Truths & Untruths - Smart Pharma · Source: IMS World Review Executive 2013 – Forbes: The Global...

Smart Pharma Consulting

1, rue Houdart de Lamotte – 75015 Paris – France

Tel.: +33 6 11 96 33 78 – Fax: +33 1 45 57 46 59

E-mail: [email protected]

Website: www.smart-pharma.com


Smart Pharma Consulting analyses

“Smart Pharma – ESSEC Santé – ALK” Prize

Truths & Untruths

in the Global Pharma Industry

June 2014


Sources: Smart Pharma Consulting

1. Introduction

June 2014

1 Also named Rituxan

1st Statement: The price pressure on pharma companies is temporary

2nd Statement: Pharma companies profitability keeps on shrinking

3rd Statement: The cost of new molecules is in the range of USD 1B

4th Statement: BRIC countries are the Eldorado of pharma companies

Smart Pharma Consulting has reviewed and analyzed four key statements related to

the global pharma business

Four key statements: Truths & Untruths

Truths & Untruths in the Global Pharma Industry 2


Source: World Bank and WHO (2012)

1st

Statement: The price pressure on pharma companies is temporary

June 2014 3 Truths & Untruths in the Global Pharma Industry

Healthcare expenditure per capita is highly related to growth domestic product per

capita of each country

Relation between GDP¹ and healthcare expenditure per capita (2012)

Norway Switzerland United States

Netherlands Austria Sweden

Japan

Belgium France

Germany

Finland Iceland

Ireland United Kingdom New Zealand

Italy Spain

Singapore Greece Qatar Cyprus

Slovenia

Portugal South Korea

Czech Republic Kuwait

Slovak Republic

Uruguay

Chile

Brazil

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

9 000

10 000

0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000 90 000 100 000 110 000

Healthcare expenditure per capita (USD)

GDP1 per capita (USD)

¹ Gross Domestic Product - - -: Linear trend line


16%

11% 11%

8% 8% 8% 8%

18%

12% 11%

10% 10% 9% 9%

0%

5%

10%

15%

20%

USA France Germany Japan Spain UK Italy

Source: World Bank's Open Data (2012) – OECD Government expenditure by function (2012) – Smart Pharma Consulting analyses

1st



The weight of healthcare expenditure in developed economies has risen between

2003 and 2012, despite the implementation of cost containment measures

Healthcare expenditure as a percentage of GDP1

2012 2003

Healthcare expenditure as a % of GDP¹

(Local currency)

In 2012, healthcare expenditure

represented one of the largest public spending items in most developed economies: 1st (USA), 2nd (France, Germany, Japan, UK)2 and 3rd (Italy3 and Spain4)

At best, health authorities will manage to slow down the rise of healthcare expenditure as a percentage of GDP, but not to stop it

In principle, there is no ideal or optimal ratio of healthcare expenditure over GDP

The weight of healthcare expenditure is primarily a political decision based on public health considerations and national investment prioritization

1 Gross Domestic Product – 2 After social protection – 3 After social protection and general public services – 4 After social protection and economic affairs


33%

40%

46%

46%

48%

54%

56%

61%

70%

74%

74%

76%

77%

78%

82%

83%

9%

15%

43%

23%

45%

10%

10%

5%

7%

6%

9%

12%

16%

2%

3%

7%

58%

45%

11%

31%

7%

36%

34%

34%

23%

20%

17%

12%

7%

20%

14%

10%

India

Indonesia

USA

Brazil

S. Africa

S. Korea

China

Russia

Poland

Spain

Turkey

Germany

France

Italy

Japan

UK

Government Private (excl. out-of-pocket) Out-of-pocket

Source: WHO Global Health Observatory Data Repository (2012) – World Bank's Open Data (2012) – Smart Pharma Consulting analyses

1st



1 Gross domestic product

With the exception of the USA, governments play a more important role in covering

healthcare expenditure in developed markets than in less developed ones

Share of public spending in total healthcare expenditure (2012)

In the USA, the level of public spending on healthcare is far below the one of other developed countries

Nonetheless, the weight of healthcare expenditure in the GDP is also significantly higher, stimulated by favorable policies to the private sector

The recent healthcare reform in the USA is expected to narrow the spending gap between the USA and other developed countries in the coming years

In emerging countries, the public and private healthcare insurance systems are less advanced, resulting in a higher share of out-of-pocket spending and a lower weight of healthcare expenditure in the GDP

Healthcare expenditure

as % of GDP1 % of total healthcare expenditure

9%

10%

9%

12%

11%

6%

10%

7%

6%

5%

8%

9%

9%

18%

3%

4%


Source: OECD Health Database as of June 2014 (Data France: 2012, Japan: 2010, other countries: 2011) – Farmindustria.it – Smart Pharma Consulting analyses

1st



1 2012 - 2 2010

The cost of drugs is far behind that of hospital and ambulatory care, yet this segment

is paradoxically targeted by governments because it is easier and quicker to reduce

Breakdown of healthcare expenditure (2011)

Drugs represent the 3rd largest source of healthcare expenditure in major developed countries

Drugs are typically the easiest segment to apply cost-containment measures on, as decisions are:

– Made by payers (either public and/or private), with little or no negotiation with suppliers

– Much better accepted by citizens than restriction measures on the other segments

However, to significantly reduce total healthcare costs, governments will need to apply cost-optimization measures on all healthcare segments, irrespective of their relative importance

47% 42%

37%

50% 54%

38%

26% 29%

30%

27% 24%

35%

20% 21% 20%

18% 15%

13%

7% 8% 13%

5% 7% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% of total healthcare expenditure

Ambulatory care Hospital Other Drugs

Spain France1 Germany Japan2 Italy USA



June 2014 Truths & Untruths in the Global Pharma Industry 7

1st


Irrespective of the considered country, the price pressure on drugs, from either public or private

insurance companies, will keep on growing, over the long term

Three main reasons support this assumption:

− The cost of healthcare increases faster than the economy

− Pharma companies do still make high profits (net profits ~15%)

− Drug cost is not the biggest bucket, but the easiest on which price cuts can be applied (i.e. application is

easy and effects immediate, no direct social nor political negative impacts)

Pharma companies could negotiate, collectively (through their union) or individually a “Drug Price

Stability Pact” that will guarantee a certain level on price depending on:

− The medico-economic value of their products, at a national, regional and local levels

− Their commitment to invest in research programs and facilities

− Their logistic and manufacturing facilities

− Their level of employment and its evolution overtime

− Their contribution to exports

True or Untrue?

If drug price pressure will continue over the long-term, pharma companies will not be

impacted the same way, due to differences of portfolio and socio-political strategy


Source: IMS World Review Executive 2013 – Forbes: The Global 2000 (2014) – United Nations: World Economic Situation and Prospects 2011-2012-2013 – IMF 2014 – Smart Pharma Consulting analyses

2nd

Statement: Pharma companies profitability keep on shrinking


1 Return on revenues = net profit / total revenues – ² Including biotech companies, J&J, Fresenius and Baxter, which are included in the medical equipment and other supplies industry and excluding companies whose

business is mainly focused on distribution – 3 Constant USD (2012) – 4 Compound annual growth rate

The pharma sector continues to be very attractive as it offers higher profitability and

growth rates than the global economy, however its performance is deteriorating

Global pharmaceutical market attractiveness (2008-2013)

0

200

400

600

800

1 000

1 200

2008 2013

USD3 B

Market sales trend

CAGR4: +4.4%

Profitability trend (Based on companies included in the Forbes Global 2000)

16,9%

20,5%

15,5%

16,7%

16,5%

14,5%

5,1%

4,7%

7,3%

7,2%

6,4%

7,9%

0% 5% 10% 15% 20% 25% 30%

2008

2009

2010

2011

2012

2013

Global economy Global pharma²

Return on

revenues¹

808 B

1,000 B

Global economic growth - CAGR 2008-2013: +3.7%


Source: Annual reports -2011-2012-2013 – Smart Pharma Consulting analyses

2nd



1 Including profits from non-healthcare related businesses – 2 Average 2011 - 2013 Federal Reserve exchange rate –

The operating profitability of the top 10 pharma companies has decreased in 2013

compared to 2012, mostly driven by AstraZeneca’s & Merck & Co profitability drop

Operating profitability of leading pharmaceutical companies (2011-2012-2013)

Operating profits2

(USD B)

2013 2011 2012

12 14 15 11 11 11 12 13 15 11 11 16 8 8 7 13 12 11 7 9 6 6 3 4 13 8 4 5 5 6

Note: Reported numbers have been adjusted to make them comparable – In 2013, Eli Lilly came back on the top 10 at the expense of Abbott/AbbVie

Operating profitability¹

19% 19%

32%

19%

18%

29%

15%

24%

38%

22%

20% 20%

31%

21%

18%

28%

18%

12%

29%

24%

22%

19%

35%

30%

15%

27%

13%

17%

14%

25%

0%

10%

20%

30%

40%

J&J Novartis Roche Pfizer Sanofi GSK Merck & Co Bayer HC AstraZeneca Eli Lilly

Average 2013: 21.8%

Average 2012: 22.1% Average 2011: 23.4%



June 2014 Truths & Untruths in the Global Pharma Industry 10

2nd


We have observed over the past years, a deterioration of the profitability of the pharma industry

and a slow down of its sales growth

However, the analysis of the top selling pharma companies, shows that, with the exception of

AstraZeneca, they manage to maintain they profitability level, over the past three years

To achieve such a performance, the leading pharma companies have:

− Refocused most of their research programs to address secondary care diseases with major unmet needs

− Closed a large number of their production centers, and reallocated many of the remaining ones in countries

benefiting from lower-cost manpower

− Significantly downsized they sales forces

− Divested or sold their low (lower) profit strategic segments

In the years to come, pharma companies should not only keep on improving the efficiency of their

operations (R&D, manufacturing, marketing & sales, etc.)…

… but also simplifying their internal processes and their structure to become leaner and more agile

True or Untrue?

If the pharma industry profitability has declined, it is still very profitable and should

remain as such, provided they improve their operational and organizational efficiency


Average: USD 1308 M

2 200

1 778 1 700

1 506

1 318 1 241

1 100

992 880 868

802

0

500

1 000

1 500

2 000

2 500

1 2 3 4 5 6 7 8 9 10 11

Source: Adams CP et al, 2006. health Affairs – O’Hagab P and Farkas C, 2009. Bain & Co, Mestre-Ferrandiz J. 2012 – Efpia key data 2013 – M. Steven 2010 – Smart Pharma Consulting analyses

3rd

Statement: The cost of new molecules is in the range of USD 1B


According to the most recent study published, the R&D cost per approved new drug,

including the cost of capital, is estimated at USD 1.5 B

Evolution of R&D costs (2000 – 2012)

Bain

(2008)

BCG

(2001)

Adams

(2000)

DiMasi

(2000)

USD M

Sources Bain

(2005)

DiMasi 2

(2005)

DiMasi 1

(2005)

Bain

(2000)

Vernon

(2000)

Mestre-

Ferrandiz

(2012)

Lilly & Co

(2010)

Estimated capitalized cost per approved new drug (pre-tax)


Source: DiMasi JA et al, 2007. Manage. Decis. Econ – Smart Pharma Consulting analyses

3rd



1 Capitalized costs in 2005 dollars

No significant differences have been observed between the R&D costs of biological

and chemical products (small molecule chemical entities)

R&D costs for biological & chemical products

55% 51%

45% 49%

0%

20%

40%

60%

80%

100%USD 1,241 M1

Out-of-pocket

costs

Cost of capital (discount rate of

11.5%)

USD 559 M

USD 682 M

Biological products

Costs of 17 investigational biological products

(9 recombinant proteins and 8 monoclonal antibodies)

from 4 pharmaceutical companies were analyzed based

on 2005 data

Costs of compound failures were included

Out-of-pocket costs were capitalized at a real discount

rate of 11.5% until the date of marketing approval (~12.5

years)

Development time costs of failed projects were allocated

to those of marketed new products

Out-of-pocket and capitalized preclinical costs were

estimated at USD 198 M and USD 615 M, respectively

Out-of-pocket and capitalized clinical costs were

estimated at USD 361 M and USD 626 M, respectively Chemical products

USD 672 M

USD 646 M

USD 1,318 M1

Biological products

Estimated capitalized cost per approved new drug (pre-tax)

% of total cost


Source: Forbes August 2013 after Innothink Center for Research in Biomedical Innovation


1 Cumulated resulting from 2003 to 2012 – 2 Period preceding new drugs approval

3rd


The overall cost per new drug differs significantly amongst top 10 pharma

companies, with Sanofi spending twice as much as J&J or GSK per launched product Estimated R&D costs of new drugs – Top 10 pharma companies

10,1 9,6

8,9

7,8

6,7 6,6 6,1

5,5 5,2 5,2

0

2

4

6

8

10

12

Sanofi AstraZeneca Roche Pfizer Eli Lilly Bayer Novartis Merck & Co GSK J&J

# of new drugs1 6 4 5 8 10 13 10 4 9 11

10-year spending

USD B2 61 38 33 71 61 68 78 26 49 56

Average cost per new drug in US B

Average: USD 7.2 B


Source: Forbes August 2013 after Innothink Center for Research in Biomedical Innovation


1 Average spending of top 10 big pharm companies = USD 7.2 B / USD 2.0 B for biotech companies = 3.6 times 2 Cumulated resulting from 2003 to 2012 – 3 Period preceding new drugs approval

3rd


Biotech companies which spend much less than big pharma companies in R&D and

focus on a limited number of projects show a cost per new drug 3.6 times lower1 Estimated R&D costs of new drugs – Selection of 10 biotech companies

5 2 1 4 4 1 2 3 5 3

21.4 7.2 1.6 9.5 6.3 4.9 4.1 5.5 4.8 2.2

4,3 3,6

2,4 2,1 1,8 1,6 1,6 1,0 0,7 0,5

0

2

4

6

8

10

12

Amgen Celgene Biogen idec Vertex Gilead Millenium Genentech Genzyme Regeneron Alexion

Average: USD 2.0 B

# of new drugs2

10-year spending

USD B3

Average cost per new drug in US B



June 2014

1 For an opportunity cost estimated at 11%. The US government guidelines call for using 3%


3rd


The review of the main studies published since 2000, shows that the average cost of new drugs is

estimated at USD ~1.3 B

The average cost of a new drug is USD ~7.2 B for top 10 pharma companies and USD ~ 2.0 B for

biotech companies that are focused on a more limited number of research projects

The huge variations observed from one source to another one are due to differences in

methodologies and cost assumptions used

These figures should be analyzed with caution because:

− They include the cost of drugs having failed during their development

− They take into account the cost of capital invested (~50% of the total estimated cost)

− They do not deduct corporate tax savings (estimated at ~35% of total R&D costs)

− They use means while median would be more appropriate because of the huge difference of R&D costs

observed according to pharma companies and the type of products being developed

The median cost of one single successful new drug, without considering the associated

opportunity costs and with deduction of tax savings should amount USD ~ 0.5 B

True or Untrue?

The median cost of a new drug is in the range of USD ~0.5 B, if one considers out-of-

pocket costs only and one deducts tax savings


Source: IMS Medicines Outlook Through 2016 (July 2012) – Nicholas Hall's OTC Yearbook 2013 – Smart Pharma Consulting analyses


1 Brazil, Russia, India, China – 2 Compound annual growth rate – 3 France, Germany, Italy, Spain, UK – 4 USA and Canada

Almost 50% of the total pharma sales growth is expected to come from the BRIC1 during

the 2013 – 2018 period, while North America should contribute to 30% of that growth

Pharmaceutical market size and growth (2013-2018)

4th

Statement: BRIC countries are the Eldorado of pharma companies

360 415

150 154

90 102

160

250

240

265 1,000 B

1,186 B

0

200

400

600

800

1 000

1 200

2013 2018

Sales in USD B

+3% North America4

BRIC

Total +3%

+9%

CAGR2 2012-2018

Sales growth 2013-2018

+3% Japan

+1% EU 53

USD 55 B

USD 186 B

USD 90 B

USD 12 B

USD 4 B

(36%)

(15%)

(9%)

(16%)

(35%)

(13%)

(21%)

(22%)

(24%)

(9%)

Rest of the world +2% USD 25 B

+100%

+13%

+48%

+6%

+2%

+30%

Contribution to growth


Ranking

Source: IMS World Review Executive 2013 – Smart Pharma Consulting analyses

4th



¹ Brazil, Russia, India and China

The BRIC¹ countries are expected to belong to the top 10 pharma markets by the end

of 2018, while China and Brazil will be ahead of Germany, France and Italy

Evolution of the Top 20 national pharma markets in value (2013-2018)

2013 2018

USA

Japan

Germany

China

Brazil

Italy

Canada

UK

France

Spain

Russia

Mexico

South Korea

Australia

India

USA

China

Brazil

Germany

France

Canada

Italy

Russia

Japan

India

Australia

Spain

UK

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

Argentina

South Korea

Evolution 2013-2018

Turkey 16. Mexico

Venezuela 17. Turkey

Poland 18. Indonesia

Argentina 19. Venezuela

Belgium 20. Poland

+++

+

-

- -

=

++

+

+

+

+++

+++

+++

+

+

+

+

+++

+

++

+

+++ 8 – 12%

++ 3 – 6%

+ 0 – 2%

- -12 – 2%

- - -32 – 4%


2018 estimated EBITDA3

2013-2

018 s

ale

s g

row

th (

CA

GR

2)

+0-2%%

+3-6%

+7-8%

+8-10%

2018 estimated sales level in USD B3

+3% GAGR of the total pharma market

Source: Smart Pharma Consulting analyses

4th



1 Brazil, Russia, India, China – 2 Compounded annual growth rate – 3 Earnings before interests, taxes, depreciation and amortizations – 4 France, Germany, Italy, Spain, UK – 5 USA and Canada

BRIC1 countries are likely to keep on driving the growth of the global pharma market

but they are expected to be much less profitable than North America, EU 5 and Japan

Growth potential per socio-geographical area (2013-2018)

EU 54 ROW

North America5

190% for total sales of pharma companies

154

(16%)

265

(22%)

415

(35%)

<15% 26-30% 16-20% 21-25%

(x%): of total market

2018 total pharma marketing size:

USD 1186 B

Japan 102

(9%)

BRIC 250

(21%)



June 2014

1 Brazil, Russia, India, China


4th


The key question for pharma companies is not anymore: “Should we operate in BRIC countries?”

but “How can we run a profitable business?”

These emerging markets appear to be less attractive and more complicated than anticipated:

− The Chinese market sales growth rate is lower than forecasted

− Access through local registration procedures and affordability by local patients remain strong barriers to

the development of global pharma companies in all BRIC countries

− Governments tend to favor the development of domestic companies at the expense of foreign

multinationals (e.g. Brazil, Russia, India, China) through the implementation drastic price controls,

amongst other measures

− Local rules and business practices are not always clear to understand and nor in line with the code of

business ethics of foreign pharma companies

− Low protection of Intellectual Property: India has declared compulsory licensing on several brands (e.g. In

2012, a compulsory license of Bayer’s Nexavar, indicated for hepatocarcinoma, was granted to the Indian

generic company Natco Pharma Ltd)

− Local currencies are weak and may fall significantly (e.g. Russia, recently)

True or Untrue?

The profitability of foreign pharma companies operating in BRIC1 countries remains a

key issue for most of them and their situation is unlikely to improve in the short term

1, rue Houdart de Lamotte – 75015 Paris – France • Tel.: +33 6 11 96 33 78 • Fax: +33 1 45 57 46 59 • E-mail: [email protected] • Website: www.smart-pharma.com

Consulting company dedicated to the pharmaceutical sector operating in the complementary domains of strategy, management and organization


Core capabilities

Strategy 1

Assessing the attractiveness of markets (Hospital / retail innovative products - Vaccines - OTC - Generics)

Growth strategy

Optimization of marketing / sales investments

Development of a company in the hospital market Business

Valuation for acquisition

Portfolio / franchise assessment

Extension of product life cycle performance

Improvement mature products performance

Adaptation of price strategy

Defense strategies vs. new entrants

Competitive strategies in the hospital market

Strategic partnerships companies / pharmacies

Rethink of operational units organization

Improvement of sales force effectiveness

Improvement of the distribution channels covering the hospital and retail markets

Development of a strategic planning process

Organization 3

Organization

Facilitation and structuring of strategic thinking for multidisciplinary product teams

Key challenges identification

Strategic options formalization

Resource allocation optimization program

Training of marketing and market research teams to sales forecast techniques (modeling and scenarios development)

Development and implementation of a "coaching program" for area managers

Sales reps coaching

Regional action plans roll-out

Development and implementation of a "sales techniques program" for sales forces (STAR1)

Management 2

1 Sales Techniques Application for Results (training courser

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