Roland berger: fight_or_flight_shortversion_20101025


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Roland berger: fight_or_flight_shortversion_20101025

  1. 1. PRESS BRIEFING O t b 2010October 2010 Fight or flight?Fight or flight? Diversification vs. Rx-focus in big pharma's quest for t i d th 1 sustained growth
  2. 2. Contents Page A. Executive Summary 3 B. Context and study approach 9 C Study findings and discussion 19C. Study findings and discussion 19 2© 2010 Roland Berger Strategy Consultants GmbH
  3. 3. E ti SA Executive SummaryA. PRESS BRIEFING 3
  4. 4. Executive Summary Data basis • Study is based on a global quantitative survey supported by in-depth desk1. y g q y pp y p research. The survey results were validated in over 50 CEO and board level face- to-face interviews with top decision makers of leading pharmaceutical groups • Participating companies cover 40% of global pharma revenues and include 7 t f th l b l t 10 l7 out of the global top 10 players Pharma in the midst of a strategic crisis 2 Pharma in the midst of a strategic crisis • According to 65% of pharma executives, the pharmaceutical industry is currently experiencing a strategic crisis • Changing healthcare environments, budget pressures, challenging market 2. g g , g p , g g access as well as massive patent expiries ask for a review of the traditional business model focusing exclusively on high margin, patent-protected innovative medicine 4 • 57% of 2008 global pharma sales will be going off-patent within the next three years; 75% within the next five years
  5. 5. Executive Summary Diversification – a potential way out of the crisis? • 67% of pharma executives think of diversification as a potential way out of the3 p p y strategic crisis • For those currently pursuing diversification, the study distinguishes three alternative dimensions: the de-risk path, the innovation path and the integration th 3. path • At the moment, the industry seems to be focusing on the rather conservative de- risking strategy. By acquiring particularly generics and consumer health companies the industry aims at top line growth while also preparing for thecompanies, the industry aims at top-line growth while also preparing for the opportunities emerging markets offer • Diversification along the innovation path ranks second. It results from the trend towards personalized healthcare and diagnosticsp g • Integration strategies along the healthcare value chain would turn pharma into active healthcare solution providers – they are not yet in the focus of today's strategies 5
  6. 6. Executive Summary The art of managing a diversified business • Leveraging existing capabilities and realizing related synergies is key to any4. g g g p g y g y y successful diversification • The largest overlaps of innovative patent-protected pharma with alternative diversification areas are identified with Generics (45%) followed by Diagnostics (43%) d V i (37%)(43%) and Vaccines (37%) • Pharma executives see only very limited functional competencies of their innovative business model which can be leveraged in other diversification areas • In particular despite huge investments customer skills such as access to• In particular, despite huge investments, customer skills, such as access to prescribers or even branding, are not seen as key competencies to be leveraged in an effort to diversify R&D d ti it i i d i di ifi tiR&D productivity crisis drives diversification • Over 60% of executives are re-evaluating their traditional strategy which was focused on patent-protected, high margin products due to two reasons Fi tl i t i t th i f i ti di i t d 5. 6 • Firstly, interviewees expect the margins of innovative medicine to come under tremendous pressure as public household deficits need to be managed across the globe
  7. 7. Executive Summary R&D productivity crisis drives diversification (Continued) • Second, massive R&D investments are no longer expected to bring the required 5 g p g q level of return • As many as almost 50% of executives expect a negative return of invest for today's R&D investments I ti h ill i i l h t j tif th i hi h l l f R&D t 5. • Innovative pharma will increasingly have to justify their high level of R&D spent. Many top-players have already started to reassess their R&D operations and reduced the internal investment level significantly 7
  8. 8. Executive Summary Financial community and shareholders support diversification • The financial community has already acknowledged this fundamental change – it6 y y g g no longer penalizes diversified companies • With over USD 400 billion of market capitalization lost over the past 10 years among innovative pharma, investors are now linking high growth expectations to di ifi d i 6. diversified companies • Price-to-earnings ratios of diversified companies are already higher than those of focused players Diversification is here to stay • Over 80% of executives believe diversification is a long-term trend that will be7. g pursued irrespective of R&D productivity • For the rest, it will be a bridging strategy needed to compensate for profit and growth shortfalls 8 • The future will bring a more diversified picture: ranging from highly focused, innovative players to fully integrated healthcare conglomerates
  9. 9. C t t d t d hB Context and study approachB. PRESS BRIEFING 9
  10. 10. Top pharma leaders recognize the existence of a looming strategic crisis in the industry … fuel a potential strategic crisis in pharma1) Today's challenges… p Q: Given reduced top-line growth and margin pressure, do you think the Public cost containment measures resulting in margin pressure pharmaceutical industry is facing a strategic crisis? g g p Looming patent cliff and R&D productivity crisis No 35%Restricted market access and health economic requirements productivity crisis Yes65% economic requirements Value of innovative Rx drugs i i l ti d 10 increasingly questioned Source: Roland Berger Survey 2010
  11. 11. Consequently, we observe two different strategic business models in the pharmaceutical industry Diversification as a way out of the strategic crisis? Top management point of +140%Top management point of view1) Q: Do you think diversi- fication is a potential 140% +120% +100% EDBUSINESS1) Diversification fication is a potential way out of the strategic crisis for pharmaceutical companies? +80% +60% % ROMDIVERSIFIE + + 3) No 33% +40% +20% 0 ONOFSALESFR 2) Yes67% -20% -40% -100% PROPORTIO Rx Focus 3) 11Source: Roland Berger Survey 2010; Annual reports 2004 2005 2006 2007 2008 2009 100% 1) All sales not resulting from pure innovative Rx business 2) Incl. Sandoz 3) Preliminary data
  12. 12. BACKUP While many big pharma companies are currently diversifying, others are strongly focusing their businesses Recent diversification/ focus actions in pharma Diversification R -focusDiversification Rx-focus • Mega merger with Wyeth (Consumer Health, Nutritionals, Vaccines) • Acquisition of RFCL-Vetnex Animal Health • Clear focus strategy on diagnostics and Rx pharma • Sale of Roche Consumer Health to Bayer Health • Acquisition of Ebewe Pharma (Generics) • Announced acquisition of Alcon (consumer vision care, surgical equipment & devices) • IPO and split-off of Mead Johnson Nutrition • Monetization of non-pharma businesses, e.g. sale of BMS Branded to GSK (G i ) FIGHT or • Numerous Generics acquisitions worldwide • Acquisition of Chattem Inc. (Consumer Health) and Merial Ltd. (Animal Health) f • SHAPE program to focus on indication areas Neurology and Immunology, e.g. divesting primary care organization and l f E OTC b i equipment & devices) (Generics) FLIGHT ??• Increase of Vaccine presence through joint venture in China • Investment in Aspen Pharmacare (Generics) Additional diversifiers sale of European OTC business • Acquisition of Schwarz Pharma AG (Neurology)?? 12Source: Roland Berger Additional diversifiers
  13. 13. Three dimensions of diversification can be distinguished Roland Berger diversification framework • Continue on path of medicalINNOVATE INNOVATE p progress by investing into adjacent medical disciplines INNOVATE "High risk, high fun" INTEGRATE • Defend existing top-line by forward integration along the healthcare value chain INTEGRATE "Maintain fun" value chain Reduce dependency on R businessDE RISK fun Rx Focus DE-RISK • Reduce dependency on Rx business model by investing into other non-Rx life science businesses DE-RISK "Low risk, still fun" 13Source: Roland Berger Focus DE RISK
  14. 14. Three dimensions of diversification can be distinguished Roland Berger diversification framework INNOVATE H lth Medical Diagnostics Wholesale/ Retail bus. INTEGRATE INNOVATE Healthcare provision devices Consumer health Vaccines Animal health GenericsRx-Focus DE-RISK 14Source: Roland Berger Survey 2010
  15. 15. In our current study, we investigate the strategic rationale behind diversification decisions and generate an outlook to the future Goals of our current Understand drivers behind diversification our current study Analyze status quo and recent evolution with regard to diversification Determine most attractive areas for diversification Evaluate options for management of diversified businesses Analyze diversification from a stakeholder's perspective Generate an outlook and suggest next steps 15Source: Roland Berger Generate an outlook and suggest next steps
  16. 16. The survey covers the majority of global pharmaceutical companies producing patented prescription drugs Survey population • Over 25Geographic focus of Global revenues of respondents' O 5 participating companies • Participating i G g p respondents [% of respondents] G p companies [% of respondents] AboveBelowGlobalNational companies cover over 40% of global pharma revenues • 7 out of top 1040% 29% Above USD 15 bn Below USD 5 bn Global focus National focus out o top 0 pharmaceutical companies included (based on 2009 40% 47% 46% Regional focus ( revenues)13% 25% Between USD 5 and 15 bn 16Source: Roland Berger Survey 2010
  17. 17. Top executive interviews represent the most important input to validate findings and to derive strategic implications High level survey results Desk research Fight or Flight? R&D, scientific conversion and novel approaches to healthcare management are seen as the key drivers for diversification Q: What are the most important drivers for diversification (select top 3)? Survey results [% of respondents selecting area within top 3] Key finding • The most important drivers of diversification are those related to R&D / scientific conversion and novel approaches to healthcare management Scientific conversion trends R&D productivity crisis 47% 50% I DRIVERS Diversification vs. Rx focus in big pharma's quest for sustained growth 1510_06_20 - Fight or flight - Top Executive Interviews_v5.pptx g Source: Roland Berger Survey 2009 General uncertainty about evolution of healthcare system Rx pharmaceutical budget restrictions Consumerization of healthcare Shifts in stakeholders/novel approaches to HC management 12% 18% 18% 20% 42% Emerging market opportunities Proposed discussion topics • Can diversification help to overcome the R&D productivity crisis? • Which scientific conversion trends should be addressed through diversification? • Which capabilities are required to deal with shifts in stakeholders/ novel approaches to HC management? Roland Berger experience 17Source: Roland Berger Top executive interviews Roland Berger experience from global projects
  18. 18. St d fi di d di iC Study findings and discussionsC. PRESS BRIEFING 18
  19. 19. We have tackled the topic of diversification along four guiding questions What drives pharmaceutical companies to diversify? Drivers of diversification I What are attractive diversification areas?II Where to diversify? What are the implications for management of diversified businesses? How to diversify?III How is diversification assessed from a pure financial and investment perspective and is it here to stay? Shareholder's per- spective & outlook IV 19 ROLAND BERGER STUDY ON DIVERSIFICATION Source: Roland Berger
  20. 20. I DRIVERS OF DIVERSIFICATION Changing health care environment, R&D and merging of medical disciplines are seen as the key drivers for diversification Q: What are the most important drivers for diversification (select top 3)? S lt [% f d t l ti ithi t 3] K fi diSurvey results [% of respondents selecting area within top 3] Key findings • In light of the R&D productivity crisis executives watch out for investment opportunities outside Changing health care environment in industrialized countries 88% investment opportunities outside the traditional Rx-innovation model • Merging of medical disciplines drives pharmaceutical companies to secure technological/ R&D productivity crisis 75% to secure technological/ scientific leadership through diversification Emerging market opportunities Merging of medical disciplines 43% 57% Consumerization of health care 28% 20Source: Roland Berger Survey 2010 Others 3%
  21. 21. R&D PRODUCTIVITY CRISIS – BACKUP At the same time, pharma companies are facing the expiration of numerous patents COMPANY 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Range of LOE exposure within next 5 years in % of total sales 2009 Sanofi-Aventis Eli Lilly Novartis y Bristol-Myers Squibb Merck & Co + Schering Plough Astra-Zeneca Pfizer+Wyeth Merck & Co. + Schering-Plough Roche GlaxoSmithKline 21Source: US Patent and Trademark Office, Annual Reports Johnson&Johnson Source: US Patent and Trademark Office, Annual Reports
  22. 22. MERGING OF MEDICAL DISCIPLINES – BACKUP Merging of medical disciplines drives pharma companies to innovate through diversification Examples for merging of medical disciplines 1 Combination of Rx with 2 Combination of medical 3 Combination of imaging 1 x genetic tests 2 devices and Rx 3 g g and molecular biology • Tumor response to treatment with Erbitux® can be predicted with genetic testing (K-RAS) • Patient subpopulations with high • The IntelliCap technology allows for controlled drug delivery in the intestinal tract • Drug effectiveness can • Combination of molecular tra- cers with in-vivo imaging techno- logies allows for early detection of diseases at molecular levelp p g response can be easily selected g significantly increase with fewer side effects • Bayer-Schering's Florbetaben can be used for early detection of Alzheimer's disease 22Source: Roland Berger
  23. 23. II WHERE TO DIVERSIFY? Most important diversification area is the generics business – forward integration not yet in focus Q: What is the importance of each diversification area in the current trend toward diversification? (select top 3) Survey results1) Key findings • Pharma companies concentrate on expanding existing 78%Generics WHY? • Close to existing business? • Close to existing businesses instead of innovating in other areas • If other areas are entered, those with highest margins or R&D 50% 42% Diagnostics 40% Vaccines Consumer health • Close to existing business? • High margins / R&D synergies? • High margins / R&D synergies synergies are in focus 28%Healthcare provision Medical devices 35% R&D synergies • High margins / R&D synergies • Securing revenues? 8% 5% Wholesale business Animal health Retail business 0% 23Source: Roland Berger Survey 2010 Other 0% 1) % of respondents selecting area within top 3
  24. 24. II WHERE TO DIVERSIFY? Drivers vary by diversification area – Restricted healthcare budgets mainly drive the move into generics Q: What are the key drivers behind each area of diversification? K fi di s/ ment Key findings • Move into generics (most important area) is driven by multiple trends R&D i i ll i f RS roductivity rmaceutical restrictions nstakeholders approachesto caremanagem ingmarket unities merizationof care gofmedical nes • R&D crisis as well as merging of medical disciplines fuel diversification into high-margin areas DIVERSIFICATION AREAS DRIVE R&Dpr crisis Rxphar budget Shiftsin novela healthc Emergi opportu Consum healthc Merging disciplin Generics Medical devices Consumer health Diagnostics Healthcare provision 24Source: Roland Berger Survey 2010 Vaccines Named by more than 50% of respondents per diversification area
  25. 25. III HOW TO DIVERSIFY? Leveraging existing capabilities and choosing the optimal management approach are key to create value from diversification How to diversify for value creation? Identify areas in which Rx capabilities can be leveraged In which areas do you believe, Rx-based pharma players could most successfully leverage their skills and capabilities? Q: Detail relevant Rx capabilities per Which core competencies of the Rx pharma business can be le eraged most s ccessf ll for different di ersification Q: capabilities per diversification area leveraged most successfully for different diversification areas? Determine optimal management approach for diversified businesses Which diversification areas should be integrated into the existing organization and which should be managed as a stand-alone business? Q: 25Source: Roland Berger
  26. 26. III HOW TO DIVERSIFY? The most successful transfer of skills and capabilities is expected in the areas of generics and diagnostics In which areas do you believe, Rx-based pharma players could most successfully leverage their skills and capabilities? Q: Di i 43% Generics 45% • There is no clear "must be in" area in which Rx skills can be perfectly l d Survey results [% of respondents selecting area within top 2] Key findings Consumer health 28% Vaccines 37% Diagnostics 43% leveraged • According to executives, Rx companies lack capabilities for forward integration 13% Healthcare provision 20% Medical devices Wholesale business 2% Retail business 7% Animal health 8% 26Source: Roland Berger Survey 2010 Other 0%
  27. 27. III HOW TO DIVERSIFY? Relevant and applicable core competencies vary by diversification area – There is no single "must have" diversification area Q: Which core competencies of the Rx pharma business can be leveraged most successfully? e) • Pharma companies seek to leverage manufacturing skills in generics – At th ti i Key findings NAL ETENCIES acturing (public/private ercial OMER ETENCIES mer/patient bers the same time some generics companies are outsourcing manufacturing (e.g. TEVA) • Top executives see no major opportunity to successfully leverage DIVERSIFICATION AREAS INTERN COMPE Generics R&D Manufa Payers Comme CUSTO COMPE Consum Prescri opportunity to successfully leverage their relationships with prescribers Vaccines Diagnostics Consumer health Healthcare provision 27Source: Roland Berger Survey 2010 Medical devices Named by more than 50% of respondents per diversification area
  28. 28. III HOW TO DIVERSIFY? Top executives favor to integrate those businesses where high R&D synergies are expected Which diversification areas should be integrated into the existing organization and which should be managed as a stand-alone business? Q: Top-executives High Vaccines Top executives believe that diversification areas with a high level of R&D synergies Level of R&D Diagnostics R&D synergies should be integrated into existing innovative R b i R&D synergies Medical devices Rx business Low Healthcare provision Consumer health Generics 28Source: Roland Berger Survey 2010 Stand-alone Integrated Management approach
  29. 29. IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK The "traditional" stance on R&D productivity favored a focus strategy – However, the picture might change Does the R&D productivity crisis tilt the scale towards diversification? M i M i Potential ROIC ? Margin WACC Margin WACC depending on R&D d ti it consequences • Margin dilution • Risk reduction ROIC ? productivity • Value creation? • Value destruction? Focus on RX Diversification 29Source: Roland Berger
  30. 30. IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK A significant portion of top executives does not believe in positive returns from R&D investments – Improvement is expected Q: Looking specifically at R&D, do you believe that today's investments yield a positive ROI? Q: Looking at potential scientific advantages, do you believe that the return on R&D investments will be positive in 10 years?will be positive in 10 years? NEGATIVE POSITIVE Key findings M t ti b li i 53%47%Today's R&D NEGATIVE POSITIVE • Most executives believe in improvement of R&D returns in the next 10 years • Looking at R&D productivity, at l t f th ti 67%33%R&D in 10 years least one of three executives should consider diversification 30Source: Roland Berger Survey 2010
  31. 31. IV SHAREHOLDER'S PERSPECTIVE AND OUTLOOK Manage for growth or margin? There is a gap between investor's expectations and management's preference Conflicting expectations … … and their impact on diversification activities Q: What do you believe to be investors' primary expectation of pharma- ceutical companies: high Q: Please rate the following statement: "CEOs are currently limiting their diversification activities Q: If you could choose, would you manage for growth or margins? Sales growth High margins ceutical companies: high margins or sales growth? diversification activities because of the expected dilution of margins." 23% 44% 56% 68%32% 77% High margins 56% Sales growth Disagree Agree 31Source: Roland Berger Survey 2010 High margins Sales growth
  32. 32. IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK Most executives see diversification as a long-term trend, irrespective of R&D productivity Q: Please rate the following statement: "Diversification is a long-term trend that will be pursued irrespective of R&D productivity recovery because it offers Q: Please rate the following statement: "The market will split into different segments, with some players focusing only on the R&D-based Rx model and others becomingp y y attractive business opportunities." x g diversified healthcare players." Disagree Disagree 18% g 22% Disagree Agree 82% Agree 78% Agree g 32Source: Roland Berger Survey 2010