The Novasecta European MidPharma Report 2018

5th June 2018

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Novasecta defines European MidPharmas to be R&D-based pharmaceutical companies with sustaining annual revenues of between €50m and €5bn. In our fourth annual report into this fascinating sector, we examine the current health of these companies, drawing on both our extensive consulting experience with such companies and our proprietary research based on public domain data sources. We highlight important lessons for pharma and biotech companies of all sizes.

Ownership

An enduringly private group of companies

The diverse ownership structure of the European MidPharmas marks them out as a distinct and highly successful group of companies. In a global industry dominated by stock market-listed Big Pharmas and venture-backed biotechs, almost three quarters of European MidPharmas (74%) are privately held or controlled.

This 2018 report tracks the progress of 76 European-headquartered MidPharmas that fit our definition of having on-market pharmaceutical products, being based in a genuine European headquarters (i.e. excluding US companies that domicile in Ireland), investing in R&D (i.e. excluding pure commercial distributors and service companies), and generating sustaining annual revenues of €50m – €5bn. We further segment them into three ownership categories:

•‘Pure’ Listed (20 in number, 26% of cohort) – publicly traded, no majority shareholder
•Listed Privately Controlled (9, 12%) – publicly traded with a majority shareholder
•Private (47, 62%) – wholly owned by families, foundations or funds

To further classify the companies, we combine the ownership dimension with scale; defining €50m-€5bn revenue as ‘mid-sized’ and R&D intensity as R&D investment as a % of revenue:

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


click for enlarged graph

 Notes
– Novasecta analysis from company websites and other public domain sources. 2016 data has been used for companies where 2017 data has not yet been published
– Companies headquartered in Ireland but with most of their 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 the 76 MidPharmas, only the 45 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

The MidPharma signature: resilience

One of the most enduring characteristics of the European MidPharma sector is its resilience. This underlines the advantages of a more long-term and ‘patient capital’ model that recognises it can take time and patience to reap the results of innovation. The past twelve months have, once again, shown MidPharmas to be a remarkably strong group. The size and shape of the sector has changed little since our last report. Other than Actelion – which was acquired by J&J in January 2017 – no company has left the group and there have been no significant changes in ownership, with the exception of Stada having been taken into private control.

Significantly, MidPharmas have not allowed themselves to be distracted by wider talk of industry consolidation; while their Big Pharma and biotech counterparts have been busy engaging in sometimes significant M&A, mid-sized companies have chosen a path of neither consolidating nor being consolidated. Instead some have chosen partnerships and smaller bolt-on acquisitions to build from strength. They have maintained their long-term focus and, crucially, stayed profitable.

Over the years, the influence that ownership has on both the performance and behaviour of pharma companies has been a recurrent theme of our analysis. Once again, our 2018 report uncovers some interesting findings in this regard. While R&D intensity can be seen across all ownership categories, the most revealing trend concerns the larger MidPharmas: in the mid-sized firms whose revenues exceed €1bn, almost all the companies investing more than 15% of revenues in R&D are privately owned or controlled. Even the one exception – UCB – has a strong family holding.

UCB (€4.5bn revenue in 2017) is one of just three MidPharmas with revenues of more than €2.5bn. Alongside it, Grifols (€4.3bn) and Servier (€4.1bn) are the stand-out players of scale in the sector. There is a sizeable gap between them and the chasing pack – Pierre Fabre, Lundbeck and Stada – all have a turnover of €2.3bn, with Ferring (€2bn) and Ipsen (€1.9bn) further back. Although the largest two companies are listed, they each have significant private shareholdings and the fingerprints of family ownership; the Grifols family (and related parties) still owns around 40% of Grifols, while UCB’s founders, the Janssen family, have maintained a 36% share in the business.

Stable ownership – and family influence – has been an important factor in the successes of the three largest companies. Servier, owned by a private foundation, has built solidly on the commercial success of its original R&D through careful acquisition and sustained investment in R&D. Its 2013 acquisition of Egis, the Hungarian generics manufacturer, gave Servier a complement to its pharma business, enabling it to have both generics and pharma under one structure. Alongside this, the company has consistently ploughed significant proportions of its combined revenues back into R&D (19% in 2017). Its recent bolt-on acquisition of Shire’s oncology assets for $2.5bn falls outside the scope of this review but demonstrates an intention to build from its European strength into the US market.

UCB has also used astute acquisition over many years to grow into the player it now is. Its 2004 purchase of Celltech, at the time the UK’s biggest biotech, gave it access to biologics R&D. This was followed up by the 2006 acquisition of Schwarz Pharma, a similar sized family company, for $4.4bn to bulk up its late-stage pipeline. For the last 10 years it has been less active, pursuing a more organic path to growth. In 2017 its profitability increased by 24%.

Grifols’ success is a story of focus. Its specialisation in plasma-derived products has seen it develop a dominant, diverse business across bioscience, diagnostics and hospitals. The unique nature of its business model has reaped handsome rewards; since plasma-designed protein therapies are less R&D intense, Grifols has been able to maintain profitability with a lower R&D spend. In 2017 the company invested just 6% of revenues in R&D with reported profits of 15%.

A decade of MidPharma evolution

Novasecta’s tracking of the European MidPharma sector began in 2007, allowing us to now take a retrospective ten-year view of the sector’s evolution. The general picture in 2007 showed a similar pattern to the one we see today; a small cluster of companies at the higher end of the size scale and then a large gap to a larger group of MidPharmas in the up to €1-2bn range.

In fact, during a period of 10 years of substantial global pharma/biotech M&A activity, the European MidPharma sector has been relatively immune to being acquired by Big Pharmas. Yes, some MidPharmas have acquired bolt-on biotechs or other MidPharmas, but most have chosen a more organic path to growth.

A relatively small group of MidPharmas has grown by acquiring other MidPharmas

 Notes
– Table shows M&A involving a MidPharma as acquirer or target, pre-revenue biotech acquisitions excluded

The resilience of the MidPharma sector, and the sustainability of the companies within it, is self-evident; there has been little change in the make-up of the list with the enduring presence of many well-established players an indication of stability.

Most of the movement has typically occurred at the larger end of the scale, with MidPharmas merging or being acquired by other MidPharmas. For example, in 2008, Merck – a mid-sized player at the time – merged with fellow MidPharma Serono in a €10.4bn deal to move them both into Big Pharma territory. Similarly, in 2006 Altana was acquired by Nycomed (for €4.5bn), which was itself then taken over by Takeda in 2011 (€9.6bn), to become another Big Pharma. However, until J&J’s 2017 purchase of Actelion, the only three examples of Big Pharmas acquiring MidPharmas came in 2007 when Schering Plough acquired Organon for $14.4bn, in 2009 when Abbott acquired Solvay for $6.2bn, and in 2016 when Mylan acquired Meda for $7.2bn.

The 10-year journey of Actelion underlines how strong and attractive MidPharmas can become. In 2007, the Swiss biotech – founded by the Clozel family – was ten years old with revenues of around €400m. A decade later it was sold to J&J for an astonishing $30bn. The Actelion experience illustrates the value of founding entrepreneurs, the presence of whom is a common and stabilising feature of many present-day MidPharmas. While a world of cheap capital has focused analysts’ attention on stock markets and the venture capital/private equity firms that feed investors’ desire for ever-higher returns, family and foundation-controlled companies have typically been taking a more long-term approach to growth.

The ten-year story of European MidPharmas is therefore not one of transformative roll-up, it is evolutionary. MidPharmas typically adopt a ‘patient capital’ model that relies on R&D intensity, synergistic acquisition, and discipline to deliver sustainable growth.

The remainder of this report explores and contrasts MidPharma companies’ performance both with each other and with their Big Pharma peers. Our analysis focuses on three primary areas, R&D, commercial and corporate. These areas are further broken down to cover a range of related business drivers. The report concludes with our ranking of European MidPharmas based on three fundamental attributes; R&D intensity, commercial growth, and corporate activity.

R&D

Growth in R&D investment and R&D intensity: signs of strength

This section explores MidPharmas’ R&D investment and what it indicates about their growth strategies. We first assess how the companies are growing R&D investment over a five year period, and second, the trends in R&D intensity: the R&D investment as a percentage of revenue.

Over the last five years, European MidPharmas of all types have continued to increase their investments in R&D. Furthermore, our analysis shows that between 2013 and 2017, the compound R&D investment growth in pure listed MidPharmas is neck-and-neck with Big Pharma.

Listed MidPharmas have been increasing R&D investment at the same rate as Big Pharmas

 Notes
– Companies with insufficient public domain data are excluded

This analysis demonstrates that the MidPharmas have not needed to have massive scale to reap the benefits of significant stock market liquidity over the last five years. By contrast the relatively flat performance of privately-controlled and fully private companies suggests that stable ownership comes with a more cautious approach to building up R&D investment. This is consistent with our findings from previous years. It appears that part of this is caused by the lower revenue growth of these companies coupled with a general industry mindset of targeting R&D spend to be a fixed percentage of revenue. This mindset is simple to execute but not necessarily helpful: R&D is more of an investment than a cost, and companies that allow it to fluctuate up and down as a percentage of revenue, in line with pipeline progress, tend to be more successful than those that consider it a cost to be kept at a capped percentage of revenue.

Closer scrutiny of the trends in R&D intensity show that the MidPharma sector as a whole has been sticking with a percentage of sales mindset for deciding what to invest in R&D, and that on this basis is continuing to invest in R&D across all ownership types. This commitment to innovation is also symptomatic of the resilience of the mid-sized sector.

MidPharmas have increased R&D intensity in the last year


click for enlarged graph

 Notes
– Companies with insufficient public domain data are excluded

An encouraging group of MidPharmas is also investing more than 15% of revenues into R&D, figures more comparable with and ahead of many Big Pharmas. This level of R&D intensity is a good proxy for the long-term health of such companies: it shows either a confidence in the future potential of their R&D investments or the advancing of assets into the expensive later stages of development, or both. The significance of this high R&D intensity cannot be underestimated – the most successful MidPharma companies have often been those that have invested heavily in R&D. This is certainly the case in 2017, when four of the biggest MidPharma success stories – LEO, Lundbeck, Ipsen, and Chiesi – ploughed healthy chunks of their revenues back into R&D and reaped the rewards. All of these companies are privately owned or controlled.

In the past decade, LEO Pharma has been transformed from a company with a broad therapeutic base to one with a specialist focus on dermatology. It is now one of the world’s leading dermatology players and is investing heavily in innovation. In 2017, LEO invested 15% of its revenues in R&D while achieving solid revenue growth of 8%. This is a great example of a foundation-held company that recognised the limitations of broad legacy products and strategically chose to invest in a more focused, long-term future at the expense of a few years of lower profitability.

Long-term focus has also been a feature at another foundation-held Danish company – Lundbeck – which has continued to concentrate its efforts on the difficult, and for some Big Pharma, unfashionable CNS market. In recent years, a litany of failed late-stage trials has seen a number of big companies exit the CNS market. However, Lundbeck’s relentless focus in this area, underpinned by a sustained commitment to R&D, has paid off. In 2017, it invested 16% of its revenues in R&D – and profits increased by 26%.

It’s been a similar performance at Ipsen, where R&D intensity of 14% was accompanied by a 26% increase in profits in 2017. Privately controlled by the Beaufour family, Ipsen has managed to secure approvals for a high number of new products via clever innovation on the backbone of some relatively old specialist products. It has also extended its commercial footprint into the US which, in tandem with some shrewd bolt-on acquisitions, has seen its profits and its stock price significantly appreciate.

Privately-owned Chiesi continues to invest heavily in R&D and has created a stream of successful innovations. In 2017 it reinvested 22% of its revenues back in R&D. The company, which is still actively managed by the Chiesi brothers Alberto (President) and Paolo (Head of R&D), has become an important player in the respiratory space – a competitive category traditionally dominated by Big Pharmas. It has been very successful in securing approvals, not least in the triple combination therapy for Chronic Obstructive Pulmonary Disease (COPD), for which it was the first company to receive an EU approval.

These four examples once again show the value of long-term R&D investment, focus and control. With much of the MidPharma sector showing healthy levels of R&D intensity, the most successful players have been investing sustainably in innovation to support focused and disciplined growth strategies.

Commercial

Commercial success: the virtue of capital discipline

Our 2018 analysis appears to back up a hypothesis previously explored in our White Paper on Ownership Structure: listed companies tend to be more commercially successful than their private counterparts. Our white paper revealed that, across the industry, listed companies generate more revenue per NDA – and twice as much revenue per NME – than private organisations. At the broader level, this is borne out by five-year compound revenue growth rates (CAGRs) that show listed companies achieving twice as much revenue growth as part-listed businesses and around 50% more than private companies. However, despite the difference, it is important to recognise that almost all of the private companies in our sample are indeed growing.

Although private MidPharmas are growing, listed companies are outperforming them

 Notes
– Companies with insufficient public domain data are excluded

The reasons for the difference in performance between the ownership types are, at face value at least, relatively simple; listed companies not only have easier access to liquid capital, they are highly driven by the discipline of capital markets. Shareholders’ demands for quarterly earnings and growth force listed companies to impose a capital discipline that focuses sharply on delivering top-line revenue and profitability numbers. This, in turn, compels companies to establish excellent commercial practices, structure, and processes that can sometimes be less well developed in private organisations. Fundamentally, commercial success is not about size or scale – it’s about discipline and rigour.

Certainly, private companies can learn much from the commercial approaches of successful listed companies. Three of the most notable listed success stories in our 2018 report are Genmab, BTG and Sobi – each of which has generated a compound annual revenue growth of more than 20% over the last five years.

Genmab is the highest-performing of the trio with compound revenue growth of 29% between 2013 and 2017. Its revenues are not from its own commercialisation yet, but are in fact the result of its very successful blood cancer drug, Darzalex, and a highly productive partnership deal with J&J for commercialising the product. The deal, under the terms of which J&J sell Darzalex and pay Genmab royalties of between 12-20%, is proving tremendously successful.

With 2017 sales of Darzalex already exceeding $1bn – and analysts predicting they could reach as high as $8bn – Genmab is now rapidly reaping the rewards. Moreover, it is investing these revenues back into R&D to create the next generation of products that will ultimately enable it to commercialise its innovations itself. In 2017, Genmab invested 37% of its revenues in R&D. The company, which now has a market capitalisation of more than €10bn, is a powerful example of a listed biotech that has transitioned to become a MidPharma off the back of fantastic innovation.

BTG is another listed company that has experienced sustained revenue growth, with a CAGR of 23% in the past five years. The company, formerly British Technology Group with the sole shareholder of the UK government, has been transformed since Dame Louise Makin took the helm as CEO in 2004. It has stripped out all of its non-pharmaceutical assets and focused on interventional medicine, leveraging its access to capital to drive a series of astute bolt-on acquisitions. BTG’s profits grew by 10% in 2017.

Sobi (Swedish Orphan Biovitrum) started out as Biovitrium – a spin-off from Pharmacia (now part of Pfizer). Originally a successful contract manufacturing organisation with R&D capabilities, the business acquired Swedish Orphan in 2010 to add pharmaceutical revenues and commercial footprint. Sobi has subsequently transformed into a specialist pharma company with a strong focus on haemophilia. It is growing rapidly, with revenue CAGR of 21% between 2013-17 and a 25% increase in profits in 2017. In the past year Sobi’s share price has increased by 33%.

These three examples underline how a stock market listing can help companies access capital for bolt-on acquisitions or commercial footprint. The capital markets are a natural source of funding to scale businesses. However, while the option to part-list is open to private companies – and MidPharmas like Ipsen, Recordati, and Almirall have already taken this option – commercial success does not simply depend on ownership type and capital.

With greater structure and discipline in commercial processes or, like Genmab, a willingness to explore strategic collaborations to benefit from the commercial capabilities of others – private companies can significantly grow the commercial revenue and value of their companies.

Corporate

Profitability sustained across the board

Despite widespread challenges – not least the global pressure on healthcare spending and pharma’s ongoing efforts to redesign operating models and reduce the cost of drug development – the MidPharma sector has continued to be profitable in 2017.

The pharma industry generated healthy profitability across the board in 2017

 Notes
– Companies with insufficient public domain data are excluded

In 2017, the median EBIT of listed and part-listed mid-sized companies was almost on a par with Big Pharma – and while the median profitability for private companies was slightly lower, it still made double digits. It may, in fact, be the case that private companies are more comfortable with lower profitability; a willingness to invest in R&D suggests that some are choosing to be less profitable as part of a long-term business model. Servier, a quintessentially private company, is a good example of this: its EBIT of 10% is the same as the median for private companies in 2017 – and during the same period it invested 19% of its revenues in R&D.

Some of the most profitable MidPharmas are listed or part-listed; Recordati (32% EBIT), Orion (27%), Lundbeck (26%) and Sobi (25%). Recordati – like its larger part-listed Big Pharma peer, Novo Nordisk (44%) – has sustained a high level of profitability by using the capital markets to serially acquire synergistic businesses, and has further demonstrated the commercial acumen that is needed to deliver sustainable growth.

Continued decline in the use of M&A

Over recent years we have observed an increasing reticence amongst mid-sized pharmas to get involved in M&A activity. This is largely because M&A has become too expensive, with the combined effect of cheap capital and patent expiries pushing the price of deals beyond the reach of disciplined buyers. This 2018 report shows that our assessment in 2017 – detailed in our White Paper Pharma M&A is too expensive: now what? – has proved to be prescient

MidPharma M&A has plummeted, but strategic collaborations have remained consistent


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 Notes
– Novasecta analysis of mergers, 100% and majority acquisitions, and strategic alliances from GlobalData deal database

The number of M&A deals executed by MidPharmas has fallen to just six in 2017. Interestingly, the number of deals in the sector peaked in 2007, and has steadily fallen ever since. There was a brief resurgence in 2013, when the number of deals rose from 13 to 21, but this surge was short-lived.

MidPharmas’ collective decision to broadly steer clear of M&A is well founded – the sector was the first to recognise the escalating cost of deals and, unlike some of its Big Pharma counterparts, has become much more disciplined in its buying. This is not to discount the value of good M&A. As we have already seen in the cases of UCB and Sobi, effective, synergistic deals can transform businesses and project them towards new platforms for rapid growth.

Strategic alliances: falling but still favoured

The number of strategic alliances in the MidPharma space fell slightly in 2017. However, with the exception of spikes around 2010 and 2013, the number of alliances across the sector has remained at a consistently high level for more than a decade. This paints a clear picture: while MidPharmas may be carrying out less M&A, they’ve continued to embrace strategic alliances. As our 2017 paper Growth through Strategic Collaborations shows, collaboration offers companies good opportunities for transformative growth by establishing a deeper strategic focus and more effective deployment of high-value assets and capabilities.

In the final analysis, as companies explore inorganic ways of fuelling business value and growth, both M&A and strategic collaborations provide obvious opportunities to scale. While M&A can be both expensive and disruptive, it can work well if it’s synergistic and enables aligned evolution. Strategic collaborations are arguably better suited to mid-sized companies because they allow organisations to retain some control of their assets. This can be particularly important to private companies.

With the price of M&A now mostly prohibitively high, collaborations and licenses are likely to continue to be the best way for MidPharmas to grow in the future.

MidPharma Performance Ranking

We conclude this report with our annual MidPharma Performance Ranking. Here we rank MidPharmas on three fundamental attributes that we believe are indicators of long-term strength; R&D intensity (average R&D spend as a % of revenue), business development activity (number of deals per €10m revenue), and commercial performance (5-year revenue CAGR). We take public domain data on each of these three attributes and rank the companies based on the combination of all three.

Novasecta’s European MidPharma Ranking 2018

 Notes
– R&D ranking uses average R&D intensity over 5 years. The 42 ranked companies were 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 2015-2017 deals divided by the average revenue for 2015-2017, assigned to equal groups as above
– Commercial ranking uses revenue compound annual growth rate (CAGR) 2013-2017, assigned to equal groups as above
– Total rank is based on sum of all three sub-rankings (lowest sum is highest total rank)

Our ranking has some important caveats; the R&D measure favours R&D-based companies, while the BD measure does not favour those that have taken a selective approach to bringing in assets and capabilities. The commercial measure using top-line growth rate is new for 2018 and could be argued to favour those that have grown inorganically. Finally, it is important to note that the nature of private companies is such that many do not disclose their financial data. This year, only around a third of the private companies in our sample have published complete information. This means that some private businesses that are performing strongly cannot be ranked. The ranking table, therefore, unavoidably favours listed and part-listed companies.

The higher ranks unsurprisingly include many of the companies that have already featured in this report. Genmab’s R&D intensity of 51%, fuelled by its astute commercial partnership with J&J generating impressive commercial growth, has seen it climb to the top of the rankings. Just below it, the highest ranked private company – Helsinn – has an enviable record of FDA approvals for products in cancer and supportive care. In third place is Orexo – a listed Swedish pharma company specialising in opioid dependence and pain, which has also invested heavily (31%) in R&D. Finally, focus is a key characteristic of the third-ranked fully private company – Ferring. The Swiss firm has just one owner – Frederik Paulsen Jr – whose late father founded the business in 1950. Ferring has maintained a laser focus on reproductive medicine and women’s health, with its revenues reaching the €2bn mark for the first time in 2017.

Conclusion: resilience through focus

The trends shown in this report once again highlight the resilience, sustainability and diversity of European MidPharmas. The successes of some of the privately owned and controlled companies within the group demonstrate that, even though the price environment for M&A has changed dramatically, it is still possible to grow through clever strategic collaborations and synergistic bolt-on acquisitions. Moreover, the performances of the most successful companies across the MidPharma sector as a whole underline the value of strategic focus, long-term investment in R&D, commercial excellence, and disciplined deal-making.

Analysis of the MidPharma sector’s evolution over a ten year period further emphasises the importance and value of focus. As some predict a significant wave of consolidation across the wider sector, we see a future where the laser-focused, entrepreneurial specialists in MidPharmas increasingly demonstrate that although there are clear economies of scale in the Big Pharma consolidated model, there are real diseconomies of scale too. We therefore look forward to continuing to support progressive companies of all sizes as they grow and evolve through strategic collaborations, strong commercial operations and excellent R&D.