Mid pharma looks outside itself to drive revenue

Datamonitor defines 'mid pharma' as those companies within the PharmaVitae company universe with less than $10 billion in ethical revenues in 2005, excluding Japanese and biotechnology companies. Within this group, the players can be broken down into further sub-groups: the 'big six,' those focused on the central nervous system (CNS) market, those focused on the cardiovascular (CV) market, and domestic players. 

The 'big six' - Boehringer Ingelheim, Schering Plough, Novo Nordisk, Bayer, Schering AG and Merck KGaA - all have annual revenues of greater than $4 billion, are global players and have a broad therapeutic strategy. The 'big six' is currently in the grips of consolidation with the merger of Bayer and Schering AG going ahead - this dynamic will propel Bayer-Schering into 'big pharma', leaving behind the remaining 'big four' in their wake.

At the other end of the mid pharma scale are companies with around $1 billion in annual revenue that is mainly generated in their country of origin, such as Recordati, Ipsen, Almirall and Pierre Fabre, while companies such as Lundbeck and Schwarz focus their efforts on the CNS and CV markets, respectively.

As a group, mid pharma recorded total ethical sales of $66 billion in 2005, which is forecast to grow with a compound annual growth rate (CAGR) of almost 5% from 2005 to 2010. In fact, mid pharma growth is expected to outstrip big pharma growth during this period. However, this growth is expected to slow by the end of the decade.

It should be noted that these forecasts only utilize currently marketed products and pipeline products, for the simple fact that it is impossible to predict what licensing agreements will be struck going forward.

However, further externalization could boost growth rates and is an integral part of mid pharma's business model.

Four varieties of externalization

Externalization can come in a number of forms, but the most common is marketing and development. These agreements involve the licensing of intellectual property rights to develop and market a product and are the major mechanism (in revenue terms) by which mid pharma secures access to products from external pipelines. Given the greater commitment of resources required to engage in marketing and development deals, the company that in-licenses enjoys a greater share of financial returns with, of course, a payout to the source company of a mix of upfront, milestone and royalties payments.

Distribution deals are a contractual agreement to distribute another party's products and provide the least added-value for the in-licensing company. This is due to no R&D investment and almost 100% certainty of the product reaching the market. These deals frequently occur when a company is seeking to access a territory with significant barriers to entry, such as high local fragmentation of the market. Commensurate with the low level of engagement required for a distribution agreement, the financial returns to the distributor are relatively modest compared to other externalization strategies.

With a product acquisition, meanwhile, a company secures full rights to a product - typically for a one-off payment. The complete acquisition of a product ensures that the purchaser will enjoy the full share of future returns from the acquired product.

Corporate acquisition differs from the other three externalization strategies in that it is not restricted to one product but rather involves the purchase of a whole target company, including its current marketed portfolio, pipeline and full value chain infrastructure. In many ways, corporate acquisition can be viewed as the ultimate externalization strategy, and is most appropriate when a company is seeking to expand in a new direction - whether at the product, technology or disease market level.

Why externalize?

Externalization works for both parties because it allows the mid pharma company access to a broader palette of R&D opportunities that it may not have had otherwise. Corporate acquisition can also be employed as a mechanism for strategic corporate redirection. For a smaller company, dealing with mid pharma may be more appealing than dealing with big pharma, because the product is likely to constitute a larger percentage of the mid pharma's revenue.

This affords the smaller company more bargaining power, which may allow the development company to secure a more financially rewarding agreement. Compared to big pharma, mid pharma companies tend to have a narrower focus in a particular dimension - often in terms of therapy or geography. 

By selecting a mid pharma partner that specializes in the same therapy area/geography as the product, the source company is maximizing its chances of commanding a higher price, because the partner company should be able to pay a high price and yet still extract value for its shareholders by exploiting the good fit/synergy that the product offers.

Of course, it must be said that big pharma firms, due to their larger scale, can also find value in deals with mid pharma by utilizing its specializations in both geography and niche therapies. 

However, not all mid pharma companies rely heavily on externalization strategies: , King, Menarini, Shire and Almirall are highly dependent on externalization and thus it is a major part of their business model.

Meanwhile, the 'big six' generally have a more balanced approach between sourcing products externally or through internal R&D, while companies like Lundbeck, Novo Nordisk, Akzo Nobel, Altana and Servier have a low dependence and rely heavily on in-house R&D to source products. 

But, with two thirds of absolute revenue growth for mid pharma between now and 2010 coming from externally sourced products, externalization strategies will remain vital to the continued success of the mid pharma peer group.

Related research:

§          Mid Pharma Sector: In-licensing and other externalization strategies priced $7,600

§          The Pharmaceutical Industry: Key events and trends shaping its current status and future direction priced $15,200

§          From blockbuster to nichebuster - Niche therapies drive future drugs growth and incentivize R&D investment over sales spending priced $1,900