roland berger: fight_or_flight_shortversion_20101025

PRESS BRIEFINGO t b 2010October 2010

Fight or flight?Fight or flight?Diversification vs. Rx-focus in big pharma's quest for

t i d th

1

sustained growth

Contents Page

A. Executive Summary 3

B. Context and study approach 9

C Study findings and discussion 19C. Study findings and discussion 19

2© 2010 Roland Berger Strategy Consultants GmbH

E ti SA Executive SummaryA.

PRESS BRIEFING

3

Executive Summary

Data basis• Study is based on a global quantitative survey supported by in-depth desk 1. y g q y pp y p

research. The survey results were validated in over 50 CEO and board level face-to-face interviews with top decision makers of leading pharmaceutical groups

• Participating companies cover 40% of global pharma revenues and include7 t f th l b l t 10 l7 out of the global top 10 players

Pharma in the midst of a strategic crisis2 Pharma in the midst of a strategic crisis• According to 65% of pharma executives, the pharmaceutical industry is currently

experiencing a strategic crisis• Changing healthcare environments, budget pressures, challenging market

2.g g , g p , g g

access as well as massive patent expiries ask for a review of the traditional business model focusing exclusively on high margin, patent-protected innovative medicine

4

• 57% of 2008 global pharma sales will be going off-patent within the next three years; 75% within the next five years

Executive Summary

Diversification – a potential way out of the crisis?• 67% of pharma executives think of diversification as a potential way out of the 3 p p y

strategic crisis• For those currently pursuing diversification, the study distinguishes three

alternative dimensions: the de-risk path, the innovation path and the integration th

3.

path• At the moment, the industry seems to be focusing on the rather conservative de-

risking strategy. By acquiring particularly generics and consumer health companies the industry aims at top line growth while also preparing for thecompanies, the industry aims at top-line growth while also preparing for the opportunities emerging markets offer

• Diversification along the innovation path ranks second. It results from the trend towards personalized healthcare and diagnosticsp g

• Integration strategies along the healthcare value chain would turn pharma into active healthcare solution providers – they are not yet in the focus of today's strategies

5

Executive Summary

The art of managing a diversified business• Leveraging existing capabilities and realizing related synergies is key to any 4. g g g p g y g y y

successful diversification• The largest overlaps of innovative patent-protected pharma with alternative

diversification areas are identified with Generics (45%) followed by Diagnostics (43%) d V i (37%)(43%) and Vaccines (37%)

• Pharma executives see only very limited functional competencies of their innovative business model which can be leveraged in other diversification areas

• In particular despite huge investments customer skills such as access to• In particular, despite huge investments, customer skills, such as access to prescribers or even branding, are not seen as key competencies to be leveraged in an effort to diversify

R&D d ti it i i d i di ifi tiR&D productivity crisis drives diversification• Over 60% of executives are re-evaluating their traditional strategy which was

focused on patent-protected, high margin products due to two reasonsFi tl i t i t th i f i ti di i t d

5.

6

• Firstly, interviewees expect the margins of innovative medicine to come under tremendous pressure as public household deficits need to be managed across the globe

Executive Summary

R&D productivity crisis drives diversification (Continued)• Second, massive R&D investments are no longer expected to bring the required 5 g p g q

level of return• As many as almost 50% of executives expect a negative return of invest for

today's R&D investmentsI ti h ill i i l h t j tif th i hi h l l f R&D t

5.

• Innovative pharma will increasingly have to justify their high level of R&D spent. Many top-players have already started to reassess their R&D operations and reduced the internal investment level significantly

7

Executive Summary

Financial community and shareholders support diversification• The financial community has already acknowledged this fundamental change – it 6 y y g g

no longer penalizes diversified companies• With over USD 400 billion of market capitalization lost over the past 10 years

among innovative pharma, investors are now linking high growth expectations to di ifi d i

6.

diversified companies• Price-to-earnings ratios of diversified companies are already higher than those of

focused players

Diversification is here to stay• Over 80% of executives believe diversification is a long-term trend that will be 7. g

pursued irrespective of R&D productivity• For the rest, it will be a bridging strategy needed to compensate for profit and

growth shortfalls

8

• The future will bring a more diversified picture: ranging from highly focused, innovative players to fully integrated healthcare conglomerates

C t t d t d hB Context and study approachB.

PRESS BRIEFING

9

Top pharma leaders recognize the existence of a looming strategic crisis in the industry

… fuel a potential strategic crisis in pharma1)

Today's challenges…p

Q: Given reduced top-line growth and margin pressure, do you think the

Public cost containment measures resulting in margin pressure

pharmaceutical industry is facing a strategic crisis?

g g p

Looming patent cliff and R&D productivity crisis

No35%Restricted market access and health

economic requirements

productivity crisis

Yes65%

economic requirements

Value of innovative Rx drugs i i l ti d

10

increasingly questioned

Source: Roland Berger Survey 2010

Consequently, we observe two different strategic business models in the pharmaceutical industry

Diversification as a way out of the strategic crisis?

Top management point of +140%Top management point of view1)

Q: Do you think diversi-fication is a potential

140%

+120%

+100%

ED B

USI

NES

S1) Diversification

fication is a potential way out of the strategic crisis for pharmaceutical companies?

+80%

+60%

%RO

M D

IVER

SIFI

E++

3)

No33%

+40%

+20%

0

ON

OF

SALE

S FR

2)

Yes67%-20%

-40%

-100%

PRO

POR

TIO

Rx Focus 3)

11Source: Roland Berger Survey 2010; Annual reports

2004 2005 2006 2007 2008 2009100%

1) All sales not resulting from pure innovative Rx business 2) Incl. Sandoz 3) Preliminary data

BACKUP

While many big pharma companies are currently diversifying, others are strongly focusing their businesses

Recent diversification/ focus actions in pharma

Diversification R -focusDiversification Rx-focus • Mega merger with Wyeth (Consumer

Health, Nutritionals, Vaccines)• Acquisition of RFCL-Vetnex Animal

Health

• Clear focus strategy on diagnostics and Rx pharma

• Sale of Roche Consumer Health to BayerHealth

• Acquisition of Ebewe Pharma (Generics)

• Announced acquisition of Alcon (consumer vision care, surgical equipment & devices)

• IPO and split-off of Mead Johnson Nutrition

• Monetization of non-pharma businesses, e.g. sale of BMS Branded to GSK(G i )

FIGHT

or

• Numerous Generics acquisitions worldwide

• Acquisition of Chattem Inc. (Consumer Health) and Merial Ltd. (Animal Health)

f

• SHAPE program to focus on indication areas Neurology and Immunology, e.g. divesting primary care organization and

l f E OTC b i

equipment & devices) (Generics)FLIGHT

??• Increase of Vaccine presence through joint venture in China

• Investment in Aspen Pharmacare(Generics)

Additional diversifiers

sale of European OTC business • Acquisition of Schwarz Pharma AG

(Neurology)??12Source: Roland Berger

Additional diversifiers

Three dimensions of diversification can be distinguished

Roland Berger diversification framework

• Continue on path of medical INNOVATE

INNOVATE

pprogress by investing into adjacent medical disciplines

INNOVATE

"High risk, high fun"

INTEGRATE• Defend existing top-line by forward

integration along the healthcare value chain

INTEGRATE"Maintain

fun" value chain

Reduce dependency on R businessDE RISK

fun

Rx

Focus DE-RISK

• Reduce dependency on Rx business model by investing into other non-Rxlife science businesses

DE-RISK"Low risk, still fun"

13Source: Roland Berger

Focus DE RISK

Three dimensions of diversification can be distinguished

Roland Berger diversification framework

INNOVATE

H lthMedical

Diagnostics Wholesale/ Retail bus.

INTEGRATE

INNOVATE

Healthcare provision

devices

Consumer health

Vaccines

Animal health

GenericsRx-Focus

DE-RISK

14Source: Roland Berger Survey 2010

In our current study, we investigate the strategic rationale behind diversification decisions and generate an outlook to the future

Goals of our current

Understand drivers behind diversificationour current study

Analyze status quo and recent evolution with regard to diversification

Determine most attractive areas for diversification

Evaluate options for management of diversified businesses

Analyze diversification from a stakeholder's perspective

Generate an outlook and suggest next steps


Generate an outlook and suggest next steps

The survey covers the majority of global pharmaceutical companies producing patented prescription drugs

Survey population

• Over 25 Geographic focus of Global revenues of respondents' O 5participating companies

• Participating i

G g prespondents [% of respondents]

G pcompanies [% of respondents]

AboveBelowGlobalNational companies cover over 40% of global pharma revenues

• 7 out of top 10 40%29%

Above USD 15 bn

Below USD 5 bn

Global focus

Nationalfocus

out o top 0pharmaceutical companies included(based on 2009

40%47% 46%

Regional focus

(revenues)13%

25%

Between USD 5 and 15 bn


Top executive interviews represent the most important input to validate findings and to derive strategic implications

High level survey results Desk research

Fight or Flight?

R&D, scientific conversion and novel approaches to healthcare management are seen as the key drivers for diversification

Q: What are the most important drivers for diversification (select top 3)?

Survey results [% of respondents selecting area within top 3] Key finding

• The most important drivers of diversification are those related to R&D / scientific conversion and novel approaches to healthcare management

Scientific conversion trends

R&D productivity crisis

47%

50%

I DRIVERS

Diversification vs. Rx focus in big pharma's quest for sustained growth

1510_06_20 - Fight or flight - Top Executive Interviews_v5.pptx

g

Source: Roland Berger Survey 2009

General uncertainty about evolution of healthcare system

Rx pharmaceutical budget restrictions

Consumerization of healthcare

Shifts in stakeholders/novelapproaches to HC management

12%

18%

18%

20%

42%

Emerging market opportunities

Proposed discussion topics

• Can diversification help to overcome the R&D productivity crisis?

• Which scientific conversion trends should be addressed through diversification?

• Which capabilities are required to deal with shifts in stakeholders/ novel approaches to HC management?

Roland Berger experience


Top executive interviewsRoland Berger experience from global projects

St d fi di d di iC Study findings and discussionsC.

PRESS BRIEFING

18

We have tackled the topic of diversification along four guiding questions

What drives pharmaceutical companies to diversify?Drivers of diversificationI

What are attractive diversification areas?II Where to diversify?

What are the implications for management of diversified businesses?

How to diversify?III

How is diversification assessed from a pure financialand investment perspective and is it here to stay?

Shareholder's per-spective & outlookIV

19

ROLAND BERGER STUDY ON DIVERSIFICATION

Source: Roland Berger

I DRIVERS OF DIVERSIFICATION

Changing health care environment, R&D and merging of medical disciplines are seen as the key drivers for diversification

Q: What are the most important drivers for diversification (select top 3)?

S lt [% f d t l ti ithi t 3] K fi diSurvey results [% of respondents selecting area within top 3] Key findings

• In light of the R&D productivity crisis executives watch out for investment opportunities outside

Changing health care environmentin industrialized countries 88%

investment opportunities outside the traditional Rx-innovation model

• Merging of medical disciplines drives pharmaceutical companies to secure technological/

R&D productivity crisis 75%

to secure technological/ scientific leadership through diversification

Emerging market opportunities

Merging of medical disciplines

43%

57%

Consumerization of health care 28%


Others 3%

R&D PRODUCTIVITY CRISIS – BACKUP

At the same time, pharma companies are facing the expiration of numerous patents

COMPANY 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Range of LOE exposure within next 5 years in % of total sales 2009

Sanofi-Aventis

Eli Lilly

Novartis

y

Bristol-Myers Squibb

Merck & Co + Schering Plough

Astra-Zeneca

Pfizer+Wyeth

Merck & Co. + Schering-Plough

Roche

GlaxoSmithKline

21Source: US Patent and Trademark Office, Annual Reports

Johnson&Johnson

Source: US Patent and Trademark Office, Annual Reports

MERGING OF MEDICAL DISCIPLINES – BACKUP

Merging of medical disciplines drives pharma companies to innovate through diversification

Examples for merging of medical disciplines

1 Combination of Rx with 2 Combination of medical 3 Combination of imaging 1 xgenetic tests 2 devices and Rx

3 g gand molecular biology

• Tumor response to treatment with Erbitux® can be predicted with genetic testing (K-RAS)

• Patient subpopulations with high

• The IntelliCap technology allows for controlled drug delivery in the intestinal tract

• Drug effectiveness can

• Combination of molecular tra-cers with in-vivo imaging techno-logies allows for early detection of diseases at molecular levelp p g

response can be easily selectedg

significantly increase with fewer side effects

• Bayer-Schering's Florbetabencan be used for early detection of Alzheimer's disease


II WHERE TO DIVERSIFY?

Most important diversification area is the generics business –forward integration not yet in focus

Q: What is the importance of each diversification area in the current trend toward diversification? (select top 3)

Survey results1) Key findings

• Pharma companies concentrate on expanding existing

78%Generics

WHY?

• Close to existing business?

• Close to existing businesses instead of innovating in other areas

• If other areas are entered, those with highest margins or R&D

50%

42%

Diagnostics 40%

Vaccines

Consumer health • Close to existing business?

• High margins / R&D synergies?

• High margins / R&D synergies synergies are in focus

28%Healthcare provision

Medical devices 35%R&D synergies

• High margins / R&D synergies

• Securing revenues?

8%

5%

Wholesale business

Animal health

Retail business

0%


Other 0%1) % of respondents selecting area within top 3

II WHERE TO DIVERSIFY?

Drivers vary by diversification area – Restricted healthcare budgets mainly drive the move into generics

Q: What are the key drivers behind each area of diversification?

K fi dis/

men

t

Key findings

• Move into generics (most important area) is driven by multiple trendsR&D i i ll i f

RS

rodu

ctiv

ity

rmac

eutic

al

rest

rictio

ns

n st

akeh

olde

rsap

proa

ches

to

care

man

agem

ing

mar

ket

uniti

es

mer

izat

ion

of

care

g of

med

ical

ne

s

• R&D crisis as well as merging of medical disciplines fuel diversification into high-margin areas

DIVERSIFICATION AREAS D

RIV

E

R&

D p

rcr

isis

Rx

phar

budg

et

Shi

fts i n

nove

l ahe

alth

c

Em

ergi

oppo

rtu

Con

sum

heal

thc

Mer

ging

disc

iplin

Generics

Medical devices

Consumer health

Diagnostics



Vaccines

Named by more than 50% of respondents per diversification area

III HOW TO DIVERSIFY?

Leveraging existing capabilities and choosing the optimal management approach are key to create value from diversification

How to diversify for value creation?

Identify areas in which Rxcapabilities can be

leveraged

In which areas do you believe, Rx-based pharma players could most successfully leverage their skills and capabilities?

Q:

Detail relevant Rxcapabilities per

Which core competencies of the Rx pharma business can be le eraged most s ccessf ll for different di ersification

Q:capabilities per

diversification arealeveraged most successfully for different diversification areas?

Determine optimal management approach for

diversified businesses

Which diversification areas should be integrated into the existing organization and which should be managed as a stand-alone business?

Q:



The most successful transfer of skills and capabilities is expected in the areas of generics and diagnostics

In which areas do you believe, Rx-based pharma players could most successfully leverage their skills and capabilities?

Q:

Di i 43%

Generics 45% • There is no clear "must be in" area in which Rx skills can be perfectly l d

Survey results [% of respondents selecting area within top 2] Key findings

Consumer health 28%

Vaccines 37%

Diagnostics 43% leveraged• According to executives, Rx

companies lack capabilities for forward integration

13%

Healthcare provision 20%

Medical devices

Wholesale business 2%

Retail business 7%

Animal health 8%


Other 0%


Relevant and applicable core competencies vary by diversification area – There is no single "must have" diversification area

Q: Which core competencies of the Rx pharma business can be leveraged most successfully?

e)

• Pharma companies seek to leverage manufacturing skills in generics – At th ti i

Key findings

NA

LET

ENC

IES

actu

ring

(pub

lic/p

rivat

e

erci

al

OM

ERET

ENC

IES

mer

/pat

ient

bers

the same time some generics companies are outsourcing manufacturing (e.g. TEVA)

• Top executives see no major opportunity to successfully leverage

DIVERSIFICATION AREAS IN

TER

NC

OM

PE

Generics

R&

D

Man

ufa

Pay

ers

Com

me

CU

STO

CO

MPE

Con

sum

Pre

scri

opportunity to successfully leverage their relationships with prescribers

Vaccines

Diagnostics

Consumer health



Medical devices

Named by more than 50% of respondents per diversification area


Top executives favor to integrate those businesses where high R&D synergies are expected

Which diversification areas should be integrated into the existing organization and which should be managed as a stand-alone business?

Q:

Top-executives

HighVaccines

Top executives believe that diversification areas with a high level of R&D synergies

Level of R&D

Diagnostics

R&D synergies should be integrated into existing innovative R b i

R&D synergies Medical

devices

Rx business

Low

Healthcare provisionConsumer

health

Generics


Stand-alone IntegratedManagement approach

IV SHAREHOLDER'S PERSPECTIVE & OUTLOOK

The "traditional" stance on R&D productivity favored a focus strategy – However, the picture might change

Does the R&D productivity crisis tilt the scale towards diversification?

M i M iPotential

ROIC ?

MarginWACC

MarginWACC

depending on R&D d ti it

consequences

• Margin dilution• Risk reduction

ROIC ? productivity

• Value creation?• Value destruction?

Focus on RX Diversification



A significant portion of top executives does not believe in positive returns from R&D investments – Improvement is expected

Q: Looking specifically at R&D, do you believe that today's investments yield a positive ROI?

Q: Looking at potential scientific advantages, do you believe that the return on R&D investmentswill be positive in 10 years?will be positive in 10 years?

NEGATIVE POSITIVE

Key findings

M t ti b li i

53%47%Today's R&D

NEGATIVE POSITIVE • Most executives believe in improvement of R&D returns in the next 10 years

• Looking at R&D productivity, at l t f th ti

67%33%R&D in 10 years

least one of three executives should consider diversification


IV SHAREHOLDER'S PERSPECTIVE AND OUTLOOK

Manage for growth or margin? There is a gap between investor's expectations and management's preference

Conflicting expectations … … and their impact on diversification activities

Q: What do you believe to be investors' primary expectation of pharma-ceutical companies: high

Q: Please rate the following statement: "CEOs are currently limiting their diversification activities

Q: If you could choose, would you manage for growth or margins?

Sales growth High margins

ceutical companies: high margins or sales growth?

diversification activities because of the expected dilution of margins."

23%

44%56%

68%32%

77%

High margins

56%

Sales growth

Disagree Agree


High margins Sales growth


Most executives see diversification as a long-term trend, irrespective of R&D productivity

Q: Please rate the following statement: "Diversification is a long-term trend that will be pursued irrespective of R&D productivity recovery because it offers

Q: Please rate the following statement: "The market will split into different segments, with some players focusing only on the R&D-based Rx model and others becoming p y y

attractive business opportunities."x g

diversified healthcare players."

Disagree Disagree18%

g

22%

Disagree

Agree

82%Agree

78%

Agree g


roland berger: fight_or_flight_shortversion_20101025

Health & Medicine

g g access

t i t th

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innovative pharma

pharma executives

g p g q level of return

players pharma

fundamental change it6