4 growth strategies for middle size pharmaceuticals & some thoughts on international expansion

A considerable percentage of medium-sized companies in the pharmaceutical segment are finding difficulties in their traditional markets and it seems that the situation will not reverse in the coming years. Facing an increasingly competitive and globalized context, they are obliged to review their “business as usual” and explore strategies, traditionally reserved to big companies. Among the various possible options, we review shortly some that are focused on growth. Although if wisely implemented can be highly effective, a wrong use can seriously compromise the company′s future.

I&D (improve and development) versus traditional R&D (research and development)

Traditional R & D activities are those that provide the most added value to the organization... when they work. In recent years, development costs have been consistently rising while the outcomes haven′t followed the same trend. In addition, these are long-term strategies that can’t be accelerated to face the company′s urgency for innovative new products. To increase R & D productivity, high investments should be allocated now with an expectation of getting results in not less than three, five or even ten years. It is a difficult decision when the present P&L doesn′t look particularly healthy. A way to reduce investment costs and share risks that some big pharma is broadly using is co-development agreements, that can be remarkably sophisticated. In the “middle class” however, things are not so easy as sensitive information has to be shared with companies that are still being seen as competitors rather than partners.

In the absence of financial muscle, medium-sized companies are required to use creativity to shorten the time frame

In the absence of financial muscle, medium-sized companies are required to use creativity to shorten the time frame. Instead of looking for new entities, many companies have found a solution in the search for improvements to existing products/ treatments, what we have called I&D (improvement and development): from new formulations, like slow-release capsules or microsphere technologies, different routes of administration, such as ODFs or patches transdermal, combination of several products in the same tablet, or different delivery devices (for example pre-filled syringes, intelligent insulin administration pens). Medical devices have also served as a field of experimentation for these companies that can’t spend 7-10 years to bring a new product to the market. However, things can change when new unified regulation under preparation by EMA will take effect next year.

Joint Ventures and Acquisitions

Joint Ventures are becoming very popular recently, as a tool to enter some high-growth Emerging Markets where local assets’ ownership is heavily restricted, such as China, Thailand or Indonesia and others with strong cultural barriers like Japan. Well managed, a JV benefits from both companies′ different expertise. However, an important weakness is the need to balance interests, often not aligned, of two heterogeneous partners. JV control can unleash a power war between the two parties with unforeseen consequences. The selection of the right person/ team to lead the project and especially to keep the necessary level of autonomy will be a key success factor.

An option to avoid the problems of a JV seems to be purchasing the entire company. However, it`s also a complex process where a realistic evaluation of tangible and intangible assets of the targeted company is equally important, if not more, than the potential synergies that can be generated. As core motivation is, in most cases, to speed up the access to new markets, it should never be forgotten than after acquisition, an integration process will take place and it should be expected to deeply affect both organizations. A few years ago, a Brazilian company was acquired by a large European multinational, sure to be strengthening its leadership in one of the world′s fastest-growing markets. Just a few years later, most managers and technical staff had left the boat and the company was suffering to keep half market share than before the acquisition. A process of hard integration implemented by the acquiring company’s team without experience in Brazilian culture and uses resulted in breaking the motivation of the most professional and expert part of the team, which was the main asset that had motivated the purchase, and to whom the competitors were waiting with open arms.

Licensing-in, licensing-out

"Sometimes it is possible to find interesting products that are nonetheless left off the radar of large companies, either because they can only be marketed in restricted areas or because the sales expectation is lower than the filter established"

Most middle size companies are permanently screening the market in search of products for in-licensing. The main problem they usually find is that almost all products with a clear interest or differential value are going to be "hunted" by large companies, capable of offering greater geographic coverage and therefore, theoretically higher sales and a better agreement. However, sometimes it is possible to find interesting products that are nonetheless left off the radar of large companies, either because they can only be marketed in restricted areas or because the sales expectation is lower than the filter established. A product with the potential of, say, 100 million euros can be a great opportunity for a medium-sized company, but not even a discussion of a Top Pharma's business development team. Once again, the key to competing is to apply a creative concept when evaluating opportunities.

A competitive advantage that medium-sized companies can use when negotiating an in-licensing agreement, is their knowledge of local markets. More and more companies are realizing that not always the biggest is more successful everywhere. Several recent cases, including some biosimilar developers such as Celltrion, have preferred to license "local champions" in certain markets than to give exclusives to a big company in all markets.

On the other side, licensing-out own products have become a strategy widely used by mid-sized companies to generate a profitable surplus and penetrate new markets. Out-licensing helps to minimize risks, as the product owner doesn’t need to be directly involved in marketing or distribution activities, but also limits the revenues opportunities as well as the control over the end customer. Too often, the agreed conditions are not achieved and finding a new partner generates additional costs. One of the biggest mistakes, as mentioned in the in-licensing part, is to think that a large company is by definition better choice than a smaller one. A careful assessment of the role the licensee will assign to the product in the promotional grid and synergies with its own portfolio are key elements to avoid bad experiences.

Open subsidiaries

Until very recently, this was an option only available to large companies. However, more and more medium-sized enterprises take the risk of establishing offices in other markets. It is the most appropriate way if the ultimate goal is to control the whole process and ensure own brand presence in the market and gain experience. Costs can be considerably higher and it is possible that the company′s `portfolio is insufficient or inappropriate for the targeted market. In this case, reaching an adequate ROI will require adding other products to complete the portfolio. It is a common mistake to add products without assessing the synergies with own products, incurring costly inefficiencies. 

Middle size companies global expansion

Contrary to what happens with top pharmaceuticals, with standardized processes for almost all contingencies, in medium-sized companies it is usual for decisions to have a strong opportunistic component. Suddenly, the board of directors realizes that accelerating international expansion is a must, and should be made now. Then, the company decides to get down to work by assigning the task to the existing business development team or building another. It is not uncommon for such a team to lack a route plan and even to face an organization hiddenly or not so much reluctant to change.

What usually happens is that there is an official communication to all concerned directors requesting their full support to the "new international BD team". These departments (medical, regulatory, logistics, commercial, marketing), accustomed to a “business as usual” that has been always done in the same way, are suddenly required to integrate new tasks, usually with the same resources or with some recently hired inexperienced (in the company) new team. In addition, the organization has to face the learning curve, but management will not allow the “normal business” to be negatively affected by the new demands. In summary, these highly experienced directors must face a challenging dilemma: on one hand it is not politically correct to openly boycott the expansion plans that have been approved by the management and that are considered "the only possible way", but on the other they know that their bonus and possibly their career is based on their success in the local and well-known markets. It is not surprising that the order of priorities does not especially benefit internationalization, nor that the most “traditional” part of the company develops a vision between skeptical and reluctant to these activities, whose results are expected above all in the medium term.

The lack of an effective and manageable plan for international expansion activities is a common standard in pharmaceutical middle size companies

The lack of an effective and manageable plan for international expansion activities is a common standard in pharmaceutical middle size companies. In some cases, after some disappointing experiences, some actions are taken to structure the “new markets” department in a different way than the “existing business”. Even the profiles should be different, as different are the needs.

In summary, as far as ensuring growth is considered a need for middle size pharmaceutical companies, that may not always be the case, only realistic, well-designed execution-focused strategies should be implemented. The impact that these strategies will have in the existing organization should be evaluated, barriers to change anticipated and measures implemented to ensure timely adoption. Otherwise, outcomes can be catastrophic.