The End Of The Big Pharma Conglomerate
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From now on it’s focus, focus, focus

The pharmaceutical industry and the make-up of its lead players continues to evolve. The current trend is a clear drive towards more focused approach:

  • Focus on the prescription pharmaceutical business
  • Focus on innovative product
  • Focus on few targeted therapeutic areas

This paper examines the industry’s shifting landscape. We look at how key players have evolved their strategies over the past few years and offer predictions for what kind of deal activity to expect in 2022. Below is an excerpt of the report.

Focus on prescription pharmaceuticals, focus on innovative products, and focus on 1–2 therapeutic areas.

For most of the past two decades, the dominant strategic trend among pharmaceutical companies has been a fight for scale and size. We saw many mega-mergers creating the giants of the industry today. Diversification was also part of the strategy, mostly in the consumer health and animal health businesses. There has been an evolution over the past couple of years though. Companies are becoming more focused and are pursuing pureplay strategies centered around their innovative prescription pharmaceuticals portfolios.

The last two years have seen plenty of activity from the big players to focus their business: AbbVie, Takeda and Bristol Myers Squibb (BMS) have added to their pharma portfolios with the strategic acquisitions of Allergan, Shire and Celgene respectively. GlaxoSmithKline (GSK) and Johnson & Johnson are setting their consumer health businesses free. Pfizer and Novartis are separating out their established products and generics businesses, as Sanofi did with the sale of Zentiva a few years back. Bayer sold its animal healthcare business to Elanco.

The key driver behind this is the recognition that different capabilities are needed to run each of these life science businesses, and that they are better off making their own resource allocation decisions. Consumer healthcare requires the skills and talent closer to fast-moving consumer goods companies. Similarly, generics players need a different operating model and cost base and will also benefit from their separations.

We expect these newly independent businesses to build and focus their own portfolios, including further consolidation in the generics market with smaller regional players being bought out by the likes of Zentiva, Viatris, and the future Sandoz. Similarly, for the new consumer health giants of the industry, who will be battling it out with the likes of Unilever, Procter & Gamble (P&G) and Nestle in future.

In the meantime, Bayer and Sanofi remain committed to their consumer health businesses and are operating them as distinct units. Similarly, Boehringer Ingelheim, and Merck are holding on to their animal healthcare businesses. We expect this will continue, but with increasing operational autonomy. These changes will free up pharmaceutical lines to pursue new products and innovations.

The top big pharma continue to focus their businesses, divesting their off-patent portfolios and their consumer health divisions

Oncology, antiviral, and inflammation in musculoskeletal (and derma) have driven growth since 2015.

Key insights

Looking across the therapeutic areas and companies, five areas stand out as market drivers:

  • CNS is another highly contested area dominated by treatments for psychiatric an neurodegenerative disorders
  • Several companies are invested in inflammation (rheumatology and musculoskeletal), with growth since 2015 driven by biologic therapies
  • Anti-infective growth is driven by antivirals for Hep C and HIV, with the segment dominated by Merck, GSK and Gilead
  • Endocrine growth is driven by Type 2 Diabetes, globally with a market becoming more crowded. Type 1 diabetes continues to be dominated by Novo Nordisk, which maintained its leadership position

Most companies focus on 2-4 therapeutic areas, with very few still carrying a broad portfolio.

Therapy area focus and proportion of company revenue generated by the lead therapeutic area

How many focus areas is optimal, and what we are striving for?

The three most focussed companies, Gilead, Novo Nordisk, and Biogen are each leaders in their respective areas — their focus has enabled them each to achieve the top position in one of the five largest therapeutic areas:

  • None of the companies with a broad portfolio have achieved top three positions in the larger therapeutic areas — J&J being the notable exception with one second and one third place
  • The optimal amount of focus is somewhere in-between, two or maximally three focus areas depending on the overall scale of the company. This is underlined in the stated strategy of the single TA players — they are investing to add a second pillar to their portfolio. The companies with a focussed portfolio are all investing to double down in their areas of strength — oncology consistently being the number one are for future focus
  • The question in the long run is what will happen to the companies with broadest portfolios like Takeda, J&J and Sanofi, which state they will actively pursue research in four to six therapeutic areas 

Key conclusions and expectations for 2022

  • Increase in targeted investments and deals to acquire assets from biotech – Complement current portfolios as companies strive to become dominant players in their target therapeutic areas
  • More big pharma companies will move to operationally separate or divest established products and generics businesses
    • Allow investment in minor innovations formulation development
      • Freedom to develop own supply chain strategies
  • A new breed of pureplay consumer care and over-the-counter giants will emerge independently from their parent companies with the ability to build dedicated capabilities and allocate investments
    • These companies will become active in acquisitions and building portfolios
    • Increasing category focus in consumer care segments
  • More targeted investments, deals, and partnerships between pharma and biotech
    • To keep the innovation pipeline flowing, we expect to see more targeted investments, deals, and partnerships around specific therapeutics. Big players will come together with nimble biotech companies in unique ways. We’ve seen this play out over the past couple of years. On the partnership front, AstraZeneca is collaborating with Daiichi Sankyo to license its antibody-drug conjugate. Merck & Co. made a similar move with Seattle Genetics for its antibody-drug conjugate. Meanwhile, Sanofi made a targeted buy when it acquired Tidal Therapeutics, a biotech company with a focus on MRNA therapy
  • More divestiture of product lines, including generics
    • As they narrow their focus, pharmaceutical companies will continue to spin-off established product lines, including generics, which need a different operating model and cost base. Generics will also benefit from these separations. Novartis executives during their October 2021 earnings call acknowledged that the company is embarking on a “strategic review” of its generics business, Sandoz. The unit saw operating income drop 15% in Q3. Pfizer in 2020 completed the sale of its generic business, Upjohn, to Mylan N.V., to form Viatris Inc. And Bayer sold its animal healthcare business to Elanco. We expect to see further consolidation in these business lines
  • More independent consumer companies
    • Consumer healthcare also requires a different set of skills and talent, mainly resembling fast-moving consumer goods companies. Here too, we’ll see more companies divesting their interests. J&J in November 2021 announced plans to separate its consumer health enterprise into a publicly-traded company. GSK anticipates completing divestiture of its consumer line by mid-2022