Pharma 2020: The vision - which path will you take?
A Report by PricewaterhouseCoopers
Introduction:
Demand for effective medicines is rising, as the population ages, new medical needs emerge and the disease burden of the developing world increasingly resembles that of the developed world. The E7 countries – Brazil, China, India, Indonesia, Mexico, Russia and Turkey – are also becoming much more prosperous, with real gross domestic product (GDP) projected to triple over the next 13 years. By 2020, the E7 could account for as much as one-fifth of global sales. Yet the biopharmaceutical sector (Pharma) will find it hard to capitalize on these opportunities unless it can change the way in which it functions. Its core problem is lack of productivity in the lab. Several external factors have arguably exacerbated the industry’s difficulties, but the inescapable truth is that it now spends far more on research and development (R&D) and produces far fewer new molecules than it did 20 years ago. The shortage of good medicines in the pipeline underlies many of the other challenges Pharma faces, including its increasing expenditure on sales and marketing, deteriorating financial performance and damaged reputation.
At the start of the decade, many people thought that science would come to the industry’s rescue and that molecular genetics would reveal numerous new biological targets, but the human genome has proved even more complex than anyone first envisaged. It is no longer the speed at which scientific knowledge is advancing so much as it is the healthcare agenda that is dictating how Pharma evolves. The first part of our report highlights a number of issues that will have a major bearing on the industry over the next 13 years. The second part covers the changes we believe will best help pharmaceutical companies:
- operate in this new milieu
- realise the potential the future holds; and
- enhance the value they provide shareholders and society alike
Conclusion
By 2020, the context in which Pharma operates will be very different from that which prevails today. And one of the recurring motifs in all the shifts we have described is globalisation: the globalisation of the markets, as demand for medicine rises in the developing world; the globalisation of R&D, as a growing share of R&D migrates to Asia; the globalisation of the regulations governing the development of new medicines, as national and federal agencies collaborate; and the globalisation of information, as healthcare payers share data on the clinical and financial performance of medicines. Globalisation will increase the risks Pharma faces; if a product fails in one market, for example, it may well fail in all. But it will also create opportunities for considerable savings. Global IT platforms, process standardisation and data standards, global regulatory requirements and global marketing efforts will enable the industry to eliminate inefficiencies and reduce its costs. If Pharma is to thrive in this new environment, though, it will have to make sweeping changes throughout the value chain. Moreover, the incumbent management will have to move fast. The disintegration of the traditional way of making and selling medicines could fuel another round of mergers and acquisitions very different in nature from those that took place a few years ago. One large company could buy another, for example, and strip it of all but the assets it wants. Private equity houses and hedge funds could also play a significant role in reshaping the sector. Private equity firms have shown relatively little interest in Pharma to date. This is partly because they typically like to invest in companies with tangible assets and steady cash flows, whereas research-based pharmaceutical operations have intellectual assets and increasingly cyclical cash flows, and partly because their high market capitalisations have kept all but the smallest pharmaceutical companies off the radar screen.
However, a number of funds have been dipping their toes in the water. In January 2005, for example, a consortium of private equity investors bought speciality pharmaceuticals company Warner Chilcott for $3.1 billion.Similarly, in December 2006, Nycomed (which is owned by Nordic Capital and CSFB Alternative Capital) acquired Altana’s pharmaceuticals division for €4.8 billion ($6.5 billion). And several private equity firms are thought to have put in bids when Roche put its OTC business on the block in mid-2004, although Bayer eventually prevailed. Clearly, the sums involved in such transactions are tiny compared with the cash that would be needed to buy a major pharmaceutical concern, but the private equity industry is rapidly getting larger and hungrier. In December 2006, David Rubenstein, co-founder of The Carlyle Group, predicted that there would be a $100 billion deal within two years. Two months later, Blackstone pulled off the biggest ever leveraged buyout with the $38.9 billion acquisition of Equity Office Properties Trust.
On this showing, at least one of the 13 companies in the Big Pharma universe is already within reach of the chief consortia, although giants like Pfizer, Johnson & Johnson and GlaxoSmithKline are still far too massive to touch. We therefore think it is very likely that one or more leading pharmaceutical companies will fall into the private equity industry’s hands within the next 13 years – and private equity houses do not flinch when it comes to radical restructuring. Yet in some respects it does not matter who holds the reins, for Pharma cannot do everything itself. It cannot train a new generation of research scientists unless there are scientists to train. Nor can it make the medicines people need without society’s support – and we are dishonest if we pretend otherwise. We cannot expect charities and individual philanthropists to fund the research that is required to develop new therapies.
Several relatively small changes would make a considerable difference. Investing in school science labs and specialist teachers, and giving science a more prominent place on the school curriculum, would encourage more pupils to study the sciences at university, thus creating a larger pool of researchers on whom the industry could call. Altering the patent laws to recognise the value of long-term research, rewarding the development of vaccines and cures more generously, and demonstrating a genuine commitment to the prevention of disease would likewise help to put the industry on a firmer footing in its efforts to decode the molecular basis of disease – surely one of the biggest and most worthwhile intellectual challenges the world faces.
