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Strategies for Value Creation in the Biopharmaceutical Industry
A recent report by The Boston Consulting Group (BCG) examined the performance of the biopharmaceutical industry in comparison to other industries with respect to total shareholder return (TSR) as a measure of value creation during the five-year period of 2006–2010 (1). The report concluded that the biopharmaceutical industry lags other industries in terms of value-creation and that there is opportunity to improve growth prospects with sector-specific strategies for large-cap biopharmaceutical companies, emerging biopharmaceutical companies, and generic-drug companies.
Benchmarking the biopharmaceutical industry
Examining biopharmaceutical industry performance
The factors contributing to better performance, as measured by valuation multiples, in each sector differed. Among large-cap biopharmaceutical companies, the key drivers are R&D productivity, operational efficiency and margins, financial policy, and the ability to maximize the sales value of the product portfolio before and after loss of exclusivity. For emerging biopharmaceutical companies, the key drivers were margin, R&D productivity, debt ratio, and sales growth. For generic-drug companies, the key drivers are scale and financial stability, particularly in the debt/enterprise value ratio.
The large-cap biopharmaceutical sector performed poorly on average, with a flat 0% TSR over the five-year period. For companies that performed better, four factors contributed to a higher TSR: improved R&D productivity, operational efficiency and margins, financial policy, and the ability to maximize the sales value of the product portfolio before and after loss of exclusivity. In measuring the net value of R&D as a percentage of enterprise value, the report found that in 2010, five companies–Amgen, Bristol-Myers Squibb, Celgene, Genentech, and Gilead Sciences–had positive ROI for R&D while five companies–AstraZeneca, Merck & Co., Pfizer, GlaxoSmithKline, and Eli Lilly had below average performance. In 2011, only two companies–Bristol-Myers Squibb and Pfizer–performed above average in ROI on R&D and seven companies–Amgen, GlaxoSmithKline, Merck & Co., Gilead Sciences, AstraZeneca, Celgene, and Eli Lilly–had below average ROI on R&D. To improve R&D output, BCG advises strategies to reduce bureaucracy in R&D and facilitate decision-making for “go/no” projects both operationally and culturally.
The report also found that companies that treat life-cycle management as part of product development proactively rather than defensively when confronting loss of exclusivity perform better. The report identifies four key strategies: maximizing patent life through technical, legal, and regulatory means; driving demand and scale immediately before patent expiry; progressively lowering the cost base for the product; and limiting revenue decline due to loss of exclusivity by preserving or replacing lost volumes by lowering prices in certain segments while maintaining a premium price in other segments that support the product (1). For example, the report estimates that as much as 40% of blockbusters’ potential revenue maintenance can come from geographic markets outside the established markets in the United States and five top Western European markets (1).
For emerging biopharmaceutical companies, the key drivers for creating value were margins, R&D productivity, debt ratio, and sales growth. Crucial for these companies is to have a follow-on strategy for a recently launched drug or licensed drug. For generic-drug companies, the key drivers are scale and financial stability, particularly in the debt/enterprise value ratio. Generic-drug companies often face a “land grab” situation, in which companies are building scale to win market share but need to do so without becoming financially extended. Financial stability tends to favor the larger generic-drug companies that have available funds for investing in new growth opportunities (1).
1. M. Ringel, C. Foley, O. Wierzba, “The 2011 Health Care Value Creators Report: Strength in the Storm: How Biopharmaceutical and Medical Technology Companies Can Create Value in a Challenging Business Environment” (The Boston Consulting Group, Dec. 2011).