Animal Health Strategy Playbook for an Evolving Industry

Transcription

1 Animal Health Strategy Playbook for an Evolving Industry August 2015 At a Glance Animal Health companies are at a crossroads. Traditional strategies for competing in the industry may have limited effectiveness, given emerging market forces and the gradual lowering of barriers to entry. Animal Health companies should consider which business models allow them to achieve and maintain competitive advantage in this evolving environment.

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3 New business models are needed in the evolving Animal Health industry Animal Health (AH) product manufacturers are at a crossroads. The industry s long-term demand-drivers and outlook for growth remain stable; however, there are industry trends that could limit the potential of current industry business models and strategies. Traditional strategies such as innovation for lifecycle management and growth through consolidation could be losing their effectiveness, particularly for the leading AH players. What strategies could AH product manufacturers adopt going forward? First, it s important to understand what characterizes current business models and why they exist. Traditionally, the AH industry has enjoyed positive underlying demanddrivers (e.g., growing protein consumption and pet ownership), strong competitive advantages in the value chain, and low threat from generics because of high barriers to entry. These characteristics and trends meant that AH product manufacturers could successfully rely on a limited set of strategies that targeted only a few of the industry s value-drivers, e.g., achieving commercial and product portfolio advantage through industry consolidation, and innovation leadership through lifecycle management in Research & Development (R&D). The traditionally stable Animal Health industry is seeing changes that influence key value-drivers, creating opportunities for new business models and strategies. However, emerging trends have created new valuedrivers, diminished the potential of traditionally important value-drivers, and increased the importance of a range of previously overlooked value-drivers. Specifically, some of the trends AH product manufacturers are witnessing include (by value-driver category): Innovation Declining R&D return on investment: Innovation for New Chemical Entities (NCEs) has declined, and so has R&D productivity. In the last decade, AH product manufacturers had an average of seven NCE approvals per year, down from 12 per year in the prior decade, despite spending almost twice as much on R&D. 1 Aging product portfolios: The decline in innovation has resulted in highly mature product portfolios; the average age of leading AH players product portfolios is more than 15 years. 1 A highly mature product portfolio limits the potential of lifecycle strategies. Portfolio Advantage & Commercial Excellence Limited ability of the largest players to pursue large consolidation deals: Industry consolidation over the last decade has resulted in high market share concentration the top ten AH companies account for approximately 86% of global sales. 2 This consolidation limits the ability of the largest AH players to pursue transformative deals unless they resolve antitrust concerns (e.g., divest certain assets) or pursue targets with complementary or distinctive portfolios. 1 Per PwC estimates based on data from FDA, Zoetis company filings, and Vetnosis data. 2 Per PwC analysis of AH company public filings and data from market research company Vetnosis ( AH Industry Global Market Review Available at ifahsec.org) 1

4 Increasing influence of food producers, retailers, and pet owners; declining influence of veterinarians: Veterinarians have less influence over AH purchase decisions due to downstream consolidation among food producers and retailers, and the ongoing shift in sales to retailer and mail order channels. Competitive Forces Increased generic competition: The combination of regulatory changes that promote generics and distribution channel shifts has resulted in increased competition from generics and over-the-counter (OTC) products. Furthermore, some leading AH product manufacturers have launched branded generics, further increasing competitive intensity. Operational Effectiveness Growing pressure on profits: Diminished potential of traditional growth initiatives puts pressure on profits, increasing the importance of operational efficiency in the short term. Increasingly global operations: Increasingly, global food production requires effective global manufacturing and supply chain management. These trends reduce the traditional competitive advantage of AH players and lower the barriers to entry for generics. As a result, AH players strategies might be impacted. For example, trends such as increased portfolio maturity, high industry consolidation, and consolidation in the downstream value chain limit the effectiveness of traditional strategies. On the other hand, channel shifts and technological advances could be threats but also create new opportunities. Given these trends, how can leading AH players drive growth? Which strategies might help them target the broader range of value-drivers, including new value-drivers, available to the industry? Are there opportunities for further industry consolidation, and if so, which companies will be able to employ this strategy? Which strategies could help AH players protect their competitive advantage at a time of changing buyer profiles and channel shift? How can companies strategically position themselves to take advantage of opportunities in adjacent growth areas and emerging technologies to defend, and potentially increase, their competitive advantage? AH product manufacturers should pursue strategies that leverage the broad range of value-drivers available in order to strengthen and defend competitive advantages in an evolving industry. On the following page, we have outlined some strategies, by value-driver category, that AH companies could pursue when rethinking their paths forward. AH companies should consider strategies that reflect shifting industry trends and valuedrivers in Innovation, Portfolio Advantage & Commercial Excellence, Competitive Forces, and Operational Effectiveness. 2 Animal Health: Strategy Playbook for an Evolving Industry

5 AH Strategies, by Value-Driver Category Innovation Innovate in areas of unmet need, specialty care, and biologics to create new categories and/or seek to become the first- or best-in-class. Examples of emerging therapeutic areas in the companion AH segment include pain management, cancer, and allergies. Increase customer loyalty through the use of technology-based innovations such as analytics, software applications, or wearables. Solution-oriented business models could also reduce AH manufacturers dependence on products as a sole revenue source. Portfolio Advantage & Commercial Excellence Improve R&D productivity, e.g., through collaborations. Collaborations with academic centers, clinical research organizations, or other AH companies can help increase NCE approvals, shorten time to market at lower cost, and/or share development risk. Expand NCE pipeline, e.g., through targeted acquisitions of smaller AH companies, such as R&D-focused biotechnology new entrants. Tier 2* players could continue to consolidate by pursuing multiple small deals to gain commercial scale economies or leadership of individual species/product categories (e.g., cattle, swine, companion animal). Private equity firms could also play a role in Tier 2 consolidation. Expand into adjacencies such as diagnostics, genetics, and devices, including through collaborations or bolt-on M&A, especially in the Production AH segment where purchase decision-makers may be the same as for traditional products. Competitive Forces Operational Effectiveness Three key Production AH-specific strategies: Companies could consider (a) acquisition strategies aimed at filling product portfolio gaps within a species and/or product category; (b) expansion into emerging markets where there is growing meat consumption and a need for livestock production efficiency; (c) transformation of commercial organizations to account-based models, segmenting customers into tiers. Two key Companion AH-specific strategies: Companies could (a) seek to gain access to category leaders by investing in a stringof-pearls acquisition strategy, or pursuing in-licensing, or (b) invest in brand awareness, particularly in the parasiticides category. Pursue defensive strategies such as launching branded generics or pursuing legal action to combat the entry of generic drug players and branded generic drugs. Improve operating efficiency to offset profit pressures; initiatives could include lean manufacturing, process efficiencies, network optimization, global sourcing excellence, and/or shared services in back-office functions. * We define Tier 1 as the top four AH players by market share, and Tier 2 as the next six players. Please see footnote on next page for details. 3

6 An important question remains, though: which of these strategies are appropriate for each AH product manufacturer? AH product manufacturers could consider the following: An effective strategy playbook should be a function of an AH product manufacturer s strengths in products, in commercial spaces, and in innovation. The strategic degrees of freedom available to the top four AH players by market share the Tier 1 players may be different from those available to the next six leading players the Tier 2 players.* Using our Capabilities-Driven Strategy approach, we have developed a proprietary strategy framework that can help AH players identify the right set of strategies to achieve competitive advantage and leadership in the industry. The PwC Animal Health Strategy Framework and Playbook is based on the key value-drivers of Innovation (as measured by portfolio maturity) and Portfolio Advantage & Commercial Excellence (as measured by market share). These two value-drivers (dimensions) result in four sets of strategy playbooks tailored for: Innovation and Market Share Leaders, Market Share Leaders, Innovation Leaders, and Potential Leaders. Innovation and Market Share Leaders might need to transform their commercial organization (especially in the Production AH segment), invest in branding, invest to remain innovation leaders, and expand into adjacencies. Innovation Leaders might need to continue to invest in innovation and improve the revenue potential of their innovative products, either by building their own commercial capabilities or by out-licensing. Potential Leaders might need to build commercial capabilities, including through consolidation of smaller players, and invest to own species or product categories. Private Equity (PE) firms might also see potential in this industry due to several of its unique characteristics, such as low-risk R&D models, diversified revenue streams, and stable, long-term demand-drivers. PE firms may see opportunities in acquiring Potential Leaders and in creating additional value through portfolio re-balancing and industry consolidation. Given the changes in the AH industry, one thing is clear: status quo business models may not be effective stand-alone options for long. We have provided a number of ways to think about potential paths forward based on AH companies current market position and product portfolio maturity. This playbook is intended as a guide to begin discussions. Every company has a unique vision for itself that will influence appropriate courses of action, and we know that industry leaders have already begun to think about some of the issues raised here. Market Share Leaders might need to fill portfolio gaps, improve R&D productivity, invest in high-potential areas of unmet need, transform commercial capabilities, and invest in new adjacent growth platforms such as diagnostics, devices, and analytics. * Tier 1 companies each have double-digit market share, and are at least twice as large as Tier 2 players. 4 Animal Health: Strategy Playbook for an Evolving Industry

7 Animal Health Strategy Framework and Playbook New (Low maturity) Innovation Leaders (Low portfolio maturity, low market share) Continue to invest in innovation, improve Co. I revenue potential either by building commercial capabilities or by out-licensing. Innovation and Market Share Leaders (Low portfolio maturity, high market share) Transform commercial organization in production AH, invest in branding in companion AH, invest to remain innovation leaders, expand into adjacencies. Strategies by Value-Driver Category Innovation 1. 1 Innovate for unmet needs, specialty care, biologics 2. 2 Improve R&D productivity, e.g., through collaborations 3. 3 Expand NCE pipeline, e.g.,through targeted acquisitions Portfolio Advantage & Commercial Excellence Innovation Value-Drivers Product portfolio maturity Old (High maturity) Co. H Co. J Co. G Potential Leaders (High portfolio maturity, low market share) Co. C Build commercial capabilities, Co. F invest to own species or product categories, invest in category leaders. Co. B Co. E Market Share Leaders (High portfolio maturity, high market share) Improve Co. DR&D productivity, invest in high potential areas of unmet need, fill portfolio gaps, transform commercial, and invest in new growth platforms Co. 7 A Continue to consolidate (applicable to Tier 2 players) 5. 5 Expand into adjacencies, including through collaborations or bolt-on M&A 6. 6 Use analytics, software applications, or wearables to increase customer loyalty 7. 7 Own a species and/or category in Production AH, by filling portfolio gaps, including through bolt-on M&A or in-licensing 8. 8 Expand into emerging markets in Production AH, including via bolt-on M&A 9. 9 Transform commercial organization 0. Invest in category leaders in Companion AH, including 10 through string-of-pearls M&A or in-licensing Invest in brand awareness with pet owners Competitive Forces 12. Defensive strategies in commercial, R&D, legal Operational Effectiveness Low Market share Portfolio Advantage & Commercial Excellence Value-Drivers High 13. Continue to invest in improving operating efficiencies In addition, the following traditional strategies are still applicable to Innovation Leaders: Applies to production AH and companion AH Applies to production AH Applies to companion AH 14. Lifecycle management, e.g., proactively plan launches and/or align with R&D Bubbles in background reflect illustrative positions of AH manufacturers. 15. Build commercial capabilities, or pursue out-licensing/commercial collaboration Source: PwC analysis Our proprietary capabilitiesdriven strategy framework includes four sets of tailored strategy playbooks for AH companies. 5

8 Acknowledgments Authors Dimitri Drone Partner, US Pharmaceutical and Life Sciences Leader PwC s Deals Practice +1 (973) dimitri.b.drone@us.pwc.com Brian Williams Director PwC s Global Health Practice +1 (317) brian.s.williams@us.pwc.com Div Kumar Lead Analyst PwC s Pharma & Life Sciences Practice +1 (646) divyadarshi.kumar@us.pwc.com Report Advisory Team For a deeper discussion on animal health industry strategies by functional area, please contact one of our subject matter leaders Research & Development Ben Gill Principal, PwC s Pharmaceuticals R&D Practice +1 (973) ben.gill@us.pwc.com Commercial and Operational Strategies Dr. Marcus Ehrhardt Partner, Strategy& s Life Sciences Operations Leader +1 (347) marcus.ehrhardt@strategyand.pwc. com Colin Carroll Director, PwC s Pricing and Profitability Practice +1 (315) colin.carroll@us.pwc.com Technologies Steve Zaloga Principal, PwC s Pharmaceutical & Life Science Technology Executive Officer +1 (708) steven.zaloga@us.pwc.com Mergers, Acquisitions, Integrations: David Dietzel Partner, PwC s Deals Practice +1 (646) david.p.dietzel@us.pwc.com Glenn Hunzinger Partner, PwC s Deals Practice +1 (646) glenn.hunzinger@us.pwc.com Jay Meldrum Principal, PwC s Deals Practice +1 (214) jay.d.meldrum@us.pwc.com Nitin Kaushal Managing Director, PwC s Corporate Finance Practice +1 (416) nitin.kaushal@ca.pwc.com Chris Mowry Director, PwC s Deals Practice +1 (214) chris.m.mowry@us.pwc.com Roel Van den Akker Director, PwC s Deals Practice +1 (646) rudolf.c.van.den.akker@us.pwc.com Other Contributors Moriah Nell, Vicky Sakr, Vijay Shetty, Tiffany Xu 6 Animal Health: Strategy Playbook for an Evolving Industry

9 About PwC s Pharmaceuticals and Life Sciences Industry Group PwC s Pharmaceuticals and Life Sciences Industry Group is dedicated to delivering effective solutions to the complex strategic, operational, and financial challenges facing pharmaceutical, biotechnology, and medical device companies. We provide industry focused assurance, tax, and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 195,000 people in 157 countries across the PwC global network share their thinking, experience, and solutions to develop fresh perspectives and practical advice PwC. All rights reserved. PwC and PwC US refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. MW