Pharma 2020: The vision - which path will you take?

A Report by Business Insights

Revati Nehru

Healthcare market analyst

Executive Summary

The specialty pharmaceutical sector

• Specialty pharmaceutical companies can be defined as those companies that do not possess fully integrated value chains, and are not pure-play companies, involved in only one part of the value chain.

• Specialty pharmaceutical companies are limited by structural capabilities, which have negative implications for value, and as such companies in this sector need to target opportunities that offer significant levels of competitive differentiation.
• Market differentiation is one of the key strategies employed by specialty pharmaceutical companies, targeting areas of limited competitive activity, most notably from multinational pharmaceutical companies, biotechnology companies and pure-play generics companies.

• Technological differentiation is another of the key strategies employed by specialty pharmaceutical companies, wherein companies attempt to differentiate their products from generic competitors through reformulation and subsequent brand development in order to generate higher and durable returns.

• The development of a cohesive product portfolio strategy remains a key strategy whereby specialty pharmaceutical companies aim to deliver higher returns from marketing brands within a defined therapeutic area.
• Companies which feature a predominance of manufacturing and regionally integrated assets are correlated with higher sales and improved earnings, albeit over a high range, whilst those companies reliant on development and drug delivery based assets feature lower revenues, weaker earnings and lower margins.

Specialty Markets

• The specialty pharmaceutical market under analysis was valued at $52,057m in 2005 with CNS disorders commanding a share of 22.1% or $11,500m rendering it at the number one position in the market for the same year.

• CNS disorders featured the largest number of players with product portfolios expanding through major sub-indications. Of these, revenues from depression accounted for 30.4% or $3,492m of the total CNS market in 2005.

• Ophthalmology contributed towards $8.3bn in 2005 of which surgicals, contact lenses and glaucoma treatments collectively accounted for some 52.6% of total sales. Among companies analyzed in this therapeutic area, Alcon accrued highest sales reported at $4.3bn in 2005.

• Although major companies have typically avoided entering the dermatology market, cosmetic indications are steadily gaining popularity and accounted for 37.8% of the total dermatology market revenues in 2005. Allergan’s Botox captured the highest sales in this indication which were reported at $831m for the same year.

• Urology features high levels of growth associated with it given the increasing popularity of treatments for overactive bladder and the low levels of innovation and high unmet need associated with it.

• The largest sub-indication in women’s health was oral contraceptives which despite being highly genericized offer large patient potentials and a low cost-high volume associated with marketing products in this indication.

• Despite high genericization, treatments for cardiovascular disorders continue to remain popular among specialty pharmaceutical companies. This indication generated revenues of $4,600m in 2005 with anti-hypertensives accounting for $1.2bn or 26.7% of total sales.

Case studies of Specialty Players

• The specialty pharmaceuticals company growth model requires companies to position themselves in an area of expertise with a therapeutic focus, a presence in the markets in which it operates as well as a value chain based specialization.

• Growth strategies employed by specialty pharmaceutical companies include in licensing of product rights for development and/or marketing, co-promotional agreements, as well as M&A.

• Despite the fact that Elan faced a financial setback in 2002, the company is set on the path to recovery having re-established itself as a drug development company marked by the recent approval of Tysabri, indicated for the treatment of MS.

• Allergan’s accrued the highest revenues in 2005 reported at $2.3bn and is forecast to maintain a strong presence in niche marketing. The company currently draws some 57.0% of its revenues from its ophthalmology segment.

• Although Watson has historically featured a strong generics portfolio, the company recently acquired Andrx to supplement its product pipeline and drug delivery technologies following a recent decline in generics’ sales.

• Shire’s corporate strategy is to focus on niche therapeutic areas while establish a presence in international markets through co-promotion agreements. The company is expected to extend its presence into biologics following the recent acquisition of Transkaryotic Therapies.

• KV Pharmaceuticals, through licensing agreements has penetrated over 50 markets worldwide for two of the leading products in its women’s healthcare portfolio. However, Biovail has not expanded its presence beyond the markets of US and Canada.

Future outlook for the specialty pharmaceuticals sector

• Increasing commoditization of drug delivery technologies is one of the key pressures affecting the specialty pharmaceutical industry. Companies based on this model, such as KV and Biovail, are forecast to suffer from limited target selection and a lack of competitiveness across other stages of the value chain.

• Growing competition from bulk manufacturers is forecast to affect companies specializing in generic manufacturing. Companies based on this model, such as Watson, are forecast to experience competition across their generic portfolios and require franchise build strategies to remain competitive as licensing partners.

• Increased competition for the strongest licensing opportunities is forecast to affect companies specializing in sales and marketing, with scale remaining a key constituent of competitive advantage.

• Market saturation in niche indications is forecast to constrain the activities of niche marketers, although companies based on this model are forecast to be the most insulated from pressures affecting the specialty pharmaceuticals industry.

• In order to remain competitive, companies based on the generics manufacturing model require refocusing on value, and investment in franchise build strategies centered on developing targeted portfolios and in developing stronger abilities in late-stage drug development support.

• Companies based on the drug delivery/reformulation model should develop stronger capabilities in marketing to exploit a lower level of suitable product candidates, and develop a more compelling value proposition for licensers.

• Companies based on the model of marketing in niche indications are forecast to experience greater competition in product acquisition and a contraction in market opportunity in traditional areas, and thus should shore up development capabilities in indications that are competitive with ‘Big Pharma’.

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