Pharma companies have opportunities post-COVID-19 to bolt

Pharma companies have opportunities post-COVID-19 to bolt on undervalued clinical assets

Overview

1Pharma companies have opportunities post-Covid-19 to bolt-on undervalued clinical assets |

The specialty drug market has expanded rapidly through scientific innovation and competitive M&A activity, enabled by advances in clinical understanding and supporting biotechnology platforms.

This expansion may give M&A executives at larger pharma companies the opportunity to revamp how they screen for potential targets as they attempt to fill gaps in their own portfolios. This is especially important now, as specialty companies come under financial pressure due to the COVID-19 pandemic. The below methodology can assist in this revamping and help identify targets experiencing financial difficulties.

| Pharma companies have opportunities post-Covid-19 to bolt-on undervalued clinical assets22

Growth and benefits from specialty pharmaceuticalsDiseases that were previously untreatable now have cures. Where only palliative therapies were marginally effective there are new therapies that modify disease activity. The phenomenal success of innovations in the last 20 years have transformed small biotechnology companies into global giants.

These successes are now driving large-scale and highly competitive transactions, elevating expectations by investors and leading to significant multiples

for investments in the “promise and potential” of unproven clinical products. The overall global specialty market has grown at an annual rate of 11% from 2015 to 2020, with the top two categories by value being immunology and solid tumors. (See Figure 1. Note: Gene therapies are excluded from figure due to limited data across the selected time range.)

2020F

$232b $242b$261b

$275b$284b

$312b

$339b

$376b

$417b

$470b

$197b

+9%

$500b

$450b

$400b

$350b

$300b

$250b

$200b

$150b

$100b

$50b

$0b

CAGR(2010-2015)

CAGR(2015-2020F)

8% 11%

19% 19%

6% 12%

-2% 5%

5% 15%

15% 9%

2010

Source: Evaluate Pharma, EY-Parthenon analysis

Rare disease

Liquid tumors Solid tumors

Specialty neurology Immunology

2011 2012 2013 2014 2015 2016 2017 2018 2019

Figure 1: Select specialty markets — size and growth 2012-2020F


The six therapeutic areas (TAs) selected for our analysis represent the breadth of the specialty segment:

Our analysis highlights the strong growth and significant proportion of total drug spend captured by specialty products (see Figure 2). The specialty category’s share of total medicine spending is projected to grow from ~20% in 2008 to ~50% by 2023 in developed countries such as the US, Canada, the UK, and Germany.

Major pharmaceutical manufacturers increased their investments in the specialty category via acquisitions between 2016–2020 relative to 2011–2015 (see Figure 3). While deal volume decreased over this time, deal value increased by approximately ~11%. Given that the per deal size is growing, a higher level of pressure is placed on acquiring companies to make the correct investment decision.

1 Immunology

2 Solid tumors

3 Hematologic (liquid) tumors

4 Specialty neurology

5 Cell and gene therapy (not previously counted)

6 Other rare diseases (not previously counted)

Figure 2: Map of specialty medicine share of spending, 2008-2023F

Source: IQVIA Market Prognosis, Sep 2018; IQVIA Institute, Dec 2018, EY-Parthenon analysis


To explore how these six categories within the specialty segment are represented by the clinical pipelines of major biopharma companies, we indexed the mid- and late-stage clinical pipelines for the top 20 global biopharma companies to visualize the number of active (a) assets and (b) programs that currently draw R&D investment. These illustrations enable a number of hypotheses and strategic questions for R&D and corporate development leaders to test and action.

Figure 3: Specialty biopharmaceutical M&A deals. 2011-2020

Deals in the specialty category

Source: Biomedtracker, EY-Parthenon analysis

2011-2015 2016-2020 (%)

Value ($bn) $160 $178 +11

Volume (No.) 52 25 -48

Per deal ($bn) $3.1 $7.1 +131

The trend of increasing deal vales with decreasing volumes places more and more pressure on “getting it right” as transactions increasingly require more of a capital outlay.

^

Identifying gaps in existing clinical pipelines

Given the high growth within the specialty segment and its large potential impact, many top pharma manufacturers are directing significant portions of their R&D spend to this category. Other leading pharma players are investing in this category through external M&A of smaller companies that already have specialty products in development or in the marketplace.

We developed a benchmarking methodology based on specialty products in mid-to-late stage development (Phase II and Phase III) to assess current-state investments and gaps or areas for future opportunity. We developed this benchmarking methodology by aggregating Phase II and Phase III assets by manufacturer and categorizing them by their respective therapeutic category within the specialty segment. We then calculated leading asset counts and average asset count by therapeutic category. This approach enabled visualization of the specialty portfolios in a different way that is agnostic to mechanism of action (MOA) and indication leading to representative comparison across category average and leaders for each dimension.

For illustrative purposes, we broadly defined two types of pharmaceutical players: lower-focus manufacturers that possess a more diversified set of specialty drugs in their clinical pipelines and higher-focus manufacturers that specialized in only one to two therapeutic categories within the specialty category. As shown in Figure 4, a leading “lower-focus” pharma manufacturer, Company A, has more products and programs in development than the average of the other top 20 pharma players. This sample company is even the market leader for in-development assets in categories such as solid tumors, liquid tumors, and rare diseases. Despite its overall strong clinical pipeline profile, Company A may still consider strategic investments and areas for opportunity relative to competitors to drive growth and maximize the value of internal assets.

2011-2015

52

25

2016-2020

Value ($bn) Volume

M&A

dea

l vol

ume

Tota

l M&A

val

ue ($

bn)

80

40

0

$300b

$250b

$200b

$150b

$100b

$50b

$0b


Source: Evaluate Pharma; EY-Parthenon interviews and analysis

A “higher-focus” pharma manufacturer like Company B is typical in that these manufacturers are laggards for each of the six in-scope specialty categories relative to the benchmark average; the exception being the select one to two categories where they have “higher focus” (for Company B, this is specialty neurology; see Figure 5). Given Company B’s lower level of internally developed pipeline assets in the specialty segment, this company

may consider and weigh investments against strategic options, such as category leadership and diversification, to deliver growth objectives. Rather than investing in early-stage in-house clinical programs, achieving any of the strategic options through external innovation via acquisition and licensing will deliver value to patients and shareholders more quickly and with reduced risk.

Figure 4: Company A has a diverse overall pipeline, with potential consideration to enhance investments in speciality neurology and/or gene therapy

Company A Asset/product benchmark

Company A Total R&D program benchmark

Top 20 biopharma firms (category maximum)

Top 20 biopharma firms (class average)

Company A

Overall benchmark Portfolio strength Portfolio gap

• Company A nearly tracks at or above category average for all TAs except specialty neurology.

• Company A owns the category maximum of pipeline assets for oncology and is close to the category maximum for rare diseases and immunology.

• Company A has additional room to expand in both specialty neurology and cell and gene therapy in order to become the category leaders.

Rare diseases

Solid tumors

Specialty neurology

Cell and gene therapy

Liquid tumors

Immunology

0

10

20

30

40

Rare diseases

Solid tumors

Specialty neurology


Liquid tumors

Immunology

0

25

50

75

100


Figure 5: Immunology and rare diseases represent Company B’s biggest opportunity categories to support through acquisitive activity

Rare diseases

Solid tumors

Specialty neurology


Liquid tumors

Immunology

Rare diseases

Solid tumors

Specialty neurology


Liquid tumors

Immunology

Company B Asset/product benchmark

Company B Total R&D Program benchmark

Top 20 biopharma firms (category maximum)

Top 20 biopharma firms (class average)

Company B

Overall benchmark Portfolio strength Portfolio gap

• Company B has the category maximum number of pipeline assets for specialty neurology.

• Company B tracks below the category average for the other four out of six TAs (except cell and gene therapy), in terms of pipeline assets.

• Company B has room to bolster its pipeline in categories such as cell and gene therapy, rare diseases, and immunology.

0

10

20

30

40

0

25

50

75

100

Source: Evaluate Pharma; EY-Parthenon research and analysis


How the pandemic has placed financial strains on clinical stage manufacturersThe effects of the COVID-19 pandemic have been felt more acutely by smaller pharma manufacturers than the larger ones due to fundamental issues such as less diverse clinical portfolios, more challenging access to capital, market volatility, and operational hurdles with regard to active clinical programs. Because of these financial and operational challenges, larger manufacturers may identify opportunities today at a transaction price that is lower than it might have been 12 months ago.

M&A in the pharma space has steadily risen over the past three years, and deal values are approaching all-time highs (see Figure 3). The demand for pharma acquisitions was clearly evident in the market prior to the COVID-19 pandemic, and we expect such demand to continue.

https://www.ey.com/en_us/strategy-transactions/how-covid-19-threatens-biopharma-but-could-also-drive-change


A framework for acquiring distressed assetsPharma manufacturers that have identified gaps in their clinical pipeline for a specialty drug category and desire to fill these gaps through an acquisition of a smaller (and potentially financially distressed) company can consider a framework to focus their search and identify potential targets for licensing or acquisition.

EY-Parthenon has developed a proprietary index of public and private companies and set criteria to support pharma manufacturers to identify potential M&A targets. The criteria include clinical status of the

assets, financial “health” of the company, geography, and other parameters that may be refined and aligned with our clients to meet their strategic needs (see Figure 6). For corporate development and business development teams within larger manufacturers that undergo this level of activity, a refined list of acquisition candidates or new view of existing targets can be refined with a new energy to advance necessary business cases toward acquisition.

Figure 6: Methodology and funneling process to identify companies with distressed assets

Filtering out steps

“Inactive” companies1

2

3

4

5

Partnered assets

Clinical trial status

Financial indicators

Other company credentials

Source: EY-Parthenon analysis


Implementing this strategyPharmaceutical manufacturers may look to take advantage of the current market conditions to better position themselves for the continued growth in the specialty products segments. Below are three steps companies may want to take to prepare for M&A opportunities that arise:

EY-Parthenon has significant experience and robust capabilities throughout the deal life cycle, including core competencies in commercial diligence, financial diligence, tax diligence, and operational integration. The specialty drug category can no longer be ignored due to its rising importance in the health care ecosystem, and clinical gaps within this category can be addressed by one of the strategies above with which EY is ready to support.

1 Identify gaps in a specialty product portfolio by benchmarking clinical stage assets against the competitive set.

2Develop a list of viable M&A targets leveraging search and evaluation criteria and other filters to reflect both financial and operational considerations stemming from the COVID-19 pandemic.

3Connect internal stakeholders across the organization (e.g., R&D, corporate development, corporate finance) for a coordinated and efficient approach executing along the deal life cycle.

Nick Davies, PhD

Principal EY-Parthenon, Ernst & Young LLP +1 860 326 8187 [email protected]

James Dolan, PhD

Senior Director EY-Parthenon, Ernst & Young LLP+1 773 744 9780 [email protected]

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Authors

EY-Parthenon’s Max Dreeben; Vish Mazumder, PhD; and Sadie Bronk also contributed to this article.

For more information, please visit ey.com/parthenon.

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Pharma companies have opportunities post-COVID-19 to bolt