On the news that Pfizer has found an innovative means to keep its neuroscience portfolio alive, in-PharmaTechnologist (IPT) has investigated what is spurring companies to make the move to divest in the first place.
Pfizer is not the only company making such moves. Novartis, under the stewardship of new CEO, Vas Narasimhan, has moved away from research into antimicrobial resistance and is taking first steps towards divesting its US generics portfolio. Alongside these moves are a number of companies looking at exiting the consumer healthcare space, which appears to have proven tricky for some and less so for others.
IPT discussed these restructures with Deloitte’s Jan Rattay (JR), transaction service partner, and Hanno Ronte (HR), partner, who have both followed this trend on a micro and macro level across the life sciences industry.
IPT: What is driving portfolio divestment in pharma?
JR: When you look at divestments last year, there was $472bn (€415bn) of divestments globally, which is the highest seen since 2007. In our research, 70% of all businesses that we surveyed are looking to make more than one divestment in the next two years. As a general industry trend, outside of pharma and the life sciences, companies are realising it's a good way to create shareholder value as part of more active portfolio management.
One reason behind this trend is the increase in activist investors. People that are looking to drive change into companies that they invest in, and if you look at the funds these investors have, this has doubled between 2016 and 2017 to $62bn. When we speak to activist investors, a large proportion say that M&A or divestments are a key part of their investment strategy.
The other major trend is the return on private equity in 2017, with $70bn of transaction value. In addition, unallocated capital in private equity is now at $1tn and this means that funds are now under pressure to spend that.
Zooming in on pharma, last year there was $217bn worth of transactions and the number of deals increased from 3,100 to 3,500 between 2015 and 2017. At present, companies have to spend $2bn to get a drug to market so companies have been using M&A to supplement their pipelines.
IPT: How is pharma reacting to the challenge of bringing drugs to market?
HR: One of the things we've seen, particularly with large pharma companies, is a shift into speciality areas, such as oncology and chimeric antigen receptor (CAR)-T technology. This is because there is still a much higher unmet need from a clinical perspective and therefore deliver good patient outcomes and recoup some of the investment.
Previously, a lot of pharma companies had larger, more diversified portfolios across multiple different healthcare businesses, but have become increasingly under pressure to justify that the whole is bigger than the sum of its parts. I think this has driven the core trend towards diversification.
IPT: Would you expect to see this trend of divestment to continue or is it just a cycle?
JR: Large pharma companies have taken different approaches. Some have been engaged in a divestment drive in order to focus on their core areas, while others have been consolidating. There is a cycle, every three to five years, or so, for a strategic review of the portfolio and how the current portfolio fits into the overall corporate strategy. A lot of the reorganisations we've seen are as a result of shifts in corporate strategy and refocusing of capital allocation across the portfolio.
IPT: How have companies deployed their capital?
HR: All the large pharma companies have declared, in some shape or form, that innovative medicines are their goal and, for that, they will either invest in R&D or seek to buy 'young' companies or early Phase I or II projects then use their commercialisation 'engines' to drive them. This makes sense, as it's the lifeblood of pharma, to develop new medicines and help patients.
For those companies that have loss of exclusivity on products, there is an even greater drive to acquire new prospects. Even large firms and large products that are facing patent cliffs in the next five years, for example, are creating pressure to act – given the length of the development cycle. This has certainly helped drive acquisitions. The tax situation in the US, as well, has created a little bit more freedom with cash resources and that will drive the uptick of acquisitions.
IPT: There have been a number of exits from AMR, what’s behind this and would you expect this to continue?
HR: Companies invest where they believe there will be the highest return. Despite the antimicrobial resistance (AMR) drive, the problem with this area of research is that governments want research into the next line of defence, which is hopefully never used. So, from a pharma perspective, it's quite a difficult justification for significant R&D investment in that area because you cannot make the right return. A lot of pharma companies moved out of the space over the last fifteen years because governments had pushed down the price of products in the space so low that there was no real commercial incentive to develop more innovative drugs.
IPT: What could lead companies back into such underinvested areas?
HR: In the industry, things tend to happen in cycles – there's a new discovery that creates a new lease of R&D life; the PD-1/L1 pathway in oncology is a good example of this and it created a huge wave of investment.
An area that isn't seeing as much investment, but which remains a goal, Alzheimer's or Parkinson's treatment development, which would be phenomenal if people can crack the code. However, billions of dollars of investment have dried up in the area, with no breakthroughs found. Capital allocation for companies in the area is very risky, even if the potential prize is very high.
Jan Rattay is a transaction service partner with more than 10 years’ experience working across the M&A lifecycle for both corporate and private equity clients. He leads Deloitte’s Financial Advisory Life Sciences and Healthcare practice in the UK.
Hanno Ronte is a partner at Deloitte with more than 25 years’ experience of focusing on strategic transformation in life sciences, working with pharma, medical devices and governments. He leads the life sciences strategy practice.