Is Big Pharma Getting Smaller?

Does Pfizer’s consumer healthcare announcement herald a trend towards slimmer, more focused business models? Pfizer’s announcement that it is exploring a sale or spin-off of its consumer healthcare business comes hard on the heels of a similar decision by the German company Merck. This runs against the trend of a few years ago when there was a scramble by Big Pharma to get into the consumer health/OTC medicines market in order to spread the business risk as Rx drugs came under increasing price and regulatory pressures and patents expired on blockbusters.

Pfizer Consumer Healthcare is one of the largest OTC/healthcare products businesses in the world. Revenues in 2016 were around $3.4 billion, boosted by two of the world’s top selling consumer health brands – Advil and Centrum. Like one of its main competitors, GlaxoSmithKline, Pfizer’s consumer healthcare business includes both over-the-counter medicines and fast moving consumer goods (FMCG). The business is estimated to be worth about $14-15 billion.

While fierce competition, particularly from own-label products, and higher advertising costs, mean that profit margins on OTC products are generally lower than for prescription drugs, companies have been attracted by opportunities offered by the OTC market for exploiting the brand.

The main drivers for growth in the OTC market, which is estimated to have a value of over $200 billion, are:

• The increase in and ageing of the population

• Greater health awareness and knowledge of consumer medicines, boosted in part by pharmacists taking on more responsibilities for healthcare and by social media

• Campaigns promoting healthier lifestyles

• Switching of medicines from prescription to OTC status, although in many countries this has not lived up to initial expectations

Slimmer, more focused models

Two to three decades ago the trend was towards large diversified corporations, driven by a spate of major M&A activity that led, for example, to Glaxo-SmithKline, AstraZeneca, and to Pfizer’s acquisition of Warner-Lambert and then Pharmacia. As the focus has shifted from primary care medicines to biologics and products aimed at specialists some of the bigger companies are looking at slimmer, more focused business models.

Even if they are not divesting parts of their business, big pharma firms such as AstraZeneca and GSK are narrowing or ‘prioritising’ their research focus. GSK recently announced that its pharmaceutical R&D pipeline will be reviewed over time to allocate 80% of capital to priority assets in two current (respiratory and HIV/infectious diseases) and two potential (oncology and immuno-inflammation) therapy areas; more than 30 pre-clinical and clinical programmes will be halted.

Spinning off businesses such as animal and consumer health will release funds for acquisitions and collaborations in new areas of interest, although analysts suggest that this is probably not Pfizer’s main reason for looking at divesting consumer health. The company has already moved to build a major oncology franchise by its acquisition last year of the California-based company Medivation.

Health technology

As they focus more on their core innovative business, big pharma firms are likely to explore new developments in health technology related to that business. Developments in healthcare technology might almost be said to be outpacing those in pharmaceuticals, and big pharma firms will need the flexibility and funds to focus on these new developments.

Digital health

Looking ahead we might see collaborations between pharma firms and the digital health operations of multinational technology companies such as Google and Apple, or Nokia which recently launched a digital health unit. If pharmacogenomics and personalised medicine become routine, collaboration with companies like these could be vital.

Sanofi is collaborating with Google’s Verily Life Sciences on a joint venture (Onudo) which is working on ways to help diabetics make better decisions about their use of medication and lifestyle choices.

Wearable sensors also have the potential to change healthcare strategies. Apple, for example, is working with Stanford Medicine to test whether the Apple Watch can detect heart rhythm disorders.

Data from wearables, devices and apps will identify whether drugs are working or not. There is also the prospect that eventually digital heath could result in new developments that might do away with the need for certain medicines.

Artificial intelligence

Some of the earliest applications of artificial intelligence are expected to be in drug discovery, disease prediction and diagnostics. The market for artificial intelligence in healthcare and life sciences is projected to grow by 40% a year, to $6.6 billion in 2021, according to Frost & Sullivan estimates.

Pfizer is already going down the AI route through its agreement with IBM’s Watson for Drug Discovery cloud-based platform. This will target cancer therapies, aiming to help researchers discover new drug targets and alternative drug indications. Novartis recently announced a collaboration with IBM Watson Health aimed at improving health outcomes. This follows a similar collaboration with Cota Healthcare, a data and technology platform for value-based precision medicine, which will use Cota’s cloud-based platform to speed up clinical development of new therapies for breast cancer and identify patients most likely to benefit.

Of course Pfizer may decide not to divest its consumer health unit. It is exploring a range of ‘strategic alternatives’, and has not ruled out retaining the business. A decision will be made next year.It will be interesting to see how much interest there is from potential buyers and what type of companies show an interest.

Perhaps indicative of waning interest in the OTC market by research-based multinationals, market observers do not seem to be tipping these companies as potential purchasers, with the exception perhaps of GSK. The Swiss food and nutrition giant Nestle is thought to be a more likely contender.