AstraZeneca, Novartis Continued Divestment Sprees In 2018, While Peers Joined The Action
Executive Summary
While leading large pharma with seven out-licensing or divestiture deals apiece during 2018, AstraZeneca and Novartis each slowed their pace somewhat. But several peer companies followed suit, as there were 31 such deals among the 20 largest biopharma firms last year.
Perhaps it reflects a greater focus on core competencies or an increased emphasis on specialty indications, particularly within oncology; or maybe it is just a sign of smarter portfolio management. Opinions vary on the motivations but not about the reality that large pharma companies are doing a lot of divestment and licensing deals.
In 2018, the 20 largest biopharmas completed 31 such deals according to Pharma Intelligence’s Strategic Transactions database – and that occurred despite six of those firms making no divestitures at all (see Exhibit 1). Leading the way were AstraZeneca PLC and Novartis AG – each with seven such transactions – but in both cases, that volume was down a bit from previous years.
Behind the two leaders, GlaxoSmithKline PLC had three license/divestment deals. In addition, Roche, Johnson & Johnson and Shire PLC each made two such transactions.
“I think there are two things going on,” Morningstar analyst Damien Conover told In Vivo. “You’ve got [companies] focusing on core competencies – I think Novartis is a great example of that, maybe Sanofi also is a good example with the [Boehringer Ingelheim GMBH] asset swap. Then you have AstraZeneca; it’s partly focusing on core competencies, it’s also focusing on bringing in enough cash to the company to support the dividend to get them through their patent cliff. But this idea of focusing on core competency and less diversification is something that has been happening probably over the last decade and a half I would argue.”
In 2015, Sanofi traded its animal health unit Merial to Boehringer in exchange for the German pharma’s consumer health care business. (Also see " Bold Brandicourt Plots Mega Sanofi And Boehringer Animal, Consumer Asset Swap " - Scrip, 15 Dec, 2015.) AstraZeneca has negotiated a patent cliff for years now, due to patent expiries of former blockbuster products such as Seroquel (quetiapine) and Nexium (esomeprazole).
“It was [around] the 1980s and 1990s when these firms got really more into conglomerate structures and they did that because they were concerned about innovation and pricing power for drugs,” Conover continued. “Which is interesting because if you look at today, that concern is definitely out there in the market, but given the actions by some of these firms to divest things like consumer health and animal health, you tend to wonder if the concern about pricing power might be less than what it was, say, three decades ago.”
“I think there’s definitely something to be said for focusing on core competency – you [become] a lot more efficient,” he added, “but I also get a sense that executives believe that if they can develop innovative drugs for unmet medical needs, the pricing power will be there, so they’ll be less dependent on things like animal health and maybe consumer health.”
Deloitte M&A life sciences and health care tax leader Kyle Woitel said the recent trend of divestiture deals indicates that biopharmas are asking themselves what in their portfolio really fits well and what does not. “We’ve seen biopharma companies start to do more divestitures over the last handful of years and I think when that wave started it was definitely the thinking of ‘Let’s return to a core business,’” he explained. “These companies got fairly large over a period of years through M&A and have learned that maybe some of the things that they were expanding into weren’t successful because they weren’t in or complementary to their core business, so they started that divestiture wave.”
PwC’s US pharma and life sciences deals leader Glenn Hunzinger thinks the trend reflects an improved understanding of asset valuation more generally within the biopharma industry. This heightened sophistication within business development teams also helps explain why 2018 did not yield the increase in mega-merger activity many expected, he told In Vivo previously. (Also see "Why The M&A Boom Many Expected In 2018 Didn’t Happen" - In Vivo, 14 Dec, 2018.) “You don’t see the big dollars coming through because of larger deals not materializing, but I think the [increased] volume of transactions will continue,” Hunzinger said. “We’ll continue to see this across the board – we’ve seen it already – it’s just a matter of divestitures. I’m seeing it in large pharma, in specialty pharma, in generics and also medical devices, in particular private equity stepping into that place where companies look to change their growth trajectory.”
Large pharmas have some organic growth but they no longer can enhance that growth through pricing, he noted. So, companies say, “I can go out and buy, which is expensive, or I can go and reset the baseline if I can sell some of the flat or declining [assets]; I can maybe reset some of my baseline so it has a bit more of the growth,” Hunzinger explained. “Like anything, I think most people are saying, ‘If I can’t own a therapeutic category, maybe it makes sense for me to get out, just given that there are so many resources going toward being the winner in a category.’”
Moving Away From Consumer Health
GSK’s year proved a bit confounding as it took in the minority share (36.5%) of the consumer health joint venture it formed with Novartis in 2014, but later in 2018 sold off North American commercial rights to five of its over-the-counter health care products to Crown Laboratories Inc. On February 6, GSK CEO Emma Walmsley told the fourth-quarter/full-year 2018 earnings call that she is focused on extracting the best value from deal-making, whether by bringing assets into the company or off-loading them.
“We were reasonably busy through the last quarter in terms of our business development,” she noted. “And our number-one focus is to make sure that we deliver the value from those deals, be it on the consumer side or, indeed, the pharma side. That said, I was extremely clear in July 2017 that our number-one priority is the strengthening of the pipeline. I’m pleased with the progress, but business development will continue to be a key part of that.”
Walmsley added that GSK’s February 5 collaboration with Merck KGAA on bifunctional cancer immunotherapy M7824 is “exactly the kind of thing we want to do, whether it be on assets or technology platforms.” (Also see "GSK Makes I-O Move With Merck KGaA Deal Worth Up To €3.7bn" - Scrip, 5 Feb, 2019.) She then added that moving forward GSK will seek out “creative business development” that will include continued efforts to license portfolio assets as well.
On their face, GSK’s pair of consumer health deals in 2018 appear to show conflicting impulses, but Pharma Intelligence’s Datamonitor Healthcare principal analyst Amanda Micklus said the UK/US big pharma actually is in line with its peers in wanting to exit the consumer health/OTC arena. She pointed to the consumer health joint venture GSK set up with Pfizer Inc. last December under an all-equity structure as illustrative of both companies’ desires to move away from the non-prescription side of the business. (Also see "Pfizer Consumer Combo Deal Frees Capital For GSK Pharma Investment" - Scrip, 19 Dec, 2018.)
“Pfizer is trying to sell its consumer health division; it couldn’t find a buyer so instead it set up a joint venture [with GSK] in consumer health,” she told In Vivo. “I think the plan is in three years they actually want to spin that off into an independent company.” Even though Walmsley came from the consumer side of the industry, she thinks GSK should emphasize its core biopharma business, Micklus said. In some instances, biopharmas got deeper into consumer health care than they otherwise might have planned to due to M&A activity, she noted, pointing specifically to Merck & Co. Inc.’s decision in 2014 to sell its consumer business to Bayer AG for $14.2bn. Much of that portfolio arrived within Merck as part of its 2009 mega-merger with Schering-Plough Corp.
Although GSK and Novartis possibly are looking to reverse earlier efforts to diversify their business footprints, even one of big pharma’s most diversified companies, Johnson & Johnson, offloaded some OTC business in 2018, albeit on a much smaller scale. In June, its Janssen Pharmaceuticals Inc. unit sold the anti-dandruff shampoo brand Nizoral (ketoconazole) to Kramer Laboratories Inc. at undisclosed terms. [See Deal]
Novartis, AstraZeneca Shrink Areas Of Focus
Overall, the divestiture trend is something that has been occurring for several years within big pharma, perhaps in an attempt to undo some of the earlier efforts to reduce business risk through diversification. Novartis made four divestment/out-licensing deals in 2016, six more in 2017, followed by seven last year and this year already has out-licensed Phase II dry eye/uveitis candidate LME636 to Oculis. [See Deal]
A topical anti-TNF alpha candidate, LME636 came to Novartis’ Alcon Inc. eye care division in the 2009 acquisition of EsbaTech AG. The deal likely reflects Novartis’ decision to rid itself of parts of Alcon it no longer wants on a piecemeal basis, since its efforts to spin off the entire eye care division have come to no avail so far, Micklus said. “Novartis is really interesting,” she added. “I was looking back over the past year and they’ve made a lot of changes. They exited infectious diseases early in the year and they now have six core therapy areas, which are oncology, cardiometabolic, neuroscience, ophthalmology, respiratory and immune/inflammation.”
On January 24, 2018, Novartis chief financial officer Harry Kirsch said on the firm’s fourth-quarter/full-year 2017 earnings call that it was growing core operating income through “continued strong gross-margin improvement and gains from the divestment of small, tail-end, non-strategic assets.” The Swiss pharma out-licensed three infectious disease candidates in October to Boston Pharmaceuticals Inc. [See Deal] That deal was announced the same day that Boston Pharmaceuticals also licensed five early-stage candidates from GSK in gastrointestinal, dermatology and autoimmune indications.
Beyond its consumer health JV divestment – under a put option with GSK – Novartis also made a major change by selling off its Sandoz International GMBH unit’s US generic drugs business to a North American affiliate of Aurobindo Pharma Ltd. for $900m in cash plus potential earn-outs. Sandoz had seen its US sales decline by 16% year-over-year during the second quarter of 2018.
Micklus noted that Novartis CEO Vasant Narasimhan has spoken of wanting Sandoz to stand on its own as a business, perhaps indicating an eventual goal to spin out the generics unit. During the pharma’s third-quarter earnings call November 18, Narasimhan said, “When you think about how we’re going to drive Sandoz moving forward, a lot of it is about executing a strategy of transformation and shifting the focus to complex generics and biosimilars. We’re well on our way to doing that in the US.”
AstraZeneca Mines For Additions, Adds By Subtraction
Less surprising perhaps is AstraZeneca’s series of moves to narrow its focus, Micklus added. The Delaware-headquartered company long has been more of a pure-play pharma than most of its peers and recently has undertaken a multi-year divestment tear, completing 16 agreements to sell off or out-license assets in 2016 and 10 more such transactions in 2017.
“AstraZeneca is interesting because they’re not like Novartis or Bayer or J&J in that they’re not heavily diversified to begin with,” the analyst explained. “They don’t have businesses outside of biopharma the way that those other companies do, so it seems to me they are taking a very close look at their portfolio and seeing what they want to keep and what they think would be more valuable in other companies’ hands.”
AstraZeneca also is among the biopharmas significantly magnifying their focus on oncology. In January, it announced an R&D restructuring in which efforts would be consolidated into two units – an oncology division led by former Memorial Sloan Kettering Cancer Center physician-in-chief Jose Baselga and a second catch-all group encompassing cardiovascular, renal, metabolic and respiratory disease headed up by Mene Pangalos. (Also see "AZ Management Shake-Up Sees CMO Bohen Exit" - Scrip, 14 Jan, 2019.) That announcement occurred more or less in tandem with the departures of several longtime top R&D execs, including MedImmune LLC chief Bahija Jallal, who departed January 4 to become CEO of Immunocore Ltd. That same day, AstraZeneca executive VP Mark Mallon left to become CEO of Ironwood Pharmaceuticals Inc.
During its fourth quarter/full-year 2018 earnings call February 14, AstraZeneca formalized its R&D revamp, announcing that it is retiring the MedImmune name and combining small molecule and large molecule R&D. (Also see "Farewell To MedImmune: AstraZeneca Will Combine Large And Small Molecule Research " - Scrip, 14 Feb, 2019.)
AstraZeneca’s decision to set up a unit devoted fully to oncology mirrors moves made by peer firms such as Novartis and Bayer previously, Micklus pointed out. “It seems like a lot of big pharmas are doing this – there’s a very strict focus on oncology,” she said.
In 2018, AstraZeneca pared its portfolio in a wide swath of therapeutic areas, excising inflammation candidates in three transactions, dermatologic and neurological assets in two deals each and offloading respiratory, gastrointestinal and autoimmune programs as well. On its fourth-quarter/full-year 2017 earnings call last February, CEO Pascal Soriot said AstraZeneca was using “external R&D” including both in-licensing and out-licensing to focus on core therapeutic areas such as cancer, cardiometabolic health and renal and respiratory disease. “Essentially, what we’re trying to do is build a portfolio that is completely aligned with our strategy,” the exec said. “I was reading recently an interview by a CEO of a large mining company and he was explaining that they’re building the perfect portfolio for them. They’re selling mines and buying other mines.”
“And this is essentially what we are doing,” Soriot continued. “It’s very similar. Ultimately, what we want is almost the totality of our sales to come from [our] core therapy areas. So, we are investing in those core TAs. And we are partnering or divesting, partnering new products and sometimes even tail products, but divesting all the products that do not fit.”
AstraZeneca is not alone. Pfizer did only one divestment deal in 2018, but it was a major one, offloading 17 chimeric antigen receptor T-cell (CAR-T) assets acquired in 2014 and 2015 from Cellectis SA and Servier SA to start-up Allogene Therapeutics Inc., as it decided to pursue a different direction in trying to catch up with peers like Merck and Bristol-Myers Squibb Co. in immuno-oncology.
On a smaller scale, both Eli Lilly & Co. and Amgen Inc. apparently decided not to try to play catch up in non-alcoholic steatohepatitis (NASH), a field involving dozens of companies and a wide variety of targets and approaches to a multi-factorial disease with no approved drug therapy. In April, Lilly out-licensed three NASH candidates to start-up Terns Pharmaceuticals Inc., whereas Amgen in June licensed worldwide rights to a Phase I NASH candidate to Akero Therapeutics Inc., also a start-up.
“It could be they just don’t have the proper expertise to ensure those are successful,” Micklus suggested. “I know for Lilly, they’ve really been focusing on oncology lately. So, it may be just that they don’t want to put money into NASH.”
An area of apparent de-emphasis by several large pharma companies is dermatology, as six divestment or out-licensing deals of dermatology candidates or marketed products were completed by four companies – AstraZeneca, Novartis, GSK and Allergan PLC. Micklus said this may illustrate pharma’s goal to focus more on specialty indications and less on primary care products.