HC management
12%
18%
18%
20%
42%
Emerging market opportunities
Proposed discussion topics
• Can diversification help to overcome the R&D productivity crisis?
• Which scientific conversion trends should be addressed through diversification?
• Which capabilities are required to deal with shifts in stakeholders/ novel approaches to HC management?
Roland Berger experience
17Source: Roland Berger
Top executive interviewsRoland Berger experience from global projects
St d fi di d di iC Study findings and discussionsC.
PRESS BRIEFING
18
We have tackled the topic of diversification along four guiding questions
What drives pharmaceutical companies to diversify?Drivers of diversificationI
What are attractive diversification areas?II Where to diversify?
What are the implications for management of diversified businesses?
How to diversify?III
How is diversification assessed from a pure financialand investment perspective and is it here to stay?
Shareholder's per-spective & outlookIV
19
ROLAND BERGER STUDY ON DIVERSIFICATION
Source: Roland Berger
I DRIVERS OF DIVERSIFICATION
Changing health care environment, R&D and merging of medical disciplines are seen as the key drivers for diversification
Q: What are the most important drivers for diversification (select top 3)?
S lt [% f d t l ti ithi t 3] K fi diSurvey results [% of respondents selecting area within top 3] Key findings
• In light of the R&D productivity crisis executives watch out for investment opportunities outside
Changing health care environmentin industrialized countries 88%
investment opportunities outside the traditional Rx-innovation model
• Merging of medical disciplines drives pharmaceutical companies to secure technological/
R&D productivity crisis 75%
to secure technological/ scientific leadership through diversification
Emerging market opportunities
Merging of medical disciplines
43%
57%
Consumerization of health care 28%
20Source: Roland Berger Survey 2010
Others 3%
R&D PRODUCTIVITY CRISIS – BACKUP
At the same time, pharma companies are facing the expiration of numerous patents
COMPANY 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Range of LOE exposure within next 5 years in % of total sales 2009
Sanofi-Aventis
Eli Lilly
Novartis
y
Bristol-Myers Squibb
Merck & Co + Schering Plough
Astra-Zeneca
Pfizer+Wyeth
Merck & Co. + Schering-Plough
Roche
GlaxoSmithKline
21Source: US Patent and Trademark Office, Annual Reports
Johnson&Johnson
Source: US Patent and Trademark Office, Annual Reports
MERGING OF MEDICAL DISCIPLINES – BACKUP
Merging of medical disciplines drives pharma companies to innovate through diversification
Examples for merging of medical disciplines
1 Combination of Rx with 2 Combination of medical 3 Combination of imaging 1 xgenetic tests 2 devices and Rx
3 g gand molecular biology
• Tumor response to treatment with Erbitux® can be predicted with genetic testing (K-RAS)
• Patient subpopulations with high
• The IntelliCap technology allows for controlled drug delivery in the intestinal tract
• Drug effectiveness can
• Combination of molecular tra-cers with in-vivo imaging techno-logies allows for early detection of diseases at molecular levelp p g
response can be easily selectedg
significantly increase with fewer side effects
• Bayer-Schering's Florbetabencan be used for early detection of Alzheimer's disease
22Source: Roland Berger
II WHERE TO DIVERSIFY?
Most important diversification area is the generics business –forward integration not yet in focus
Q: What is the importance of each diversification area in the current trend toward diversification? (select top 3)
Survey results1) Key findings
• Pharma companies concentrate on expanding existing
78%Generics
WHY?
• Close to existing business?
• Close to existing businesses instead of innovating in other areas
• If other areas are entered, those with highest margins or R&D
50%
42%
Diagnostics 40%
Vaccines
Consumer health • Close to existing business?
• High margins / R&D synergies?
• High margins / R&D synergies synergies are in focus
28%Healthcare provision
Medical devices 35%R&D synergies
• High margins / R&D synergies
• Securing revenues?
8%
5%
Wholesale business
Animal health
Retail business
0%
23Source: Roland Berger Survey 2010
Other 0%1) % of respondents selecting area within top 3
II WHERE TO DIVERSIFY?
Drivers vary by diversification area – Restricted healthcare budgets mainly drive the move into generics
Q: What are the key drivers behind each area of diversification?
K fi dis/
men
t
Key findings
• Move into generics (most important area) is driven by multiple trendsR&D i i ll i f
RS
rodu
ctiv
ity
rmac
eutic
al
rest
rictio
ns
n st
akeh
olde
rsap
proa
ches
to
care
man
agem
ing
mar
ket
uniti
es
mer
izat
ion
of
care
g of
med
ical
ne
s
• R&D crisis as well as merging of medical disciplines fuel diversification into high-margin areas
DIVERSIFICATION AREAS D
RIV
E
R&
D p
rcr
isis
Rx
phar
budg
et
Shi
fts i n
nove
l ahe
alth
c
Em
ergi
oppo
rtu
Con
sum
heal
thc
Mer
ging
disc
iplin
Generics
Medical devices
Consumer health
Diagnostics
Healthcare provision
24Source: Roland Berger Survey 2010
Vaccines
Named by more than 50% of respondents per diversification area
III HOW TO DIVERSIFY?
Leveraging existing capabilities and choosing the optimal management approach are key to create value from diversification
How to diversify for value creation?
Identify areas in which Rxcapabilities can be
leveraged
In which areas do you believe, Rx-based pharma players could most successfully leverage their skills and capabilities?
Q:
Detail relevant Rxcapabilities per
Which core competencies of the Rx pharma business can be le eraged most s ccessf ll for different di ersification
Q:capabilities per
diversification arealeveraged most successfully for different diversification areas?
Determine optimal management approach for
diversified businesses
Which diversification areas should be integrated into the existing organization and which should be managed as a stand-alone business?
Q:
25Source: Roland Berger
III HOW TO DIVERSIFY?
The most successful transfer of skills and capabilities is expected in the areas of generics and diagnostics
In which areas do you believe, Rx-based pharma players could most successfully leverage their skills and capabilities?
Q:
Di i 43%
Generics 45% • There is no clear "must be in" area in which Rx skills can be perfectly l d
Survey results [% of respondents selecting area within top 2] Key findings
Consumer health 28%
Vaccines 37%
Diagnostics 43% leveraged• According to executives, Rx
companies lack capabilities for forward integration
13%
Healthcare provision 20%
Medical devices
Wholesale business 2%
Retail business 7%
Animal health 8%
26Source: Roland Berger Survey 2010
Other 0%
III HOW TO DIVERSIFY?
Relevant and applicable core competencies vary by diversification area – There is no single "must have" diversification area
Q: Which core competencies of the Rx pharma business can be leveraged most successfully?
e)
• Pharma companies seek to leverage manufacturing skills in generics – At th ti i
Key findings
NA
LET
ENC
IES
actu
ring
(pub
lic/p
rivat
e
erci
al
OM
ERET
ENC
IES
mer
/pat
ient
bers
the same time some generics companies are outsourcing manufacturing (e.g. TEVA)
• Top executives see no major opportunity to successfully leverage
DIVERSIFICATION AREAS IN
TER
NC
OM
PE
Generics
R&
D
Man
ufa
Pay
ers
Com
me
CU
STO
CO
MPE
Con
sum
Pre
scri
opportunity to successfully leverage their relationships with prescribers
Vaccines
Diagnostics
Consumer health
Healthcare provision
27Source: Roland Berger Survey 2010
Medical devices
Named by more than 50% of respondents per diversification area
III HOW TO DIVERSIFY?
Top executives favor to integrate those businesses where high R&D synergies are expected
Which diversification areas should be integrated into the existing organization and which should be managed as a stand-alone business?
Q:
Top-executives
HighVaccines
Top executives believe that diversification areas with a high level of R&D synergies
Level of R&D
Diagnostics
R&D synergies should be integrated into existing innovative R b i
R&D synergies Medical
devices
Rx business
Low
Healthcare provisionConsumer
health
Generics
28Source: Roland Berger Survey 2010
Stand-alone IntegratedManagement approach
IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK
The "traditional" stance on R&D productivity favored a focus strategy – However, the picture might change
Does the R&D productivity crisis tilt the scale towards diversification?
M i M iPotential
ROIC ?
MarginWACC
MarginWACC
depending on R&D d ti it
consequences
• Margin dilution• Risk reduction
ROIC ? productivity
• Value creation?• Value destruction?
Focus on RX Diversification
29Source: Roland Berger
IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK
A significant portion of top executives does not believe in positive returns from R&D investments – Improvement is expected
Q: Looking specifically at R&D, do you believe that today's investments yield a positive ROI?
Q: Looking at potential scientific advantages, do you believe that the return on R&D investmentswill be positive in 10 years?will be positive in 10 years?
NEGATIVE POSITIVE
Key findings
M t ti b li i
53%47%Today's R&D
NEGATIVE POSITIVE • Most executives believe in improvement of R&D returns in the next 10 years
• Looking at R&D productivity, at l t f th ti
67%33%R&D in 10 years
least one of three executives should consider diversification
30Source: Roland Berger Survey 2010
IV SHAREHOLDER'S PERSPECTIVE AND OUTLOOK
Manage for growth or margin? There is a gap between investor's expectations and management's preference
Conflicting expectations … … and their impact on diversification activities
Q: What do you believe to be investors' primary expectation of pharma-ceutical companies: high
Q: Please rate the following statement: "CEOs are currently limiting their diversification activities
Q: If you could choose, would you manage for growth or margins?
Sales growth High margins
ceutical companies: high margins or sales growth?
diversification activities because of the expected dilution of margins."
23%
44%56%
68%32%
77%
High margins
56%
Sales growth
Disagree Agree
31Source: Roland Berger Survey 2010
High margins Sales growth
IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK
Most executives see diversification as a long-term trend, irrespective of R&D productivity
Q: Please rate the following statement: "Diversification is a long-term trend that will be pursued irrespective of R&D productivity recovery because it offers
Q: Please rate the following statement: "The market will split into different segments, with some players focusing only on the R&D-based Rx model and others becoming p y y
attractive business opportunities."x g
diversified healthcare players."
Disagree Disagree18%
g
22%
Disagree
Agree
82%Agree
78%
Agree g
32Source: Roland Berger Survey 2010