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Aspiring giants: How small pharmas can drive to $1 billion — and beyond
 

Aspiring giants: How small pharmas can drive to $1 billion — and beyond

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Is your company aiming to earn over $1 billion in annual revenues? Companies that reached this mark have pursued three distinct strategies for growth. They've launched differentiated products, ...

Is your company aiming to earn over $1 billion in annual revenues? Companies that reached this mark have pursued three distinct strategies for growth. They've launched differentiated products, expanded their global presence and built a strong leadership team with vision and drive. Find out more in our study of 30 small successful pharmaceutical companies.

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    Aspiring giants: How small pharmas can drive to $1 billion — and beyond Aspiring giants: How small pharmas can drive to $1 billion — and beyond Document Transcript

    • www.pwc.com/us/pharma Aspiring giants How small pharmas can drive to $1 billion— and beyond PwC’s PRTM Management Consulting
    • Aspiring giants Executive summary Amid the volatile blend of opportunity and challenge that characterizes the global pharmaceutical industry, only a few small companies have managed to catapult their revenue over the $1 billion mark over the past two decades. Whether they chose to expand their therapeutic area focus and product portfolios, enter new geographies, or grow their core business, these aspiring giants pursued three distinct strategies to jump-start growth:  Leveraged core product and technology capabilities to launch differentiated products  Used mergers and acquisitions to gain new products and/or expand geographic presence  Built a strong, stable leadership team armed with a compelling vision and relentless drive The experiences of these winning companies offer lessons for today’s smaller pharma companies harboring the ambition to reach the $1 billion revenue mark. To achieve this milestone, these companies will need to excel in three areas: expanding a core area of expertise to deliver niche and valueadded products, adopting an acquisition and partnering mindset to expand product offerings and geographic presence, and attracting and retaining talented leaders. Focusing on these fronts can help position a pharma company to become a growth leader—rather than merely a follower—in tomorrow’s ever-shifting global pharmaceutical industry landscape. Industry backdrop Potential for global growth Small pharmaceutical companies seeking to hit $1 billion in revenues Growth in developed markets are seeing new possibilities thanks to an increased focus on novel therapeutic areas, genomics, and personalized medicine and emerging markets are seeing strong growth rates in part due to the growth of the global generics drug market. These conditions have set the stage for the global pharma industry to grow between 5% and 8% 1 annually, reaching US $1.1 trillion in sales by 2014. These opportunities beckon even as the industry faces the peak years of patent expiries for innovative drugs introduced 10 to 15 years ago and the subsequent entry of lower-cost generics. As forecast by IMS Health and reported in Reuters. http://www.moneycontrol.com/news/business/global-drug-sales-to-top-361trillion2014-ims_452580.html. 1 Aspiring giants 1
    • In this dynamic industry, small pharmaceutical companies will have the opportunity to catapult themselves beyond the $1 billion revenue mark in the next five to ten years in existing and emerging markets. Given the blistering pace at which these small-sized firms aim to grow, especially those based in emerging markets, we set out to identify pharmaceutical companies that had already reached the $1 billion mark in the last two decades. During 1990–2009, hundreds of new pharma firms emerged around the globe, driven in part by the growing demand for generics and specialty or biotechnology-based products. But within this crowded space, only a small number of firms managed to expand their sales to $1 billion, 30 of which are represented in our study. These 30 companies can be categorized according to their primary growth strategy—expanding their therapeutic areas (TAs) and product portfolios, entering new geographies, or growing their core business. They also can be categorized according to whether they grew organically (through existing assets) or inorganically (through mergers and acquisitions) (Figure 1). Figure 1: A winning field Watson Wockhardt TA/Product Portfolio Expansion Seprator Shire King STADA Medimmune Andrx Harbin Barr Idec Immunex Lupin Cipla Geographic Expansion Actavis Dr Reddys Ranbaxy Abdi Ibrahim Sun Pharma Cephaton Schwarz Genzyme Celgene Gilead Core Area Focus WarnerChilcot Acetlion 0 1 2 3 4 5 Mylan Forest Endo Pharma 6 No. of Years to Reach $1B from $200 M  7 8 9 10 Perrigo 11 Organic 12 13 14 15 Inorganic 1Bubble size indicates company revenue in 2010. Bubble size ranges: $1–2 billion $2–3 billion $3–5 billion > $5 billion 2For companies that were acquired, bubble size indicates revenue at the time of acquisition (Cephalon, Sepracor, King Pharmaceuticals, Andrx, Barr Pharmaceuticals, Immunex, MedImmune, Genzyme, Schwarz). Aspiring giants 2
    • Of the 30 companies in our study, 22 showed an extraordinary revenue trajectory. After reaching an inflection point of around $200 million in revenues, they grew to $1 billion with a compound annual growth rate (CAGR) of 25% or more. How, precisely, did these exemplars of speedy growth achieve this feat? And what lessons do their experiences offer other pharma companies striving to reach the same growth goals in an increasingly dynamic environment? Our research revealed that most of these companies, regardless of their primary growth strategy, incorporated three operational levers to execute that strategy:  Leveraged core product and technology capabilities to launch commercially successful, differentiated products in the market  Used mergers and acquisitions to rapidly gain new products, capabilities, and/or geographic presence  Built a strong, stable leadership team that rallied their organization around a compelling vision and embodied a relentless drive toward achievement In the remainder of this report, we examine each of these levers in greater detail. Actavis, King Pharma, and Lupin. Leveraging core product and technology capabilities Fast-growing pharmas leveraged their existing know-how and capabilities to the fullest to grow their revenue. The majority of the 30 firms in our study focused on products or technologies that drew on their existing assets, skills, and core competencies. New Jersey-headquartered Watson Pharmaceuticals, for instance, started as a pure-play generics company. It soon expanded into differentiated and branded generics in niche therapeutic segments such as women’s health, urology, and dermatology. To make this move, Watson relied heavily on its existing R&D capabilities and infrastructure. Because it did not have to invest in substantial new resources or assets, it was able to grow revenue profitably and rapidly. A few research-oriented, single-product companies in our study—such as Gilead, Cephalon, Celgene, and Actelion—saw their revenues soar after the launch of their first innovative product. Take Cephalon as an example. Provigil, its drug for excessive daytime sleepiness due to narcolepsy, accounted for nearly half of the company’s revenue at the time sales Aspiring giants 3
    • surpassed $1 billion in 2004. For research-oriented companies, launching one product with blockbuster potential may be all that it takes to break the $1 billion barrier (Figure 2). In contrast, companies that tried to pursue products too far beyond their core expertise stumbled and had to course-correct along the way. Indian generics companies Dr Reddy’s and Piramal invested significantly in new chemical entity (NCE) research during their formative years. The investments, time horizons, skills, and technologies required for NCE research differ markedly from those required for generics research. As a result, in a bid to reduce R&D costs, protect margins, and reduce overall business risk, all three divested their NCE research operations by spinning out the unit. They then resumed building their core generics business. Figure 2: Single-product successes and inorganic growth trump organic growth 9 13 8 13% 44% 77% 11% 88% 44% 23% 0-5 yrs 5-8 yrs > 8 yrs No. of years from $200M to $1B Single product Organic Inorganic Deploying M&A, the fastest way to grow There is little question: If a small pharma company wants to grow quickly, M&A is a vital part of the equation. The majority of the 30 companies that achieved their first $1 billion in revenues in eight years or less expanded through inorganic means. But that is where the similarity ends. Our research reveals that the companies headquartered in developed markets used M&A for very different purposes than companies based in emerging markets (Table 1). Aspiring giants 4
    • Developed market companies. The developed market companies deployed M&A to bolster their product portfolio and expand their product offerings to customers in their existing markets of focus. For example, Shire Pharmaceuticals, headquartered in Dublin, Ireland; and Idec, based in San Diego, California, maintained their focus on the United States and Europe, respectively. However, both companies fueled growth by undertaking strategic acquisitions in selective therapeutic segments. Emerging market companies. In contrast, companies based in emerging markets saw M&A as a way to gain access to developed markets, which offered stable operating environments, relatively higher price points for drugs, and high growth rates in the specialty and generics segments. For these companies, a shift in focus from a relatively small, highly fragmented domestic market to the developed world propelled revenue growth from $200 million to over $1 billion in just six to eight years. Indian generics players such as Ranbaxy, Dr Reddy’s, and Sun Pharmaceuticals—all of which had established strong positions in their domestic markets—expanded into other markets such as the United States and Europe, through a series of small acquisitions. To serve these new markets, they built scale in their commercial operations by acquiring or partnering with companies. Indian player Cipla, for example, established alliances with local players in Europe and the United States to distribute and market products. By 2010, Cipla had 22 partners in the United States that were selling 118 products, and about 60 partners in Europe that were selling 400 products. In comparison, Turkish generics company Abdi Ibrahim had spent most of the last decade focused solely on its highly fragmented domestic market, where it competed with 300 other players. In 2008, the company made a late entry into some other emerging markets and Europe. The result was slow growth: It took Abdi Ibrahim 14 years to push its revenues from $200 million to $1 billion. By contrast, companies that chose the organic route to growth, regardless of whether they were based in developed or emerging markets, took longer to surpass the $1 billion mark. They focused on building their core areas of expertise and on increasing their product offerings through in-house R&D or partnerships with R&D-focused pharmaceutical companies and/or academic institutions—all time-consuming initiatives. US drug maker Perrigo, for instance, chose to focus on its core store-brand OTC and nutritional products business for the US market. To drive growth, it attempted to increase market share and introduce new products in select therapeutic areas. Perrigo’s revenues rose slowly, from $281 million back in 1991 to $1 billion in 2005. Aspiring giants 5
    • Table 1: M&A strategies adopted by fast-growing pharma Company Examples of companies acquired or merged M&A strategy Acquisition rationale Developed Market Based Actavis Velefarm, Lotus Labs, Alpharma Geographic expansion/ Market access Gain access to US and EU markets; strengthen functional capabilities in areas such as low-cost manufacturing Andrx CTEX pharma, Cybear, Valmed Functional expertise Build functional capabilities in sales and marketing, IT services, and distribution to drive improved sales in existing markets Endo Pharmaceuticals RxKinetix, Alexza, Algos Portfolio expansion Strengthen current portfolio and enable expansion in new therapeutic areas such as oncology Idec Biogen Portfolio expansion Primarily to broaden product portfolio; expand global reach in countries such as Japan, Australia, and New Zealand King Pharmaceuticals Jones Pharma, Medco, Meridian Medical Technologies Portfolio expansion Expand across the value chain from a pure-play CMO into the branded generics space by building its own portfolio of products Shire Pharmaceuticals BioChem Pharma, Atlantic Pharmaceutical, Fuisz Hybrid* Gain market access (Fuisz, EU), portfolio expansion (BioChem, US), and strengthen functional expertise (Atlantic Pharma, US) STADA Dowelhurst, Bayvit Hybrid* Multi-pronged strategy: Gain access to a new market, build the branded-generics portfolio, and acquire functional capabilities in manufacturing, sales, and marketing Warner Chilcott P&G Pharma Portfolio expansion Expand portfolio of women’s health products and strengthen presence in different geographies Watson Oclassen, Royce Labs, Schein Pharmaceutical Portfolio expansion Strengthen existing generics and specialty portfolio and expand into new therapeutic areas such as dermatology, nephrology, etc. Functional expertise and geographic expansion Leverage acquisitions to market and sell products across different geographies; leverage in-depth local expertise of partners Emerging Market Based Cipla Medpro, MediTab, Mab Pharm Aspiring giants 6
    • Company Examples of companies acquired or merged M&A strategy Acquisition rationale Dr Reddy’s BetaPharm, Indicus, American Remedies Geographic expansion/ Market access Improve/gain market access and geographic presence Lupin Multicare Pharmaceuticals, Kyowa Pharmaceutical, Pharma Dynamics Functional expertise and geographic expansion Strengthen functional expertise, specifically in sales and marketing while simultaneously gaining market access Ranbaxy RPG Aventis, Ohm Labs, Croslands Research Labs Geographic expansion/ Market access Increase size and scale in emerging markets, expand geographical reach, acquire niche and complex products and gain cost efficiencies in manufacturing and R&D Sun Pharmaceuticals Taro Pharmaceuticals, Caraco Pharmaceutical, Women’s First Healthcare Portfolio expansion and functional expertise Acquire companies with distressed assets to build geographic footprint and expertise in manufacturing; target portfolio expansion in therapeutic areas like women’s health and pain management Geographic expansion/ Market access Achieve geographic expansion with an adapted portfolio to meet market requirements Wockhardt Morton Grove Pinewood, Negma Labs A hybrid strategy refers to a combination of portfolio expansion, market access/geographic expansion, and strengthening of functional capabilities such as manufacturing, sales and marketing, and distribution. Aspiring giants 7
    • Building a strong leadership team A steady hand at the helm helped growth-minded companies spur revenue The companies that hit the $1 billion revenue target in a relatively short time span had leaders who held their position throughout this growth period. These leaders had a strong vision and demonstrated to others how they embody their business’s values, mission, and principles. By staying at the helm for a long time, they brought stability in an otherwise tumultuous growth period for their companies. When turnover did happen, these leaders excelled at succession management. They maintained their next-level management teams, offering the best among these teams the opportunity to develop into future leaders. For instance, John W. Jackson led New Jersey-headquartered Celgene as CEO from 1996 to 2006. During that period, the company grew from less than $100 million in revenues to $1 billion. Jackson was replaced by COO Sol Barer in 2006, who remained in this position until 2010. That year, Celgene recorded a whopping $2.7 billion in revenues. In contrast, Ontario-based Valeant Pharmaceuticals underwent a series of senior management changes since the 1990s. They experienced turnover in the CEO’s position, and between 2002 and 2008, the entire board of directors’ membership was changed three times. These changes triggered repeated shifts in strategic direction and focus, slowing the company’s growth. To reach $1 billion in revenues by 2010, Valeant had to wait almost 20 years. Table 2: Three growth leaders Actavis Growth CAGR HQ Core area of expertise King Pharmaceuticals $145M (2001) – $1.7B (2006) $294M (1998) – $1.1B (2002) $290M (2005) – $1B (2010) 43% 30% 28% Iceland United States India Generics pharmaceuticals development Aspiring giants Contract manufacturing and supply of branded pharmaceuticals Lupin Generics pharmaceuticals development 8
    • Actavis Geographic expansion: Adjacencies pursued King Pharmaceuticals Portfolio expansion: Geographic expansion: Acquired established branded Grew from an Iceland-only Grew from an India-only focus pharma products and focus to having a strong panto supply to developed markets increased sales through European presence and entry such as United States, Europe, focused marketing, promotion, into the United States and Japan and life cycle management Eleven acquisitions to gain Acquisition access to US and EU activity markets; strengthening functional capabilities in areas such as low-cost manufacturing Five acquisitions to expand across the value chain from a pure-play CMO into the branded generics space by building its own portfolio of products Three acquisitions to strengthen functional expertise, specifically in sales and marketing, while simultaneously gaining developed market access North America (100%) India (32%); Other emerging markets (9%); United States (42%); European Union (4%); Japan (13%) Founder & CEO John M. Gregory led the company from 1994–2002, growing it from a family-run business to an S&P 500 company through a combination of strategic acquisitions, timely decision-making, and a commitment to employee development. Founder & current CEO Desh Bandhu Gupta has led the company since 1968. He has focused on effectively executing against the vision, culture, and growth path laid out during the formative years and on building second-generation leadership. Revenue: $1.8B (2009) Revenue: $1.3B (2010–11 FY) Acquired by Pfizer in 2010 for $3.6B (4x share price) Publicly traded on BSE Central and Eastern Europe (38%) Key markets North America (31%) (% revenue) Western Europe, MENA (21%) CEO Robert Wessman led the company from 1999– 2008, building an organization culture focused on speed in execution and Leadership decision-making excellence. These were key to Actavis achieving one of the fastest growth rates among generics firms. Current status Lupin Revenue: $2.4B (2010) Private company Aspiring giants Market cap: $4.2B 9
    • The path ahead What should the smaller, ambitious pharmaceutical companies do next? Three areas of excellence can help growth-minded pharmas reach their goals For small pharmaceutical companies eager to rapidly score their first $1 billion in annual revenues, will the strategies of the past create winners for the future? In our opinion, some strategies will remain important, while new ones will need to be adopted if companies hope to navigate successfully in the changing pharmaceutical industry landscape. In particular, we believe that future winners will be decided by who is the most adept at three key practices: expanding a core area of expertise to deliver niche, value-added products, adopting an acquisition and partnering mindset to expand geographic presence and product portfolios, and attracting and retaining the right leaders. Expanding a core area of expertise To serve the rapidly growing, competitive emerging markets and the slowergrowing yet lucrative developed markets, small pharma companies will need to focus their R&D and commercial capabilities selectively on products and customer-centric delivery models that leverage their existing strengths, enhance sales, and manage risk. For instance, research-oriented companies can consider developing core expertise in products that target a niche therapy area with a high unmet need or a novel technology such as genomics to develop personalized medicines. Commercial success of a single such innovative product or technology can result in a revenue stream that may allow the company to acquire additional resources, assets, or capabilities in core or adjacent areas to fuel further growth. Companies may also choose to expand into high-value product or valuechain adjacencies that leverage their existing know-how and skills without requiring heavy investment in new assets, resources, or capabilities. For instance, companies focused on plain generics may choose to enter the differentiated or proprietary generics space to deliver higher-value products that can garner higher price points and margins. Adopting an acquisition and partnering mindset Over the last two decades, the pharmaceutical business has grown increasingly complex, competitive, and risky. To achieve their defined growth objectives, small pharma companies will have to draw more strongly on acquisitions and alliances to generate new products, expand into new geographies, especially emerging markets, and build needed capabilities. Aspiring giants 10
    • Companies will therefore have to constantly search for suitable deal targets. The most attractive targets will provide access to select geographies, adjacent products, or value-chain links poised for rapid growth. For instance, acquisitions in select emerging markets, such as China, India, Brazil, Russia, Turkey, and Eastern Europe, may be tempting targets because they offer opportunities for double-digit growth in the near term. However, to achieve successful return on investment, companies should carefully analyze and select the emerging markets to enter, since the growth valuations in some markets may be unreasonably high and may need to be balanced against the risks and business environment in that country. Sound targets will also provide new capabilities to strengthen the core business by helping to capitalize on existing customer relationships and competencies. Once a company has identified potential targets, it will need to demonstrate excellence in due diligence of those targets. Specifically, companies may want to look at the potential of its target’s intellectual property, breadth of product portfolio and commercial/distribution capabilities in relevant geographies, its R&D and manufacturing capabilities, and its maturity of quality and regulatory operations. Any red flags in these dimensions may require close examination. Establishing presence in new geographies may also require companies to partner with local players or source market-specific products from other global companies. To extract maximum value from such alliances, companies will need to excel at collaborating and at managing relationships. Attracting and retaining the right leaders To grow aggressively, small pharma firms must help their existing leaders evolve their styles as befitting a company in rapid-growth mode, and they must attract strong leaders as well. Recruitment of the right kind of professional talent depends on conveying the success of the enterprise and on making a compelling business case for why a particular candidate should sign on with their company. It is also important to offer the right incentives—e.g., equity in the company—in return for the risk. Savvy leaders will know how to plan and choose the right markets and adjacencies to pursue, how to acquire companies and capabilities at the right time to expand rapidly, and how to take a holistic approach toward strategy execution. These skills can mean the difference between becoming a growth leader and merely following rivals into tomorrow’s global pharmaceutical industry landscape. Aspiring giants 11
    • Beyond the $1 billion mark What does it take to succeed and sustain growth beyond $1 billion? Executing the three strategies outlined above can enable significant growth for small companies over a relatively short period. Expanding a core area of expertise can be the best lever to utilize existing capabilities and assets to fuel growth. Mergers, acquisitions, and partnering can result in rapid product portfolio and geographic expansion. Attracting and retaining talented leaders can ensure that aggressive growth plans are supported by a strong vision, drive, and passion for capability building and execution. As companies approach and exceed their first $1 billion in revenues following a period of rapid growth, they will need to plan and execute strategies that enable achievement of effective and sustained growth for years to come (i.e., significant top-line growth while improving profitability, enhancing organization and capabilities, maintaining product quality and effectively managing risk). A key component of such strategies would be to drive operational efficiencies post-M&A in order to stabilize the business and position it to achieve long-term success. Companies may need to consider restructuring their operations as they expand their geographical footprint to lower costs and maintain profitability. They may also need to rationalize their product pipeline and existing product portfolios to maintain focus on top priority products for key markets as well as evolve their commercial operating model to ensure that market-specific customer needs are being met effectively. Lastly, companies may need to enhance quality systems and supply chain robustness to consistently deliver safe and effective products to the market and build critical personnel capabilities, management controls and incentives to assure performance effectiveness. Aspiring giants 12
    • Study methodology Research for this study was conducted in 2010 and comprised three steps: 1. Identified pharmaceutical companies whose current revenue is greater than $1 billion and selected those that achieved their first $1 billion in revenue in the last 20 years (between 1990 and 2009). A total of 30 companies, comprising branded pharma, generics, and biotech firms fell in this category. 2. Categorized the companies based on number of years taken to grow from $200 million to $1 billion in revenue (<5 years, 5–8 years, >8 years). 3. Studied the growth strategies employed by the 30 companies along selected growth levers and management practices. Figure 3: Study population profile 15 10 8 8 2 5 5 5 Generic Biotech 2 Branded pharma US Europe Emerging markets* 3Note: Geography indicates the HQ location of the companies included in the study. *Emerging Markets include India, China, and Turkey. Aspiring giants 13
    • About PwC’s Pharmaceuticals and Life Sciences Industry Group PwC’s Pharmaceuticals and Life Sciences Industry Group (www.pwc.com/us/pharma and www.pwc.com/us/medtech) is dedicated to delivering effective solutions to the complex strategic, operational, and financial challenges facing pharmaceutical, biotechnology, and medical device companies. We provide industryfocused assurance, tax, and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience, and solutions to develop fresh perspectives and practical advice. For more information, please contact: Mauli Teli Manager mauli.teli@in.prtm.pwc.com Vinita Vasanth Experienced Associate vinita.vasanth@in.prtm.pwc.com Dinkar Saran Principal dinkar.saran@us.pwc.com www.pwc.com/us/healthindustries www.pwc.com/us/pharma twitter.com/PwCHealth © 2011. PricewaterhouseCoopers PRTM Management Consultants, LLC, a Delaware limited liability company (“PRTM”). All rights reserved. PwC US and PRTM refers to US member firms, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.