European Mid-Caps

European MidPharmas: Focused and Resilient, yet Vulnerable

European MidPharmas – R&D based pharmaceutical companies with annual revenues of between EUR 50 million and 5 billion – are having to be increasingly focused and resilient to succeed and fend off their inherent vulnerabilities according to a new report from specialist pharma and biotech consultancy Novasecta.

European MidPharmas – R&D based pharmaceutical companies with annual revenues of between EUR 50 million and 5 billion – are having to be increasingly focused and resilient to succeed and fend off their inherent vulnerabilities according to a new report from specialist pharma and biotech consultancy Novasecta.

Written by Patrick Burton on 11.06.2019

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Focus

75 percent of European MidPharmas are privately-owned and therefore predominantly players that build for the long term and tolerate lower profitability levels than listed firms. However, these companies are not so homogenous when it comes to business models.

Common to all successful MidPharmas is their focus

While Big Pharma increasingly bets on oncology, specialty care and highly risky technological innovation in the hope of future high prices for relatively small patient populations, primarily in the US market, MidPharmas are much more diverse. Many are involved in innovation, branded generics and consumer markets with geographic interests that are not dominated by the US.

However, common to all successful MidPharmas is their focus. This can manifest itself in a singular therapeutic area focus, sometimes not the original one, for example, Merz changed from CNS to Aesthetics, Almirall from Respiratory to Dermatology. Or it can be a technological or product focus, such as plasma-derived products (Grifols, Kedrion, Octapharma) or diagnostics (Bracco, Guerbet). Or a geographic strength, for example, Gedeon Richter and Polpharma in Eastern Europe. MidPharmas can even have a “double” focus, for example, Pierre Fabre and Expanscience both operating in pharmaceuticals and dermo-cosmetics.

Resilience

With only two MidPharmas having been acquired by Big Pharma in the last five years and in an increasingly crowded marketplace, successful MidPharmas have to have resilience.

Thanks to their stable ownership and focus, MidPharmas have been relatively immune to being acquired by, or indeed growing substantially to become, Big Pharma. Indeed, only two MidPharmas have been acquired by Big Pharma since 2014 – Meda by Mylan in 2016 and Actelion by J&J in 2017. While Big Pharma firms have acquired and merged with each other and with smaller biotechs, MidPharmas have instead largely focused on organic growth.

The reasons for this resilience are twofold. Firstly, many MidPharmas’ origins lie in entrepreneurial families that have built up their firms from scratch and are thus unwilling to cede control easily. Secondly, many of these firms have a breadth of low-margin commercial coverage across small countries, ageing primary care and genericised product portfolios, weak R&D pipelines, and are vulnerable to severe price pressures in Europe; making them unattractive to a Big Pharma that is increasingly betting on high-priced game-changing innovation and the US specialty market. The more successful MidPharmas are now, however, more focused and attractive to potential acquirers.

Only two MidPharmas have been acquired by Big Pharma since 2014

Vulnerability

Many MidPharmas are, however, vulnerable. In a world of abundant capital, larger, smaller and peer rivals are using venture funds, liquid public capital markets, private equity funds and debt to deploy significant capital in effective R&D and commercial efficiency.

Global investors are increasingly keen to take a risk on the high returns that come from game-changing pharmaceutical innovation, particularly in the USA, with capital currently being deployed to an ever-growing venture capital and private equity community as well as directly into listed biotechs. Against this backdrop, more conservative MidPharmas that choose not to access this type of capital risk missing out.

In R&D, MidPharmas that wish to exploit innovation are vulnerable to venture funds driving up the price that needs to be paid to access innovative assets and technologies from small biotechs. In turn, biotechs are becoming bolder in their ambitions, preferring to commercialise their own products by raising money in capital markets than partner with a MidPharma or Big Pharma for late-stage development and commercialisation.

Commercially, MidPharmas active in areas with lower R&D risk are vulnerable to margin pressure caused by European payers reducing prices and not reimbursing incremental innovation, competition from cheap generics that make a genuine difference to patients, and a consequent drying up of the old co-marketing model of essentially distributing Big Pharma primary care products in specific countries.

Commercially, MidPharmas active in areas with lower R&D risk are vulnerable

Success Traits

Despite these vulnerabilities and risks, the Novasecta European Midpharma Report 2019 sees a positive future for Europe’s MidPharmas, especially those that adhere to the following strategies:

  • Strategically focus on one or two domains with deep distinctive capabilities: acknowledge and build from unique advantages compared to biotech and Big Pharma
  • Seek profitability growth through purposeful and selective corporate development: engage in collaborations to share risk and access complementary capabilities, with highly selective bolt-on M&A
  • Reinvent the R&D model to be highly project-focused and externally-wired: recognise and exploit increasing fragmentation in the industry’s innovation sources and capabilities
  • Drive increased efficiency and customer orientation in commercial infrastructure: respond to margin pressure on older product portfolios, particularly in Europe

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