Overview
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.
2020F $500b $450b $400b $350b $300b $250b $200b $150b $100b $50b $0b CAGR (2010-2015) (2015-2020F)CAGR 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
Growth and benefits from specialty
pharmaceuticals
Diseases 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.)
Figure 1: Select specialty markets — size and growth 2010-2020
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
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.
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
Figure 5: Immunology and rare diseases represent Company B’s biggest opportunity categories to support through acquisitive activity Rare diseases Solid tumors Specialty neurology
Cell and gene therapy Liquid tumors Immunology Rare diseases Solid tumors Specialty neurology
Cell and gene therapy
Liquid tumors
Immunology Company B
Asset/product benchmark Total R&D Program benchmarkCompany B
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
How the pandemic has placed financial strains
on clinical stage manufacturers
The 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.
A framework for acquiring
distressed assets
Pharma 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” companies
1
2
3
4
5
Partnered assetsClinical trial status
Financial indicators
Other company credentials
Implementing this
strategy
Pharmaceutical 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.2
Develop 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.Nick Davies, PhD Principal
EY-Parthenon, Ernst & Young LLP +1 860 326 8187
James Dolan, PhD Senior Director
EY-Parthenon, Ernst & Young LLP +1 773 744 9780
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Authors
EY-Parthenon’s Max Dreeben; Vish Mazumder, PhD; and Sadie Bronk also contributed to this article.
