Big Pharma Turning Into Focused Pharma

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Pharmaceutical giants are shedding business units with an eye toward focusing on their innovative pharma operations and targeted therapeutic areas.

Akshay Agarwal, MD  and  Tobias Handschuh

Similar to every sector in healthcare, pharmaceutical companies are undergoing significant changes to their business and operating models. But unlike what we are witnessing in the provider and insurer spaces, especially in the US, many are transitioning away from an unrestrained drive towards scale and size to being more focused, aiming to capture innovation largely in their prescription drug portfolios. They are doing this by zeroing in on a couple of key therapeutic areas and divesting other units that compete for internal attention and resources.

Over the past couple of years, we saw companies like AbbVie, Bristol Myers Squibb, and Takeda make moves to enhance pharma portfolios. Similarly, Bayer, GlaxoSmithKline, Johnson & Johnson, Novartis, and Pfizer separated off such business lines as consumer healthcare, generics, and animal healthcare. The key driver behind this strategy is a recognition that different capabilities are needed to run each of these units. There’s a strong belief these divested companies will be better equipped to stand on their own and win in their respective markets. And it will free up the prescription pharmaceutical business to pursue targeted innovation through R&D, partnerships, and deals. We fully expect this trend to continue in 2022 and beyond. Here are three key considerations for the industry as we head into the new year:

More targeted investments, deals, and partnerships between pharma and biotech

Various studies and analyses over the past several years have pointed to declining efficiency in the industry’s research and development model. That’s been driven by a host of factors, including soaring costs and a drop in return on investments. Even though the industry has experienced periodic spikes in drug approvals, those haven’t translated to seismic shifts in the market, as the US Congressional Budget Office noted in an April 2021 report: “That increase in drug approvals does not, by itself, indicate the extent to which the new drugs are particularly innovative (for instance, targeting illnesses in new ways) as opposed to improving only incrementally upon existing drugs.”

At the same time, the mega deals that drove the industry for years can stymie innovation since those tend to cause resources to be stretched across multiple layers and business units and can dilute a company’s focus.

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.

The underlying goal here is to a build meaningful portfolio in specific therapeutic areas and becoming a relevant player for a targeted audience.

More divestiture of non-core 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 health 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. Johnson & Johnson in November 2021 announced plans to separate its consumer health enterprise into a publicly traded company. The unit generated $14 billion (US) in sales in 2020, compared to $43 billion for pharmaceuticals. GSK anticipates completing divestiture of its consumer line — a $14 billion business — by mid-2022. GSK’s pharmaceuticals accounted for $31 billion (US) in 2020.

“Together, we are now ready to deliver a step-change in growth for New GSK and unlock the value of consumer healthcare,” CEO Emma Walmsley, said during the company’s earnings call in June 2021. “With world class capabilities across prevention and treatment of disease, New GSK is exceptionally well positioned to positively impact people’s health and to deliver strong performance and value to shareholders through the decade.”

We view this evolution among pharmaceutical companies as mainly positive. Rather than just racing to be the biggest, and holding on to their adjacent businesses and off-patent portfolios, companies are focusing their efforts building capabilities and leadership positions in a few targeted areas. That is a smart play and should help to bring more innovation to patients and the market.