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PHARMA M&A REPORT 2018
2017 challenges Pharma’s way of doing business … Pricing, the opioid crisis, and marketing practices of originators spurred a broad debate about Pharma’s role in society. The outcome may have a profound impact for the future.
Will CAR-T cell thereapies mark the beginning of a new era? … Even though the results of CAR-T therapies are stunning, intrinsic limitations may lower the high hopes of cancer patients.
Playing big – acquiring products from Global Pharma companies … Strategy, process and pitfalls of product acquisition.
CDMOs thrive amid consolidation … These two deals are salient examples of two trends: First, the ongoing consolidation among CDMOs. Second, the entrance of new players into the market.
How the GDUFA influence the US generic consolidation … The introduction of a user fee structure may further drive consolidation and expose the Agency to counter effects such as increased risk of shortage or drug price rises.
Partners
Professionals
Senior advisors
KURMANN PARTNERS 2018
Tim HoaenProject Leader
Prof. Dr. Bernhard Kutscher
Alex Scheffler
alex.scheffler @kurmannpartners.com
Dr. Christoph BieriManaging Partner
christoph.bieri@ kurmannpartners.com
Anjuman GuptaSenior Analyst
Marco Gorgas
Hans-Jürgen Kromp
Peter DegenManaging Partner
peter.degen @ kurmannpartners.com
Linda KlöppelAnalyst
Markus Lämmler
Alfredo Granai
Michel Le BarsManaging Partner
Camille ChételatAnalyst
Thomas Dressendörfer
Ronaldo Valentini
Bernard PellereauPartner
Marko StjepandicAnalyst
Dr. Mauricio Girón
Ricardo Montenegro
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We also have a look at some of the indirect ef-fects of the evolving Pharma industry: CDMOs are thriving amidst a wave of consolidation (see page 14). As always when significant changes take place, there are also opportunities which can be reaped by those who are ready: On page 17, we comment on how regional champions can position themselves to acquire products rights and portfolios from large players. We hope you enjoy reading the report. As always, we are glad to receive your comments and suggestions.
Yours truly
Christoph BieriManaging Partner
We are pleased to present our seventh annual review of M&A activity and major trends in the Pharma industry. As in previous editions, we strive to go beyond mere statistics and to describe some of the events and stories which – we believe – will shape the industry and drive future strategic transactions. And while 2017 was calmer than other years in terms of M&A activity (see page 4), it was remarkable in respect of how strategic drivers developed. The year was heralded a “break-through year for Biotech” because it saw the marketing approval of several truly innovative treatments, such as CAR-T cell cancer therapies (see page 12). These biomedical advances are encouraging. However, the pricing of the new therapies, and the ways how Pharma in general is conduct-ing business, was intensely debated (see page 7), exposing fundamental issues of regulation and of reimbursement models. As an example of regulations defining a market, we analyze how the generic drugs segment in the US has been fundamentally re-shaped by FDA’s GDUFA (see page 10).
Dear reader
EDITORIAL
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Globally, deal activity in 2017 was at a compara- ble level to 2016, and significantly lower than in 2014 and 2015. We counted 323 transactions (2016: 345), with cumulative deal values of USD 120bn (2016: USD 95bn). In comparison, in 2014 and 2015, there were 440 to 490 trans- actions with cumulative deal values of approx-imately USD 225bn. We believe that the earlier years were exceptional, and that the 2016/2017 level likely reflects normal rather than subdued M&A activity. While global transaction numbers remained stable, the pattern shifted: As shown in FIGURE 1, there were fewer acquisitions in- volving targets based in the USA, but significantly greater activity from bidders in emerging markets, when compared to 2016.
The end of a long courtship for ActelionThe largest transaction in 2017 was J&J’s acqui-sition for USD 30bn of Actelion (see FIGURE 2), the Swiss-based specialist in Pulmonary Arterial Hypertension (PAH), and Europe’s largest Bio-
tech company. Back in 2011, activist investor Elliott tried to push Actelion’s management to in- itiate a sale process, when the company was trading at around 45 CHF per share. In January 2017, after a long and very public courtship in the second half of 2016 (with Sanofi stepping in and out of the process), J&J agreed to pay CHF 280 per share. The valuation is perceived as very high, corresponding to 12 times revenues and 30 times EBIT. But not only did Actelion’s founders, Jean- Paul and Martine Clozel, realize a very attractive price for their shareholders, they also managed to carve-out Actelion’s pipeline and R&D outside the PAH indication into a new company, Idorsia. In June 2017, the new company was floated on the Swiss stock exchange, and at the end of 2017 already had a market capitalization of more than USD 3bn. Without doubt, Actelion is one of the most successful Biotech stories in Europe to date.
Big bets on cancer A substantial amount of M&A funds in the Pharma industry is spent on so-called “pipeline deals”, when large Pharma companies acquire small innovators with development programs or innovative products. The substantial prices paid in these transactions are based on the expecta-tion of future profits which quite often are elusive; the deals are veritable billion-dollar bets. And Pharma is betting on oncology. Gilead acquired Kite Pharma for USD 10bn, just before the latter’s CAR-T cell therapy against a form of B-cell cancer was approved (see also page 12). In January, Takeda paid USD 5bn for Ariad Pharma- ceuticals to get Ariad’s blood cancer drug and its lung cancer drug candidate. In December, Novartis offered USD 3.7bn to secure the rights for AAA’s endocrine cancer treatment. And just before the year-end, Roche purchased Ignyta for USD 1.8bn to take on a program of drug candi-dates against specific solid tumors.
Large buy-outs by Private Equity drive M&A deal volume in 2017While deal activity in 2017 was slightly higher than in 2016, a substantial amount of the cumulative deal value was generated by Private Equity deals. The acquisition of Actelion and Gilead’s huge bet on CAR-T were two of the most talked about deals of the year.
YEAR 2017 IN REVIEW
Private Equity Groups (PEGs) have been shaping of the CMO and the CRO industries. PEGs seem to have continued confidence in the sector, increasing the value of their individual bets. The CROs PPD and Parexel and the CDMO AMRI were acquired in billion-dollar transactions, a clear sign that financial investors believe that more consolidation is coming, and that operation-al improvements can be achieved.
Renewed deal activity in genericsThree transactions announced in 2017 with deal values greater than USD 1bn involved generic drug firms. Akorn was acquired for USD 4.8bn by Fresenius Kabi: with the deal, Fresenius expanded its portfolio of generics from sterile injectables to other difficult-to-make formulations. The other large deal in the US was Amneal’s acquisition of IMPAX, a deal which was seen as a defensive stepin the context of the evolving crisis in the generics market in the USA (see also page 10).
Continuing consolidation among CMOs and CROsInterestingly, five of the transactions with deal values greater than USD 1bn involved companies which provide services to the Pharma industry, rather than Pharma companies themselves (see FIGURE 2). In the CMO space, former serial acquirer Patheon was taken over by Thermo- Fisher, the provider of R&D technology and Pharma services, for USD 7bn. In the same period, Lonza completed the acquisition of Cap- sugel (announced in 2016, not in FIGURE 2) for USD 5.5bn. In 2016, the merger of IMS Health and Quintiles (now trading as IQVIA) created a com- pany providing services from early-stage research through to commercialization. In 2017, INC and InVentiv Health followed suit in a merger valued around USD 4.6bn, with the stated claim to become another “end-to-end” service provider for the industry.
YEAR 2017 IN REVIEW 5
0 5 10 15 20 25 30
Deal Value, USD bn
J &J | Actelion
Gilead | Kite
PPD Buy-out
Thermo Fisher | Patheon
STADA Buy-Out
Parexel Buy-Out
Takeda | Ariad
Fresenius | Akorn
ICN | InVentiv Merger
Novartis | AAA
Amneal | Impax
Roche | Ignyta
AMRI Buy-out
Mallinckrodt | Sucampo
Sawai | Upsher-Smith
Originator
Originator
Pipeline
Pipeline
CRO/CDMO
CRO/CDMO
Generics
Generics
USA
USA
WesternEurope and Canada
WesternEurope and
Canada
Otherdevelopedmarkets
Otherdeveloped
markets
Emerging markets USA
WesternEurope and Canada
Otherdevelopedmarkets
Emerging markets
Emergingmarkets
61 22 8 5
20 72 1 5
8 4 10 2
15 10 5 76
72 24 1 5
37 80 1 11
5 4 5 5
2 6 7 80
Buye
r re
gion
# Number of Transactions
Target region 2016
USD 50bn
Target region 2017 FIGURE 1
6 YEAR 2017 IN REVIEW
Shortly after Merck’s announcement, Pfizer informed that they are seeking a buyer for their consumer health business. With revenues of USD 3.4bn and a purchase price of up to USD 15bn, Pfizer’s proposed deal is much larger. There are few obvious buyers for these portfolios. In March, GSK will have to decide whether to buy out Novartis from their JV. Bayer is still digesting its huge acquisition of OTC products from Merck & Co, and Reckitt Benckiser – keen to expand its OTC business – may first have to do a lot of homework.
In Europe, STADA, one of Europe’s largest generic drugs providers, was bought out by a consortium of investors for US$ 6bn. The protrac- ted and highly public transaction process involved some drama, including the involuntary departure of the CEO and CFO of STADA, and the alleged installation of electronic surveillance equipment in the car of the CEO.
More deals expected after tax overhaulThe end of 2017 brought a big tax overhaul in the USA, and many financial advisors expect that this may lead to increased M&A activity involving US companies as buyers, across all industries. Against this backdrop, some observers expect that large deals amongst originators may be on the rise in 2018, particularly as pipeline deals become scarcer. Both Novartis and Sanofi are said to be under pressure to do large acqui-sitions. BMS is perceived as a potential target, and AstraZeneca’s survival as an independent company is often questioned.
Large deals building momentum in OTCIn OTC, three large transactions seem to be building momentum: In October, Merck KGaA announced the intention to sell its OTC portfolio business, with revenues of EUR 860m, which is expected to fetch EUR 1.8bn to EUR 2.7bn. This divestment was expected since February, as the German company then announced the preparation of the organization for a separation.
FIGURE 2 Deal Value, USD bn
0 5 10 15 20 25 30
Deal Value, USD bn
J &J | Actelion
Gilead | Kite
Private Equity | PPD
Thermo Fisher | Patheon
Private Equity | STADA
Private Equity | Parexel
Takeda | Ariad
Fresenius | Akorn
ICN | InVentiv Merger
Novartis | AAA
Amneal | Impax
Roche | Ignyta
Private Equity | AMRI
Mallinckrodt | Sucampo
Sawai | Upsher-Smith
Originator
Originator
Pipeline
Pipeline
CRO/CDMO
CRO/CDMO
Generics
Generics
USA
USA
WesternEurope and Canada
WesternEurope and
Canada
Otherdevelopedmarkets
Otherdeveloped
markets
Emerging markets USA
WesternEurope and Canada
Otherdevelopedmarkets
Emerging markets
Emergingmarkets
61 22 8 5
20 72 1 5
8 4 10 2
15 10 5 76
72 24 1 5
37 80 1 11
5 4 5 5
2 6 7 80
Buye
r re
gion
# Number of Transactions
Target region 2016
USD 50bn
Target region 2017
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Whatever the health economic benefit provided by Sovaldi, Gilead’s price request was widely con-sidered to be unsustainable.
PR issue 1: Too obvious profit maximizationWhile the dispute about the value of new treat-ments for society is necessary and important, other issues weaken Pharma’s position in their discourse with other stakeholders. One of these PR issues centers around unjustified price increases, for example when a Pharma company relaunches a very old drug at a much higher price, or when they acquire drugs and subsequently multiply their prices, as did notorious Mr. Shkreli. In 2017, a less conspicuous practice in the US came into focus: Originators routinely increase prices for branded drugs twice per year. A part of these increases is partially reversed by higher discounts negotiated by Pharmaceutical Benefits Managers (PBM). In 2016, for example, half of the list price increases were reversed by discounts. But even considering discounts to PBMs, the net price increase of products without gener-ic competition increased by 10% on average in both 2014 and 2015, and 8.8% in 2016. Over time, these exponential price increases make drugs extremely expensive. Then, after loss of exclusivity, many bran- ded drugs are much more expensive (up to 100 times) than generic versions, for no obvious reason. Finally, originators go to great lengths to prevent generic competition from entering the market: tactics include pay-for-delay, patenting of distribution systems, and the use of citizen petitions on behalf of the original.
PR issue 2: The opioid crisisThe debate on profit maximization was over- shadowed by the opioid epidemic. Purdue’s “pioneering” role of marketing opioids as “every-
A year which tested Pharma’s way of doing business
Originators invest large sums in R&D. How much development of a new drug actually costs has been one area of dispute – estimates range from USD 90m to USD 1.4bn. Whatever the absolute value – there is general consent that R&D costs have been steadily and substantially increasing over time. The most fundamental of many rea-sons is Pharma’s own success: Most “low-hanging fruits” have been picked and the law of decreas-ing marginal contribution sets in; the remaining unmet medical needs are increasingly difficult to address. As a consequence, originators are re-fo-cusing their pipelines. In July, GSK announced to dispose of 30 projects, and Eli Lilly to concentrate R&D efforts on 10 oncology candidates. Pfizer spun off four programs in September, and in early 2018 announced that it would completely with-draw from neurology (Alzheimer and Parkinson’s) research. According to Deloitte, the increasing diffi-culty of finding new drugs has reduced Pharma’s Internal Rate of Return (IRR) on R&D investments from 10% in 2010 to just 3.2% in 2018. The in- dustry newsletter Endpoints News even conclud-ed that the “Pharma business model is at the brink of terminal decline”.
How is value created by Pharma shared with society?Few doubt that private enterprise is needed to develop new medicines. Also, it is generally accepted that breakthrough cures (such as Sovaldi for Hepatitis Virus C) create substantial value for society – in the case of Sovaldi, by redu- cing the number of liver transplants required. Another question is how this value is shared between Pharma and society. When Sovaldi was launched at a cost of USD 84’000, one analy-sis computed that if all patients in need in the US were treated the same year, the costs would amount to USD 227bn, compared to USD 260bn spent for all other drugs during that year.
The press heralded 2017 as a “breakthrough year for biotech”: CAR-T cell therapies and a gene therapy curing a hereditary form of blindness entered the market. But pricing, the opioid crisis, and marketing practices of originators spurred a broad debate about Pharma’s role in society. The outcome may have a profound impact for the future.
YEAR 2017 IN REVIEW
8 YEAR 2017 IN REVIEW
day” pain killers to General Practitioners is at the roots of a health emergency which is now evolving in the USA. In total, two million US residents are opioid addicts, 1’000 are treated each day for overdosing, and at least 15’000 addicts die per year. The impact of the epidemic is so strong that it affects life expectancy and has an impact on the job market in the US. This problem is not new: Purdue had already paid USD 600m to settle accusations of improper marketing in 2007. In 2017, an ava-lanche of new law suits against Purdue and other Pharma companies was launched. A further settlement could become very expensive – the cost for opioid abuse is estimated to amount to USD 75bn.
PR issue 3:“Pharma tricking the system”All this negative publicity led to a growing criticism of Pharma in general. In a widely-quoted editorial, one of the leading Biotech trade journals, BioCentury, stated that Pharma had “broken its contract with society”.
The new FDA commissioner Scott Gottlieb told US Congress that “branded companies… are ‘gaming’ our system”. He is making price com- petition, particularly for off-patent drugs with no innovation, a priority. In June, the FDA published a list of drugs for which exclusivity had been lost, but for which no generic competition exists. In December, it introduced measures to increase competition against price gouging. Also, the wider public pushes back: For example, political protests over of the price of Emfleza (deflazacort), a decade-old product re- launched with minimal work to treat Duchenne’s Muscular Dystrophy, caused Marathon Pharma to cancel the drug’s launch. The drug was sold to PTC Therapeutics shortly afterwards. In Europe, Concordia faced similar objections in the UK for raising the price of an essential drug manifold.
PR issue 4: A contract with the public, backfiringPharma companies tried to counter with pledges and transparency. Already in 2016, Allergan (and later Novo Nordisk, Sanofi, and AbbVie) promised in a “contract with the public” not to raise prices by more than 10% per year. To increase trans-parency, Merck & Co and Eli Lilly published their average price increases. However, Allergan’s pledge started to look cynical when its management resorted to des-perate measures to protect exclusivity of its drug Restasis. Allergan transferred ownership of the patents covering Restasis to an Indian tribe, trying to protect the IP against a challenge in a US court. Even though it quickly became clear that this tactic would not be successful, the mere attempt was very damaging for Allergan’s reputation and led to a highly public backlash by all stakeholders.
Such outcome-based pricing models are easier to digest for payers than upfront, at-risk reimbursement of drugs. Thus, it may be that in the future patients are cured at by a one-time treatment, and then pay an annuity for their regained health as long as the therapy’s effect persists.
… and more pragmatic regulationLastly, many other issues in the Pharma industry are the result of inappropriate regulation. Pricing of old drugs, and marketing of dangerous products, can and should be regulated. What it all boils down to is that Pharma is a private enterprise which in essence is financed by society. There are intrinsic fault lines which always appear in semi-free markets (such as utilities and banking, for that matter). Improving the system requires a deepened dialogue between all stakeholders – industry, payors, and patients – to create not more, but more prag-matic regulations.
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Our view: It’s not all that badThe stories which emerged in 2017 negatively touched all corners of branded Pharma’s way of doing business – drug development, pricing, marketing, patents. But is it all that bad? Most importantly, are originators losing their “raison d’être”? We don’t think so. First, we don’t believe that Pharma’s business model is in terminal decline. If there was no advancement of our un- derstanding of diseases, or only incremental advances (as opposed to breakthroughs), there indeed would be a dead end for privately financed R&D. But there are breakthroughs. Gene editing technologies (CRISPR), cell-based therapeutics, and gene therapies are a few of them. Cures based on these breakthroughs will deliver value for society, as did Sovaldi. The issue is that no money can ensure a steady stream of break-throughs, and thus biomedical progress will come in a series of surprising “leaps”.
Solutions may be outcome-based prices…The question remains how to pay for curative treatments, an issue already discussed for years. In Europe, the first approved gene therapy, Glybera by uniQure (partnered with Chiesi) was withdrawn after five years and only one single reimbursed patient. The clinical benefit (reducing pancreatitis in patients with a genetic deficiency in fat metabolism) did not justify reimbursement of the USD 1m price tag. But Pharma companies are starting to commercially share the risk of their therapies. For Luxturna, Spark announced that it would ask for a high price (USD 850k), but that it would grant rebates based on the short- and mid-term effectiveness of treatment. Similarly, Novartis’ CAR-T cell therapy, Kymriah, comes with a high price (USD 475k), but only if treatment is successfull within one month.
YEAR 2017 IN REVIEW
10
− A number of severe events raising safety concerns regarding Active Pharmaceutical Ingredients (APIs) and Finished Dosage Forms (FDF) increasingly being contracted or out- sourced outside of the USA; and− A decreasing number of facilities, about 20% fewer in the USA between 2013 and 2017.
US Congress recognizes the importance of the FDA’s drug application review program and, in 2017, reauthorized among others both the Generic and Prescription Drug User Fee Amendments (GDUFA II and PDUFA IV for brand-ed products). The GDUFA II alone will allow the FDA to collect close to USD 500 million annually between 2017 and 2022 from fees assessed on the drug or substance applications (respec-tively Abbreviated New Drug Application (ANDA) and Drug Master Files (DMF)), the facilities where APIs and FDF are produced, and the gener-ic drug applicants or sponsors.
The GDUFA II fee structure The GDUFA II presents a shift of financing sources away from the facility owners who used to carry 70% of the burden, against 30% for the applications sponsors: the introduction of an annual ANDA program fee in addition to the one-time applications brings their contribu-tion to the opposite proportion. This new fee is meant to be an investment in the generic drug application review program and eliminates previous Prior Approval Supplement (PAS) fees. There are other noticeable changes in the fee structure negotiated between the FDA and industry representatives: − Only one FDF fee is applicable for sites producing both APIs and FDFs; This may lead to more multi-purpose facilities and conso- lidation of production at larger sites, driving economies of scope; − Payment of the annual facility fee from the moment an ANDA is approved; and
The FDA contextThrough regulation and policy implementation leading to extensive generic drug entry and price competition among manufacturers, the FDA has managed to increase access to affordable treatments. Out of the USD 333bn total pharma-ceutical net sales in 2016 in the USA, generics only accounted for roughly 20%, although they represent more than 80% of the prescriptions: on average oral generics eventually cost 80% less than the respective originals and capture 80% to 90% market share within a year following loss of exclusivity (LoE). For the FDA, the last decade has been character-ized by: − High-profile drug shortages; − Huge price hikes for some old drugs, such as Turing Pharmaceuticals’ Daraprim price in- crease ($13.50 to $750 a tablet);− Increasing numbers of ANDAs in relation to LoE;
Through its policies, the Federal Drug Agency (FDA) influences the compe- titive landscape of the US generic markets. And while the entry of newforeign generic players and the fierce market competition have benefitedthe players organizations, the introduction of a user fee structure may further drive consolidation and expose the Agency to counter effects.
STRATEGY AND MARKET
How the GDUFA influence the US generic consolidation
Localisation of facilities (2013–2017)Localisation of facilities (2013–2017)
325 255
122 101
433 420
763
688
0
200
400
600
800
1000
1200
1400
1600
1800
2017 2013
US FDF
US API
Foreign FDF
Foreign API
306
35 52
18 9 7 0
50
100
150
200
250
300
350
400
1–5 6–10 11–50 51–150 151–300 >300 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
# of Sponsors
% Cum. Share of sponsor
% Cum. Share of ANDAs held
FIGURE 1
11
and USD 30k, representing a clear barrier to entry (FIGURE 3)]. The top 10 generic players hold more than half (54%) of the 10’100 listed ANDAs. For TEVA or Mylan which hold approximately 1’500 and 700 ANDAs respectively, the annual im-pact per ANDA of the full program fee is marginal at circa USD 1’000 to USD 2’000. Through this GDUFA II fee structure, the FDA establishes economies of scale which give cost advantages to the larger players. The smaller players may withdraw from the market leading to more drug shortages unless prices can be increased, an option that remains in a nation that does not directly regulate the price of drugs. We believe the market consolidation will continue, driven by portfolio rationalization and further M&A transactions. Times of high valu-ations observed in the past such as, for instance, TEVA’s acquisition of ACTAVIS generic portfolio which is now contributing to its current financial strain, seems over. Lower multiples can be expected to reflect the challenges of US generic drugs markets: the bargaining power in the value chain has evolved with the consolidation of retailers (CVS Health, Walgreen Boots Alliance) and middlemen Pharmacy Benefit Managers (PBM) (Express Scripts, OptumRx), companies that are much larger than the manufacturers.And they will continue to leverage it unless the regulator intervenes or other ventures such as Amazon decide to disrupt the market.
− FDF Contract Manufacturing Organizations (CMOs) will only pay one third of the fee paid by generic manufacturers, potentially raising the interest of CMOs in producing generics.
The impact on the generic marketSince the implementation of GDUFA I though, the number of entries and exits has been seen to converge. Is this an indicator of a less attractive market? On average, there are four to five manufacturers of each generic drug, but still 50% of drugs have two or fewer manufac-turers. Does this indicate fierce competition or rather a high risk of shortages? 75% of generic drugs each generate revenue of less than USD 6 million per year, and 50% less than USD 0.8 million. Primary care drugs are under continuous price pressure (2% to 3% decrease in 2016), while specialty drugs still benefit from increasing prices, usually reflecting less competition due to more com- plex manufacturing process, in particular for sterile injectables. The GDUFA II and its new annual program fee, following a three-tier scheme which accounts for the number of owned approved ANDAs, is not good news for the generic players. Almost three quarters of generic manufacturers hold fewer than five ANDAs, and half of that number only one (FIGURE 2). Although smaller players will pay a lower annual program fee, the impact per ANDA may be greater. The fee ranges between USD 160k
306
35 52 18 9 7
0
50
100
150
200
250
300
350
400
1–5 6–10 11–50 51–150 151–300 >300 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
# of Sponsors
% Cum. Share of sponsor
% Cum. Share of ANDAs held
0
20
40
60
80
100
120
140
160
USD
Tho
usan
ds
180
200
1 10 100 1000 # of ANDAs
Tier 1 1 to 5 ANDAs
Tier 2 6 to 19 ANDAs
Tier 3 >20 ANDAs
Number of ANDAs per sponsor Three-tiered progrm fee | Annual fee per ANDA
FIGURE 2 FIGURE 3
STRATEGY AND MARKET
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CAR-T cells represent a platform for a fundamen-tally new type of medicine: Kymriah by Novartis, approved in 2017 for certain young and pediatric patients with acute lymphoblastic leukemia (ALL), was heralded as the beginning of a new era in oncology. As the first treatment ever, the FDA designated Kymriah as a “gene therapy” under the 21st Century Cure Act. So, what is the background of this new therapy?
Perfect weapons against cancer…CAR-T cell therapies are a result of decades of research into the immune system, and an impres-sive example of utilizing detailed knowledge of biological processes to create a new treatment.In CAR-T cell therapies, certain immune cells (“T-cells”) are taken from the patient and gene- tically modified to act against a “marker”, a mole- cular which is specific for the class of cells that have become cancerous. After preparation in a lab, the modified cells are reintroduced into the patient. The elaborate modifications make CAR-T cells perfect biological weapons (“guns
loaded and cocked”, as one scientist put it) which trigger the immune system to rapidly attack and wipe out the targeted cancer. In the case of ALL, the cancerous cells are B-cells, another type of immune cells. B-cells are the only cells in the body which have a protein called CD-19 on their surface. By targeting CD-19, Kymriah eradicates all B-cells (cancerous and healthy). Treated patients lack B- cells, which is manageable as B-cells are not essential for survival. The success rates of Kymriah are stunning, with more than 80% of the patients (for whom other treatments did not work) entering complete remission, with the potential to be cured perma-nently.
… triggering one of the few mega-deals in 2017Around the time of Kymriah’s approval, Gilead made a huge bet on CAR-T therapies by acquiring KITE Pharma for USD 10.3bn. Some weeks later, KITE Pharma received FDA’s marketing approval for Yescarta, a CAR-T cell therapy against another form of B-cell cancers. The transaction value looks high given Yescarta’s estimated peak sales of USD 2bn. But Gilead seems like a perfect buyer as the com- pany has a strong track record in making large bets on revolutionary treatments. In 2011, Gilead acquired Pharmasset for USD 11bn, purchasing the development program which resulted in Sovaldi, the treatment for Hepatitis Virus C (HCV). Sovaldi and its successor products turned HCV into a curable disease, and generated huge prof-its for Gilead.
Will CAR-T cell therapies mark the beginning of a new era?One of the big stories in 2017 was the approval of the first CAR-T cell therapy,developed by Novartis, and the almost simultaneous announcement ofthe most discussed transaction of the year, the USD 10.3bn acquisition of KITEPharma by Gilead. Even though the results of CAR-T therapies are stunning,intrinsic limitations may lower the high hopes of cancer patients.
STRATEGY AND MARKET
13
Some companies try to establish solu- tions which avoid the need for manufacturing sites completely. Cellectis of France is devel- oping off-the-shelf CAR-T cells, thus avoiding the requirement to collect the patient’s immune cells before preparing the treatment. Miltenyi, a provider of laboratory instruments, offers automated solutions to create CAR-T cells, which would enable cell modification to be moved into hospitals. And scientists recently published an experimental method to engineer CAR-T cells in-situ, within the body. Although the latter method is currently tested only in mice, it creates the intriguing possibility that CAR-T based therapies move away from being “manufacturing services” back to being simple injections available for sale, much more closely resembling Pharma’s usual business model.
Beyond the hype, limitations loomBeyond the hype, there are intrinsic limitations to CAR-T cell therapies. Most importantly, the approach can only be used against cancer of cell types which are non-essential and have a specific marker, otherwise the treatment would kill the patient. The only marker which today is known to qualify is BCMA, which is specifically present on blood plasma cells which degenerate to multiple myeloma. Consequently, the number of patients who could benefit from CAR-T cell therapies seems relatively low. However, there are many possibil-ities to optimize the molecular design of CAR-T cells. The vision is to train CAR-T cells against solid tumors, which would open a much larger market, and in future variations of CAR-T cells may be used against viral infections.
Adding to Pharma’s business model?Commercially, CAR-T cell therapies present a supply chain challenge. The patients’ immune cells must be collected, modified, and then re-introduced into the patient within weeks. This requires trained hospital staff, tight coordi- nation, and seamless transportation to and from dedicated manufacturing facilities. This service- based business model is a challenge for Pharma companies which typically sell pills in boxes, and the example of Dendreon’s cancer vaccine shows how the substantial investment re- quired in dedicated manufacturing facilities can make a cell-based therapy commercially unviable. In addition to CAR-T, there are other cell- based therapies emerging, and a need for manufacturing services which can be used by all players to deploy their cell-based therapies may arise. Already, some CMOs try to position themselves to address this market need: In 2017 Japanese conglomerate Hitachi acquired PCT, a CDMO for cell therapies for USD 80m, and Lonza purchased cell therapy CDMO PharmaCell.
STRATEGY AND MARKET
14
As Pharma companies refine their business strategy and market focus, Pharma manufactur- ing also undergoes a fundamental change. More and more, large Pharma “originators” view manufacturing as a non-core activity, unless it involves proprietary technology. This is a boost for contract development and manufacturing organizations (CDMOs), and one of the key drivers for the consolidation of this industry.
CDMOs grow faster than the Pharma marketCDMOs collectively generate approximately USD 40bn in revenue, and the large players fore-cast a market growth of 5% to 6.5% per year over the next five years. Two growth drivers are stated: First, small innovators (“biotechs”) do not want to commit capital to building manufacturing plants, but rather use CDMOs. Second, outsourcing by Big Pharma is expected to increase further, from an “outsourcing penetration” of 30% today
to 40% in 2020. Following this rationale, we believe that the CDMO industry may expand even faster, given that growth of the Pharma industry is expected to be 5% to 7%. Interestingly, the largest CDMOs grow fast-er than the largest Pharma firms, as can be seen in FIGURE 1. Each bubble in this graph represents one company, with the bubble’s size proportional to the company’s revenues. The position on the horizontal axis reflects the company’s growth in the last three years, while the position on the vertical axis reflects the profitability (EBITDA margin). The higher rate of growth of CDMOs re-flects on one hand the consolidation in the CDMO market (see below), and on the other hand the growing trend towards outsourcing in the industry. For comparison, FIGURE 1 also contains some of the large contract research organizations (CROs), which also grew substantially faster than the Pharma market.
CDMOs thrive amid consolidation Last year saw two of the largest M&A transactions ever in the CDMO industry: Lonza’s acquisition of Capsugel for USD 5.5bn, and Thermo Fisher’s takeover of Patheon for USD 7.2bn. These two deals are salient examples of two trends: First, the ongoing consolidation among CDMOs. Second, the entrance of new players into the market.
Growth (CAGR, latest 3 periods available)
Average market growth (IMS),
Profi
tabi
lity
(EBI
TDA-
mar
gin,
last
ava
ilabl
e)
CAGR 2011–2016 (6.2%)
Lonza Catalent Recipharm
Patheon
Cambrex
Siegfried
ThermoFisher
Evotec
Charles River
Icon
Medpace Holdings
INC
PRA Health Sciences
IQVIA
0%
10%
20%
30%
40%
50%
60%
70%
-10% -5% 0% 5% 10% 15% 20% 25% 30% 35%
Pharma
C(D)MO
CRO
FIGURE 1
Growth (CAGR, latest 3 periods available)
Average market growth (IMS),
Profi
tabi
lity
(EBI
TDA-
mar
gin,
last
ava
ilabl
e)
CAGR 2011–2016 (6.2%)
Lonza Catalent Recipharm
Patheon
Cambrex
Siegfried
ThermoFisher
Evotec
Charles River
Icon
Medpace Holdings
INC
PRA Health Sciences
IQVIA
0%
10%
20%
30%
40%
50%
60%
70%
-10% -5% 0% 5% 10% 15% 20% 25% 30% 35%
Pharma
C(D)MO
CRO
STRATEGY AND MARKET
15
of intense consolidation, comparable to the CRO industry three to five years ago. As shown in FIGURE 2, between 2013 and 2017 there were 30 to 60 transactions annually with CDMOs and manufacturing units as targets. The number of deals peaked in 2015, but while the number of transactions decreased in the last two years, the deal volume (the sum of all published deal val-ues) increased, mainly due to the very large deals: Capsugel / Lonza and Patheon / Thermo Fisher.
Platform builders and new entrantsTwo particular type of M&A actors drive deal activity: First, several CDMOs made serial acqui- sitions to expand their platform and reach. FIGURE 3 illustrates the acquisition timeline of Catalent, Recipharm and Patheon which have used M&A to build up sizeable manufacturing platforms. These players use M&A as part of their business model to complement their technology footprint, geographic reach, and client portfolio. Second, new entrants are attracted to the industry. Private Equity Groups (PEGs) have played a strong role in building the CDMO indus-try (as well as for CROs), and last year again saw several transactions involving PEGs buying out CDMOs, most notably AMRI. In addition, firms in related industries such as Thermo Fisher, a lab instrument and consumables supplier, enter the CDMO industry. TABLE 1 gives examples of recent acquisitions of CDMOs by strategic buyers and private equity groups.
Biopharmaceutical contract manufacturing – a submarket of its ownManufacturing of biologicals, for example anti-bodies which are produced using very complex mammalian cell cultures, is highly complicated and requires large dedicated investments. Even some of the largest Pharma companies prefer to enter into strategic alliances with specialist CDMOs, rather than building manufac-turing plants on their own, as exemplified by Sanofi’s €270m alliance with Lonza announced in February 2017. Due to the high barriers to entry, the Biopharmaceutical CMO market is an oligopoly in which Samsung Biologics, Lonza and Boehringer have the lion’s share. However, some large new players are seeking to muscle their way in: Japanese Asahi Glass acquired CMC Biologics at the end of 2016, and KBI, subsidiary of Japanese group JSR, acquired two companies to expand its biopharmaceutical contract manu-
Big Pharma’s bias for large CDMOs drives consolidationDespite a considerable number of M&A trans- actions, the CDMO market remains very frag-mented. The top five players generate approxi-mately 15% of the USD 40bn total, and there is a long tail of medium-sized and smaller CDMOs – we count at least 300 companies offering CDMO services.However, there is a strong bias by Big Pharma for large CDMOs: Big Pharma firms want few, long-term, reliable relationships, and favor large CDMOs (which also have the capacity and means to manage and cultivate complex niche tech- nologies) over smaller ones. A similar “size affinity” exists between Pharma companies and CROs. Consequently, the CDMO industry is in a phase
FIGURE 2
Sum of deal values, others
Sum
of p
ublis
hed
deal
val
ues,
USD
bn
Num
er o
f ann
ounc
ed tr
ansa
ctio
ns
Number of announced transactions
Deal values, largest deal
Number of deals 0
10
20
30
40
50
60
70
0
2
4
6
8
10
12
2013 2014 2015 2016 2017
OT Chemistry Kemwell Mitim Kaysersberg(Alcon)
Nitin
Lusomedi
Corvette
Flamel Plant
Roche PlantCook Pharmica
Accucaps
Aptuit (CTS)
Pharmatek
Micron
Relthy
Zhejiang Jiang
Scherer
DSM /Patheon merger
Banner Pharmacaps
Agere
Irix
Gallus
Roche,Florence Plant
Deal size unknown
Source: KP ResearchLegend: Area relative to deal size
Jan 2018
Jan 2017
Jan 2016
Jan 2015
Jan 2014
Jan 2013
Jan 2012
Jan 2011
FIGURE 3
STRATEGY AND MARKET
Sum of deal values, others
Sum
of p
ublis
hed
deal
val
ues,
USD
bn
Num
er o
f ann
ounc
ed tr
ansa
ctio
ns
Number of announced transactions
Deal values, largest deal
Number of deals 0
10
20
30
40
50
60
70
0
2
4
6
8
10
12
2013 2014 2015 2016 2017
OT Chemistry Kemwell Mitim Kaysersberg(Alcon)
Nitin
Lusomedi
Corvette
Flamel Plant
Roche PlantCook Pharmica
Accucaps
Aptuit (CTS)
Pharmatek
Micron
Relthy
Zhejiang Jiang
Scherer
DSM /Patheon merger
Banner Pharmacaps
Agere
Irix
Gallus
Roche,Florence Plant
Deal size unknown
Source: KP ResearchLegend: Area relative to deal size
Jan 2018
Jan 2017
Jan 2016
Jan 2015
Jan 2014
Jan 2013
Jan 2012
Jan 2011
16
trial) with whom to work. The same may happen in manufacturing. The large CDMOs are big, stable, and broad enough to cover substantially all manufacturing needs of Big Pharma companies, perhaps apart from biopharmaceuticals which may be covered by specialist CDMOs. We believe this is one reason for Lonza’s acquisition of Capsugel – com- plementing existing technical capabilities and gaining scale. Similarly, Patheon becomes part of a large group under Thermo Fisher and hence may be viewed as an even more compelling potential partner for Big Pharma companies. Obviously, given the many technical and regulatory constraints, transformation of a manufacturing network takes much more time to implement than changing suppliers of services. However, the transfer of manufacturing units from Pharma company to its future CDMO, could accelerate the process – thus the future of the CDMO industry may resemble its beginnings in the mid-90s.
facturing capabilities. Biopharmaceutical toll manufacturing and biosimilar development overlap, as the example of Samsung Biologics shows: This company offers contract manufacturing services and has de- veloped several biosimilars in partnership with large biotech companies. Samsung Biologics is also an example of a successful new entrant into the CDMO market – with anticipated volume of 362’000 liters for mammalian cell culture, it is currently the largest biopharmaceutical CDMO. The company went public in November 2016 and at the beginning of 2018 traded at a market capitalization of more than USD 24bn.
The beginning of Pharma-CMO alliances?Pharma companies have for many years been relying on the acquisition of, or in-licensing from, Biotech companies for innovation. In 2011 McKinsey, a consultancy, suggested that like the automotive industry, other parts of the Pharma value chain may disintegrate, with few large brand-owners sourcing everything – from innovation to manufacturing – through a network of suppliers. Along these lines, in the first half of this decade, Big Pharma companies have entered into strategic alliances with CROs, establishing preferred relationships with few (two or three) CROs instead of deciding case by case (or trial by
New Entrant How
Strategic players
Thermo Fisher … by acquiring Patheon, expanding lab and analytical products to CMO operations
Asahi Glass … by acquiring CMC Biologics, a fast-growing biopharmaceutical supplier
CMIC and JSR … through their jointly owned venture KBI, enter into biologics contract manufacturing; acquired cell-line developer Selexis, and cell therapy manufacturing unit from Opex
Eurofins … through a string of acquisitions, expanding from environmental and chemical testing to CRO and CMO activities
Samsung … through its majority-owned, partially listed subsidiary Samsung Biologics
Avara … through serial acquisitions; formed in 2015, acquired five plants from Big Pharma within two years
Private Equity groups
Carlyle and GTCR … acquired AMRI for USD 920m
Permira … acquired LSNM (Lyophyilization Services of New England)
TABLE 1: Examples of new entrants in the CDMO market in the last two years
STRATEGY AND MARKET
17
Positioning as a potential buyerThus, the first challenge for a smaller Pharma company is to be perceived as a credible potential buyer. Having a compelling strategic rationale for a specific product acquisition is a good step-ping stone. As in all M&A deals, an acquirer should have a sound, plausible and feasible acquisition strategy. To position themselves as buyers, smaller Pharma firms should regularly communi-cate their strategy to global Pharma companies which have interesting products in their portfolio. It is important that the strategy is realistic and is only adapted when necessary: Frankness and constancy build trust. Ideally, the strategy can be tailored to demonstrate why the bidder is the best potential owner for a specific product owned by the respective global Pharma company. In the best case, the rationale is so compelling that the potential buyer is treated as a preferred bidder once a divestment process is envisaged. Even if a global Pharma company will rarely admit, they often have their preferences when selling, and trust based on transparency is an important factor for them.
Making an offer credibleOne of the issues which small and medium-sized Pharma companies face is that they are perceived as risky, i.e. unreliable bidders. Large sellers be-lieve the small candidate buyers are more likely to withdraw from an M&A process, and that they will be less capable to manage the transfer of products professionally.
Small and medium-sized Pharma companies have always been trading national or regional product rights with each other, as an alternative to li-censing, co-marketing, or other types of coop-erative deals. However, if the seller is a global Pharma company (thus there exists a significant size asymmetry between buyer and seller), it is difficult for smaller players to be recognized as credible buyers. Why is that? The reason is an aversion of the sellers to risk and complexity. If global Pharma compa-nies engage in pruning their product portfolios, they usually do so to focus their organization on key strategic areas and reduce complexity. The financial aspects are important, but often not decisive: The main concern for the seller is to perform the divestment process with as little dis- traction for senior management as possible. To ensure this, they prefer to speak to larger com- panies with strong acquisition track records rather than to smaller players whose M&A com-petencies are less well known.
As the speed of consolidation in the Pharma industry picks up again, there will be more opportunities for medium-sized companies to complement their portfolios by acquiring product rights pruned from the portfolios of global Pharma companies. We look at strategy, process and pitfalls of product acquisitions.
Playing big – acquiring products from Global Pharma companies
M&A TOOL BOX
Flexibility to help the sellerOnce a price level is established, the seller will invite one or very few bidders to the due diligence and negotiation process. The sale of product rights is far more complex than selling a company. Areas of concern are the product’s regulatory and reimbursement status; its supply chain in a post-closing transition phase and in the long term; third-party rights to the product such as sub-licensing agreements; and marketing considerations. These topics run through many different functions of the seller, and require quite often laborious and time- consuming alignment exercises. Here is one of the advantages smaller bidders have over global Pharma company buyers: They are more flexible to build solutions for the many detailed issues which arise in the negotiation and implementation phase. Finding a balance between flexibility to address techni- cal issues of the seller and firmness where vital interests of the buyer are concerned is a key ele-ment in contract negotiations.
18
Thus, once the process starts, the bidder needs to establish three additional elements to actually win the deal: First, obviously, an offer which is appealing as a package, taking into account the up-front valuation and all post-deal terms such as manufacturing obligations of the seller. Second, transparency that financing is secured. And third, evidence that the buyer has the internal manpower and competence to execute the deal and integrate the product.
Keeping it simpleAt this stage, it is important to reconsider the objectives of the seller: Realize an attractive valuation while reducing complexity without too much distraction in the process. Therefore, a seller wants to have one credible buyer for the product rights which are up for sale. If the products are sold globally, the seller may carve out the rights for the US and/or Japan if ne- cessary, but further splits typically are unfeasible, even if the sum of the offers for the separate parts may be higher than for the total. The buyer is well advised to formulate its offer by proactively addressing potential issues perceived by the seller: Financing of the trans-action should be fully disclosed (e.g. presenting bank warranties, or the balance sheet of the buyer); the due diligence team should be in place; the post-deal integration process should be explained in detail. Typically, a limited auction progresses through several stages, and a buyer may add to and amend its initial offer. Again, transparency and consistency help to build trust and credibility. The buyer should emphasize the strategic fit of the proposed acquisition, and state any con-cerns and limitations openly and early.
M&A TOOL BOX
Kurmann Partners is a trusted advisor for mid-market merger and acquisition transactions. Since 1987 KP has been advising entrepreneurs, boards and CEOs on a wide range of transactions. Clients value KP’s management experience, industry expertise and global services.
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