Pure Play vs. Diversification

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Among the assorted pharma CEOs and KOLs gathered at the recent Financial Times Pharmaceutical and Biotechnology Conference in London, debate raged on the pros and cons of a pure play strategy, focusing on a few key therapeutic areas, compared to a more diversified approach.

If the 1990s and early 2000s, were all about amassing size, today’s innovator pharma companies appear to be much more interested in scaling back their armies of sales representatives and streamlining their bloated businesses so as to double down upon their core competitive advantages.

“We are witnessing many instances where pharma companies are shrinking to grow.”

David Butts, CMS Cameron McKenna LLP

“We are witnessing many instances where pharma companies are shrinking to grow,” reasons the Head of International Life Sciences M&A of CMS Cameron McKenna LLP, David Butts. “We detect a definite gravitation towards pure play models, as many companies set about unlocking value in non-core businesses, so that then can then re-deploy that cash to shore up the core business.”

Indeed examples abound of iconic pharma players stampeding down this pathway. First, BMS divested large parts of their organization so as to specialize in immune-oncology. Meanwhile AstraZeneca spun off their infectious disease capabilities so as concentrate on core strengths like cardiovascular-metabolism and respiratory. More recently, Sanofi CEO Olivier Brandicourt informed investors that his company has “made a definitive decision to initiate a carve-out and divest the ‘Zentiva’ generics portfolio” and Novartis Chairman Joerg Reinhardt, candidly admitted that their Alcon, eye-care business “needs to recover very soon, or face a new life under new ownership.” However, as a recent debate at the Financial Times Pharmaceutical and Biotechnology Conference in London made abundantly clear, ideas about optimum growth strategies remain fiercely contested.

Some companies actually seem to have made a point of swimming against the tide. GSK, for instance, raised eyebrows for jettisoning their cancer drugs portfolio in favour of bolstering their vaccines division and branching out into low-margin consumer health products such as toothpaste and nicotine patches, right at the very moment that some of their pure play peers such as BMS were enjoying heady returns from breakthroughs in oncology.

“It’s no secret that we are a fierce proponent of the diversified model and maintain a global business spanning consumer healthcare, vaccines and pharma,”acknowledges David Redfern, GSK’s Chef Strategy Officer. “It’s about covering our backs in an era when pharmaceutical pricing pressures are becoming ever more intense… we calculate that even if constraints are placed on drug prices in key markets, then there’s still a world of 7 billion people out there all of whom have health needs to respond to and that represents a tremendous opportunity that should be leveraged.”

“We see it as inevitable that companies are going to have to transition towards volume when it becomes apparent that the engine of price driven economics for this industry is no longer capable of growing at the rate it has historically attained”

Andrew Witty, GSK

Outgoing GSK CEO Andrew Witty is even more forthright when defending his legacy. “We have been one of the early movers to position ourselves into a place whereby we can drive growth through volume when price is no longer going to be there… it gives us an extra string to our bow,” he asserts. “This is an industry characterized by a super long lifecycle where it is essential to plan really well in advance. GSK did well to anticipate the type of plateau-ing of innovative pharma and loss of productivity that the industry is now going through. We see it as inevitable that companies are going to have to transition towards volume when it becomes apparent that the engine of price driven economics for this industry is no longer capable of growing at the rate it has historically attained…. I am confident that history will ultimately judge our decision making to be sound.”

Steve Wooding, Head of Commercial Strategy at Janssen agrees that the diversified model is actually quite “forward looking” and “in tune” with emerging trends in the pharma space. “Pharma has recently undergone a profound shift towards emphasizing health outcomes and there has been a definite migration from product-centricity to patient-centricity. Companies that can deliver holistic value to patients will thrive under this new paradigm and that means being able to complement drugs with medical devices and associated services. The days of just pushing pills are over: the market demands much more than that.”

“At a juncture when everyone is trying to develop therapies that are more patient friendly than they were in the past, Janssen can draw upon the experience in consumer health of our parent company, Johnson & Johnson. We can utilize the data and relationships from the consumer side of the business to better engage patient groups and incorporate their input earlier on in the drug development process, ” he adds.

Then there is the additional security that a diversified portfolio affords. “Financial hedging can certainly be a useful tool to deploy,” reflects Wooding. “Think of it this way: it’s going to be easy to tip over a three-legged stool if one of those legs suddenly gets a bit shorter (when you don’t reap the revenues that you were expecting), but if you can add a few other legs then they can compensate for a while and that gives you the breathing space to short out the short one… you’re always going to feel more secure when you possess parts of your business model that are out of reach of institutional payers and the disruptive hands of the state.”

Orthodox business logic, nevertheless, dictates that that pharma firms should not be attempting to hedge bets when investors can perform exactly the same function in the marketplace more cheaply and effectively. “Investors really don’t approve of hedging strategies because they believe that is their own role and quite frankly a task that they excel in, whereas they think the pharma companies that they have invested in would do much better instead concentrating their energies upon their bread and butter job of creating value,” notes Albert Bourla, Pfizer’s Group President for Innovative Health. “While there may certainly be some legitimate moments to embark upon a portfolio diversification, it’s very important not to be doing it for the wrong reasons… just trying to build safety cushions for the sake of it can quickly deteriorate to the point in which you’re taking your eye of the ball and spreading yourself too thinly,” he counsels.

“Jack-of-all-trades firms are going to be inherently inefficient”

Neil Woodford, Woodford Investment Management

Neil Woodford, a highly acclaimed UK fund manager and Head of Woodford Investment Management, very much concurs that, “jack-of-all-trades firms are going to be inherently inefficient.” Himself a big GSK shareholder, he has been scathing about the company’s diversification strategy. “GSK these days resembles four FTSE 100 companies all bolted together and doesn’t do particularly good job of managing the constituent parts,” he laments.

“Longstanding wisdom maintains that a focused approach is the right answer in times of prosperity when the pure play model tends to outperform the market,” clarifies Bourla, “but in times of economic stagnation a diversified structure will undoubtedly offer greater stability whereas pure player risk going bust if they hit a dry spell and are unable to maintain a minimum tempo of innovation.” He believes that Pfizer has actually managed to square the circle via a hybrid structure that combines the merits of both approaches. “We have smartly managed to balance an diversified product portfolio with an organizational structure that enables different parts of the business to operate with the autonomy and speed that only pure players usually attain… Pfizer Innovative Health is organized across 6 groups that function with their own distinct identities and remits,” he affirms.

Writer: Louis Haynes

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