The Novasecta European MidPharma Report 2017

5 July 2017

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Novasecta defines European MidPharmas to be R&D-based integrated pharmaceutical companies with annual revenues of between €50m and €5bn. Our consulting work in this sector has given us a uniquely powerful understanding of how this tremendously diverse group of companies can survive and thrive. In this annual report we share some of our insights into their health. Through this analysis we point to a focused and entrepreneurial future for the entire industry that goes beyond an industry dynamic driven by Big Pharma and small biotechs.


It is the ownership of European MidPharmas that makes them such an unusual yet successful group of companies. In an industry that is dominated by stock-market listed Big Pharmas and venture-backed biotechs, the fact that more that 70% of European MidPharmas are privately held or controlled points to a more long-term and “patient capital” model for the industry. We therefore segment the 74 MidPharmas that we track into three ownership categories throughout our report:

  • ‘Pure’ listed (21, 28%) – publicly-traded with no majority shareholder
  • Listed privately-controlled (8, 11%) – publicly-traded with a majority shareholder
  • Private (45, 61%) – wholly owned by families or foundations or funds

To further classify the various companies we combine the ownership dimension with scale – defining €50m-€5bn as “mid-sized” – and R&D intensity, defined to be R&D investment as a proportion of revenue: 

European MidPharmas remain highly diverse in ownership, scale and R&D intensity

Dot Chart 2017 

− Novasecta analysis from company websites and many other public domain sources. 2015 data has been used for selected companies where 2016 data has not yet been published
− Companies headquartered in Ireland but with most of operations in USA excluded (e.g. Alkermes, Amarin, Endo, Mallinckrodt); Companies with > €50m revenue but without own-commercialisation capabilities excluded (e.g. Ablynx, Cellectis, Innate, Vectura)
− Of 74 MidPharmas, only the 42 displayed above have sufficient recent public domain data on both revenue and R&D spend. Others are included in the remainder of the report where some data such as revenue trends are available (e.g. Angelini, Menarini, Thea, Urgo)

The resilience of European MidPharmas, as noted in our 2016 report, has continued in the past 12 months. Only two have left our list in the year: Shire, a tremendous growth success story, now a Big Pharma with its transformative Baxalta acquisition, and Meda, acquired by Mylan at a 92% premium. So MidPharmas are not only surviving, many are flourishing. There appears to be an encouraging continued R&D intensity across the sector, with a good number of the companies investing more than 15% of their revenues in R&D. MidPharmas are increasingly recognising that investment in R&D reduces the risk of not having product and is a key ingredient of a sustainable business.

The rise and resilience of the MidPharmas is perhaps best exemplified by Actelion, which was acquired by J&J for $30bn in January 2017. So this is the last of our MidPharma reports in which Actelion will be covered. Its acquisition underlines how strong and attractive MidPharmas can become. The $30bn price tag, based on an eye-watering multiplier of 15 times revenue, also shows how much Big Pharmas are prepared to pay for strong innovation capabilities. The purchase was indeed a ‘wake-up call’ to the industry, reinforcing the value of good R&D and focus. Moreover, it breaks the mould of market valuation; analysts have traditionally not valued discovery assets and capabilities, considering them too distant and volatile to quantify accurately. J&J’s purchase is based not on consolidation cost-savings but on strategic benefits and long-term growth. The high price – mirroring a trend towards increasingly expensive M&A in pharma that will be examined later in this report – reflects the growing strength of some European MidPharmas.

The ownership of the European MidPharmas can provide a helpful foundation for sustainability. In an industry that has long-term horizons but operates in an uncertain and volatile economic climate, this is a valuable characteristic. Certainly, corporate sustainability can be a force of good in the industry; a laser focus on achieving excellence in a core, specialist area is evident not only in many European MidPharmas but also in larger companies like Boehringer Ingelheim and Roche, both of which have substantial private shareholdings. Combining patient long-term capital (a characteristic of privately-controlled companies) with financial discipline (a characteristic of pure listed companies) can indeed be a great balance to have in this industry.

One new trend in the past year has been the increase in private capital being deployed in pharma companies that doesn’t emanate from families or family foundations. For example, in the UK both Circassia and Kymab have had major funding rounds from large private shareholders that are not family offices, with the intention of creating powerful integrated pharma companies in the future. It will be interesting to see if this trend continues, with Private Equity funds seeing the value that can be created, as well as the clear risks, amply demonstrated in the case of Circassia and its major clinical trial setback.

The remainder of this report explores and contrasts MidPharma companies’ performance both with each other and with their Big Pharma peers. We focus on three primary areas, structured broadly in the order of the value chain: R&D, commercial and corporate as follows:

  • R&D
    • R&D Intensity
    • R&D Externalisation
  • Commercial
    • Revenue Growth
    • Commercial Models
  • Corporate
    • Profitability
    • M&A
    • Partnering

The report concludes with our proprietary ranking of European MidPharmas based on three fundamental attributes; R&D strength, global commercial reach and corporate business development. 


R&D Intensity: Still important but some signs of pulling back in MidPharmas

This section examines the intensity of businesses’ R&D investment and what that indicates about their growth strategies. To measure a company’s R&D intensity we consider its R&D spend as a percentage of revenue. This tends to be a highly instructive proxy of the corporate business model; to what extent are companies seeking to grow organically through R&D or looking to buy their way to growth?

As shown in our opening graphic above, the proportion of revenue that European MidPharmas invest in R&D is hugely variable. This is consistent with our previous annual reports. As was the case last year, there are two clear clusters: those that maintain a significant commitment to R&D, investing between 15-25% of revenue, and those that invest between 5-15% in R&D. In the latter cluster R&D may perhaps be considered an investment necessity for Life Cycle Management and commercial success, rather than a source of future earnings and growth. Outside of these two clusters, there are a small number of companies – from across all three ownership types – investing less than 5% of revenue in R&D.

Another indicator of R&D intensity is the extent to which R&D investment grows year-on-year. We see R&D investment growth as a good barometer of company health; those that increase investment year-on-year have either been succeeding with it (late-stage drug development costs more than early-stage) or have confidence in its ability to create value for the organisation. So what are the latest trends? Below we explore the five-year compound annual growth rates of R&D spend across the various company segments, including Big Pharmas: 

Listed companies have been increasing R&D investment more than their private peersRD Spend 2017 

− Novasecta analysis:each dot represents one company, those with insufficient public domain data are excluded

In our previous two reports we observed that ‘pure’ listed MidPharmas were growing their R&D at a similar rate to their larger peers in Big Pharma. This trend continued in 2016: an encouraging sign that indicates a strong belief in the future value that R&D can create. By contrast, the privately controlled and private MidPharmas have not been increasing R&D investment as strongly, with -0.4% and 3.5% mean CAGRs respectively, albeit with a small sample size. The reasons for the decline are varied. Privately controlled MidPharmas are naturally cautious about increasing R&D investment, sometimes because they have less capital to deploy than their listed counterparts. Yet there are other more company-specific factors at play. For example, Almirall’s five-year R&D spend CAGR is negative (-7.4%), partly due to a strategic change in therapeutic focus from respiratory to dermatology. Similarly, Ipsen’s five-year compound R&D spend has also seen negative growth (-2.3%), but the company has made commercial growth in the US a clear investment priority and is starting to see very positive results from that. Elsewhere, Lundbeck’s R&D investment has steadily declined over the past five years, though it has enjoyed an encouraging increase in the last 12 months.

R&D Externalisation: Some signs of not being embraced sufficiently in MidPharmas

Our focus now shifts to the analysis of R&D business models. We examine a simple but important question: are companies using their own R&D resources or outsourcing to external parties? One proxy measure for this is the number of R&D-focused employees an organisation has, as when normalised for R&D investment. This indicates the intensity of internal R&D activities compared to external. Our analysis aims to establish whether the perceived trend and fashion for outsourcing more R&D is reflected in the data.

Certainly, the ‘virtual’ model of R&D, where companies deploy external contractors and partners to conduct R&D activities, has become a familiar direction of travel for pharma and biotech. The benefits are widely understood; outsourcing is regarded not simply as a means of securing cost reduction. Just as importantly, outsourcing represents an opportunity to access capabilities that increase flexibility, improve productivity and accelerate the speed of development. Therefore, twelve months after our first analysis of this area identified that MidPharmas had more proportional R&D heads than their Big Pharma counterparts, we once again examined the extent to which the different pharmaceutical segments are balancing internal versus external R&D.

Big Pharmas continue to externalise more of their R&D than MidPharmasRD Heads 2017 

Notes − Novasecta Analysis: Each dot represents one company, those companies with insufficient public domain data are excluded

Big Pharmas now deploy a remarkably similar proportion of internal R&D staff to each other, settling at a median of 2.7 heads per €1m of R&D spend, with an apparent cap of around 3 in the number of heads per million that they choose to invest in R&D. Their similar business models and pipeline mix (later stages are typically more outsourced than earlier) clearly have an effect here. By comparison, there remains much more variability among the MidPharmas. The spread in R&D heads per €1m of spend in MidPharmas is yet again evidence of the variety in business models in this sector. Interestingly, Stada, with the highest R&D heads per €1m of 9.6 in 2016, is still as we write being actively pursued by private equity investors in 2017 in a move presumably to reduce some of the excess fixed costs in its R&D. Finally and notable this year is the smaller sample size: more companies are choosing not to disclose how many R&D heads they employ, perhaps reflecting either a reluctance to disclose decreases. Or more likely the general industry sense that it is not about numbers of people it’s about the quality.

What is clear, though, is that some private companies appear less willing to reduce the number of R&D staff they have in-house than their listed counterparts. This can be caused by a more family attitude to staff reduction – only done in extremis – or facing less pressure to do so from the stock market. Whatever their motivation, it does mean that private MidPharmas’ relative reluctance to outsource and partner does mean that these companies are missing out on the benefits of flexibility, cost reduction and productivity.

The larger companies are still refining their approach and developing new ways of transforming their R&D models. This is perhaps best exemplified by Allergan, who has – with great success – extolled and pursued an ‘open science’ model to R&D. Through this open science approach, Allergan identifies external partners – biotech companies, specialist pharma companies and academia – to conduct early stage discovery and then acquires the rights for compounds at a later stage of development. The company says that its open science concept, which has seen it reduce R&D costs, has made it ‘a magnet for game-changing ideas and innovation’. So far the stock market appears to be rewarding them for this approach. The need to find innovation and flexibility from external partners, whether biotech or service companies, is not going away soon, and many MidPharmas are behind their larger counterparts in embracing this change.


Revenue Growth: A clear strength for MidPharmas

Comparing the growth of the various types of MidPharma with their Big Pharma peers provides some interesting clues to the evolving shape and direction of the industry.


MidPharmas continue to grow faster than most of their Big Pharma peersRev CAGR 2017 

Notes − Novasecta Analysis: Each dot represents one company, those companies with insufficient public domain data are excluded

MidPharmas are still growing their top-line revenue at a faster rate than their Big Pharma peers – continuing the trend identified last year. Furthermore, remarkably few MidPharmas have not grown at all. The same cannot be said of Big Pharma where pricing pressures and high profile patent expiries on significant products have led to a number of companies experiencing negative compound annual growth over a five-year period. Naturally, smaller mid-size companies whose businesses aren’t reliant on dominant products don’t tend to face these challenges. The contrast of the less volatile MidPharmas with the more fluctuating fortunes of Big Pharmas is notable.

Some MidPharmas have gone on to become Big Pharmas through M&A. Shire is the most recent example, having made enormous strides not least through persistent and focused acquisitions – the most recent of which being its $32bn takeover of Baxalta. Others like UCB appear to be on the same track. But the vast majority of MidPharmas are not growing top-line significantly through acquisition, preferring a more conservative and organic path to growth.

There is more recent evidence that M&A alone may not always be a ticket to success. In this regard, Valeant provides a cautionary tale. At face value, Valeant has enjoyed the biggest growth in the Big Pharma segment, with CAGR of 36% over the five-year period. However, this growth was fundamentally driven by over-paying for acquisitions that overloaded the company with debt. The massive drop in Valeant’s share price and its continued troubles prove that overly financially driven M&A roll-ups is not a viable strategy in the pharmaceutical industry.

Highlights of growth in MidPharmas include impressive compound growth at Genmab (39%) and BTG (36%), albeit from lower bases. These companies – previously classified as biotechs – are great examples of successful MidPharmas that have adopted new commercial structures to help them grow. Genmab’s compound growth, the highest in the listed franchise, is largely the result of a very focused business model. The Danish company has built its business through licenses and careful use of capital – and it has had the courage to commercialise itself as well as striking some very good partnering deals. BTG has chosen a niche – interventional medicine – and pursued targeted acquisitions to grow in this area.

The successes of BTG and Genmab, unburdened by the legacy of old commercial models, shows how new players can start with a clean sheet to establish effective commercialisation strategies for a highly competitive environment. This freedom, combined with tightly focused business models and astute leadership, has provided the engine for significant growth.

Commercial Models: Some much-needed change to come

The emergence of new and agile commercial models yielding great success shines a light on a much-debated question: are the industry’s legacy commercial models fit for purpose in the modern health and economic environment? The overwhelming consensus is now that a traditional volume-based sales model is often misaligned with the needs of new and emerging customers and influencers. The industry is having to adapt to healthcare systems that demand greater value for money in response to ageing populations and diminishing healthcare budgets.

The more effective emerging commercial models that we see in MidPharmas do not accept functions operating in silos, but instead tightly integrate medical, scientific and commercial skills. These critical functions are then further integrated into powerful strategic marketing to build strategies and engagement that are underpinned by true, holistic customer insights and understanding. Those insights no longer focus on physicians alone, being cognisant of a complex ecosystem where payers and patients are exerting greater influence.

So though the MidPharmas we profile in this report have mostly managed to sustain commercial growth, the difficulties of market access in Europe particularly require a renewed focus on evolving commercial models and capabilities for the future. Our sense is that the focus of some MidPharmas is a significant benefit in this respect, while other more diverse players are somewhat behind their Big Pharma “franchise-focused” peers in applying customer insight to commercialise their products more effectively.


Profitability: Healthy, with some signs that MidPharmas are catching up with Big Pharmas

With MidPharmas still growing at a faster rate than Big Pharma, albeit from a much lower base, the focus now shifts to the metric where the “rubber hits the road” – profitability. We examine the EBIT of each company, which by its nature and unlike EBITDA includes somewhat the potential cost of over-paying for buying external companies and assets.

There has been a convergence in the profitability range of all segments - apart from privateProfit 2017 

Notes − Novasecta Analysis: Each dot represents one company, those companies with insufficient public domain data are excluded

Profitability across the sector has fallen since our last report in 2016; median EBIT as a percentage of revenue in Big Pharma has decreased from 20.4% to 15.9%, whilst in listed MidPharmas it has dropped from 16.7% to 15.5%. Private MidPharmas have, at face value, suffered more, plummeting from a median of 15.2% in 2015 to just 8.4% in 2016. However, this is based on a small sample size, with very few private companies publishing their figures this year. Conversely, listed privately controlled MidPharmas have enjoyed a slight upturn on 2015 figures – growing from a median of 10.2% to 13.1% in 2016. Once again, with a small sample.

Despite the general fall in EBIT, the sector as a whole remains highly profitable. Interestingly, there appears to be a convergence in the median profitability range across all segments outside of private MidPharmas. Whereas last year we saw the median 2015 profitability for Big Pharma (20.4%) was double that of listed privately controlled companies (10.2%), for 2016 that gap narrowed to just 0.4% as MidPharmas improved and Big Pharmas declined.

There are, of course, success stories in each MidPharma segment. Genmab, as previously highlighted, has performed well, translating its revenue growth into an impressive 58% profit. Similarly, Actelion – ahead of its 2017 takeover by J&J – recorded profits of 33%. Privately controlled and listed companies, Recordati (28%) and Ipsen (22%) also posted solid results.

As in previous years, we believe that Big Pharma’s relatively higher profitability compared to some of the smaller mid-sized peers is where the financial discipline of stock markets is most apparent. Big Pharmas remain ‘safe haven’ stocks for the financial markets, with relatively high and reliable dividends. CEOs of such companies have been aggressively protecting dividends, executing share buy-backs and sustaining major cost-cutting initiatives to reinforce these. These are hallmarks of financial discipline and are generally less apparent in European MidPharmas. It remains an interesting question as to how such activities create long-term value. The catching up we are seeing in MidPharmas this year may be an important early signal that it is not. Cutting R&D, for example, yields short-term profitability benefits but risks long-term damage. Similarly, as we have seen with Valeant, a desperate quest for acquisitions to boost earnings and provide synergy cost benefits can have serious negative implications.

For MidPharmas, there are undoubtedly economies and cost-saving opportunities that come from both scale and market discipline. As we have already observed, listed companies are typically more amenable to shedding R&D headcount than their privately held counterparts as a means of cost reduction. In terms of R&D intensity, the impact on profitability is harder to call. The companies that have increased their R&D investment may well have experienced a dent in profitability, though there is a clear argument for tolerating it short-term. The risk for many MidPharmas is that insufficient cost discipline creates complacency, which ultimately stunts R&D and commercial progress. That said the contrasting risk in Big Pharma is that the constant cycle of M&A and synergy cost cutting will harm the focus and sustained investment in R&D that brought much of their success and will sustain them in future. As ever the optimum position is one of balance: maintaining cost discipline while investing for the long-term.

M&A Activity: Pulling back as the price has been simply too high

In early 2017 we carried out some deep-dive research into M&A prices and concluded that pharmaceutical M&A was too expensive for most pharma buyers. Our findings were published in the Financial Times and are also detailed in our White Paper – Pharma M&A is Too Expensive: Now What?

The escalating price of M&A has been a natural consequence of the combined effect of an abundance of cheap capital and a relentless ticking clock of patent expiries. As we outline in our White Paper, cheap capital puts pressure on larger firms to ‘do something’, and in most cases acquiring companies – at a price – can appear quicker and easier than building them.

For most MidPharmas, the price has been too high for M&A in 2016MandA 2017 

Notes − Novasecta Analysis of mergers, 100% and majority acquisitions by MidPharmas from GlobalData deal database

Our analysis shows the stark reality of M&A for MidPharmas in 2016: a massive drop in both the number of deals and deal value. They pre-date the later phenomenon observed in deal-making across the sector in the first half of 2017 – perhaps the more long-term oriented and mostly private companies can see a bubble more quickly than their listed counterparts that are under relentless pressure by their analysts and investors to buy growth.

Reflecting on the diminished M&A activity in 2016 within the MidPharma segments, we have seen low levels of activity throughout, though the listed companies have been able to pay more through ready access to capital markets.

Listed MidPharmas spent more on M&A than their private peers in 2016MandA Table 2017 

Notes − Novasecta Analysis of mergers, 100% and majority acquisitions by MidPharmas in 2016 from GlobalData deal database

In the listed segments, Recordati continued its past form with two out of the four M&A deals carried out by pure and privately controlled listed MidPharmas in 2016. Fully privately owned MidPharmas were also active, though their average deal value was considerably lower. Unlike their Big Pharma counterparts, few MidPharmas have applied M&A as a routine part of doing business. The case of listed company Shire’s acquisition of Baxalta catapulting it out of the MidPharma space is an exception rather than the rule, particularly for those MidPharmas that are privately owned or controlled.

Partnering: The preferred alternative to M&A for most MidPharmas

Moving from M&A to licensing, we now examine partnering and strategic alliances across the MidPharma sector. In contrast with the picture for M&A, privately owned and controlled companies have paid more in deal value and upfronts than their listed MidPharma peers.

Private MidPharmas are still more willing to partner than their listed peersPartnering 2017 

Notes − Novasecta Analysis of strategic alliances by MidPharmas in 2016 from GlobalData deal database

The evident preference for partnering over M&A by privately controlled companies is a phenomenon with profound implications for the industry. While other industries consolidate for scale, the pharma industry remains relatively fragmented, with an appetite for partnering and alliances that preserves and builds on the strengths of the parties involved rather than putting them through the disruption of post-merger integration and culture clash. It is not an accident that the “mega-mergers” of the last two decades in pharma are drying up – albeit there will always be the exceptions to the rule. They have become expensive and with dubious value.

Creating partnerships and alliances is a force for good in the industry, and in this sense the mostly privately controlled MidPharmas, where capital is deployed carefully and necessity is often the mother of invention, are leading the way.

MidPharma Performance Ranking

We conclude with our annual MidPharma Performance Ranking, in which we rank MidPharmas on three fundamental attributes that we believe provide long-term strength: focus on R&D, attention to partnerships, and global commercial reach. We take public-domain data on proxies for each of these attributes and rank the companies based on the combination of all three.

Novasecta's European MidPharma Ranking 2017Ranking 2017 



− R&D ranking uses 2016 data except in selected companies where only 2015 data available, the 42 companies are then assigned to 5 equal groups with integer scores from 0 to 4 representing the number of quadrants of the Harvey balls displayed

− BD ranking uses number of 2014-2016 deals divided by average revenue for 2014-2016, assigned to equal groups as with R&D ranking

− Commercial footprint ranking is the number of regions with subsidiaries (from 1 to 5) counted from GlobalData database. Regions used are Canada/US, EU/EEA, Japan, BRICS (Brazil, Russia, India, China, South Africa), Rest of World

− In a tie, companies are listed in alphabetical order

Our normal caveats still apply to our ranking: the R&D measure favours R&D-based companies, the partnership measure does not favour those that have taken a selective M&A approach to bringing in assets and capabilities, and the commercial measure favours larger companies that have had time to develop their global footprint. That all said, the ranking shows a clear clustering of groups of companies.

In the top-scoring group of 10 companies, the presence of Actelion is no surprise in the light of our discussion earlier, though being part of J&J now it won’t appear next year. The other listed companies are Genmab, again discussed earlier as a success story, newly commercialising Pharmamar, focused vaccine player Bavarian Nordic, and UCB. There are also five privately controlled or owned companies – all of which have chosen a focused therapeutic approach – Ferring, Grünenthal, Ipsen, LEO and Stallergenes. All provide inspiration for the industry’s future, as do companies in the second and third groups, that tend to follow a similarly focused approach.

The lower ranked groups partly suffer from our methodology that favours R&D intensive companies, with business models that require less R&D being more focused on generics and/or consumer markets. However some of the companies have suffered through a relatively low ranking on business development too, owing to fewer partnership deals as a proportion of revenue than other companies. This more closed model can work in some cases, but may hinder future growth and access to innovation. We remain convinced that focus and an open-ness to strategic partnerships will mark out the industry success stories in the years to come.

Conclusion: A bright future for focused and collaborative MidPharmas

The European MidPharma sector comprises a highly diverse and mostly privately controlled group of companies that point the way to a successful future for the industry as a whole. Combining up-and-coming stars that dare to be different to Big Pharma with long-established privately controlled players that can take a longer view than their listed counterparts, the sector is rich with insights on how to be successful in pharma/biotech today.

The trends that we have shown in this report that MidPharmas are growing faster and catching up in profitability to Big Pharmas are encouraging. They demonstrate that more focus and a careful use of strategic partnerships are valuable for an industry that has to develop the innovative medicines of the future. These qualities will become even more valuable as the industry embraces new digital and other technologies from non-pharma companies. Furthermore while the future global economic outlook remains uncertain, the long-term view that characterises the mostly privately controlled MidPharmas is also a sound reminder that investing in the future pays off better than over-paying for acquisitions and cost-cutting.