In 2005, 44% of ‘Mid Pharma’ revenues were derived from products that have been discovered outside of the in-house development pipelines. In fact, even in the absence of any further external sourcing between now and 2010, the dependence on revenues of products that came from external pipelines will continue to increase, coming to stand at 49% by 2010, according to a new report* from independent market analyst Datamonitor (DTM.L). Externalization can reduce Mid Pharma companies’ R&D costs and allow it to boost revenues when internal R&D is failing to bring sufficient products to market.
Groups within the group
Datamonitor defines ‘Mid Pharma’ as those companies within the PharmaVitae company universe with less than $10 billion in ethical revenues in 2005, excluding Japanese and biotechnology companies. Within this group, the players can be broken down into further sub-groups: the ‘Big 6’, those focussed on the central nervous system (CNS) market, those focussed on the cardiovascular (CV) market, and domestic players.
The Big 6- Boehringer Ingelheim, Schering Plough, Novo Nordisk, Bayer, Schering AG and Merck KGaA- all have revenues of greater than $4bn, are global players and have a broad therapeutic strategy. The ‘Big 6’ is currently in the grips of consolidation with the merger of Bayer and Schering AG going ahead- this dynamic will propel Bayer-Schering into ‘Big Pharma’, leaving behind the remaining ‘Big 4’ in their wake. At the other end of the Mid Pharma scale are companies with around $1bn in annual revenue which is mainly generated in their country of origin, such as Recordati, Ipsen, Almirall and Pierre Fabre. While companies such as Lundbeck and Schwarz focus their efforts on the CNS and CV markets respectively.
As a group, Mid Pharma recorded total ethical sales of $66bn in 2005, which is forecast to grow with a compound annual growth rate (CAGR) of almost 5% from 2005-10. In fact, Mid Pharma growth is expected to outstrip ‘Big Pharma’ growth during this period. However, this growth is expected to slow by the end of the decade, according to Datamonitor pharmaceutical markets analyst Brett Scottorn. “Although it should be noted that these forecasts only utilise currently marketed products and pipeline products, for the simple fact that it is impossible to predict what licensing agreements will be struck going forward. However, further externalisation could boost growth rates and is an integral part of Mid Pharma’s business model,” he says.

Externalisation comes in 4 main varieties
Externalisation can come in a number of forms, but the most common is marketing and development. These agreements involve the licensing of intellectual property rights to develop and market a product and are the major mechanism (in revenue terms) by which Mid Pharma secures access to products from external pipelines. Given the greater commitment of resources required to engage in marketing and development deals, the company that in-licenses enjoys a greater share of financial returns with, of course, a pay-out to the source company of a mix of up-front, milestone and royalties payments.
Distribution deals are a contractual agreement to distribute another party’s products and provide the least added-value for the in-licensing company. This is due to no R&D investment and almost 100% certainty of the product reaching the market. These deals frequently occur when a company is seeking to access a territory with significant barriers to entry such as high local fragmentation of the market, Scottorn says. “Commensurate with the low level of engagement required for a distribution agreement, the financial returns to the distributor are relatively modest compared to other externalization strategies.”
With a product acquisition, a company secures full rights to a product- typically for a one-off payment. The complete acquisition of a product ensures that the purchaser will enjoy the full share of future returns from the acquired product. Corporate acquisition differs from the other three externalization strategies in that it is not restricted to one product but rather involves the purchase of a whole target company, including its current marketed portfolio, pipeline and full value chain infrastructure. “In many ways, corporate acquisition can be viewed as the ultimate externalization strategy”, Scottorn says, “and is most appropriate when a company is seeking to expand in a new direction- whether at the product technology or disease market level.”
But why do it in the first place?
Externalization works for both parties because it allows the Mid Pharma company access to a broader palette of R&D opportunities that it may not have had otherwise. Corporate acquisition can also be employed as a mechanism for strategic corporate redirection. For a smaller company, dealing with Mid Pharma may be more appealing than dealing with Big Pharma, because the product will likely constitute a larger percentage of the Mid Pharma’s revenue. This affords the smaller company more bargaining power, which may allow the development company to secure a more financially rewarding agreement, Scottorn says. “Compared to Big Pharma, Mid Pharma companies tend to have a narrower focus in a particular dimension- often in terms of therapy or geography.”
“By selecting a Mid Pharma partner that specializes in the same therapy area/geography as the product, the source company is maximizing its chances of commanding a higher price, because the partner company should be able to pay a high price and yet still extract value for its shareholders by exploiting the good fit/synergy that the product offers.”
Of course, it must be said that Big Pharma, due to their larger scale, can also find value in deals with Mid Pharma by utilising its specializations in both geography and niche therapies.
However, not all Mid Pharma companies rely heavily on externalization strategies: Forest, King, Menarini, Shire and Almirall are highly dependent on externalisation and thus it is a major part of their business model. Meanwhile, the ‘Big 6’ generally have a more balanced approach between sourcing products externally or through internal R&D, while companies like Lundbeck, Novo Nordisk, Akzo Nobel, Altana and Servier have a low dependence and rely heavily on in-house R&D to source products, Scottorn says.
“But with two-thirds of absolute revenue growth for Mid Pharma between now and 2010 coming from externally sourced products, externalization strategies will remain vital to the continued success of the Mid Pharma peer group.”