How do strategic alliances help pharmaceutical companies to strengthen their position?

For decades the pharmaceutical industry has led therapeutic progress through innovative drugs which have been game-changers for society. The emergence of revolutionary new treatment options in different therapeutic areas such as Keytruda, Opdivo in oncology or Harvoni for Hepatitis C come with a cost. Companies have been investing hugely in the past decade, worldwide pharmaceutical Research and development (R&D) spending reached $142B in 2014 and will hit $160B in 2020. The pharmaceutical industry is clearly the world leading industry in terms of research and development (R&D) spending, allocating nearly 15% of its total revenues to R&D.

Despite these heavy investments and a compound annual growth rate of 4-5%, this sector is facing numerous challenges which could shake up his mission. Poor R&D productivity, a drug dependency strategy and difficult market conditions are some of the key challenges that pharmaceutical companies need to tackle. What role can strategic alliances play in this challenging period for pharmaceutical companies?

A strategic alliance is a cooperation that is of strategic importance for the companies involved. They are generally bilateral and can involve both competing and non-competing companies. The collaboration between companies is limited in scope to a specific project. We can clearly identify 3 types of alliances:

Co-integrations

They are alliances in which competitors cooperate to make economies of scale in the early stages of the production process. They are generally limited to R & D activities or the production of a product component.

Pseudo-concentrations

In this type of alliance competing companies work together to develop, produce and market a common product. Traditionally this type of alliance is always between companies in the same industry. The alliance covers the entire value chain (R & D, production and marketing) and one single product, common between all allies, is placed on the market.

They are alliances involving companies whose skills and contributions are of a different nature. In most cases, these are alliances where one of the companies has developed a product or service that is commercialized through the network of the other.

Pharmaceutical companies are using strategic alliances all along the value chain. Through our analyses we will focus the spotlight on R&D activities and emerging market penetration strategy.

Increase R&D productivity

Research and development spending in the pharmaceutical sector is crucial. There is a large disparity in the amount of R & D investment realized by large pharmaceutical companies. At the bottom of the pile we have Teva which devotes more than 6% of its revenue to R&D; this is mainly due to the fact that the core business of Teva is generics. At the top of the spectrum, companies like Eli Lilly are leading the pack with 24.7%. In the same time, the cost to develop a drug have escalated dramatically. A study from the Tufts Center for the Study of Drug Development (CSDD) estimated that it costs €2.5 billion to develop a new drug, from the research stage to market launch.

With all these investments, we would expect a high productivity rate on R&D activities, however this is not the case. Low this situation has a direct impact on companies’ pipeline, R&D productivity needs to be improved. Companies are seeking to expand and feed their pharmaceutical portfolio through the addition of new molecules, as well as the development of new indications for existing drugs.

Pharmaceutical companies are leveraging strategic alliances as a way to feed their pipeline and minimize risks and costs.

Case Study

AbbVie

AbbVie is a highly focused research-driven biopharmaceutical company which become independent entity in 2013. AbbVie has three drugs: Humira, Viekira and Imbruvica. Humira, a biologic drug and AbbVie’s key product, generates 61.3% of turnover. The patent for Humira is ending and the company need to find new source of growth, particularly in oncology, a new area in which the company wants to establish a strong position. As a new player in this therapeutic area, AbbVie is putting strategic alliances at the heart of its strategy.

AbbVie work with Bristol-Myers on immuno-oncology drug for patients with myeloma Empliciti (elotuzumab). Genentech and AbbVie are developing Venclexta an oncology drug. It is jointly commercialized by Genentech in the United States and commercialized by AbbVie outside of the United States.

Shanghai Pharmaceuticals

Shanghai Pharmaceuticals is a major Chinese pharmaceutical distribution company, ranked third in size terms of revenue in 2015 (€15.13 billion). The company is present both in generic and original drugs across five therapeutic fields: digestive and metabolic systems, cerebral and cardiovascular diseases, infection, neurology and oncology.

Shanghai Pharmaceuticals wants to become the leading player of the Chinese market through the launch of new products in the generic and original landscape. To achieve this new vision, the company decided to build a collaborative research & development platform of strategic alliances with competitors like Mitsubishi Tanabe Pharma.

Shanghai Pharmaceuticals and AbbVie have been using strategic alliances as a way to boost their innovation (pipeline), to learn from the best about specific topics like oncology for AbbVie and to increase growth.

We also observe a strong partnership between the pharmaceutical industy and academia in research and development activities. Academic institutions are helping companies to discover new molecules; in return they receive funding, materials and royalties. For example, GlaxoSmithKline and the University of Manchester are working to generate new cancer drug, GlaxoSmithKline will have the exclusive rights of molecules discovered.

Entering a foreign market

Emerging markets accounted for 9% of worldwide pharma spending in 2016 and this figure is expected to climb to 11% in 2020 at a CAGR of more than 9%. It is clear that emerging markets are the focus of the global pharmaceutical landscape. In this context where mature markets are experiencing modest growth, pharmaceutical companies seeking new opportunities are focusing on emerging markets where they hope tobuild strong positions. But entering a foreign market is not an easy task, there are numerous challenges.

The challenges include:

Regulatory
Intellectual property rights
Counterfeit trade
Infrastructure and distribution network

Pharmaceutical companies avoid part of these obstacles through strategic alliances which allow them to take advantage of their partner’s local sales and distribution networks. Moreover, interaction with local players and investment into local initiatives helps companies to better understand foreign markets.

Case Study

Merck Serono – Lupin Ltd

Merck Serono, the biopharmaceuticals division of Merck KGaA and Lupin Pharmaceuticals, an Indian pharmaceutical company joined forces to create a strategic alliance. Lupin will develop products and supply finished products to Merck Serono. Merck Serono will leverage its commercial and medical network in emerging markets to bring new drugs to customers. Emerging markets are key drivers of growth for Merck Serono, the region represent more than €1.7 billion in 2013.

Pfizer – Zhejiang Hisun

Pfizer, one of the world’s leading biopharmaceutical companies and Zhejiang Hisun a leading Chinese pharmaceutical company decided to create Hisun-Pfizer Pharmaceuticals Co Ltd, a joint venture. The joint venture had the aims of providing high-quality and affordable branded generic medicines for patients in China. The joint venture will allow Pfizer to enter the fast-growing Chinese generics market, where generics will represent 25% of the in 2020. The joint venture will benefit from Pfizer’s research and development activities and Hisun’s strong experience in the production and commercialization of drugs in china.

Pfizer and Merck Serono have leveraged strategic alliances in order to build strong position in emerging market. In 2015, Emerging markets represented more than 22% of Pfizer’s consolidated revenue.

Strategic alliances are clearly a strategic asset for pharmaceutical companies to boost their innovation and enter new markets. While these strategic alliances offer advantages to companies, they also also create challenges which must be considered by pharmaceutical companies.

Advantages offered by strategic alliances

Less expensive than acquisitions, avoids integration problems of mergers and acquisition
Create opportunities for learning and skills transfer
Strengthen competitive positions
Create a strategic option for the future

Challenges created by strategic alliances