The supply chain
By 2020, the context in which Pharma operates will be very different from that which prevails today. And one of the recurring motifs in all the shifts we have described is globalisation: the globalisation of the markets, as demand for medicine rises in the developing world; the globalisation of R&D, as a growing share of R&D migrates to Asia; the globalisation of the regulations governing the development of new medicines, as national and federal agencies collaborate; and the globalisation of information, as healthcare payers share data on the clinical and financial performance of medicines.
Globalisation will increase the risks Pharma faces; if a product fails in one market, for example, it may well fail in all. But it will also create opportunities for considerable savings. Global IT platforms, process standardisation and data standards, global regulatory requirements and global marketing efforts will enable the industry to eliminate inefficiencies and reduce its costs.
If Pharma is to thrive in this new environment, though, it will have to make sweeping changes throughout the value chain. Moreover, the incumbent management will have to move fast. The disintegration of the traditional way of making and selling medicines could fuel another round of mergers and acquisitions very different in nature from those that took place a few years ago. One large company could buy another, for example, and strip it of all but the assets it wants. Private equity houses and hedge funds could also play a significant role in reshaping the sector.
Private equity firms have shown relatively little interest in Pharma to date. This is partly because they typically like to invest in companies with tangible assets and steady cash flows, whereas research-based pharmaceutical operations have intellectual assets and increasingly cyclical cash flows, and partly because their high market capitalisations have kept all but the smallest pharmaceutical companies off the radar screen. However, a number of funds have been dipping their toes in the water.
In January 2005, for example, a consortium of private equity investors bought speciality pharmaceuticals company Warner Chilcott for $3.1 billion. Similarly, in December 2006, Nycomed (which is owned by Nordic Capital and CSFB Alternative Capital) acquired Altana’s pharmaceuticals division for €4.8 billion ($6.5 billion). And several private equity firms are thought to have put in bids when Roche put its OTC business on the block in mid-2004, although Bayer eventually prevailed.
Clearly, the sums involved in such transactions are tiny compared with the cash that would be needed to buy a major pharmaceutical concern, but the private equity industry is rapidly getting larger and hungrier.
In December 2006, David Rubenstein, co-founder of The Carlyle Group, predicted that there would be a $100 billion deal within two years. Two months later, Blackstone pulled off the biggest ever leveraged buyout with the $38.9 billion acquisition of Equity Office Properties Trust.
On this showing, at least one of the 13 companies in the Big Pharma universe is already within reach of the chief consortia, although giants like Pfizer, Johnson & Johnson and GlaxoSmithKline are still far too massive to touch (see Figure 1).
Figure 17: How much cash would a private equity consortium have to pay to buy one of the leading pharmaceutical companies?
Source: PricewaterhouseCoopersNote: The UK Financial Services Authority recently reported that the average debt to earnings ratio for the five largest transactions in the 12 months to June 2006 was 6.41. We have therefore calculated the cash required to complete a leveraged buyout of a leading pharmaceutical company assuming debt multiples of between five and seven times earnings before interest and tax (EBIT).
We therefore think it is very likely that one or more leading pharmaceutical companies will fall into the private equity industry’s hands within the next 13 years –and private equity houses do not flinch when it comes to radical restructuring–. Yet in some respects it does not matter who holds the reins, for Pharma cannot do everything itself. It cannot train a new generation of research scientists unless there are scientists to train.
Nor can it make the medicines people need without society’s support –and we are dishonest if we pretend otherwise–. We cannot expect charities and individual philanthropists to fund the research that is required to develop new therapies.
Several relatively small changes would make a considerable difference. Investing in school science labs and specialist teachers, and giving science a more prominent place on the school curriculum, would encourage more pupils to study the sciences at university, thus creating a larger pool of researchers on whom the industry could call.
Altering the patent laws to recognise the value of long-term research, rewarding the development of vaccines and cures more generously, and demonstrating a genuine commitment to the prevention of disease would likewise help to put the industry on a firmer footing in its efforts to decode the molecular basis of disease –surely one of the biggest and most worthwhile intellectual challenges the world faces–.
We would like to thank the many people at PricewaterhouseCoopers who helped us to develop this report, including the members of the Macro Economic Consulting Group and Research & Analytics Group who contributed to our research. We would also like to express our appreciation for the input we have received from clients, and our particular gratitude to the following external experts who so generously donated their time and effort to the project.
Rob Arnold, Independent Consultant.
Dr David Chiswell, Chairman of Nabriva Therapeutics, former Chief Executive of Cambridge Antibody Technology and former Chairman of the BioIndustry Association.
Dr Nick Davies, Senior Director, Strategic Management Group, Pfizer Global Research and Development. Greg Ernest, Principal, ZS Associates. Dr Tony Felton, Medical Director of Clinovia.
Dr Brian Gennery, former Director of the Clinical Research Centre, University of Surrey School of Biomedical and Molecular Sciences.
Professor Peter Hutton, Professor of Anaesthesia, University of Birmingham, and Consultant Anaesthetist, University Hospital Birmingham NHS Foundation Trust.
Dr John Murphy, European Pharmaceuticals Analyst, Goldman Sachs.
Dr David Roblin, Vice-President, Head of Clinical R&D, Europe, Pfizer. The views expressed herein are personal and do not reflect the views of the organisations represented by the individuals concerned.