In 2017, the worldwide pharmaceutical market reached 1 trillion Euro, an increase of 6.7 percent over 2016. This market is expected to continue to growth at 4 percent CAGR and exceed 1.1 trillion euros by 2020.
Four main growth drivers are behind this evolution, which occurred in spite of bad and challenging market conditions—growing health spending in emerging countries, drug price increases in some key markets, growing demand for generics in a context of high patent expiries, and innovative drugs and new treatments, especially in the field of oncology, which accounted for 27 percent of active global R&D pipelines in 2017, ahead of neurology and virology.
For decades, pharmaceutical companies have been bringing innovative drugs to market for the benefit of the patients and the society. However, this process is not straightforward. The average time for a new drug to reach the market is between eight and 12 years. On average, from 10,000 compounds at the discovery phase, only one is approved and reaches the market.
With more than 14 percent of its revenues allocated to R&D, the pharmaceutical industry is a leading contender in terms of R&D spending. From 2007 to 2016, the industry invested more than $1.3 trillion in R&D and forecasts predict an annual investment of $204 billion by 2024, with the U.S. leading the pack. This huge investment in R&D is necessary for pharmaceutical companies to launch new drugs, to sustain growth and profit.
However, in recent years declining productivity has become a concern for pharmaceutical companies. R&D returns declined to 2 percent in 2018, down from 10 percent in 2010, with figures showing a steady decline. Moreover, during the past decades, the average drug development costs has been multiplied by more than 13, from 160 million euros in 1970 to 2.3 billion in 2010. This evolution is due to many factors, such as higher technical, regulatory and economic constraints, but also the search of innovative drugs by companies facing competition. For many experts, this situation raises questions on the capacity of the industry to innovate and to create growth in the future. Furthermore, 160 drugs lost patents in recent years, and this number is expected to reach more than 40 between 2017 and 2020. The new landscape opens the door to generic and biosimilar drugs and creates more opportunity for more competition, between existing players and new ones.
New business models
This situation has a big impact on the big pharmaceutical blockbuster business model, which is based on top selling drugs that generated over 1 billion USD in annual sales. Large pharmaceutical companies are changing and adapting their capabilities by focusing on external growth, more precisely mergers and acquisitions (M&A), to increase R&D capabilities and boost portfolio with biotech companies as preferred targets.
In the past 10 years, merger and acquisition activities have significantly increased, with a high in 2015 when the total value reached more than 345 billion USD. 2019 started with the same strength, a mega merger between Bristol-Myers Squibb and Celgene of 95 billion USD (including debt recovery)—an astronomical amount which confirms the growing interest in biotech.
Beyond M&A, partnerships with biotech companies are also appealing to big pharmaceutical companies. We have observed an increase in partnerships between biotech companies and pharmaceutical companies as a way to feed their pipeline and minimize risks and costs. For example, through a strategic partnership, Genentech and AbbVie developed Venclexta, an oncology drug. It is jointly commercialized by Genentech in the United States and commercialized by AbbVie outside of the United States.
Big pharmaceutical companies are looking at biotech companies for many reasons. First, biotechnology companies clearly dominate new drug pipelines. Secondly, they are characterized by a very specific know-how and high value-added research involving patented technologies. They participate strongly in therapeutic innovation and are structures of interest for large pharmaceutical companies. Finally, biotech companies can bring more efficiency and responsiveness through licensing agreements to pharmaceutical companies. Put all together, biotech startups can help pharmaceutical companies to strengthen and revitalize portfolios in a challenging landscape where innovation is key. At the same time large companies bring financial support and expertise to put drugs on the market through enhancement of clinical development, market access and regulatory affairs.
This strategic shift by large pharmaceutical companies toward biotech through M&A and partnering is bearing fruit. During the past 10 years, the number of new molecular entities has increased steadily. In 2018, the European Medicines Agency (EMA) had approved 84 (vs 94 in 2017) new drugs with 42 (vs 35 in 2017) of these being new active substances. At the same time, the U S Food and Drug Administration (FDA) had approved 59 novel drugs and biologics in 2018 (vs 46 in 2017).
Moreover, biotechnology drugs are contributing to sales at a large scale. For EvaluatePharma, these products will represent 31 percent of the market in 2024 in comparison to 25 percent in 2017. This heavy role played by biotech companies is more visible when the top 100 products sales are put in the spotlight; biotech drugs are predicted to account for 52 percent of sales in 2024 (vs 49 percent in 2017). Based on this forecast, the dependency of the industry on biotech is clear. In this landscape, Roche has a leading position build through continued investment, the acquisition of Genentech, a biotechnology pioneer, in 2009 for $46.8 billion or Ignyta, a biotech in oncology, for $ 1.7 billion in 2017 in order to foster the company’s position in oncology.
A new strategic roadmap
Biotechnology companies can be a strategic pillar to help pharmaceutical giants redesign themselves. In the past decades, many groups have been defining a new strategic roadmap from diversification strategy to focus on core areas.
In the case of Sanofi, the company is remaining on a diversification strategy, but started since 2016 restructuring a plan and discarded non-strategic activities. Sanofi sold its animal health business (Merial) and withdrew from some of its generic business by selling its subsidiary Zentiva, which manufactures generic drugs for the European market.
In order to position itself on the strategic areas of oncology, immunology and multiple sclerosis, Sanofi have been using external growth strategy. Between 2017 and 2018, Sanofi bought three biotechnology companies, which allow it to reinforce its presence in the specialty medicine landscape. The first was Protein Sciences in 2017 for $750 million, through the acquisition of the biotech, Sanofi Pasteur, the vaccines global business unit of Sanofi. This adds a promising product, based on recombinant proteins, to its influenza vaccine portfolio.
The second acquisition is Ablynx, a Belgian biotech company for $4.8 billion. Ablynx is engaged in the development of nanobodies, proprietary therapeutic proteins based on single-domain antibody fragments, which combine the advantages of conventional antibody drugs with some of the features of small-molecule drugs. Ablynx has more than 45 proprietary and partnered programs in development in various therapeutic areas, including inflammation, hematology, immuno-oncology, oncology and respiratory disease.
Finally, Sanofi purchased Bioverativ for $11.6 billion, a U.S. biotech company focusing on therapies for hemophilia and other rare blood disorders. This acquisition should have two upsides or benefits—it helps Sanofi build a leading hemophilia portfolio and strengthens Sanofi’s portfolio in specialty care.
The decline in R&D productivity, the increase in costs of drugs, the tough competition between existing and new players, and expertise of biotech companies has created an undeniable and undisputable incentive for a marriage between big pharma and biotech companies. Even if, the path to success is not guaranteed, the opportunity need to be taken for a brighter and exciting future for patients, large pharma players and in the end, creation of shareholder value.
Joseph Pategou is a consultant with the management consulting firm Wavestone, specialized in the pharmaceutical industry. He has published more than 20 articles and completed a Master of Sciences in International Strategy and Influence, as well as a master’s in chemistry and life sciences.