Top-performing pharmaceutical companies aren’t like their peers. The top six companies have each found their own “secret sauce” that, according to a recent Accenture report, helps them dominate their markets and boost profit margins far beyond those of their peers.
For the top performers — Novo Nordisk, Bristol-Myers Squibb (BMS), Astellas, Amgen, Roche, and Eli Lilly (in order) — “business as usual” was transformed a decade ago when the industry recognized the looming patent cliff. Each of the top six companies developed its own formula for success, but they share some commonalities that have created a significant performance gap between themselves and all the others.
According to Accenture’s “High Performance Business Review,” the top six performers each:
MAKE GUTSY DECISIONS
Finding the “secret sauce” that enables success requires balancing focus with breadth of research. “It is about deciding what areas you want to play in, and playing to win,” says Paul Biondi, head of business development at Bristol-Myers Squibb. “Finding that balance isn’t easy. It takes a lot of gutsy decisions.”
BMS has made several “gutsy” decisions. In 2007, it began transforming itself into a biopharma company. That meant divesting its nonpharma businesses to focus on biologics and innovative medicines for serious diseases. More recently, it divested its diabetes business and early virology pipeline to concentrate on immuno-oncology.
“We had great success in diabetes and virology, but we realized future advances would be incremental compared to the opportunity to transform the way cancer and other diseases are treated,” says Carl Decicco, Ph.D., head of discovery, BMS. Not coincidentally, this was an area in which the company already had expertise.
One of the strategies BMS uses is based on leveraging its extensive knowledge base to transcend programs and thus help researchers uncover synergies and build upon existing data to streamline development. For example, its immunoscience research accelerates its immuno-oncology work.
Woven into each of its decisions was the determination to build a carefully focused pipeline. “A key differentiator at Bristol-Myers Squibb is the equal balance between internal and external innovation, which is mutually connected to building and evolving our portfolio over time,” Decicco says.
FOCUS RELENTLESSLY ON INNOVATION
When Lilly faced the patent cliff, it consciously went against analysts’ advice. “We made the decision several years ago not to get into specialty pharma or generics (as analysts advised), but instead to focus relentlessly on innovation,” says Darren Carroll, SVP, corporate business development. “We doubled-down and ensured we had a pipeline of innovation to meet unmet medical needs.”
The 70-plus agents in its pipeline today are concentrated around diabetes, oncology, immunological diseases, neuroscience and pain, and cardiovascular disease. Two of those, diabetes and oncology, were chosen because of longstanding success in those areas. The others resulted from collaborations or acquisitions. For example, in 2008, Lilly acquired the biotech company ImClone, gaining the cancer therapy Erbitux (a monoclonal therapy that inhibits epidermal growth factor receptor inhibitor) and research facilities in New York City. Through collaborations, Lilly acquired new molecules that pivoted its central nervous system program from neuropsychiatric drugs to neurodegenerative medicine. Its autoimmune programs were developed through partnerships and its internal work with IL-17, which has blockbuster potential as a psoriasis treatment.
Lilly changed its business models too, sourcing innovation throughout the world. “We pioneered investment in alliance management across the industry to help ensure we get the value early on,” Carroll says. That includes substantial investments and innovation sourcing in Asia, which has led to new medical entities for autoimmunity.
The formation of Lilly Asia Ventures — “the first VC firm of its kind in the industry,” Carroll says — enabled Lilly to better understand the global risk capital market, which led, in turn, to project-focused investing. “With our fund manager partners, we created new funds that invest in single molecule companies. Almost every penny of investment is focused on developing molecules, rather than building labs or hiring the right CFO.” Consequently, the resulting companies are built to sell.
That idea evolved from an autonomous Lilly division called Chorus. “Chorus’ elite developers have a fast, lean approach to clinical proof of concept for candidate stage molecules through Phase 2A. Part of our approach to venture capital is making Chorus developers available to companies created by our venture partners, so the developers function like extensions of the company,” Carroll explains.
Lilly has created 14 companies using the Lilly VC model. “This approach ensures their innovation meets our standards. It’s already paying dividends in terms of financial returns and bringing new molecules into the pipeline. And,” he adds, “this model generates a profit.”
That type of collaboration is ideal for small biotechs, but unnecessary for big pharma peers. Consequently, collaborations among peers (including Pfizer, Boehringer Ingelheim, and AstraZeneca) leverage mutual capabilities and share big risks. Lilly’s first such collaboration was with Boehringer Ingelheim to develop Tradjenta (linagliptin). In July 2016, the two announced a clinical trial collaboration in metastatic breast cancer.
EMBRACE A NEW VISION
Astellas, in 2005, created a development road map that called for the relentless pursuit of new science in the areas of urology, transplantation, and oncology, says Bernhardt “Bernie” Zeiher, president of development at Astellas. “The 2015 iteration of that plan calls for evolving our business beyond our existing therapeutic areas and into muscle disease, ophthalmology, regenerative medicine, and next-generation vaccines.” One year into that plan, Astellas is collaborating with others in the areas of immuno-oncology and muscle disease and building internal expertise in regenerative medicine and DNA-based vaccines.
While resetting its vision, Astellas also integrated scientific and medical functions within the organization. Now development, medical affairs, pharmacovigilance, clinical and research quality assurance, and regulatory affairs report to the chief medical officer. “This enhances creativity and helps us anticipate and address evolving challenges, discoveries, opportunities, and expectations in the global healthcare system,” Zeiher explains.
Importantly, information learned during various programs is leveraged across conditions with similar biologies or mechanisms of action to take advantage of synergies and to expand into adjacent diseases. “For example, leveraging our expertise in transplantation and infectious diseases, Astellas is developing the world’s first DNA vaccine for cytomegalovirus (CMV) infections,” Zeiher says. ASP0113 is in clinical trials for immunocompromised individuals undergoing medical procedures who are at risk of reactivating the virus.
FINANCIALS SHOW POLARIZING DIFFERENCES
The difficult decisions made by Astellas, Lilly, and Bristol-Myers Squibb made them top performers. “There are a number of key characteristics distinguishing the top performers,” says Anne O’Riordan, global senior managing director for life sciences at Accenture. A quick analysis of the financials proves her point.
Top performers have a CAGR of 5.3 percent, versus 2.9 percent for all others. Likewise, operation margins for the top six performers were 28.9 percent, compared to 18.1 percent for all others. She attributes these differences to top performers’ abilities to “get the right products to market at the right time.
“The pipeline replacement strengths of the top six companies are significantly higher than those of the rest of the industry,” O’Riordan says. Accenture predicts recent and upcoming launch growth will constitute 40.7 percent of sales 2015 through 2019 (estimated). For other companies, the average is 23.5 percent. Measured another way, top performers are poised to replace each dollar lost to off-patent drugs with $4.30 in sales of new compounds (before profitability adjustment). For the rest of the industry, that figure is $1.60.
“High performers tend to externalize R&D,” O’Riordan says. External projects’ forecast growth 2014-20 for top performers represented 55.3 percent of 2014 revenues, versus 45.7 percent of the growth of all others. The CAGR for external products was 5.6 percent for high performers, versus 2 percent for the rest. That creates a symbiotic environment for small biotechs. “The large companies can complement the skills of smaller companies and bring much deeper knowledge of global markets and established sales forces. When brought together, the result can be magical.”
WILL PRICING PRESSURE TOPPLE THE LEADERS?
To continue to outperform the industry, these six companies must continue to adapt to disruptive change in the industry. For example, Accenture reports a $50 billion shortfall loom between analysts’ 2015-2020 sales forecasts for recent and upcoming launches and the additional funds payers in developed markets are expected to have available. With $258 billion in new launch sales forecast, and only $208 billion available to payers, companies must find innovative ways to close that gap.
That shortfall likely will be exacerbated by shifts to outcomes-based reimbursement. “Novartis and Amgen, for example, are signing on for outcomes-based payment to reduce total healthcare costs,” O’Riordan says.
The wide availability of highly effective generics and biosimilars increases pricing pressures. Because many extremely effective products have gone off patent, payers today have more choices among generics. To be listed on payers’ drug formularies, these top companies had to develop new classes of therapeutics that were more effective and deliver better outcomes for patients and healthcare systems.
Innovative science, however, is no assurance of commercial success. In 2015, despite more drug approvals than any year since 1996, innovative medicines were largely inaccessible to patients because they weren’t included on payers’ drug formularies. Between 2011 and 2013, the proportion of new drugs accessible to patients fell 9.5 percent, according to Accenture. That reality, highlighted by Gilead’s experience with Sovaldi (which often cures hepatitis C but was kept off formularies because of its expense), caused the industry to rethink market access in terms of meeting the medical needs of patients as well as the economic needs of payers.
At Astellas, rethinking market access involves working with payers, providers, and patients early in the R&D process to drive value by understanding patients’ needs as well as those of today’s integrated healthcare systems, Zeiher says. Astellas’ partnership with Humana is designed to improve patients’ experiences by reducing inefficiencies in managing oncology, urology, and immunology.
For top-performing companies to maintain their high performance, they must continue to keep pace with both market and scientific innovation. Having an amazing molecule and meaningful product differentiation are vital, but those are only part of the requirement. Companies must be able to deliver a continuous stream of innovation that addresses the medical and economic needs of their markets in a dynamic healthcare economy and thereby meet sales targets that drive high margins.