Massive to lean

By contrast, since the late 2000s, big pharma has started to embrace a ‘leaner and focused’ model by divesting non-core assets and focusing on their areas of strengths (Table 1). Consider some recent examples: Abbott split into two parts [an innovative business (AbbVie) and a diversified healthcare company (Abbott)]; GSK and Novartis swapped their oncology, consumer health and vaccines business to create focused organizations with GSK increasing the focus on consumer health and vaccines and Novartis on oncology; AstraZeneca narrowed the focus to three core therapy areas of oncology, cardiovascular-metabolism and respiratory, inflammation and autoimmune disease, and in the process divested infectious disease and created a semi-autonomous, virtual unit for neuroscience; and Bristol Myers-Squibb (probably the most transformative) divested large parts of the organization (medical devices, nutrition, consumer health, multiple therapy areas) to position as a specialty company in oncology, cardiology and virology.

This is not to suggest that the 2005–2015 period has not witnessed significant acquisitions – Roche and Genentech for biologics in 2009 as well as Sanofi and Genzyme for rare diseases and biologics in 2011 are such cases, as are Pfizer’s acquisition of Wyeth for biologics and of Hospira for entering biosimilar business and AbbVie’s acquisition of Pharmacyclics for oncology business and to offset reliance on Humira^®. But acquisitions during this period were largely driven by strategic rationale and to build complimentary capabilities rather than a desire to be ‘massive’. Of course, over the past couple of years, acquisitions driven by tax inversions have also been popular, such as Valeant’s multiple acquisitions, Actavis-Watson-Allergan mergers and Mylan acquisition of Abbott’s European generics business, among others. But these are as much, if not more, a result of financial engineering as they are of pure strategic drivers, as well as a desire by smaller players to gain scale and geographic reach. It is an interesting dichotomy where the large players are seeking to be focused and leaner through divesting, whereas smaller players are following the ‘bigger is better’ playbook of big pharma from the 1990s to become massive.

Hubs to hotspots

The wave of mega acquisitions was largely triggered by declining R&D productivity. The economies of scale were used as one justification for integrating the dispersed research units and therapy areas across the merged companies. An unintended consequence was creation of multiple research hubs across the globe: Pfizer’s multiple units in the USA and UK; AstraZeneca’s research sites in Sweden, USA, Canada and UK; Roche’s US and Switzerland sites; Novartis sites in the UK, USA and Switzerland; GSK’s US and UK units, among others (Fig. 1). These sites created self-contained silos that were used as research units for high-throughput technologies in an attempt to throw more money and hands at solving scientific challenges – a ‘more shots on goals’ strategy.

 

Figure 1. The data for our big pharma cohort reveals a shrinking R&D footprint and shift from large hubs to innovation hotspots. Qualitative and quantitative data are shown. Source: industry reports, company filings and press releases.

The past decade, by contrast, was marked with a desire to locate within bioscience hotspots – the innovation clusters such as Boston, San Francisco, San Diego, Cambridge and London in the UK, Shanghai – which are increasingly the key centers for producing breakthrough science. Localizing their research units in these hotspots enables big pharma scientists to work closely with external researchers and clinicians in progressing their drug pipeline, a much more open and collaborative model versus the ‘not invented here’ syndrome of the hubs model. Novartis was probably a pioneer in this trend, relocating its research headquarters to Cambridge, Massachusetts, in the early 2000s and several of the big pharma companies followed suit. Roche closed its Nutley site in New Jersey and moved to New York City, another innovation hotspot, as well as having consolidated US research operations in South San Francisco. In 2013, AstraZeneca announced that it would move its research headquarters from Alderley Park, UK, to Cambridge, UK, which is a rich scientific and entrepreneurial ecosystem. In 2013, JNJ established its innovation centers in key hotspots globally: San Francisco, Boston, London and Shanghai, and Merck and BMS are also implementing this approach. There are still large hubs: the Roche and Novartis sites in Basel, Switzerland, the Lilly site in Indianapolis and Merck in New Jersey, to name a few, but the trend toward hotspots is clear.

Over the past decade, big pharma’s R&D organizations have also experienced a paradigm shift by experimenting more entrepreneurial internal biotech units. Two such examples are GSK’s Discovery Performance Unit and AstraZeneca’s Virtual Neuroscience Unit. Further, the research units have increasingly used CROs and CMOs for strategic drug discovery alliances, such as Pfizer’s strategic partnerships with Parexel, Icon and PPD, and AstraZeneca’s partnerships with Wuxi AppTec and Pharmaron, rather than perform such functions within their hitherto hubs. Finally, localizing within the global hotspots has also allowed big pharma research organizations to broaden the access of external innovation through targeted alliances and collaborations with the academic institutions and biotechs in these innovation ecosystems.

Primary-light, specialty-heavy

The 1995–2005 period was the quintessential blockbuster drugs era for big pharma, so much so that two of the largest mergers in the industry were primarily driven by single blockbusters: Lipitor^® in case of Pfizer-Warner Lambert and Celebrex^® in case of Pfizer-Pharmacia. Some of the biggest-selling drugs in the industry’s history – Lipitor^®, Plavix^®, Nexium^®, Abilify^®, Seroquel^®, Diovan^®, Crestor^®, among others – were launched during this period. Further, most of the top-selling drugs during the 1995–2005 period were primary care, small-molecule therapies. During this period, the primary care therapy areas accounted for ∼80% of revenues for most of the big pharma portfolios.

Over the past decade, however, big pharma has been shifting away from developing primary care and small-molecule medicines, and progressively tailoring their pipelines to specialty medicines and biologics targeted for high unmet medical needs. The trend is driven by several factors such as: better understanding of the underlying disease biology to develop targeted medicines; science and technology innovation for biologics; personalized medicines and companion diagnostics; favorable regulatory framework and development timelines for such medicines; and pricing and reimbursement.

Big pharma largely missed the biologics wave early on, and caught up to the antibody, protein and cell therapies during the 2005–2015 period primarily through targeted acquisitions such as Roche-Genentech, Sanofi-Genzyme, Lilly-Imclone, BMS-Medarex, AstraZeneca-MedImmune and Pfizer-Wyeth. By 2015 this effort started to bear fruits and most of the big pharma portfolios now have an even distribution between specialty and primary care units, as well as the development pipelines that are evenly distributed between small- and large-molecule drug candidates. In 2014, for example, primary care medicines only accounted for approximately one-quarter of new FDA-approved new molecular entities (NMEs), as per consulting firm PwC’s Health Research Institute study.

Over the past couple of decades, most big pharma companies have also observed increased revenues from the specialty medicines and biologics portion of their portfolios, with several big pharma companies showing a greater than 10% absolute percentage increase for proportion of specialty products and biologics during the 2010–2014 period, as per IMS Health data (Fig. 2). Although AstraZeneca, Lilly and Merck observed a drop of percentage sales of specialty medicines over the past five years, it was mainly caused by patent expiration of the top-selling medicines, such as Zyprexa^® for Eli Lilly, Taxotere^® for Sanofi and Seroquel^® for AstraZeneca. The development pipelines have clearly shown a ramp-up and increased focus on specialty and biologic medicines as part of overall company portfolios as well, with AstraZeneca’s ∼40% of clinical stage molecules being biologics, and the split being ∼30% and ∼58% biologics for Sanofi and Eli Lilly, respectively, as per IMS Health data.

 

Figure 2. Data showing specialty and biologics products growth for big pharma cohort in our study during the 2010–2014 period. Majority of the companies saw an increase in specialty pharmaceuticals (a) and biologics (b) sales as proportion of portfolio during the period. The biologics proportion of the pipelines of various companies also reveals 20–60% of the portfolio comprised such molecules (c). Source: IMS Health Analytics. Specialty and biologics sales and pipeline distribution are as per IMS Health definitions and data.

West to East

Whereas North America and Europe were the leading major markets for the global pharmaceutical industry in the 1995–2005 period, the emerging markets of Asia, Latin America, Russia, Middle-East and Africa continue to spearhead revenue growth over the recent decade owing to strong demand and economic fundamentals (Fig. 3a). During the 1995–2005 period none of the big pharma companies in our study had more than 20% revenues derived from the emerging markets. By contrast, during the following decade of 2005–2015 most big pharma companies grew their portfolios to comprise at least 25% of the total revenues from the Asia Pacific and emerging markets, with the figure as high as ∼35% for Sanofi. In 2014, for example, AstraZeneca sales from these markets accounted for ∼US$6 billion in revenues and emerging markets accounted for ∼US$14 billion sales for Sanofi and ∼US$10 billion for GSK, as per company annual filings. China has largely been the driver for such stupendous growth, but Brazil and Russia have contributed significantly as well (Fig. 3b,c).

 

Figure 3. (a) West to East: global pharmaceutical sales by region. Data showing global pharmaceutical sales in constant dollars. During the 2000–2014 period, Asia-Pacific/Africa region saw a 5%+ increase in share of global pharmaceutical sales. Latin America increased ∼2% share during the same period, whereas the North America saw a decline of 6% and Europe had essentially a flat-to-modest decline. Source: IMS Health World Review Analysis. Regional sales distributions are as per IMS Health definitions and data. (b,c) West to East: big pharma sales and growth rate outside the USA and EU. (b) Data showing average global pharmaceutical sales in constant dollars. During the 2000–2014 period, the big pharma companies in our dataset saw sales proportion from Asia Pacific and emerging markets increase by ∼10% in absolute terms. (c) Data showing average cumulative sales growth during the 2010–2014 period in key markets. Majority of the sales growth outside the USA, EU and Japan came from key markets such as China, Brazil and Russia. The average sales growth (cumulative) for the big pharma cohort in our study was ∼88% in China during the 2010–2014 period, whereas US sales declined by ∼3%. Source: Company Annual Reports and IMS Health Analytics. The regional sales distribution is as per IMS Health definition and data.

There is, however, a bifurcation in this West to East dynamics, depending on the diversification of company portfolios between primary versus specialty-heavy businesses. Firms such as AstraZeneca, GSK, Pfizer and Merck saw emerging market businesses grow significantly as a proportion of global revenues because of the patent expiry of products in the USA, Canada and EU during the 2005–2015 period and a concomitant growth of their largely primary care business in the emerging markets. Other firms with heavier biologics focus such as Roche, JNJ and Amgen did not see as much increase in emerging markets revenue ratios because they did not face as severe a patent cliff in North America and Europe as their counterparts that had primary-care-focused portfolios.

Not just commercially, the emerging markets, specifically China, have also seen a large increase in innovation capabilities [6] over the past decade. As the world’s second-largest pharmaceutical market, backed by significant government and private capital, growing talent pool of experienced Western-trained returnees and home-grown professionals and an evolving life science ecosystem [7], China is rapidly progressing as a hotspot for global innovation. Most big pharma companies have established their research units in China including AstraZeneca, Eli Lilly, GSK, JNJ, Novartis, Roche and Sanofi, all in Shanghai, and Merck, Novo Nordisk and Bayer in Beijing. Amgen is the latest to announce establishing a research unit at the ShanghaiTech University in 2014.