Specialty Pharma

Specialty Pharma
Exploiting growth opportunities in the new industry

space
The current growth-by-acquisition model is unsustainable. Specialty pharmas must become
less dependent on top tier companies for growth as acquisition targets become increasingly
scarce and prohibitively expensive
A network of long term partners is key to sustained growth. Specialty pharmas must partner
with biotechs, major pharmas and other specialty pharmas to share resources and risk
Reference Code: DMHC1752
Publication Date: 11/02
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Specialty Pharma DMHC1752

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Executive summary
EXECUTIVE SUMMARY
Scope
The specialty pharma sector encompasses a range of company types, from

development companies through drug delivery, generics and ‘little big pharmas’.
However, all share the same end goal – to be fully integrated pharmaceutical
companies (FIPCOs). Traditionally, the strategy employed to achieve this goal is
growth by acquisition, predominantly of products although less frequently of
companies. Such products are spurned by larger pharmaceutical companies because
of their low revenue potential. However, for smaller specialists, single product
acquisitions present opportunities for explosive growth, fueling earnings and revenue
growth at relatively low cost. When growth peters out, another product is acquired to
kick-start the cycle. The strategy is not without its risks and depends upon the right
products being available at the right price. Furthermore, if an acquired product
subsequently proves unsuccessful, a lack of breadth and depth in specialty pharmas’
portfolios can significantly dent investor confidence.
Leading specialty pharmas are beginning to out-grow this business model as the size
of products required to continue their expansion puts them into greater competition
with larger pharmas and raises the prices of licensing agreements. They are
increasingly looking upstream to fill pipeline gaps with their own R&D rather than
acquisitions. However, this is not the only growth strategy available to them.
Partnership networks, for example, will become more pivotal to growth and
therapeutic foci will widen or change.
Specialty Pharma benchmarks the relative position of 12 specialty pharmas against a

set of critical success factors that will influence their growth prospects to 2012. These
success factors emerge from a comprehensive analysis of drivers and barriers to the
future growth of the specialty pharma sector. Finally, the report assesses the
attractiveness of specialty pharmas as acquisition targets and the influence of their
continued development towards FIPCO status on the wider pharmaceutical market.

Executive summary
Datamonitor insight into the specialty pharma market
Analysis of the specialty pharma sector gives rise to the following major action points:
1. To achieve FIPCO status successfully, specialty pharmas must improve their

search strategies, work closely with biotechs and target the right therapy areas
2. The current growth-by-acquisition model is unsustainable. Specialty pharmas

must become less dependent on top tier companies for growth as acquisition
targets become increasingly scarce and prohibitively expensive
3. A network of long term partners is key to sustained growth. Specialty pharmas

must partner with biotechs, major pharmas and other specialty pharmas to share
resources and risk
4. Specialty pharmas with a US sales focus are attractive acquisition targets for
European and Japanese manufacturers
Specialty pharmas must improve their search strategies, work

closely with biotechs and target the right therapy areas
The critical success factors that specialty pharmas must adopt if they are to capitalize
on current and future revenue opportunities are:
• an established partner network;
• sophisticated search strategies and well structured collaborative agreements;
• targeting the 'right' disease areas;
• allying with the biotech industry;
• extensive geographic reach, with direct US market penetration;
• a strong and deep late stage pipeline that can be leveraged for continued
vertical integration.
Datamonitor has weighted these critical success factors according to their

significance and applied them to 12 selected specialty companies to assess their
relative future growth potential (Figure 1).

Executive summary
Figure 1: Relative future growth potential of 12 specialty pharmas
Relative future growth potential

Worst positioned
for future growth
in specialty Well positioned for
pharma market future growth
Lundbeck
Andrx King Teva
IDEC ICOS Biovail Forest Watson Elan Shire Allergan
10 9 8 7 6 5 4 3 2 1
•Poor search strategy •Effective search strategies •Effective search strategy

•Negligible sales and marketing •Limited geographic presence •Wide geographic reach
presence
•Limited biotech collaborations •Several biotech partners
•Limited biotech collaborations
•Primary care disease focus •Niche therapeutic focus
•Inadequate therapeutic
specialization
Source: Datamonitor DAT AM ONIT OR
Little big pharmas follow a large pharmaceutical company business model with
resources and expertise across the value chain, albeit on a smaller scale. They are
well positioned for future growth and are more advanced in their progress towards
FIPCO status than other types of specialty pharma. Allergan is in the strongest
situation, due to its established infrastructure, global presence and niche, specialist
therapeutic focus. It is effectively a small FIPCO already. The company benefits from
its network of partners, collaborating to develop products, and its strong reputation in
its three chosen therapy areas. This presents Allergan as a marketing partner of
choice to both its peers and larger companies, and creates more in-licensing
opportunities. Financially, Allergan is in a relatively good position to benefit from such
opportunities, ending H1 2002 with a cash pile of $855m.
Forest and King are similarly positioned to drive future growth. Both companies have
successfully exploited the growth-by-acquisition strategy in the past, in-licensing
marketed or late stage development products. However, unlike certain other specialty
pharmas, they lack the R&D infrastructure that is needed to develop proprietary
products. Furthermore, Forest and King have demonstrated successful search
strategies but, as acquisition targets become scarcer and bidding wars more
expensive, they should develop a network of partners to share facilities and the risks
of drug development and marketing. Both companies can afford to take bigger

Executive summary
financial risks and continue product and corporate acquisitions through greater
leverage of debt.
As development companies, IDEC and ICOS face a longer transition to FIPCO status
compared to their specialty pharma peers that have much of the necessary
infrastructure already in place. They need to establish, acquire or network to gain
access to a sales and marketing division and products to build up their marketed
portfolios. They cannot afford to depend on in-house R&D to provide sufficient
marketed products alone and should make product acquisitions. IDEC has a weak
late stage pipeline, although its lead product, Zevalin (ibritumomab tiuxetan), has
recently been launched and will be a key growth driver. At the end of H1 2002, IDEC
had a large cash pile with which to fund acquisitions but its long term debts must first
be reduced. ICOS has a better late stage pipeline and has accessed the
biotechnology industry for products, putting it in more a favorable position than IDEC.
The company’s key challenge is the successful commercialization of Cialis (IC351),
its lead product, with Lilly. Once this is achieved, ICOS must strengthen its marketed
portfolio through in-licensing agreements and by taking on more collaborative
partners.
Andrx is currently poorly positioned for growth as a specialty pharma and is still in the
early stages of transitioning away from its roots in the generics sector. Its key
weaknesses include its lack of a partner network, with no alliances with biotechs, and
a poorly executed search strategy. Without these three critical success factors, the
company has limited access to new products with which to fuel future growth and, in
any case, has little capital to fund acquisitions. Furthermore, although Andrx has drug
development technologies in-house, it has yet to utilize them to produce a strong or
deep branded pipeline.
The current growth-by-acquisition model is unsustainable
Specialty pharmas utilize the growth-by-acquisition model because they typically lack
the resources or expertise to develop and market a full pipeline of products in-house.
As such, acquisition activity is essential to their growth. Development and drug
delivery companies, for example, already possess R&D capabilities but utilize
company acquisitions to establish a sales and marketing infrastructure as they move
down the value chain. However the current growth-by-acquisition model is
unsustainable because acquisition targets are becoming increasingly scarce and
prohibitively expensive.

Executive summary
Acquisition targets, typically with peak annual sales potential of around $200m, are
available from major pharmaceutical companies. The latter are only interested in high
selling products that can fund the double-digit growth that their investors demand or
must, upon merger or acquisition, divest specific products for anti-competitive
reasons or to streamline their portfolios. Smaller products make ideal acquisition
targets for specialty pharmas and can be acquired for between two and five times a
drug’s annual sales. With their focused sales forces and heavy reliance on such
products to drive future growth, specialty pharmas are often able to propel acquired
products to greater commercial success than larger originator companies.
However, there is a limited shelf-life to single product acquisitions in terms of

specialty company growth. A newly acquired product will kick-start company growth in
the first two years because it is an additional growth driver. After this point, growth
peters out, new growth drivers are required and, therefore, more product acquisitions
are made. This continued need for acquisitions has two major knock-on effects: high
cash burn rates among specialty pharmas and an over-reliance on each acquisition
for company growth. Furthermore, as specialty pharmas get larger, they begin to
outgrow the growth-by-acquisition business model because of a lack of targets that fit
with the company’s therapeutic strategy and an absence of targets that are large
enough and cheap enough to sustain previous growth rates.
To sustain growth, specialty pharmas must reduce their dependence on large

pharmas. The future prospects of the specialty pharma market will be determined by
the growth (both in terms of rate and strategy) of top tier companies. This is
demonstrated in Figure 2, which illustrates three potential future focused scenarios
(best case, most likely and worst case) that will define growth of the specialty pharma
market. Each scenario reflects the variable impact of a series of short and long term
drivers and resistors to growth.

Executive summary
Figure 2: Future growth of the specialty pharma market will be primarily

determined by the therapeutic focus and favored growth
strategy of top tier companies
Ongoing consolidation Best case

leads to spin-off of
entire therapeutic scenario
franchises
Greater consolidation
Relative specialty pharma
among large pharmas

significantly increases Most likely
small product
divestments
scenario
market size
Continued consolidation Pharmacogenomics increases

makes smaller products number of drug targets and reduces
available for specialty competition within pharma market as
pharmas to acquire. Co- a whole. Biogeneric approval
promotion opportunities pathway opens up
arise with biotechs
Worst case
scenario
Large pharma splits into therapeutic franchise

focused companies. Pharmacogenomics
intensifies competition in micro-segmented
markets
~$80bn
2002 2007 2012
Decreasing
productivity forces
large pharma to focus Year
on smaller products
The key differentiating factor between the best and most likely outcomes is the
intensity of consolidation among large pharmaceutical companies. In the best case
scenario, consolidation increases at the same or a higher rate than at present. To
maintain growth, top tier companies must continue to focus on larger therapeutic
markets and, consequently, will continue divesting smaller non-core products and tail-
end brands to specialty pharmas. This scenario is predicated on the fact that leading
companies will continue to favor growth via M&A above organic growth or improving
productivity. In the worst case outcome, leading companies can neither acquire nor
develop in-house products of a sufficient size to fuel their growth and are forced to
rely on smaller products to fill pipeline gaps. This brings them into direct competition
with specialty pharmas in small therapeutic markets and reduces the number of lower

Executive summary
revenue potential products that they are able to divest. Alternatively, top tier
companies may fragment into small therapeutic business units. With the cost
synergies that being linked to a larger company network offers and more extensive
expertise throughout the value chain, they will present tough competition to specialty
pharmas that are active in the same areas.
A network of partners is key to sustained growth
Specialty companies rely heavily on partners to fund growth and provide compounds,
expertise and/or facilities at different stages of the life cycle. Since the acquisition of
compounds is a fundamental feature of the specialty pharma business model,
establishing long term partnerships reduces the need for an opportunist, and
generally less effective, product search strategy. The wider a specialty pharma’s
partnership network and the more compounds that the network supports, the lower
the risk that the failure of one deal will undermine growth of the company as a whole.
Although partnership networks become less significant over time (i.e. when, as a
FIPCO, a full complement of operations is established in-house), none of the
specialty pharmas profiled in this report are as yet independent of other companies
for growth. There will also continue to be a flow of emerging specialty companies for
which partner networks are vital to growth.
Greater collaboration between specialty pharmas in R&D and sales and marketing
will help them compete with the power houses of larger players. Companies operating
in the same therapy areas should pool their resources to diversify risk, speed up drug
development and increase the market penetration of their drugs. Their ultimate goal
should be to build a portfolio of shared products that are developed and promoted
more efficiently than by one small company alone.
Opportunities also exist for biotechs and specialty pharmas to work more closely
together. Most biotechs that are moving downstream lack the in-house sales and
marketing infrastructure or expertise with which to launch their products alone. There
is thus an opportunity for specialty pharmas to partner with them, offering more
favorable deals in terms of royalties than large pharmas traditionally would. Since one
of the most common reasons for the failure of deals between leading pharmaceutical
companies and biotechs is a lack of shared goals and commitment to projects, deals
between companies of a similar size are more likely to be successful because both
partners are equally dependent upon the agreement for future growth. In July 2002,
the biotechnology industry had over 360 products in clinical development, presenting

Executive summary
numerous opportunities for specialty pharmas to co-promote or acquire product rights

for certain geographic markets.
The value of partnering extends beyond specialty pharmas and biotechs working
together. It is possible to craft productive and more profitable organizations from a
physically dispersed set of operations, with a specialty pharma company at the hub.
In the traditional pharmaceutical business model, an average of 80% of the burden of
fluctuating resource needs is borne in-house. In a partnership network model,
perhaps only 40% of resource needs are retained in-house. Outsourcing additional
requirements transfers a significant proportion of otherwise fixed costs into variable
costs. When industry dynamics change, or at times when performance exceeds
expectations, a networked company can respond quickly and optimally, without being
constrained by investments that have already been made in-house. Equally, when
revenue growth is slow or erratic, or when diluting the risks of R&D, lowering variable
costs protects gross operating profit margins. This is a particularly valuable strategy
for specialty pharmas that have yet to start, or have only just started, generating
revenue. By building a network of alliances, the sponsor specialty pharma can access
resources where and when required. Furthermore, the specialization of a vendor may
enable it to generate efficiencies that it can pass on to clients in the form of lower
costs. Even if the unit costs of outsourcing are higher, a networked specialty pharma
is still more efficient if its vendors offer greater returns than would be achieved by
investing the same amount in-house.
Specialty pharmas with a US sales focus are attractive acquisition

targets for European and Japanese manufacturers
Since the most successful specialty pharmas display relatively high degrees of
specialization, either geographically or therapeutically, as potential acquisition targets
they present opportunities for other companies to rapidly establish themselves in new
markets. This enables the latter to overcome gaps in their pipelines and revenue
streams or to escape poor growth prospects and/or declining productivity in their
existing areas of expertise. Three key factors may motivate acquisitions of specialty
pharmas:
• geographic expansion – it is quicker and more cost-effective to acquire

facilities and expertise in a foreign market than it is to penetrate it through
organic growth;

Executive summary
• sales force expansion – a feature of niche marketers is their targeted, expert

sales forces, with the most successful specialty companies having
considerable brand equity in their chosen fields;
• R&D capabilities – pipeline compounds, drug discovery technologies and/or

the delivery capabilities of specialty pharmas makes their acquisition an
effective means of closing pipeline gaps.
Specialty pharmas are attractive acquisition targets to medium and large

pharmaceutical companies based in Europe and Japan, as well as to biotechs and
other specialty companies.
The value, size and free market status of the US means that it is the source of the
majority of pharmaceutical company profits. Even the largest companies are
continuing to penetrate the US, generally as a means of escaping the current limited
growth potential of Europe: Novartis is a case in point. However, the US is difficult to
penetrate from scratch; it is geographically vast, competition is intense, and pricing
and promotional strategies are more varied (a function of fewer regulations). It is,
therefore, easier to acquire a company that is already established in the country than
to go it alone. This makes specialty pharmas with a significant US focus a particularly
attractive acquisition target for European and Japanese manufacturers. Potential
purchasers include Novartis and Roche, both of which are headquartered in Europe
but building their businesses in the US, and the Japanese companies Fujisawa and
Chugai, which are trying to gain access to the US.
Despite the presence of direct-to-consumer marketing in the US, physician detailing

remains the channel of choice in pharmaceutical promotion. For most larger
companies, maximizing rep headcount is a priority. Sales are directly proportional to
rep headcount since there are few economies of scale in pharmaceutical sales
operations. This makes those specialty pharmas with relatively large US sales forces,
such as King and Forest with their 715 and 2,200 sales reps, respectively, attractive
acquisition targets. The appeal of these companies is enhanced because their sales
forces detail primary care physicians and could, therefore, be retrained to promote a
large company’s portfolio of primary care products.
Specialty pharmas are attractive to Japanese companies that are trying to branch out
into Europe and the US to escape tough economic conditions in their domestic
market. A lack of experience operating within foreign regulatory environments makes
acquiring another company a more attractive option than merely opening new offices.
A number of leading Japanese players have partnered with foreign pharmaceutical

Executive summary
companies to establish new subsidiaries: Takeda and Abbott, for example, formed
TAP Pharmaceuticals. However, companies like Kyorin Pharmaceuticals, which had
sales of $513m in 2001, is too small to create an independent overseas presence, but
its strong cash position and low debt-to-equity ratio may enable it to acquire a small
foreign outfit, like a specialty pharma. This would give Kyorin an immediate
international presence and reduce its dependence on Japan.
Large biotechnology companies are increasingly focusing on acquisitions, driven by

their need to overcome the same productivity problems that beset their
pharmaceutical counterparts. This is illustrated by Amgen’s purchase of Immunex in
December 2001. Amgen reached its market-dominating position by focusing its
efforts on internal R&D and, using this strategy, has created two blockbusters,
Epogen (epoetin alpha) and Neupogen (filgrastim). However, it has been unable to
replicate this success through in-house R&D alone and, to maintain its position, has
acquired another biotechnology company. The $16bn deal for Immunex supplies
Amgen with another potential blockbuster, Enbrel (etanercept), and a ready-made
sales force to promote it. The purchase of Immunex is attractive to Amgen because,
unlike acquisitions between larger companies, there are minimal overlaps between
the two companies’ products and sales forces, while those from duplication of
facilities are likely to be small. Many specialty pharmas offer similar enticing features.

Table of contents
TABLE OF CONTENTS
EXECUTIVE SUMMARY 3
Scope 3
Datamonitor insight into the specialty pharma market 4
Specialty pharmas must improve their search strategies, work closely with biotechs
and target the right therapy areas 4
The current growth-by-acquisition model is unsustainable 6
A network of partners is key to sustained growth 9
Specialty pharmas with a US sales focus are attractive acquisition targets for
European and Japanese manufacturers 10
CHAPTER 1 SPECIALTY PHARMA – THE STORY SO FAR 26
Key findings 26
The specialty pharma market: definition 27
Diverse roots 27
Little big pharma 28
Generics 29
Drug delivery 29
Development 30
Specialty pharma market size 30
Characteristics of specialty pharma companies 30
Growth by acquisition 31

Table of contents
Narrow therapeutic focus 31
Reliance on niche therapy areas 32
Geographic specialization 32
Incomplete in-house infrastructure 33
Key performance indicators 33
Visibility in earnings 34
Strong revenue growth in key products 35
Operating profit margin growth 35
High profile new product approvals and launches 36
Strong financial position: high cash, moderate debt 37
Traditional specialty pharma growth strategy: growth-by-acquisition 38
Search strategies 40
Acquisitions 41
Single product acquisitions 41
Franchise acquisitions 42
Corporate acquisitions 43
Focused sales and marketing activities 44
Limitations to the growth-by-acquisition model 44
Need for high cash reserves 44
Over-reliance on success of individual acquisitions 45
Lack of appropriate acquisition targets 45
Acquisition targets too small 46

Table of contents
CHAPTER 2 COMPANY ANALYSIS 48
Key findings 48
Benchmarking specialty pharma performance 49
Benchmarking by sales and sales growth, 2000-01 49
Degree of specialization 51
Therapeutic focus 51
US market penetration 53
Sales force size: are there economies of scale for specialty pharmas? 54
Ratio analysis 55
Funding future growth 57
Individual company profiles 58
Allergan 59
Summary 59
Financial analysis 61
Portfolio analysis 62
Partnership network 63
Andrx 65
Summary 65
Biovail 72

Table of contents
Summary 72
Elan 78
Summary 78
Accountancy concerns slow Elan’s growth 79
Transforming from drug delivery to specialty pharma: current hurdles 80
Corporate acquisitions allow rapid expansion 85
Research partners: Wyeth and Biogen 85
Forest 87
Summary 87
ICOS 93
Summary 93

Table of contents
IDEC 99
Summary 99
King 104
Summary 104
Revenue growth drivers 107
Product acquisitions 109
Lundbeck 112
Summary 112
Geographic focus: Europe cannot sustain long term growth 115
Shire 119
Summary 119

Table of contents
Teva 127
Summary 127
Watson 133
Summary 133
Oxytrol: the key to growth as a specialty pharma company? 137
Deal analysis 139
Future partners 139
CHAPTER 3 IDENTIFYING AND EXPLOITING FUTURE

GROWTH OPPORTUNITIES 141
Key findings 141
Short term growth opportunities for specialty pharma, 2002-07 142
Growth drivers 142
Productivity crisis leads to consolidation among large pharmas 142
Large pharmas ignore therapeutic markets with lower revenue potential 144

Table of contents
Revenue window of opportunity for specialty pharmas 146
Patent expiries fuel generic and drug delivery company growth 149
Biotechs move downstream 150
Japanese market opens up to specialty pharmas 151
Barriers to growth 151
Large pharmas focus on small drugs 152
Emerging technologies increase the costs of discovery and R&D 153
Difficulties securing funding 153
Biotech moves into the specialty pharma space 154
Longer term growth opportunities for specialty pharma, 2007-12 154
Growth drivers 154
Genomics and related technologies lead to more drug targets 154
Pharmacogenomics leads to micro-segmentation of disease markets 155
Biogeneric introduction 156
Divestment of franchises by large pharma 157
Barriers to growth 158
The impact of pharmacogenomics 158
Major pharmas break down into therapy area companies 158
Future scenarios of specialty pharma market growth 159
Winning growth strategies 162
Improved search strategies and better structured agreements 165
Targeting the right therapy areas 166

Table of contents
Creating partnership networks 167
Working with biotechs 169
A more intimate partner 169
Acquire or co-promote? 170
Moving upstream to reduce reliance on acquisitions 171
CHAPTER 4 THE SPECIALTY PHARMA LANDSCAPE TO 2012 173
Key findings 173
Future specialty pharma critical success factors 174
Partnership networks 174
Active, structured search strategies 177
Targeting the 'right' disease areas 178
Alliances with biotech 179
Geographic reach 181
Strength and depth in the late stage pipeline 182
Future success of selected specialty pharmas to 2012 183
Little big pharmas 184
Generics companies 185
Drug delivery companies 186
Development companies 187
Impact of specialty pharma growth on the wider industry 187
Are specialty pharmas attractive acquisition targets? 187

Table of contents
Appeal to medium and large pharmaceutical companies 188
Appeal to Japanese companies 189
Appeal to biotechnology companies 190
Specialty pharma consolidation 190
The next generation of specialty pharmas 191
CHAPTER 5 APPENDIX: SUPPORTING DATA 193
Datamonitor Healthcare’s pharmaceutical strategy capabilities 193
st
About 21 Century Insight 193
About eHealthInsight 193
Datamonitor’s strategic consulting expertise 194
Datamonitor’s pharmaceutical strategy team 195
Jennifer Coe, Strategy Director 195
Johannes Inama, Consultancy Director 195
Nick Bennett, Strategy Lead Analyst 196
LIST OF TABLES
Table 1: Allergan: financial health, 1999-2001 61
Table 2: Allergan’s acquisitions and agreements, 2000-2002 64
Table 3: Andrx: financial health, 1998-2001 67
Table 4: Andrx’s acquisitions and agreements, 1997-2002 71

Table of contents
Table 5: Biovail: financial health, 1998-2001 74
Table 6: Biovail’s merger and acquisition activity, 1999-2002 77
Table 7: Elan: financial health, 1998-2001 82
Table 8: Elan’s acquisitions and agreements, 1996-2002 86
Table 9: Forest: financial health, 1998-2001 89
Table 10: Forest’s late stage pipeline, 2002 92
Table 11: ICOS: financial health, 1998-2001 95
Table 12: ICOS’ acquisitions and agreements, 1997-2002 98
Table 13: IDEC: financial health, 1998-2001 100
Table 14: IDEC’s acquisitions and agreements, 1996-2002 103
Table 15: King: financial health, 1998-2001 106
Table 16: King’s acquisitions and agreements, 1996-2002 111
Table 17: Lundbeck: financial health, 1998-2001 114
Table 18: Lundbeck’s in-licensing activities 117
Table 19: Shire: financial health, 1998-2001 121
Table 20: Shire’s merger activity, 1995-2002 125
Table 21: Shire’s agreements, 2000-2002 126
Table 22: Teva: financial health, 1998-2001 129
Table 23: Teva’s acquisitions and agreements, 1997-2002 132
Table 24: Watson: financial health, 1998-2001 135
Table 25: Watson’s product acquisition activity, 1997-2002 138
Table 26: Watson’s merger and acquisitions, 1997-2002 139

Table of contents
Table 27: Pharmaceutical industry structure in 1998, 2000 and 2005 148
Table 28: Drivers and resistors of specialty pharma market growth 160
LIST OF FIGURES
Figure 1: Relative future growth potential of 12 specialty pharmas 5

determined by the therapeutic focus and favored growth strategy of top tier
companies 8
Figure 3: The impact of acquisitions on specialty pharmas’ operating profit

margins 36
Figure 4: Specialty pharma companies’ evolution towards fully integrated

pharmaceutical company status 39
Figure 5: Benchmarking by sales: smaller specialty pharmas show higher

growth 50
Figure 6: Therapeutic, geographic and value chain focus of selected specialty

pharmas 51
Figure 7: Therapeutic specialization in 2001: CNS is the therapy area of choice 52
Figure 8: Specialty pharmas’ geographic focus 54
Figure 9: The number of sales reps is directly proportional to sales 55
Figure 10: Ratio analysis of specialty pharmas 56
Figure 11: Specialty pharma cash reserves 58
Figure 12: Indicators of specialty pharmas’ growth strategies 59
Figure 13: Assessment of Allergan’s strategic position, 2002 60

Table of contents
Figure 14: Assessment of Andrx’s strategic position, 2002 66
Figure 15: Assessment of Biovail’s strategic position, 2002 73
Figure 16: Assessment of Elan’s strategic position, 2002 81
Figure 17: Assessment of Forest’s strategic position, 2002 88
Figure 18: Assessment of ICOS’ strategic position, 2002 94
Figure 19: Assessment of IDEC’s strategic position, 2002 99
Figure 20: Assessment of King’s strategic position, 2002 105
Figure 21: Assessment of Lundbeck’s strategic position, 2002 113
Figure 22: Assessment of Shire’s strategic position, 2002 120
Figure 23: Assessment of Teva’s strategic position, 2002 128
Figure 24: Assessment of Watson’s strategic position, 2002 134
Figure 25: A handful of mega-companies will dominate the industry by 2005 149
determined by the therapeutic focus and favored growth strategy of top tier
companies 161
Figure 27: Exploiting revenue opportunities in the new industry space 164
Figure 28: Development companies display the most extensive partnership

networks 175
Figure 29: Little big pharmas have the most effective search strategies 177
Figure 30: Selecting an appropriate therapeutic focus is key to maximizing profit

margins 179
Figure 31: Elan leads the way in working with biotechs 180
Figure 32: US based specialty pharmas do not yet need to expand beyond their
domestic market – only Allergan has a global presence 182

Table of contents
Figure 33: Forest’s organized search strategy is apparent in the strength of its
late stage pipeline 183
Figure 34: Allergan is the most favorably positioned to transition successfully to

FIPCO status 184

Specialty pharma – the story so far
CHAPTER 1 Specialty pharma – the story so far
Key findings
– The specialty pharma market emerged in the early 1990s, with

traditionally niche companies utilizing a growth-by-acquisition (of
products, franchises and/or companies) strategy to achieve their mutual
goal: fully integrated pharmaceutical company (FIPCO) status
– The specialty pharma sector comprises four types of company, reflecting

their different business roots: ‘little big pharmas', with their large
pharmaceutical company business model implemented on a small scale,
and selected generics, drug delivery and development companies that
are partnering and/or integrating vertically to expand their capabilities
– Datamonitor estimates that the specialty pharma market was worth

$73bn in 2001
– Successful specialty pharmas focus on specific therapy areas and/or on

marketing their products in a limited number of countries. This allows
them to exploit synergies by concentrating their resources and, by
establish a strong presence, become a licensing partner of choice
– Smaller products divested following major pharma M&A activity or

portfolio reviews make ideal acquisition targets for specialty pharmas
and can be acquired for two to five times a drug’s annual sales
– There is a limited shelf-life to single product acquisitions in terms of

specialty company growth. Newly acquired products will kick-start sales
growth in the first two years. After this point, growth peters out, new
growth drivers are required and, therefore, more product or, preferably,
franchise or company acquisitions must be made
– Larger specialty pharmas are outgrowing the growth-by-acquisition

model because of a lack of acquisition targets that fit with their
therapeutic strategy and are large enough and cheap enough to sustain
previous growth rates

The specialty pharma market: definition
The specialty pharma market emerged in the early 1990s, with traditionally niche
companies utilizing a growth-by-acquisition strategy to achieve their mutual goal: fully
integrated pharmaceutical company (FIPCO) status. This chapter defines the types of
companies that comprise this complex group, outlines their common characteristics
and charts their position in today’s pharma market. Key performance indicators and
the pros and cons of the growth-by-acquisition strategy are also evaluated.
Diverse roots
The specialty pharma market encompasses a range of different company types but
all share the same objective: to become a FIPCO. To achieve this objective, they
must develop a similar infrastructure to that of large pharmaceutical companies,
including the in-house capabilities required to discover, develop, manufacture and
commercialize drugs.
Datamonitor classifies the different types of specialty pharma companies as:
• ‘little big pharma' – companies with a large pharmaceutical company

business model but implemented on a small scale. Within this group there
are two further subsections:
• search and development – companies that lack product discovery

capabilities and instead in-license products at various stages of the life
cycle for continued development and subsequent marketing. These
companies have invested in a sales and marketing infrastructure but do
not have to incur the costs of conducting their own research;
• niche marketers – companies that target their products at those small

markets that larger companies generally avoid because the potential
returns are not sufficiently high;
• generics – companies that have traditionally produced generic products and

are now starting to develop propriety drugs to self-market;
• drug delivery – companies that develop delivery technologies that they are
now leveraging to produce propriety drugs to self-market;

• development – companies that have traditionally focused on drug discovery

and development, out-licensing products for sales and marketing. This group
of companies is now looking to start self-marketing its proprietary drugs.
Companies that typify each category of specialty pharma and that are profiled in
detail later in this report are briefly introduced below.
Little big pharma

Five companies that are representative of the little big pharma category of specialty
pharma company, and that are subsequently profiled in detail in Chapter 2 of this
report, include:
• Allergan – a specialty pharma with the full range of capabilities that FIPCOs
require. It is a niche marketer, concentrating on ophthalmic, dermatological
and neurological indications;
• Forest – a US specialist that sits within the search and development category
of little big pharma. The company has some drug development capabilities
and is currently moving upstream. It has benefited from in-licensing products
from European pharmaceutical companies with little US presence;
• King – a US sales and marketing specialist with an increasing focus on the

cardiovascular area following its success with Aventis’ anti-hypertensive
Altace (ramipril). The company also displays characteristics of a search and
development style company, and is undergoing upstream integration having
recently acquired drug development facilities;
• Lundbeck – a European company with high therapeutic specialization in

CNS. The company conducts its own research and in-licenses products for
development. Lundbeck is a little big pharma, but its growth is currently
restricted by its limited geographic presence;
• Shire – a little big pharma with sales operations in the US, Canada and major
European markets, and a broad therapeutic portfolio. Following its merger
with BioChem Pharma in May 2001, it has moved upstream into drug
discovery and lead optimization.

Generics
A number of generics companies are making the transition out of the generics sector
and into specialty pharma in a bid to escape the low margins of the former and to
improve their long term growth prospects. Of particular note, and profiled in this
report, are:
• Teva – the largest generics company is establishing a branded portfolio of

proprietary products. It has a CNS focus within its branded business but has
little proprietary R&D experience and is dependent on partnerships for the
continued development of its pipeline;
• Watson – a US specialist that is switching its focus from its traditional market
in generic products to branded proprietary products. The company has a
therapeutic focus in women’s health and is one of the leading players in the
US women’s health market;
• Andrx – a specialty pharma company engaged in the formulation and

commercialization of oral controlled release generic and branded
pharmaceuticals that utilize its proprietary drug delivery technologies.
Drug delivery
Traditional drug delivery companies are beholden to larger pharmaceutical
companies for royalties on sales of products utilizing their technologies. This creates
uncertainty in their revenue stream since reformulated products will be launched at a
time that is commercially convenient for the in-licenser rather than for the drug
delivery company. Consequently, a number of the latter are beginning to develop and
market proprietary drugs using their own delivery technologies, setting themselves on
the path towards FIPCO status. Two such companies are featured in this report:
• Elan – a drug delivery company that has made the transition to producing
branded products by making corporate acquisitions. It has a CNS focus and
historically a strong reliance on its domestic market, Ireland;
• Biovail – a company that has transitioned from a drug delivery specialist to

marketing its own products in Canada and, since 2000, in the US.

Development
Two notable development companies are entering the specialty pharma sector by, for
the first time, taking products developed in-house to market themselves or via a co-
promotion agreement with a larger and more experienced partner:
• ICOS – the company has a diverse growth strategy and is developing a

pipeline with products in many indications. It has three late-stage products
and a number of joint venture marketing agreements. ICOS is on the verge of
marketing its first product, Cialis (IC351), indicated for erectile dysfunction,
which it will promote through a joint venture with Eli Lilly;
• IDEC – engaged primarily in the R&D and commercialization of antibody

therapies. Although IDEC has sales and marketing capabilities, they are
limited to a co-promotion agreement with Genentech. Datamonitor suggests
that the company is likely to develop its own in-house sales and marketing
force and reduce its reliance on co-promotion.
Specialty pharma market size
Datamonitor estimates that the specialty pharma market was worth $73bn in 2001.
This estimate is based on the following:
• the average sales of 24 specialty pharmas analyzed by Datamonitor in 2000

was $797m;
• Deutsche Bank estimates that there are 84 specialty pharma companies

(Wall St Transcript, August 2002).
Combining these data points generates a specialty pharma market size of $70bn in
2000. Assuming 9% market growth between 2000 and 2001 (in line with the global
pharmaceutical market’s growth) gives a figure of $73bn in 2001. This figure can be
sanity-checked against McKinsey’s estimate of the market size of companies worth
$500m to $3bn in revenues in 1999: $59.2bn. Assuming annual growth of 9%
between 1999 and 2001, McKinsey’s estimate scales up to a market size of $70.3bn
in 2001.
Characteristics of specialty pharma companies
Although the specialty pharma sector comprises a number of different company

types, they share one or more of a set of common characteristics:
• growth by the acquisition of single products;
• narrow therapeutic focus;
• reliance on small therapy areas;
• restricted geographic focus;
• lack of one or more of an R&D, sales and marketing, manufacturing and

global infrastructure.
Growth by acquisition
Specialty pharma companies make product, franchise and/or company acquisitions to
grow their businesses. For example, King acquired the anti-hypertensive Altace,
Biovail purchased the Cardizem (diltiazem) product line, and Shire acquired
Richwood and merged with BioChem Pharma. They engage in these activities
because they typically lack the resources or expertise to develop and market a full
pipeline of products in-house. As such, acquisition activity is essential to specialty
pharmas’ growth. Development and drug delivery companies, for example, already
possess R&D capabilities but utilize company acquisitions to establish a sales and
marketing infrastructure as they move down the value chain. The pros and cons of
the growth-by-acquisition strategy are discussed in greater detail later in this chapter.
Narrow therapeutic focus

Specialty pharma companies display a narrow therapeutic focus, typically
concentrating on between one and three therapy areas. This allows synergies in
resource allocation to be exploited, making them more competitive against their larger
counterparts. Furthermore, by concentrating on a small number of therapy areas a
specialty pharma can establish a reputation in a particular field and become a
development or marketing partner of choice.
Building a portfolio of products in a common therapy area reduces the number of reps
a company needs to optimize its products’ revenue potential. In addition, positioning
complementary products as part of a franchise offers clear synergies. Not only is a
sales force more efficient, but the action of a physician prescribing one product within
a company’s franchise will bring others to the front of his/her mind. Watson, for
example, has benefited from its specialization in women’s health, with sales of this
franchise growing by 37.9% from 2000 to 2001 to account for 21.2% of its total
revenues.
An established reputation in a particular therapy area allows a specialty pharma

company to become the marketing partner of choice in this area. Lundbeck’s success
with the antidepressant Cipramil (citalopram) and its continued focus on CNS
indications have created opportunities for the company to in-license further CNS
products into its pipeline. These include Oral Copaxone (glatiramer acetate), which
was in-licensed from Teva and is currently in phase III trials for the treatment of
multiple sclerosis, and bifeprunox (DU127090), which was in-licensed from Solvay
and is currently in phase II trials for the treatment of both psychoses and Parkinson’s
disease.
Reliance on niche therapy areas

Small therapy areas offer specialty pharmas a niche in which to compete because
they are less attractive to larger companies that require more sizeable growth
opportunities. Specialty pharmas with limited resources can, for example, launch
cost-effective promotional campaigns because there are only a relatively small
number of physicians to target. In contrast, in larger therapy areas they are often
eclipsed by their bigger competitors because their sales forces can only capture a
limited share of voice with physicians. However, small therapy areas do not
necessarily mean small returns. If there is a high level of unmet need that a drug can
address, specialty pharmas can still command a price premium and generate
significant revenues.
An example of a small therapy area is dermatology. Prior to its decision in October

2001 to acquire Ascent Pediatrics, the specialty pharma company Medicis had a
100% focus on this therapy area. With only 80 reps, Medicis was able to detail 60%
of the 7,000 US dermatology specialists, including all of the high prescribers, as
effectively as larger pharmaceutical companies.
Geographic specialization
Many specialty pharmas focus on selling their products in a limited number of
countries in which they have particular expertise. As with therapeutic specialization,
this allows them to concentrate their resources and establish a strong presence.
However, specialization is only practical in certain geographic markets once specialty
pharmas reach a certain size threshold. Europe, for example, is not large enough to
support the full transition of a specialist pharmaceutical company into a FIPCO.
Geographic specialization is appropriate for companies in the US, such as King,

Medicis and Watson. The US is the largest pharmaceutical market by value and, due

to its size and free market status, it is where the majority of pharmaceutical profits are
generated. A US based specialty pharma is unlikely to increase its margins by
establishing a presence outside the US when it could more profitably invest in further
expanding its US sales force and/or therapeutic coverage.
European specialty pharmas face a different challenge from those in the US. Given
that most specialty companies focus on small therapeutic markets, no individual
European country has a sufficiently large patient population to allow a company to
recoup the investment required to take a product through R&D or to in-license an
approved product for marketing. Although products may be approved simultaneously
throughout the European Union through the centralized approval procedure,
linguistic, cultural and regulatory differences mean that a company will still need a
different sales force in each country. Geographic specialization is, therefore, less
advantageous within Europe than elsewhere and European specialty pharma are
generally more diverse in their operating locations. Lundbeck, for example, relies on
its home territory of northern Europe. Further afield, the company has been able to
achieve coverage in the US through partnerships and licensing agreements. It also
runs many subsidiary organizations, although at present these do not contribute
significantly to its revenues. However, Lundbeck’s long term goal is to enter the US
market independently.
Incomplete in-house infrastructure

Most specialty pharmas do not have the financial resources or expertise to operate
throughout the value chain. In place of missing operations, specialty pharmas rely on
strategic partners to in- or out-license drugs or, in the case of manufacturing, on
contract organizations. For example, US based Forest has no in-house drug
discovery capabilities but often relies on in-licensing products from European
pharmaceutical companies, including Lundbeck.
Key performance indicators
Events that are unique to individual specialty pharma companies, rather than
industry-wide events, are the dominant influence on growth because the specialty
sector is so diverse. However, there are a number of criteria that distinguish
successful specialty pharma companies and against which their performance is
typically measured. These include:

• visibility in earnings;
• strong revenue growth in key products;
• operating profit margin growth;
• high profile new product approvals and launches;
• strong financial position: high cash, moderate debt.
Visibility in earnings
Visibility in earnings is key to the success of specialty pharmas because they rely
heavily on external investment to fund acquisitions and on a small number of
products to drive growth: this is a high risk growth strategy. They also invest large
amounts of internal resources in product acquisitions. For these activities to proceed,
a specialty company must boost investor confidence in its ability to perform well and
offer a good return on investment. Ideally, therefore, specialty pharmas should be
able to demonstrate visibility in earnings three to five years out to maximize investor
confidence.
Visibility is arguably relatively easy for specialty pharmas to achieve because they
only have a small number of key products, the sales of which are relatively easy to
forecast. This makes them straightforward for investors to track. For example,
Morgan Stanley is backing Amersham Health because of the visibility of its
Separations business and has forecast 15% earnings per share (EPS) growth over
the next three to five years. Wall Street’s estimates for King’s growth in EPS to 2005
are as high as 19%. This is based on the clear visibility provided by the company’s
key drug Altace, which has the potential to triple its sales by 2005.
Generics companies suffer from poor visibility. A company can navigate a six month
period of exclusivity that will significantly bolster sales but, once this is finished, sales
either decline to previous levels or companies must make up the gap. Such poor
visibility discourages long term investment and thus a number of generics companies
are branching out into branded, patented products to offer enhanced visibility in
earnings, which should in turn improve their attractiveness for funding and support
longer term growth.

Strong revenue growth in key products

Specialty pharmas focus on a small number of products because of their limited
resources. It is, therefore, essential that these core products show continued strong
growth, adding to the future earnings potential of the company. Forest and Lundbeck
have achieved strong growth with their flagship product, the antidepressant
citalopram. In 2001, Forest recorded $1,088m in sales of Celexa, a 52% increase on
2000, while Lundbeck’s sales of Cipramil rose by 31.3% to $545m in 2001. Although
patent expiry is expected in 2003, citalopram has contributed to high visibility in
earnings for both companies over the last five years. In contrast, Schwarz has failed
to achieve strong growth in its core products, with no single drug achieving sales of
over $100m in 2001. This has affected the company’s overall growth, which was only
4.1% between 2000 and 2001, and had a corresponding impact on investor
confidence.
Operating profit margin growth

In the early stages of a specialty company’s life cycle it is revenue growth that attracts
investors. However, as companies expand, operating profit margin growth plays an
increasingly important role. The therapeutic, geographic and value chain focus of
specialty pharmas means that if their core products achieve strong sales growth,
operating profit margins will often grow accordingly, primarily because of cost
synergies in sales and marketing operations. On the flip side, if a specialty pharma
makes an acquisition, the additional cost can have a dramatic impact on profit
margins. Figure 3 illustrates the fluctuating operating profit margins exhibited by a
selection of specialty pharma companies.

Figure 3: The impact of acquisitions on specialty pharmas’ operating

profit margins
Elan’s margins
dropping due to the
60 development of a
specialized sale force
50
Operating profit margin (%)
40
30
20 Schwarz has low
margin growth due to
10
lack of growth in
0 core products
1998 1999 2000 2001
-10
-20 Biovail has
fluctuating margins
-30
due to acquisition
-40 activity
Year
Elan Forest Lundbeck UCB Biovail

Schwarz Shire King
The constant growth of Forest, Lundbeck and UCB’s profit margins is attributable to
the strong growth of their respective core products, Celexa, Cipramil and Zyrtec
(certirizine). Shire and Biovail display fluctuating operating profit margins due to the
acquisitions that both companies have made in recent years. Elan suffered falling
profit margins in 2001 due to the high S,G&A costs associated with building a new
specialist sales force.
High profile new product approvals and launches

Specialty pharmas should aim to achieve high profile launches for each of their drugs.
This is essential because they only launch a limited number of products in any one
period. Not only does a successful product launch heavily influence a new drug’s first
year market share (Datamonitor estimates that first year market share can influence
as much as 80% of a product’s peak sales potential), it is also an ideal opportunity to
capture the attention of investors. To date, there have been relatively few high profile

drug launches within the specialty pharma sector, partly because companies are
limited by their small size and limited resources.
Following the success of the antidepressant Celexa/Cipramil for Lundbeck and

Forest, the launch of a follow-up compound to citalopram in 2001 attracted significant
media attention. Lexapro/Cipralex (escitalopram) is the single isomer of the parent
drug and was approved in the EU under the mutual recognition pathway in December
2001 and by the FDA in August 2002. Lundbeck’s launch of the product, under the
brand name Cipralex, was not particularly high profile, mainly because European
rollout proceeded in one country after another. Arguably, a Europe-wide launch would
have generated more interest, even if it had slightly delayed the drug’s launch.
However, Forest’s launch of Lexapro attracted significant media and investor
attention. Following announcement of Lexapro’s approval, Forest stock increased by
5.4%. In part, this reflects the fact that there is greater consumer awareness of
depression in the US, with this market typically accounting for 65% of the total market
in any one year. However, the primary reason is that Lexapro is the single most
important growth driver for Forest. The company is thus investing heavily in the
launch and first year promotion of the drug to increase the chances of its success:
investors are keenly tracking this process. These factors have contributed to
Lexapro’s high profile US launch and further bolstered Forest’s reputation in the
depression market.
Strong financial position: high cash, moderate debt

One indicator of a successful specialty pharma is a strong financial position. Key
markers include high cash reserves, a small level of long term debt and clear financial
statements. High cash levels are essential for specialty pharmas that are required to
make regular product acquisitions and, consequently, have a high cash burn.
However, they must also carry some debt to optimize their capital structure. Following
recent high profile accounting issues seen in other industries and at Elan, it is vital
that specialty pharmas submit clear financial statements to maintain investor
confidence.
The specialty company Altana is in a strong financial position with stable levels of
cash and short term investments over the last five years of between $400m and
$500m. The company has maintained its long term debts at a relatively low level, well
below the value of shareholders’ funds, which have risen steadily since 1996 from
$553m to $1,062m in 2001. Forest, however, adopts a less conventional financial
strategy, with no long term liabilities, instead raising cash solely through the issue of
shares. Arguably, the company could operate more efficiently and potentially realize

higher returns if it chose to leverage long term debt more extensively. This also
represents a missed opportunity because Forest has foregone the tax savings that
could have been made if it had raised interest bearing debt.
Accounting transparency is a new and significant key performance indicator for

specialty pharmas. The recent problems that Elan has encountered regarding its
accounting policy have made investors more cautious about the specialty pharma
sector. It is interesting to note that the Wall Street Transcript carried a comment from
an industry opinion leader in August 2001, stating that Elan had unnecessarily
complex financial statements. Five years ago when the company was small, complex
financials were necessary to avoid other companies accessing its deal structures.
However, now the company is much larger, such complex accounting is unnecessary
and creates uncertainty in Elan’s stock.
Traditional specialty pharma growth strategy: growth-by-

acquisition
The specialty pharma sector emerged out of the early 1990s off the back of a growth-
by-acquisition business model. The common theme that unites the diverse
companies in this sector is the goal of developing into a FIPCO. Figure 4 positions
each category of specialty pharma company against this goal and the current
strategic direction in which each is moving.

Figure 4: Specialty pharma companies’ evolution towards fully integrated

pharmaceutical company status
Discovery and Clinical Approval Sales and marketing

preclinical development
Fully integrated pharmaceutical company (FIPCO)
Little big pharma
Drug delivery
Generic
Development
Key
Current position of company type
Strategic direction of company type
Direction of integration
Essential components of the growth-by-acquisition model include:
• product search strategies;
• single product, multiple product/franchise and corporate acquisitions;
• focused sales and marketing operations.
Each of these components is discussed in greater detail below.

Search strategies
Considering the importance of making the right product acquisition to the growth of
specialty pharmas, it is surprising that the sector does not devote greater resources
to search activities. Most companies adopt a relatively opportunistic search strategy
or rely on partner organizations to provide acquisition targets. However, there are a
small number of companies that have implemented more pro-active search
strategies, albeit with varied degrees of success.
King has made numerous product acquisitions from a wide range of different
companies. It acquired a number of products from its merger with Jones Pharma in
2000 and has also in-licensed individual drugs from larger pharmaceutical
companies, including Wyeth and Bristol-Myers Squibb. King has a relatively wide
therapeutic focus, covering cardiovascular, women’s health, endocrinology, infectious
disease and critical care. This wide focus increases the range of products it can
acquire and permits an opportunist search strategy.
Lundbeck has a strong relationship with Teva, allowing it to in-license products

repeatedly. A partner like Teva is essential for Lundbeck due to its high degree of
therapeutic specialization. Lundbeck’s CNS focus is too restrictive to give the
company sufficient acquisition targets if it relied solely on seizing opportunities as
they arose. Products that Lundbeck has in-licensed from Teva include Oral Copaxone
for multiple sclerosis and etilevodopa (TV-1203), a Parkinson’s disease therapy. In
turn, Lundbeck acts as a strategic partner to Forest, out-licensing its drugs for sale in
the US market.
Schwarz is one of only a few specialty companies with a disclosed and active search
strategy. The company in-licenses, develops and markets compounds within certain
therapy areas, while avoiding the high risks and costs of basic research. In 2000,
Schwarz established a specific division to implement this strategy: Schwarz
Biosciences. A team of 25 specialists screens the scientific sector for alliances with
small companies or research groups that need partners to develop their drugs further
and to manage registration and marketing. This process is intended to add between
four and six new projects per year to Schwarz’s development pipeline. However, the
company has failed to achieve this goal and only in-licensed the marketing rights to
two products in 2000, each for individual geographic markets only. The company has
suffered two failed products; the development of C-Peptide, indicated for late-stage
diabetic complications, was suspended and Genentech’s Nutropin Depot (somatropin
(rDNA origin) for injectable suspension) failed to gain regulatory approval. The latter
resulted in Schwarz returning the marketing rights to Genentech.

Shire Pharmaceuticals has adopted a similar search strategy but with greater
success than Schwarz, implying that there is still value in this approach. Schwarz
needs to be more selective in the products that it licenses, to ensure that is does not
waste money on acquisitions that do not yield the requisite results.
Acquisitions
There are three types of acquisitions that specialty pharmas make:
• single product acquisitions;
• franchise acquisitions;
• corporate acquisitions.
Single product acquisitions

Since most specialty pharmas do not yet have extensive upstream capabilities, they
rely on single product acquisitions to fill pipeline gaps and/or to provide an immediate
growth driver in the form of a marketable drug. There are three main types of single
product acquisitions:
• promotionally sensitive products acquired from large pharmaceutical

companies;
• products in-licensed for specific geographic markets;
• products in-licensed for continued development and commercialization.
Acquisition targets, typically with peak annual sales potential of around $200m, are
available from large pharmaceutical companies. The latter are only interested in high
selling products that can fund the double-digit growth that their investors demand or
must, upon merger or acquisition, divest specific products for anti-competitive
reasons or to streamline their portfolios. Smaller products make ideal acquisition
targets for specialty pharmas and can be acquired for between two and five times a
drug’s annual sales. With their focused sales forces and heavy reliance on such
products to drive future growth, specialty pharmas are often able to propel acquired
products to greater commercial success than larger originator companies. King’s
Altace is a good example of this, having been acquired from Hoechst Marion Roussel
(now Aventis) for the US market in December 1998 for $363m. King has considerably

expanded US sales of the drug from $90m in 1998 to $285m in 2001, with the help of
Wyeth as a marketing partner.
Specialty pharmas must portray themselves as a marketing partner of choice for set
geographic regions if they are to create in-licensing opportunities. Forest has
acquired several products to promote in the US, including Lundbeck’s antidepressant
citalopram. Lundbeck does not have a presence in this market but can generate
revenue from the US via Forest. In 2001, Forest recorded $1,088m in sales of
citalopram, generating $199m in royalties for Lundbeck.
Lundbeck’s high therapeutic specialization and strong reputation in CNS creates in-
licensing opportunities for development stage compounds. For example, Solvay
entered into a co-development agreement with Lundbeck in December 2000 for
bifeprunox, a phase II compound under investigation for psychoses and Parkinson’s
disease. Teva has a long standing relationship with Lundbeck, collaborating on the
development of Oral Copaxone and two Parkinson’s disease therapies, etilevodopa
and rasagiline (TVP-1012). Through this agreement, Teva benefits from Lundbeck’s
CNS expertise, while Lundbeck gains additional products to market in Europe.
Franchise acquisitions
There are two types of franchise acquisitions: acquiring a brand line and acquiring a
group of products from the same therapy area. Both allow specialty pharmas to
expand their product offering instantly or build a presence in a new market, at a lower
cost than purchasing products from different companies. In-licensing a franchise of
related products presents an opportunity to acquire several drugs with a central
brand. Promoting the brand instead of each drug offers significant cost benefits.
Furthermore, if the franchise has an established brand, a specialty pharma can
leverage this to promote its own presence in the market. By acquiring products from a
single therapy area, specialty pharmas can either significantly bolster their presence
in a therapy area or establish a new therapeutic franchise in a short time,
simultaneously benefiting from synergies in promotional efforts.
In January 2001, Biovail acquired the US rights and benefits to the Cardizem family of
cardiovascular products from Aventis. This purchase should provide Biovail with a
source of significant revenue growth and establish its sales presence in the US
through its association with a major brand name. Biovail should be able to capitalize
on the high physician opinion of the controlled release version of Cardizem to aid the
market penetration of its self-developed drugs. Cardizem was the former Hoechst
Marion Roussel’s highest selling product in 1997, generating revenues of $756m.

Competition from generics and newer anti-hypertensive classes subsequently eroded

its sales and, in 2000, the product’s revenues were only $257m. Given that revenues
were certain to decline further, investing in promoting this product was not cost-
effective for Aventis. However, in a press release issued when Biovail in-licensed the
product family, Biovail stated that it expects to generate annual revenues of $140m
from Cardizem.
An example of a specialty pharma considering buying an entire division from another

company is Bioglan. In July 2001, Bioglan announced that it was to purchase Bristol-
Myers Squibb’s dermatology division for $765m, which generates annual revenues of
approximately $240m. The purchase fell through in October 2001 as Bioglan was
unable to raise sufficient capital, but Bristol-Myers Squibb is still looking for a
purchaser for this division. According to the Financial Times, the purchase would
have doubled Bioglan's turnover and made it one of the world's top five skincare
businesses. However, the collapse of the deal left the company with high overheads,
a stumbling pipeline and growing debts.
Corporate acquisitions
Through the acquisition of entire companies, specialty pharmas can achieve faster
growth than through organic growth or single product acquisition alone. In so doing,
they move more rapidly towards FIPCO status, sustain growth for longer than the two
to three years afforded by a single product acquisition and acquire the infrastructure
and technologies required for further product development. However, such
acquisitions come at a high price, which will be reflected in a company’s operating
profit for that year, as seen with Shire and Biovail in Figure 3.
Elan made the transition from a drug delivery company into the specialty sector
through a series of company acquisitions. The move was signaled in 1996 by the
acquisition of Athena Pharmaceuticals, which gave Elan not only an ethical product
portfolio but also a significant sales and marketing force, especially in the US. The
acquisition also provided the expertise of the then President of Athena, John Groom,
who joined Elan as President and Chief Operating Officer. Elan’s growth by corporate
acquisition strategy continued in 1998 with four other major acquisitions: Sano,
Carnrick, Neurex and NanoSystems. Its transition into the specialty pharma sector
would have taken significantly longer had Elan not embarked upon the acquisition
trail.

Focused sales and marketing activities
A focused sales and marketing operation enables specialty pharmas to compete

more effectively against larger players, as discussed previously in this chapter. The
best example of this within the specialty sector is Forest’s promotion of the
antidepressant Celexa against those of Eli Lilly, Wyeth, GlaxoSmithKline and Pfizer.
When Forest announced the termination of its co-promotion agreement with the
former Warner-Lambert, many investors were concerned that it would be unable to
maintain Celexa’s strong sales growth alone. However, the company successfully
expanded its sales force to 1,500 reps, with the new reps apparently having greater
impact than Warner-Lambert’s reps because Celexa continued uninterrupted to gain
market share.
Limitations to the growth-by-acquisition model
There is a limited shelf-life to single product acquisitions in terms of specialty

company growth. A newly acquired product will typically kick-start company growth in
the first two years because it is an additional growth driver. However, after this point,
growth peters out, new growth drivers are required and, therefore, more product
acquisitions are made. This continued need for acquisitions has two major knock-on
effects:
• high cash burn;
• over-reliance on each acquisition for company growth.
Furthermore, as specialty pharmas get larger, they begin to outgrow the growth-by-
acquisition business model because of:
• a lack of acquisition targets that fit with the company’s therapeutic strategy;
• an absence of acquisition targets that are large enough and cheap enough to
sustain previous growth rates.
These issues are discussed below.
Need for high cash reserves
The high cash burn associated with a constant rate of acquisitions is a serious
drawback to the growth-by-acquisition model. Elan, for example, spent over $1.5bn

on acquisitions in 1998 and nearly $2.5bn in 2001 on M&A activity. Companies in the
specialty pharma sector have to generate money from the capital markets to fund
further acquisitions. With the downturn in the global economy now having an effect on
pharmaceutical stocks, traditionally a relatively resilient sector, it is becoming
increasingly difficult to gain financing from the public sector. Specialty pharmas are
thus turning to private investors.
Over-reliance on success of individual acquisitions
Specialty pharmas are over-reliant on the growth that individual product acquisitions
can drive. They typically lack depth in their portfolios, leaving little to fall back on if
newly acquired drugs fail to live up to expectations. The only way to protect against
this is to grow, but the main way to grow is via further acquisitions: a double-edged
sword.
The failed acquisition of Genentech’s Nutropin Depot and Nutropin AG by Schwarz in

June 2001 had a significant impact on the short term growth of the latter. Schwarz’s
growth remained low at 4.1% in 2001, unchanged from the previous year of 4.3%.
Schwarz acquired the exclusive rights in January 1999 to Genentech’s Nutropin AQ

and Nutropin Depot in Europe and certain other countries outside of the US, Canada
and Japan. Under the terms of the agreement, Schwarz paid Genentech an upfront
payment and agreed to make additional payments upon achievement of specified
development milestones. Schwarz also contributed to the future development of both
products. However, Schwarz suffered a set back in gaining approval for Nutropin
Depot when the EMEA did not accept the same data as the FDA and requested a
head-to-head comparison of Nutropin AQ and Nutropin Depot. This threatened to
delay the launch of Nutropin Depot by 18 months and was the reason that, in June
2001, Schwarz announced that it would return the rights to both products to
Genentech.
Lack of appropriate acquisition targets
Specialty pharmas typically have a narrow therapeutic focus that acquisitions must
complement. This makes a continuous flow of acquisitions harder to achieve because
there are not sufficient numbers of therapeutically appropriate acquisitions available.
If it is not possible to find the right products to acquire, growth will stall. This presents
two options: pay more for potential acquisitions to guarantee acquiring the product

ahead of competitors or look outside of the therapeutic focus and sacrifice cost
synergies.
Women’s health is a popular and competitive therapy area among specialty pharma
companies. King focuses on this area and opted to pay a high price to secure an in-
licensing opportunity with Ortho-McNeil Pharmaceuticals in May 2002. The company
acquired Ortho-Prefest (17ß-estradiol/norgestimate), used in the treatment of
vasomotor symptoms associated with menopause, for $108m plus an additional $7m
upon FDA approval for King to rename the product. This represents a higher price
than King has traditionally paid for single product acquisitions, but is an indicator of
strong competition for acquisition targets. However, King clearly feels that it was a
price worth paying. As Jefferson J. Gregory, CEO of King, stated in a company press
release (29 May 2002):
“The acquisition of Ortho-Prefest tablets strategically complements and expands our

key women’s health product portfolio. With a beneficial lipid level and triglyceride level
profile that positively differentiates it from other combination hormone replacement
therapies, we believe this product should benefit from our proven successful
aggressive marketing efforts. These attributes, along with a pharmaceutical
preparation patent through January 2012, well position the product for long term
growth.”
Acquisition targets too small
The largest specialty pharma companies have outgrown the growth-by-acquisition

business model because the required acquisition target is not available or is only
accessible at a high price point. A product that generates an additional $50m in
revenue for a specialty pharma with annual total sales of $300m drives growth by
16.6%. However, the same product drives growth by only 3.3% for a $1.5bn specialty
pharma. To maintain growth, companies must search for larger acquisition
opportunities. Such targets are less common and come at a high price as their value
puts the specialty sector in direct competition with larger pharmaceutical companies
that are seeking similar targets to fill portfolio gaps. Failure to find appropriate targets
results in multiple purchases of smaller products, increasing purchase and
subsequent sales and marketing costs, and altering a company’s growth strategy.
Teva is perhaps a case in point.
Teva’s branded business rests on one product, Copaxone, which is indicated for the
reduction of relapses in relapsing-remitting multiple sclerosis. Its success boosted
Teva’s branded pharmaceutical sales by 47% in 2001. While the company has a

follow-on product, Oral Copaxone, this development stage compound has suffered
set backs. Teva has four novel in-licensed products in its pipeline, but none of them
have the sales potential to significantly reduce the company’s dependence on the
Copaxone franchise or to drive short term growth.

Company analysis
CHAPTER 2 COMPANY ANALYSIS
Key findings
– In 2001, the average sales growth of the 12 specialty pharmas profiled in

this chapter was 50%. This compares with 9% growth in the global
ethical pharmaceutical market and 11.4% average growth in the ethical
sales of the top 16 pharmaceutical companies in 2001
– Specialty pharmas that own relatively high selling products, such as

Lundbeck and its antidepressant Cipramil (citalopram), tend to mirror the
growth of this product in their overall sales growth. This reflects their high
dependence on one or two key products, with otherwise a lack of depth
in the marketed portfolio
– CNS is specialty pharma’s therapy area of choice because it is

characterized by high levels of unmet need and is usually treated by
specialists instead of primary care physicians (PCPs). A smaller sales
force can cost-effectively detail specialist physicians over a larger
geographic area than they can large numbers of PCPs with a diverse
range of interests. Five specialty pharmas generate more than 20% of
their sales from the CNS market: Teva, Forest, Elan, Lundbeck and
Shire
– The US is the key market for specialty pharmas due to its size and free
market status. A US based specialty pharma is unlikely to increase its
margins by establishing a presence outside the US when it could more
profitably invest in further expanding its US sales force and/or
therapeutic coverage
– As specialty pharmas expand their sales forces, product sales increase

accordingly: there are no scale economies
– Allergan has benefited from its focus on niche indications, with a sales
force that operates in over 100 countries but remains highly productive.
Lundbeck has a less productive sales force. This reflects the number of
countries that it operates across, which offer fewer cost synergies
– In general, specialty pharmas with higher cash reserves made the most
acquisitions/agreements in 2001. Allergan formed five deals in 2001 but
still ended the year with $782m of capital. It achieved this by establishing
collaborative agreements instead of acquiring products or companies,
which is a more expensive strategy

Company analysis
Benchmarking specialty pharma performance
The following section benchmarks 12 specialty pharmas against a selection of the

key performance indicators described previously in Chapter 1, specifically:
• sales and sales growth;
• degree of specialization – therapeutic, geographic and value chain;
• cost structure;
• cash pile.
Collectively, these benchmarking analyses summarize the results of detailed profiles

of each of the 12 specialty companies, which are presented later in this chapter.
Benchmarking by sales and sales growth, 2000-01
The specialty pharma market is growing at a faster rate than the pharmaceutical
market as a whole. This is attributable to the explosive growth that the growth-by-
acquisition model can offer, as detailed in Chapter 1. In 2001, the average sales
growth of the companies benchmarked in this chapter was 50%. This compares with
9% growth in the global ethical pharmaceutical market and 11.4% average growth in
the ethical sales of the top 16 pharmaceutical companies in 2001. However, the
average growth rate of a specialty pharma is artificially high because of the inclusion
of Biovail. This company’s sales increased by 138.7% in 2001, boosted by the
consolidation of Cardizem (diltiazem HCl) and DJ Pharma’s product portfolio, which it
acquired in 2001. The other company exhibiting notably high sales growth is IDEC, a
development company with low sales whose lead product, Rituxan (rituximab),
recorded sales growth of 88.7% to $251m in 2001. Figure 5 summarizes the sales
and growth of 11 of the 12 specialty pharmas profiled by Datamonitor in this report.
ICOS is excluded because it has no direct sales and instead relies on, for example,
revenues from R&D collaborations.

Company analysis
Figure 5: Benchmarking by sales: smaller specialty pharmas show

higher growth
2,000 Sales Sales growth 160

1,800 140
Sales growth 2000-01 (%)

1,600
120
Sales 2001 ($m)
1,400
1,200 100
1,000 80
800 60
600
40
400
200 20
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Company
More established players, like Teva and Allergan, with higher bases of existing sales
showed slower growth than their smaller counterparts. Allergan’s sales in 2001 were
negatively impacted by exchange rates due to the strength of the US dollar compared
to most other world currencies. The company derives 45% of its sales from outside
the US and estimates that this effectively reduced its 2001 sales by $57m.
Specialty pharmas that own relatively high selling products, such as Lundbeck with its
antidepressant Cipramil (citalopram), tend to mirror the growth of this product in their
overall sales growth. This is because of the high dependence that specialty pharmas
have on one or two key products, with otherwise a lack of depth in the marketed
portfolio. Other single product companies include Forest, King and Shire, all of which
recorded between 30% and 40% sales growth in 2001. With respect to its sales
growth, Elan appears to be performing better than its specialty pharma competitors.
However, the company is suffering from accounting concerns and is currently being
investigated by the US Securities and Exchange Commission (SEC), following
allegations that Elan artificially inflated its revenues.

Company analysis
Degree of specialization
The specialty pharma growth model requires companies to position themselves as a

partner of choice to create acquisition or collaborative agreement opportunities. This
is achieved by adopting a narrow focus, enabling them to exploit cost savings and
build expertise in specific areas. Specialization can be therapeutic, geographic or
value chain based, as discussed below. Figure 6 details the focus of selected
specialty pharmas.
Figure 6: Therapeutic, geographic and value chain focus of selected

specialty pharmas
Multiple Therapeutic specialization One therapy

therapy areas area
Andrx Allergan Watson IDEC Teva

ICOS Biovail Lundbeck
King Forest Elan Shire
Geographic specialization
Presence in 7 Domestic
major markets market
Teva Lundbeck Andrx Biovail Forest

Allergan Shire Elan ICOS IDEC King
Watson
Value chain specialization

Research and Full value Sales and
development chain marketing
IDEC Biovail Allergan Elan Forest

ICOS Andrx Lundbeck Shire Watson King
Teva
Therapeutic focus
Specialty pharmas adopt a narrow therapeutic focus to allow synergies in resource
allocation to be exploited, enabling them to become more competitive against their
larger counterparts, establish a reputation in their field and, consequently, to become
a marketing or development partner of choice. The suitability of a particular therapy
area for specialization is governed by the size of the opportunity and the level of
Company analysis
existing competition. For this reason, CNS is currently the therapy area of choice
within the specialty pharma sector, as is apparent in Figure 7.
Figure 7: Therapeutic specialization in 2001: CNS is the therapy area of

choice
2,000
1,800
1,600
1,400
Sales ($m)
1,200
1,000
800
600
400
200
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CNS Women's health Cardiovascular

Ophalmics Dermatology Cancer
Infectious diseases Other Generics
Five specialty pharmas generate more than 20% of their sales from the CNS market:
Teva, Forest, Elan, Lundbeck and Shire. They are attracted by the facts that:
• most CNS indications are characterized by high levels of unmet need, particularly
within Alzheimer’s and Parkinson’s disease and certain segments of the pain
market;

Company analysis
• a number of CNS therapies are entering a period of high and sustained revenue
growth, with rapid market development in epilepsy and psychosis and, shortly, in
dementia related disorders;
• older products to treat CNS disorders often remain in prominent market positions
but lack patent protection, allowing the active compounds to be reformulated and,
thus, extending their shelf lives;
• many CNS indications are treated by specialists instead of primary care

physicians (PCPs). A smaller sales force can cost-effectively detail specialist
physicians over a larger geographic area than they can large numbers of PCPs
with a diverse range of interests.
However, CNS is not the only market of choice. By operating in niche therapy areas,
specialty pharmas can avoid competing directly with top tier companies. They can
also market products to a limited number of specialist physicians, rather than a large
number of PCPs. This is why Allergan focuses on ophthalmic, neurological and
dermatological markets, marketing its products to specialists in over 100 countries
without coming into direct competition with larger companies. Specialization has
permitted the company to become a leader in the ophthalmic market and created in-
licensing opportunities to sustain its future growth.
US market penetration
The US is the largest pharmaceutical market by value, due to its size and free market
status. Thus, it is not surprising that a number of specialty pharma companies
operate solely within the US. Figure 8 benchmarks specialty pharmas according to
the proportion of their 2001 revenues that were generated in the US.

Company analysis
Figure 8: Specialty pharmas’ geographic focus
2,000
1,800
1,600
Forest
US sales 2001 ($m)
1,400 R2 = 0.4984
1,200
Watson
1,000 King
800 Teva
600 Biovail Shire Allergan
400 Elan
200 Lundbeck
IDEC Andrx
0
0 500 1,000 1,500 2,000 2,500
Total revenue 2001 ($m)
Denotes operating loss Bubble size proportional to operating profit 2001
Specialty pharmas deriving significant revenues from the US market have higher
operating profits, namely King, Forest, Allergan and Teva. The exception is
Lundbeck, which recorded healthy operating profits of $219m in 2001 from the
fragmented European market, reflecting its strong reputation and therapeutic focus.
Specialty pharma companies must successfully penetrate the US if they are to grow
over the long term and ultimately become FIPCOs. As a top executive from a
European specialty pharma commented to Datamonitor: “Specialty companies cannot
afford to ignore the 40% of the pharmaceutical market that the US accounts for.”
Sales force size: are there economies of scale for specialty pharmas?
As specialty pharmas expand their sales forces, product sales increase accordingly:
there are no scale economies. The relationship between ethical sales and number of
sales reps is plotted below and assumes that the number of reps that generics
companies employ to promote their generic products is negligible. For example, Teva
has just seven reps promoting its generic products in the US, yet over 300 devoted to
the promotion of its only branded product, the multiple sclerosis therapy Copaxone
(glatiramer acetate).

Company analysis
Figure 9: The number of sales reps is directly proportional to sales
2,500
Forest
2
2,000 R = 0.7024
Lundbeck
Number of sales reps
1,500 Allergan
Elan
1,000
King
Biovail
500 Watson
Andrx
Teva
0
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800
Ethical sales ($m) (excluding generics)
Allergan has benefited from its focus on niche indications, with a sales force that
operates in over 100 countries but remains highly productive. Lundbeck stands out as
having a less productive sales force. This reflects the number of countries that it
operates across, offering fewer cost synergies. Andrx also has a comparatively poor
performing sales force with respect to its productivity. However, it is still in the early
stages of developing a branded pharmaceutical business and expanded its sales
force in 2001 to 320, in preparation for the launch of its first propriety branded
product, the lipid-lowering drug Altocor (lovastatin).
Ratio analysis
Each category of specialty pharma company operates with different cost ratios.
Figure 10 illustrates the range of R&D and S,G&A costs as a proportion of sales
within the specialty pharma market and the impact that this has on operating profit
margins.

Company analysis
Figure 10: Ratio analysis of specialty pharmas
130
Elan
Andrx
S,G&A/sales 2001 (%)
50 1 Allergan
Forest
Shire
40 King
Lundbeck 2
30 Teva
20
Biovail IDEC
10 Watson 3
ICOS
0
0 5 10 15 20 25 30 120
R&D/sales 2001 (%)
Bubble size proportional to operating profit margin 2001
Denotes negative operating profit margin
1. Little big pharma companies with common S,G&A but variable R&D spend according to value chain focus
2. Development companies with no self-marketed products, leading to a high R&D spend but low S,G&A
3. Generics and drug delivery companies have low S,G&A costs
In the preceding figure, group 1 represents companies operating a little big pharma
business model. They are united by a high S,G&A spend, typically between 30% and
40% of sales, which reflects the costs of running a sales force and promoting branded
products. Sales and marketing focused companies, like King and Forest, invest
proportionately less in R&D than those little big pharmas that conduct discovery and
research. Until the acquisition of Medco Research in February 2000, King conducted
almost no R&D and concentrated on acquiring marketed products from large
pharmas. The company is now moving upstream and intends to conduct some in-
house drug development.
Group 2, consisting of IDEC and ICOS, represents development companies with high
R&D costs. IDEC has only a limited sales force to market Rituxan and, therefore, has
comparatively low S,G&A costs at 20.9% of sales in 2001. However, the launch of its
first major self-marketed product Zevalin (ibritumomab tiuxetan) will increase this
expense, although eventually this will be counterbalanced by a rise in sales.
Company analysis
Group 3 companies display relatively low S,G&A costs, at approximately 20% of

sales, because they derive a significant proportion of their sales from generic
products that require little promotion. As generics companies, both Watson and Teva
have a low R&D spend relative to their sales, while Biovail’s is higher because of the
cost of maintaining and developing its drug delivery business. Andrx is also a
generics company but its cost ratios are higher because it derives 65.6% of its
revenues from its distribution business. The company has a high R&D spend
because it is continually developing its drug delivery technologies, while its S,G&A
costs reflect the fact that it is developing a sales and marketing infrastructure in
preparation for the launch of its self-developed branded products.
Elan is set apart from the other companies by its high S,G&A spend, at 126.7% of
sales in 2001. This cost was inflated by the inclusion of its acquisition of Dura and
Liposome for the full year, as well as the expansion of its US sales force and
European infrastructure. Together, these costs contributed to an operating loss of
$830m.
Funding future growth
Specialty pharmas need high cash reserves to maintain the growth-by-acquisition

strategy. Figure 11 shows the cash reserves of selected specialty pharmas at the end
of 2001, compared with the number of agreements/acquisitions they made in the
year.

Company analysis
Figure 11: Specialty pharma cash reserves

Cash/short term investments
2,500 6
Number of deals
2,000 5
2001 ($m)
4
1,500
3
1,000
2
500 1
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Cash/short term investments in 2001
Number of acquisitions/agreements made in 2001
In general, companies with higher cash reserves made the most

acquisitions/agreements in 2001. Allergan formed five deals in 2001 but still ended
the year with cash reserves of $782m. It achieved this by establishing collaborative
agreements instead of acquiring products or companies, which is a more expensive
strategy. Allergan has a strong network of partner companies that it uses to dilute the
risks of drug development and to access expertise.
Elan had comparatively high cash reserves at the end of 2001. However, the
company also has high debt levels and made a number of one-off charges related to
write-offs and impairments of investments, including $827m in Q2 2002. This has
reduced its cash pile and limited its ability to conduct further acquisitions.
Individual company profiles
The remainder of this chapter presents individual profiles of 12 specialty pharmas.

Each case study analyzes major features that reflect a company’s historic and

Company analysis
potential future growth strategy – financial health, portfolio and partnership network –
as summarized in the figure below.
Figure 12: Indicators of specialty pharmas’ growth strategies
Company
Financials Portfolio Partnership

•Revenue •Therapeutic focus network
•Cash •Key products •Originator
companies
•Debt •Pipeline additions
•Search strategy
•Costs •Data presentations
•Deal analysis
•Profit margins •Product launches
•Earnings visibility
•Geographic focus
Growth strategy
Allergan
Summary
Allergan is effectively a FIPCO, but on a small scale. The company has a narrow
therapeutic focus on niche indications that are treated by specialist physicians. This
allows it to promote drugs to a small physician population and cover a much larger
geographic area than if it were marketing to primary care physicians. Its most
promising compound Botox (botulinum toxin type A) accounted for 18.4% of 2001
sales. Allergan is in a strong position with a handful of recently launched and pipeline

Company analysis
products that will drive growth over the short term. In the long term, it has a diverse
and full pipeline and will not be dependent on any one product for growth.
Allergan’s goal is to become the first or the second positioned company in each of the
markets in which it operates: ophthalmology, neurology and dermatology. This allows
the company to position itself as the marketing partner of choice and create in-
licensing opportunities and collaboration agreements to continually build its pipeline.
Figure 13 details Allergan’s strategic position and outlines its strengths and future
growth opportunities.
Figure 13: Assessment of Allergan’s strategic position, 2002
BUILD
Strengths
- Full pipeline
- Strong position in
ophthalmology market
- Potential blockbuster in Botox
CAPITALIZE
Heavily promote
Threats Opportunities
Botox for its
- Competition to Botox - Building presence in
cosmetic
dermatology market
indication from Elan’s Myobloc Allergan - Further indications for Botox
and invest in - Company will out grow
niche markets - Greater penetration of
penetrating
Europe
Europe
Weaknesses
- Slow uptake of Lumigan
- High levels of long term
liabilities
- Alphagan may face generic
competition in next two years
Conduct head-to-head trials

of Lumigan against
Pharmacia’s Xalatan, the
market leader

Company analysis
Financial analysis
With strong sales and stable profit margins, Allergan is in a relatively healthy financial
position. It has high cash reserves to fund acquisition activity, although its long term
liabilities may limit its financial flexibility. Table 1 summarizes Allergan’s financial
health.
Table 1: Allergan: financial health, 1999-2001
($m) 1999 2000 2001
Revenues 1,452 1,626 1,745
Sales 1,406 1,563 1,685

Research service revenues 46 63 60
R&D (168) (196) (257)

S,G&A (588) (650) (704)
Operating profit 264 296 321

Operating profit margin (%) 18.8 18.9 19.1
Cash/short term investments n/a 774 782

Shareholders’ funds n/a 874 977
Long term debt n/a 664 578
EPS 1.4 1.7 1.7
n/a = not available
Source: Datamonitor, Allergan annual report DAT AM ONIT OR
In 2001, Allergan recorded 7.3% growth in revenue, led by sales of its

pharmaceuticals division. Key products include Alphagan (brimonidine), an anti-
glaucoma agent, and Botox.
Allergan operates with high S,G&A costs, representing 41.8% of sales. This is due to
the 1,600 reps that Allergan supports globally to detail eye care professionals,
neurologists and dermatologists. The increase in S,G&A costs of 8.3% in 2001 was
primarily attributable to the launches of Lumigan (bimatoprost ophthalmic solution)
and Alphagan. R&D costs are in line with the industry average, at 15% of sales. They
rose by 31.1% in 2001 because of the acquisition of ASTI and the ongoing
development of Allergan’s diverse pipeline, including Skin Care and Botox.
Company analysis
Expansion of Allergan’s pharma business has fueled a gradual increase in operating

profit margins. Furthermore, while the company has high cash reserves of $782m
with which to finance new acquisitions, it also operates with high levels of long term
liabilities. This could limit its ability to generate further financing for M&A activity.
Portfolio analysis
Allergan focuses on niche indications. The company’s interest in ophthalmic surgical

devices and contact lens solutions was spun off in August 2002. Allergan’s
therapeutic focus allows it to market products to specialist physicians in over 100
countries without coming into direct competition with large pharmaceutical
companies. It operates a sales force of 1,600 reps to achieve maximum market
penetration.
Allergan holds a strong position in the ophthalmic market, moving from fourth position
to third in 2001. Allergan’s strategy is to offer a full line of ophthalmic products that
are each leaders in their indication, the most important of which, in terms of sales, is
glaucoma. The company has a strong product line, with over seven marketed
products and eight pipeline products. Furthermore, it is well positioned as the
marketing partner of choice in ophthalmology, which should ensure that this franchise
remains a strong growth driver. Key marketed products include Alphagan and
Lumigan, launched in March 2001, both of which are indicated for glaucoma.
Allergan has one marketed product within its neurological portfolio, Botox. The
product is the company’s largest with sales in 2001 of $310m. In 2001, Botox had
been approved for three indications: uncontrolled blinking (blepharospasm), crossed
eyes (strabismus) and involuntary contractions of the neck and shoulder muscles
(cervical dystonia). However, it was believed that a significant proportion of Botox’s
revenues were derived from off-label use for cosmetic purposes. In April 2002, Botox
was approved for brow furrow by the FDA and Allergan will market the drug under the
brand name Botox Cosmetic for this indication. The drug is in clinical trials for
hyperhidrosis, pediatric cerebral palsy, adult spasticity post-stroke, headache and
lower back pain. Approval for these new indications combined with Botox’s increasing
use for cosmetic purposes means that the drug has the potential to reach blockbuster
sales.
Elan launched Myobloc in December 2000, the first US competitor to Botox.

However, Myobloc is not believed to be as potent as Botox and does not pose a
significant threat to Botox’s sales. Indeed, in 2001, Allergan claims that it held 95% of

Company analysis
the US botulinum toxin market, with the drug rapidly gaining market share across
Europe.
Tazorac (tazarotene), a topical agent for the treatment of acne and psoriasis, leads
Allergan’s dermatology business. Dermatology accounted for just 4.7% of 2001 sales,
but it is an area that Allergan is expanding. It is focusing on the high growth markets
of acne and psoriasis. To ensure maximum penetration of its key product, the
company formed a co-promotion agreement with Proctor and Gamble
Pharmaceuticals in July 2001. Proctor and Gamble will promote the drug to general
practitioners in the US and Canada, while Allergan will continue to market Tazorac to
dermatologists. Dermatology represents a niche market that large pharmaceutical
companies typically avoid because returns are too low. However, the market is still
estimated to be worth over $5bn annually, making it an ideal target for an expanding
specialty pharma company.
Partnership network
Although Allergan has made product acquisitions to build its portfolio of drugs, it
favors collaborative agreements. The company has a strong network of partner
companies, which it utilizes to share the risk of drug development and to gain
expertise. Several agreements have been made for access to drug delivery
technology to improve Allergan’s line of products. It typically retains exclusive
marketing rights to the US market and may co-market or negate marketing rights for
Europe. While Allergan continues to build a presence in Europe, its key market
remains the US. Table 2 details Allergan’s key agreements from 2000 to 2002.

Company analysis
Table 2: Allergan’s acquisitions and agreements, 2000-2002
Date Company Details Cost ($m)
2002 Ophtec BV and Allergan to develop a new Phakic intraocular n/a

(Jan) Ophtec USA lens (IOL) based on Ophtec’s Artisan lens
technology. Allergan will market the new
product in the US and Japan
2001 Laboratoires Thea Access to ABAK device, a multi-dose system n/a
(Dec) S.A for the delivery of preservative-free eye drops
2001 Procter and Co-promotion of Tazorac n/a
(July) Gamble
Pharmaceuticals
2001 Inspire Collaboration to develop and commercialize $39m in
(June) Pharmaceuticals Inspire’s INS365 and Allergan’s Restasis upfront and
milestone
payments
2001 Oculex License and collaboration agreement to 30
(May) Pharmaceuticals develop and commercialize compounds for
serious conditions affecting the retina and
back of eye, based on Oculex’s proprietary
biodegradable and reservoir drug delivery
technologies
2001 Bardeen Sciences Transfer to BSC of a portfolio of compounds n/a
(April) Company and projects. Allergan to perform R&D on the
portfolio in exchange for a fee from BSC.
Acquired certain commercialization rights to
the portfolio and an option to acquire, under
certain circumstances, all outstanding BSC
equity
2001 Surgical Instrument Global rights. Multi-year distribution n/a
(Feb) Systems AG agreement to commercialize the Amadeus
microkeratome
2000 Photochemical Rights to develop and commercialize ATX- n/a
(Dec) S10, a compound used for photodynamic
therapy of age-related macular degeneration
2000 Aurora Biosciences Collaboration focused on ion channel drug n/a
(Dec) Corporation discovery for ophthalmic indications
2000 ISTA Global commercial partnership to develop and Up to $35m
(March) Pharmaceuticals commercialize ISTA’s Vitrase, indicated for in milestone
severe vitreous hemorrhage payments
n/a = not available

Company analysis
Andrx
Summary
Andrx is engaged in the formulation and commercialization of oral controlled release

generics, utilizing its proprietary drug delivery technologies. Through the acquisition
of CTEX in January 2001, it initiated its transition into the specialty pharma sector.
Andrx has a strong base of proprietary drug delivery technologies that enables it to
produce difficult-to-manufacture drugs, such as extended release products, which
allow it to compete in markets with greater barriers to entry and thus higher profit
potential. For example, Andrx has now entered the branded (patented) product
market by improving and altering existing drugs sufficiently to merit an NDA.
The company’s key challenge is the successful commercialization of Altocor

(lovastatin), a controlled released formulation of Merck’s Mevacor, indicated for the
treatment of dyslipidemia and launched in July 2002. This represents Andrx’s first in-
house branded and patented product and will give the company the visibility in
earnings that it currently lacks in its generics business. With sustained earnings from
its distribution business Anda, Andrx is in a strong financial position to make further
acquisitions to establish its branded business. Figure 14 details Andrx’s current
strategic position and outlines its strengths and opportunities for the future.

Company analysis
Figure 14: Assessment of Andrx’s strategic position, 2002
BUILD
Strengths
- Revenue growth from
distribution business
- Technology base that can be
leveraged to produce branded
products
Utilize drug
CAPITALIZE
delivery Threats
- Increasing number of Opportunities
technology to
generics companies - Expanding use of
produce
proprietary technologies
supergenerics focusing on specialty Andrx - Acquisitions to build
and secure products
- Lack of therapeutic branded portfolio and
position in
focus infrastructure
specialty sector
Weaknesses
- Lack of visibility in revenue
- Thin pipeline of branded
products
Acquire products or small

pharmaceutical companies to
bolster in-house pipeline
Financial analysis
Overall, Andrx is in a good financial position with strong cash reserves and few
liabilities. Its cash availability is a positive factor, enabling the company to expand its
R&D activities, acquire a company or in-license new products.

Company analysis
Table 3: Andrx: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 247 476 520 749
Revenues by division:
Distributed products n/a 262 325 491
Generic products n/a 207 176 205
Branded products n/a 7 14 44
Cybear (Internet) n/a 0 5 9
R&D (17) (25) (45) (53)

S,G&A (29) (55) (62) (119)
Operating profit 7 145 83 57

Operating profit margin (%) 3.2 36.6 16.5 7.8
Cash/short term investments 23 123 337 245

Shareholders’ funds 73 221 560 648
Long term debt 0 14 1 5
EPS 0.3 1.5 1.0 1.0
n/a = not available
Source: Datamonitor, Andrx annual report DAT AM ONIT OR
Andrx’s transition into the specialty pharma market is in its early stages with just
$44m or 5.9% of its 2001 revenues derived from branded product sales. Andrx’s
distribution business, Anda, provides the company with a steady, reliable revenue
stream with which to fund its other activities, accounting for 65.6% of total revenues in
2001.
Andrx’s R&D spend of $52.8m in 2001 represents 21.2% of ethical sales. This high
level of R&D spend, which is closer to that of a top tier pharmaceutical company than
that of a generics company, highlights Andrx’s commitment to continually improving
its technologies and applying them to more products. S,G&A costs rose by 91.9% in
2001 to $119m due, in part, to the development of a branded sales and marketing
infrastructure that included the acquired CTEX sales force. During 2001, the company
increased its total number of sales representatives to 320. As Andrx launches more

Company analysis
branded products, it is expected to increase its sales force accordingly, potentially by

a further 500 within 18 months of Altocor’s launch in July 2002.
The costs of developing its branded franchise have decreased Andrx’s 2001
operating profit margin to 7.8%. This is a major barrier for generics companies
attempting to move into the specialty pharma market. Producing generics is typically
a low margin business, which is squeezed even further when companies invest in the
development of proprietary branded products and establish a larger sales and
marketing infrastructure. Like Forest, Andrx adopts an unconventional approach to
company funding by not taking on long term debt.
Andrx only has a presence in the US market. This focus on one country increases its
exposure to market volatility and restricts the revenue it can gain from each of its
products. However, Andrx has filed for registration of Altocor in Europe and has
stated its intention to file for European approval of Metformin XT (metformin), an
extended release formulation of Bristol-Myers Squibb’s Glucophage (metformin),
indicated for the treatment of non-insulin-dependent diabetes. Thus, it is preparing to
exploit the benefits of entry into the European market. However, to achieve this
successfully, Andrx will need to either partner with or acquire a European company to
develop the sales force presence necessary to compete in the branded market place.
Andrx previously partnered with Geneva (a subsidiary of Novartis) for the
development and European marketing of two of its branded products. However, the
termination of this agreement in October 2001 suggests that Andrx has new plans for
its European entry strategy.
Portfolio analysis
Andrx is in the early stages of establishing a branded business and moving into the
specialty pharma market. At the beginning of 2002 it had four marketed products, all
of which were in-licensed in 2001, although none are expected to generate significant
sales. In July 2002, Andrx launched its first propriety branded drug Altocor, indicated
for the treatment of dyslipidemia and Alzheimer’s disease. Its key late stage pipeline
drug is Metformin XT, in phase III trials for diabetes. Rather than develop products
from basic research, Andrx uses its drug delivery technology to improve existing
drugs. As such, they are often referred to as supergenerics, which are value-added
reformulations of existing drugs that are sufficiently differentiated from the original
product to warrant an NDA.
The acquisition of CTEX in January 2001, a privately owned pharmaceutical company

based in Mississippi, gave Andrx an initial sales force of 90 reps and a small branded

Company analysis
product line of cough and cold medicines and pre-natal vitamins with which to build a
reputation in the specialty pharma market. Andrx has added a further 190 reps to this
sales force in preparation for the launch of Altocor.
Altocor is the generic version of Merck’s Mevacor, indicated for the treatment of
dyslipidemia, but in a controlled released formulation. The product has moderate
revenue potential because it targets a lucrative market, although generic competition
in the dyslipidemia market will slow its penetration. Mevacor was launched in 1987
and maintained its position as market leader until 1995, when it was overtaken by
Merck’s Zocor (simvastatin). Mevacor’s sales have declined since then, despite the
addition of several long term prevention indications. Mevacor faced patent expiry in
June 2001, the first statin to do so, and several generic versions have since been
launched. To tackle patent expiry, Merck is trying to switch Mevacor to over-the-
counter (OTC) status as a long term prevention therapy.
Initial data on Altocor are promising. Studies suggest that it could have marketing
advantages over immediate release lovastatin, including the possibility of dose
sparing (achieving the same therapeutic response as Mevacor with reduced dosing)
or enhanced compliance potential (one tablet once a day versus multiple tablets once
or twice a day). Andrx received initial FDA approval for Altocor in June 2002 and
plans to launch it later in the year. The company announced on 10 July 2002 that it
had received an approvable letter from the FDA for an additional indication for the
primary prevention of coronary heart disease in patients who have average to
moderately elevated total cholesterol and LDL-cholesterol and below average HDL-
cholesterol. Following expiration of the exclusivity rights of other indications in
September 2002, Altocor received approval for the primary prevention of coronary
heart disease in patients without symptomatic cardiovascular disease who have
average to moderately elevated total cholesterol and LDL-cholesterol and below
average HDL-cholesterol. For primary prevention, Altocor is now indicated to reduce
the risk of heart attack, unstable angina and coronary revascularization procedures.
The FDA also approved the expansion of the Altocor Package Insert to include
additional efficacy data demonstrating the effect of lovastatin on the regression of
atherosclerosis of the carotid arteries, which supply blood to the brain. These new
indications should significantly expand the drug’s patient potential. If sales of Altocor
take off, it will provide Andrx with clearer and longer term visibility in its future
revenues and help build the company’s reputation in branded pharmaceuticals.
A major opportunity for Andrx is to expand its use of controlled release technology
from a limited number of products in a few therapy areas to a broader range of
products. In particular, it could use its technology to produce new products in-house,

Company analysis
either using a generic compound and applying the technology (in cases where the
branded product uses different technology) or sourcing novel compounds to which it
can apply the technology. The development of novel compounds is not part of
Andrx’s strategy at present, but would aid its growth in the specialty market and take
it a step closer to FIPCO status.
Partnership network
As Table 4 shows, to date, Andrx has made only a small number of acquisitions and
has instead leveraged corporate alliances and agreements to build its business.
While most of this activity has focused on its generics business, the company has
begun to expand its branded business. The acquisition of a small pharmaceutical
company with several branded products in similar therapy areas to Andrx would
provide an instant sales uplift. Longer term growth would be assured through the
acquisition of a company with a stronger focus on developing specialty or
supergenerics.

Company analysis
Table 4: Andrx’s acquisitions and agreements, 1997-2002
Date Company Agreement
2001 (Apr) Mediconsult.com Mediconsult includes eMedEd and Physicians’

Online, a leading physician Internet portal with
over 217,000 authenticated US physician users
logging over 8 million page views each month
2001 (Mar) Armstrong $18m acquisition of Armstrong Pharmaceuticals,
Pharmaceuticals a division of Celltech Manufacturing
2001 (Jan) CTEX Acquisition for $29m
Pharmaceuticals
2000 (Sep) Cybear Outstanding shares of Cybear common stock:
100% ownership
2000 (Mar) Valmed Acquisition
Pharmaceutical
2000 (Aug) Carlsbad 50:50 joint venture to develop, manufacture and
Technology sell three bioequivalent pharmaceutical products
1999 (Aug) Cybearclub LC Joint venture to distribute healthcare products to
physicians’ offices through the Internet
1999 (Jun) Geneva Sales and marketing agreement with Novartis’
Pharmaceutical generics subsidiary to sell Andrx products in the
US and Europe
1999 (Mar) Bayer Application of Andrx’s drug delivery technology to
an OTC product belonging to Bayer
1998 (Oct) Cybear Strategic alliance with the Independent Practice
Association of America
1998 (Jun) Rhoxalpharma Out-license of two products for sale in Canada
1998 (Mar) Rhoxalpharma Out-license of generic Cardizem CD for sale in
Canada
1998 Hoechst Marion Marketing agreement to promote oral and
Roussel injectable Anzemet
1997 (Nov) Cybear Establishment of Cybear, an information
technology subsidiary
1997 (Sep) Hoechst Marion Quarterly payments to Andrx for the period
Roussel between Andrx’s generic version of Cardizem
being approved and launched

Company analysis
Biovail
Summary
Biovail is moving away from its traditional drug delivery focus and is developing into a
specialty pharma. The company is several steps behind Elan, but has made
acquisitions to expedite the process. Having established a sales and marketing
division in Canada, Crystaal, Biovail took the next step in 2000 with the acquisition of
DJ Pharma, which had a US sales force of 300 reps. Since then it has been
developed into Biovail’s branded sales and marketing arm, covering US territories.
This move gave Biovail the scope to develop products directly in the US rather than
relying upon third party distributors and, in the long term, will be the key catalyst in
converting Biovail from a drug delivery specialist into a FIPCO.
Biovail made significant advances in the development of its sales and marketing base
in early 2001 with the acquisition of North American rights to Aventis’ Cardizem
(diltiazem) anti-hypertensive brand line. This was followed in December 2001 with the
acquisition of the rights to a topical formulation of GSK’s Zovirax (acyclovir). In
expanding its portfolio through the addition of strong brand names, Biovail hopes to
boost the marketability of its products through strong brand association. This will be
particularly relevant for Cardizem XL, Biovail’s new and improved formulation of
Cardizem that has the potential to take the majority of existing Cardizem patients,
together with a significant proportion of patients currently using less effective generic
and branded diltiazem formulations. The Cardizem brand name will increase
physician confidence in the new product and enhance market penetration. In time,
Biovail hopes to harness this brand strength to enhance the market potential of all of
its self-developed products. However, the lag time between in-licensing a brand and
developing a follow-on product impairs the visibility of the company’s earnings, which
has contributed to its plummeting share price since the beginning of 2002.
Figure 15 details Biovail’s strategic position, highlighting the threats to company

growth.

Company analysis
Figure 15: Assessment of Biovail’s strategic position, 2002
BUILD
Strengths
- Leverage drug delivery
technology to produce branded
products
- High cash levels
Make further
product
CAPITALIZE
acquisitions Opportunities
Threats
to reduce - Increased competition - Development of US sales
dependence force
on GSK and
for acquisition targets Biovail - Acquire further brand lines
forces company to pay
boost over the odds for reformulation
marketed
branded
portfolio
Weaknesses
- Poor visibility leading to falling
share price
- High cash burn
Invest in successful launch of

Cardizem XL to boost investor
confidence and enhance
visibility
GSK = GlaxoSmithKline
Financial analysis
Biovail is in a strong financial position with sufficient flexibility to pursue further

acquisitions. Table 5 summarizes Biovail’s financial health.

Company analysis
Table 5: Biovail: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 112 172 309 583
Sales 69 99 225 537

Research and development 32 48 67 15
Royalty and licensing 11 25 17 31
R&D (17) (33) (52) (51)

S,G&A (20) (36) (52) (110)
Operating profit 45 (40) (78) 171

Operating profit margin (%) 40.6 (40.3) (34.7) 31.9

Shareholders’ funds 51 267 237 1,126
EPS n/a (1.1) (1.2) 0.6
n/a = not available
Source: Datamonitor, Biovail annual report DAT AM ONIT OR
Biovail recorded total revenues in 2001 of $583m, an increase of 88.7% over 2000.
The company has significantly expanded its revenues since 1998, growing with a
CAGR of 73.3%. Product sales soared in 2001 due to the addition of Cardizem and
DJ Pharma’s product portfolio. Generic products, marketed by Teva, accounted for
30% of 2001 sales, while organic growth of Biovail’s existing products exceeded 50%.
For a specialty pharma company, Biovail has low R&D costs at 9.5% of sales. This is
a reflection of its high sales growth in 2001, with R&D costs accounting for 23.1% of
sales in 2000, higher than the industry average. Biovail does not have the expense of
drug discovery but it does invest in drug delivery and drug development activities that
are likely to push this cost higher in the future. The company’s S,G&A costs more
than doubled in 2001 due to the inclusion and expansion of its US sales force in
preparation for the launch of Cardizem XL. Biovail doubled its sales force to 600 reps
and plans to increase headcount by a further 200 by the end of 2002.

Company analysis
Operating profit margins were boosted considerably in 2001 by the company’s

expanded revenues. Operating profit levels in 2000 were negatively impacted by a
one-off charge associated with the acquisition of Intelligent Polymers. Like other
specialty pharmas, Biovail has suffered fluctuating profitability due to acquisition
costs.
With high cash reserves of $435m and low long term debt, Biovail is in a strong
position to finance further acquisitions. Indeed, in April 2002 it purchased the US
rights to Vasotec (enalapril) from Merck. However, the company has suffered from a
depressed share price from the beginning of 2002 due to uncertainty surrounding the
launch of its first in-house developed branded drugs.
Portfolio analysis
As a drug delivery specialist, Biovail did not have much to gain from having a
therapeutic focus, since it could apply its technologies to products from most therapy
areas. Its branded business has a CNS and cardiovascular focus but the company
has also in-licensed drugs from outside of these areas. In addition to Tiazac
(diltiazem), Biovail’s largest product with Canadian sales in 2000 of $17.5m, the
company has another hypertension drug, Monocor (bisoprolol), and Retavase
(reteplase), indicated for the management of acute myocardial infarction. Crystaal
also sells two CNS drugs, Celexa for depression and Brexidol (piroxicam-beta-
cyclodextrin) for acute pain.
Biovail seems to be strengthening its cardiovascular focus, having bought the US

rights to the Cardizem franchise from Aventis in December 2000 and the US rights to
Vasotec from Merck in April 2002. Biovail had already developed a generic version of
Cardizem CD, which was launched in the US in January 2000 by Teva. However,
Biovail has used the Cardizem brand and developed new formulations of diltiazem,
receiving an approvable letter from the FDA for Cardizem XL in June 2002.
Developing new formulations of off-patent products with strong brand names and
marketing them in the US through DJ Pharma should enable Biovail to build a
stronger position in the US than if it had tried to enter with an unknown product and
little corporate brand recognition. However, until the new formulations are launched,
these off-patent products offer little earnings visibility.
Biovail is also taking opportunities to in-license products in other therapy areas. In

October 2001, the company announced that it had purchased the rights to Zovirax
(acyclovir) ointment and cream (not yet approved by the FDA). Biovail is to pay GSK

Company analysis
$133m for the right to sell the product in the US and Puerto Rico, while GSK will
manufacture it.
Partnership network
Biovail has utilized strategic partners to build its drug delivery and generics business,
including Teva and Celgene. In its quest to expand its branded business, the
company has made numerous product acquisitions, two mergers and partnerships.
Table 6 details Biovail’s M&A activity from 1999 to 2002. The company has made
agreements with an array of companies, including both small and large
pharmaceutical companies. However, its agreement with GSK is not just a one-off but
has the potential to underpin long term growth. The agreement not only gives Biovail
a strong brand in Wellbutrin (bupropion HCl) to co-promote with one of the largest
pharmaceutical companies, boosting Biovail’s presence in the branded market, but it
also has the option of co-promoting the once daily follow-on product. In addition,
Biovail obtained the rights to a further product, Zovirax Ointment. .

Company analysis
Table 6: Biovail’s merger and acquisition activity, 1999-2002
Date Company Addition Cost ($m)
2002 DepoMed US and Canadian marketing rights $12.3m plus

(May) for Metformin GR (in phase III trials) $25m milestone
payment on
approval
2002 Merck US rights to Vasotec and Vaseretic 155
(April)
2002 Solvay US rights to Teveten and Teveten 94
(March) HCT
2001 GlaxoSmithKline Co-promotion agreement for n/a
(Oct) Wellbutrin SR and the option to co-
promote Wellbutrin Once Daily upon
approval in the US
2001 GlaxoSmithKline US and Canadian rights for Zovirax 133
(Oct) Ointment
2001 Aventis US rights to Cardizem product line 409.5
(Jan)
2000 DJ Pharma Acquisition of company 212.5
(Oct)
2000 Hemispherx Canadian rights to Ampligen 2
(Feb) Biopharma
1999 Fuisz Acquisition of company 245
(Nov) Technologies
1999 Spectral Cardiac STATus n/a
(July) Diagnostics
n/a = not available
Focusing on two large therapy areas, CNS and cardiovascular, should enable Biovail
to consider numerous acquisition opportunities, although there is likely to be strong
competition from larger companies and the specialty pharma sector. However, Biovail
has demonstrated its willingness to pay a high price for the right products (e.g.
$409.5m for the rights to the Cardizem family) and it is in a strong financial position to
fund a limited number of further acquisitions.
Having gained sales and marketing experience in Canada, in 2000 Biovail took the
step of moving directly into the US. It purchased a US company, DJ Pharma, with an
existing sales force of 300 reps, hardly large by US standards but a useful base upon

Company analysis
which to build. Biovail paid $165m for DJ Pharma, which sold branded generics in the
area of respiratory and allergic disorders. Biovail also gained US rights to certain
products that DJ Pharma had in-licensed from Dura. Biovail believes that its purchase
of DJ Pharma will enable it to take its products to market alone in the US, maximizing
its return on the branded products it in-licenses and develops. Certainly, the
Canadian market is restrictive due to both its small population and its strict
pharmaceutical pricing regulations. Even if Biovail is still not in a position to compete
more equally with larger pharmaceutical companies, its margins will benefit from its
products reaching a larger audience.
Elan
Summary
Elan’s corporate strategy is to develop expertise in various drug delivery technologies

to differentiate and add value to non-innovative, previously marketed compounds.
The company’s old business model generated revenues through out-licensing its drug
delivery technology and earning royalties on subsequent sales. However, Elan
recognized that the drug delivery market was rate limiting and began an acquisitive
strategy to shift its focus and move into the specialty sector. Elan can now boast both
innovative R&D capabilities and integrated sales and marketing functions. The
company has maintained its drug delivery focus and leveraged this technology to
develop proprietary products. It is now moving its drug delivery business upstream, to
apply new formulations at the start of a product’s life cycle rather than as the drug
approaches patent expiry. This should ensure that Elan receives greater royalties
from this side of the business, which it can leverage to build its specialty pharma
expertise and address recent accounting concerns.
Elan has historically operated within niche CNS markets, where competition is
typically low and less marketing resources are required. It has two key growth drivers
in its marketed portfolio, Zanaflex (tisanidine), indicated for spasticity, and Skelaxin
(metaxolone), indicated for acute painful musculoskeletal conditions. The company
derives 31.7% of revenue from its home market, Ireland, but has made significant in
roads into the US, which accounted for 53.3% of revenue in 2001.

Company analysis
Accountancy concerns slow Elan’s growth

While Elan has successfully expanded from its drug delivery base, the company ran
into significant troubles in January 2002. Since then, its share price has dropped by
69% due to two main events:
• suspension of phase II trials of AN-1792, indicated for Alzheimer’s disease;
• concerns about the company’s accountancy practices, which led to an

investigation by the SEC.
After a number of one-time charges related to write-offs and impairments of

investments, including $827m in Q2 2002, Elan has initiated a recovery plan. The
plan retains the company’s focus as a specialty pharma but in the form of a new R&D
focused biopharmaceutical company. Elan is adopting a narrow therapeutic focus on
neurology, pain and autoimmune disease. This means that it is divesting its anti-
infectives portfolio that comprises three marketed products and one phase II drug.
Key elements of the recovery plan include:
• acquiring royalty rights held by Autoimmune for Antegren (natalizumab). This

action is aimed at preserving Elan’s pipeline and retaining all revenue from
the lead product, Antegren;
• divesting non-core financial and product activities and assets. Elan is

targeting proceeds of $1bn in the next nine months and a further $500m by
the end of 2003;
• reducing costs through headcount and infrastructure cuts;
• cutting outgoings by not exercising its option to acquire selected dermatology

products from GlaxoSmithKline, saving future payments of $180m.
The implications of this recovery plan to the growth-by-acquisition strategy adopted

by specialty pharmas are severe. With cost cutting and cost containment, Elan will
have little resources to make acquisitions to grow its business. Instead, Elan has
elected to settle its financial problems and continue to build its pipeline of products to
create future growth and shareholder value, the effects of which will take longer to
become apparent.

Company analysis
Transforming from drug delivery to specialty pharma: current hurdles

Aside from accountancy issues, Elan continues to face difficulties in making the
transition from a company that markets defined products to specific market segments
via the application of its drug delivery technology, to a company that can
autonomously develop and market products with mass market appeal, the next step
to achieving FIPCO status. Essentially, the company faces two key difficulties. Firstly,
it does not have sufficient sales and marketing expertise and resources with which to
operate in markets with intense competition from large pharmaceutical companies
and it has neither the geographic scope nor the resources with which to back any
product that has mass appeal. Instead, Elan takes marketing partners, which fuels
short term growth but sacrifices downstream revenues. Elan’s current financial
position means that it lacks the resources and the critical mass required to develop
beyond the specialist market.
The second major issue that Elan must confront is the gap in its early stage pipeline.
Elan is forecast to have a low number of product launches over 2005-06 and, of
these, none are likely to result from in-house development. The company therefore
has a void in its development program. This acute problem has the capacity to
develop into a more chronic problem, as the basis of Elan’s business model is the
acquisition of technological platforms belonging to smaller and more specialized
companies. With an inherent low level of cutting edge drug discovery technologies in-
house, Elan has still not demonstrated that it has sufficient capability across the full
spectrum of R&D activities. To evolve its business model to that of a high profitability
company, Elan must prove that, as a proposition, its value is greater than the sum of
its parts, an assertion that is not currently entirely convincing. Figure 16 summaries
Elan’s current strategic position and details the threats and opportunities that the
company faces.

Company analysis
Figure 16: Assessment of Elan’s strategic position, 2002
BUILD
Strengths
- US sales force
- Drug delivery technologies that

can be leveraged to produce
branded products
Adopt
transparent
CAPITALIZE
accountancy Opportunities
methods to Threats - Leverage drug delivery
increase - SEC investigation expertise to develop pipeline
industry
Elan
confidence. - High long term debt - Further partnerships with
Reduce long Wyeth and Biogen
term debt by
cost savings
Weaknesses
- Pipeline disappointments
- High cost base for 2002
- Lack of investor confidence
Build investor confidence by

focusing business on niche
CNS indications and building
up the pipeline
Financial analysis
Elan has a weak financial position with a number of issues threatening the security of
the company. These include:
• product disappointments;
• higher than expected costs;

Company analysis
• “flattering of revenues”;
• concerns about debt levels;
• SEC investigations.
Table 7 details Elan’s current financial position.
Table 7: Elan: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 677 1,008 1,302 1,740
R&D (145) (230) (305) (402)

S,G&A (170) (257) (385) (1,782)
Operating profit 148 310 296 (830)

Operating profit margin (%) 21.9 54.7 35.9 (59.0)
Cash/short term investments 869 867 1,078 1,964

Shareholders’ funds 2,332 2,688 5,315 5,060
Long term debt 1,235 1,551 2,158 3,048
EPS 0.6 1.2 1.1 (2.6)
Source: Datamonitor, Elan annual report DAT AM ONIT OR
Although Elan posted strong revenue growth of 33.6% in 2001 to reach over $1.7bn
and the underlying pharmaceutical business is still progressing well, pipeline
disappointments have significantly affected the company’s earnings visibility, creating
uncertainty in its stock. Three setbacks in Elan’s pipeline have exacerbated these
concerns:
• the suspension of phase II trials of AN-1792, partnered with Wyeth, following

neurological inflammation in four French patients;
• the launch of Frova (frovatriptan), a migraine treatment, was delayed by

three months from January to April 2002. The drug was eventually launched
in the US in June 2002, having gained approval in November 2001;

Company analysis
• delayed approval of Prialt (ziconotide) by another year, following the FDA’s

request of further trials. The chronic pain therapy was initially targeted to gain
approval by the end of 2001.
The news that Elan plans to spend an additional $225m in 2002 on top of previous
forecasts was not well received, considering the company’s current high cost base.
As a drug delivery company, Elan still invests a high proportion of its ethical sales in
R&D, equal to 23.1% in 2001. However, the company has significantly increased its
S,G&A spend through the development of a specialist sales force. In 2001, S,G&A
costs rose by 362.9% to $1,782m. Much of this jump was due to exceptional items,
although costs were still in line for an 84% increase before these items were included.
This was due to the integration of the acquired companies, Dura and The Liposome
Company, for the full year as well as the expansion of Elan’s US sales force and
European infrastructure.
At the root of Elan’s accounting concerns lies its “flattering of revenues”. This refers to
revenues that include a number of exceptional items that many analysts thought
should not have been classed as revenues. For example, Elan sold a number of
products in 2001, including Permax (pergolide) and Mysoline (primidone), but the
profits that it received on disposal were reported as revenues and not as exceptional
items. This meant that in the first three quarters of 2001 the company displayed
strong sales growth, but this was not organic sales and included exceptional profits.
There is considerable concern over Elan’s high debt situation. The parent company
records long term liabilities of over $3bn in 2001. However, under US GAAP, Elan’s
‘off balance sheet’ financing vehicles are not included, which amount to $1bn of debt
that Elan guarantees and $1bn of booked assets. It was this system of using off
balance sheet financing vehicles that caused the downfall of Enron at the beginning
of 2002. Investors are concerned that Elan’s level of debt will be difficult to reduce
and will result in the company’s cash reserves dwindling to approximately $500m in
2005, assuming that Elan repays the debts due and does not receive any return from
its investments. This is a worse case scenario but the company’s position is not
helped by ongoing SEC investigations into whether the accounts properly reflect the
business.
Portfolio analysis
Elan has historically operated within niche CNS markets where competition is
typically low and less marketing resources are required. Following the announcement

Company analysis
of its financial recovery plan, Elan is concentrating on three therapy areas (neurology,
pain and autoimmune disease) and divesting its interests in anti-infectives.
Elan has two key growth drivers in its marketed portfolio: Zanaflex (tisanidine),
indicated for spasticity, and Skelaxin (metaxolone), indicated for acute painful
musculoskeletal conditions. In 2001, these products generated sales of $162m and
$118m, respectively, but both are facing potential generic competition, diminishing
their value as growth drivers.
Elan has utilized its drug delivery expertise to develop a slow-release formulation of
Zanaflex that is due to be launched at the end of 2002. It should be a once daily
formulation, offering advantages over the current thrice daily dosing schedule.
Generic competition has already reached the US market, leaving Elan no opportunity
to switch patients to the new version ahead of generic entry. Despite the dosing
regime for Skelaxin being poor, requiring three to four administrations per day, Elan
has not disclosed a new delivery formulation for this drug. Skelaxin is not patented
protected and Elan has achieved strong sales through aggressive promotion by a
600-strong primary care sales force.
Elan’s late stage pipeline contains two potential growth drivers, Antegren and AN-
1792, partnered with Biogen and Wyeth, respectively. Antegren, in phase III trials for
the treatment of multiple sclerosis and Crohn’s disease, will follow Johnson &
Johnson’s Remicade (infliximab) to market. Remicade has been a success since its
launch for arthritis and Crohn’s disease indications. In 2001, Remicade accrued sales
of $721m, up 94.3% from 2000. Elan has demonstrated its confidence in the success
of Antegren by repurchasing the royalty revenue stream held by Autoimmune
Research Development Company (ADRC), and now retains all product revenues of
this growth driver. AN-1792, in development for Alzheimer’s disease, carries higher
risk for Elan following the suspension of phase II trials in January 2002.
Partnership network
Unlike other specialty pharmas that have expanded through single product
acquisitions, Elan has mainly focused on company acquisitions and on taking
research partners to share the cost and risk of drug development. Until the end of
2000, Elan’s main focus was company acquisitions. It spent $2,507m on acquiring
four companies in 2000 with the aim of expanding its breadth of technological and
operational expertise. Elan has built on this critical mass and leveraged the expertise
of strategic partners, including large players like Wyeth and biotechnology companies

Company analysis
such as Biogen. Table 8 details Elan’s major acquisitions and agreements from 1996
to 2002.
Corporate acquisitions allow rapid expansion

Elan’s largest acquisition was Dura, acquired for $1,591m in November 2000,
allowing Elan to double its sales force in the US and acquire the integrated marketing
function that supported Dura’s sales of approximately $250m. Although not profitable,
Dura’s strong record of annual sales growth, generated by an expanded presence in
sales and marketing, complements Elan’s operational presence in the US and has
allowed it to gain quicker and deeper access to this critical market.
Also key to Elan’s current strategic trajectory have been the acquisitions of The
Liposome Company and Neuralab, which have broadened Elan’s R&D platform within
key indications, such as Alzheimer’s disease, and provided it with novel drug
candidates. In-house R&D is Elan’s weakest function and the expansion of its
technological competencies in CNS should remain a priority. Via the acquisition of
The Liposome Company, Elan has been able to gain access to a technological
platform that previously enabled The Liposome Company to re-engineer existing and
successful products such as Abelcet (amphotericin B) and Myocet (doxorubicin), in
addition to providing access to a revenue stream valued at over $64m.
Research partners: Wyeth and Biogen

Elan has taken partners in not only developing its drug delivery business but also in
developing its proprietary products. The company’s most important partners are
Biogen and Wyeth because of the importance of the late stage pipeline that they are
co-developing. Antegren and AN-1792 are targeted at markets in which Elan has little
presence and operational experience. By taking a partner, it should be able to
capitalize on its innovation. The alliance with Wyeth has created other opportunities
for Elan, following its deal to in-license Sonata (zaleplon; indicated for insomnia) in
December 2002. As Elan follows its recovery plan, narrowing its therapeutic focus
and cutting costs, it must forge more research and strategic collaborations to continue
build its portfolio of products. The company must position itself as a sales and
marketing expert in its field, encouraging partner companies to provide the funding for
drug development.

Company analysis
Table 8: Elan’s acquisitions and agreements, 1996-2002
Date Company Agreement Cost ($m)
2002 UCB Pharma Co-promotion agreement for the migraine n/a

(March) drug Frova (frovatriptan succinate) in the US
2001 Wyeth Strategic alliance to develop and n/a
(Dec) commercialize novel therapeutics for the
treatment of sleep disorders
2001 Amarin Strategic partnership to establish a franchise n/a
(July) Corporation in Parkinson's disease
2001 SafeScience Joint venture to develop SafeScience's 17
(Jun) GBC-590, in phase II clinical trials for
colorectal and pancreatic cancer
2001 Cambridge Strategic partnership to develop novel Equal
(Jan) Antibody therapeutics for the treatment of human contribution of
Technology neurological disorders R&D costs plus
the division of
all profits
2000 Quadrant Drug delivery 86
(Dec) Healthcare
2000 Dura Antibiotics, inhaled drug delivery 1,592
(Nov)
2000 Biogen Exclusive collaboration to develop, n/a
(Aug) manufacture and commercialize Antegren
(natalizumab)
2000 Pharmacia Research collaboration focused on the n/a
(Aug) discovery of small molecule inhibitors of
beta-secretase for the treatment of
Alzheimer's disease
2000 The Liposome Cancer, anti-fungals, injectable drug delivery 732
(May) Company
2000 Wyeth Research alliance to develop a vaccine for
(April) use in the treatment of mild to moderate
Alzheimer's disease and possibly to prevent
the onset of disease
2000 Neurolab Alzheimer’s R&D 76
(Jan)
1998 (Oct) NanoSystems Soluble drug delivery 153
1998 Neurex Pain management and acute care 810
(Aug)
1998 Carnrick Neurology and pain management 150
(May)
1998 Sano Transdermal drug delivery 435
(Feb)
1996 Athena Neurology 596
(July)
n/a = not available


Company analysis
Forest
Summary
Like King, Forest has successfully used the growth-by-acquisition strategy to grow its
business. To date, Forest has embraced the specialty pharma model, with a narrow
therapeutic, geographic and value chain focus. It operates solely in the US,
concentrating on sales and marketing, while carrying out limited drug development.
The company has a CNS focus. Forest typically in-licenses products that are in late
stage development from European specialty pharmas for development and marketing
in the US. However, as acquisition targets become less widely available, the
company has widened its therapeutic focus from CNS indications to include
cardiovascular and respiratory indications and is moving upstream, carrying out
internal drug development and in-licensing products at earlier stages. This change in
focus is clouding the visibility of the company’s revenues but is a vital step for Forest
to maintain growth. Figure 17 details Forest’s current strategic position and outlines
its key challenge: switching patients from its current growth driver, the antidepressant
Celexa (citalopram), in-licensed form Lundbeck, to the follow-up compound
escitalopram.

Company analysis
Figure 17: Assessment of Forest’s strategic position, 2002
BUILD
Strengths
- US sales force of over 2,000
reps
- Marketing partner of choice in
US
- Strong late stage pipeline
Justify strategy of
- Switching patients to
CAPITALIZE
drug development - Lack of differentiation of
escitalopram over escitalopram
and wider
citalopram - Developing wider
therapeutic
therapeutic focus to include
focus by - Potential acquisition Forest the cardiovascular market
conducting target by large pharma
- Investor uncertainty as - Create in-licensing
well designed
company expands into opportunities with Japanese
trials to prove
drug development companies
company’s ability
Weaknesses
- Over-reliance on one revenue
stream – citalopram
- Poor visibility until company
can prove successful switch to
escitalopram
Invest heavily in promoting

escitalopram to establish
investor confidence
Financial analysis
Forest displays healthy financials, as apparent in, for example, its:
• sales growth of key products;
• low R&D spend;
• expanding operating profit margins;

Company analysis
• high cash reserves;
• lack of long term liabilities.
Table 9 summaries the current financial health of Forest.
Table 9: Forest: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenue 624 899 1,205 1,602
Sales 546 873 1,175 1,567

Other income 78 26 30 35
R&D (52) (70) (106) (158)

S,G&A (325) (456) (517) (603)


Shareholders’ funds 744 885 1,222 1,625
EPS 0.5 0.6 1.2 1.8
Source: Datamonitor, Forest annual report DAT AM ONIT OR
From 1998 to 2001, Forest’s revenues grew with a CAGR of 36.9%. This was driven
by one product, the anti-depressant Celexa, licensed from Lundbeck for the US
market. In 2001, sales of Celexa rose by 52.2% to $1,088m, accounting for 69.4% of
total sales.
Forest operates with high S,G&A costs, which account for 38.4% of sales. These
costs are associated with running the large sales force necessary to promote Celexa
and compete with large pharmaceutical companies within the depression market. In
preparation for upcoming product launches, including Lexapro, the follow-up
compound to citalopram, Forest expanded its sales force by a further 600 reps in Q3
FY2001, with the aim of reaching a sales force headcount of 2,100. Historically,
Forest’s R&D costs have been low because it has carried out limited drug
development and no discovery or research. However, as the company moves further
up the value chain into drug development, R&D costs have increased accordingly. In
Company analysis
2001, R&D costs accounted for 10.1% of sales, compared to 9% in 2000, and can be
expected to continue to rise. Forest’s strong sales and relatively low cost base have
resulted in its operating profit margins increasing to a healthy 30% in 2001.
Forest is in a strong position to fund more in-licensing deals to bolster its pipeline or
even to acquire a small company. Over the last four years, it has consistently added
to its liquid assets. In 2001, cash and short term investments saw a 51.1% rise to
$612m, compared to $405m in 2000. Forest adopts an unconventional financial
strategy with no long term liabilities, instead raising cash solely through the issue of
shares. Arguably, the company could operate more efficiently if it chose to leverage
long term debt more extensively. This represents a missed opportunity because
Forest has foregone the tax savings that could have been made if it had raised
interest bearing debt as part of its capital structure.
Portfolio analysis
Through the success of Celexa, Forest has built a very strong reputation within the
US depression market. The product has driven substantial growth and has resulted in
a significant strategic shift from a diverse portfolio marketed by a small field force to
an increasing focus on the CNS area, supported by a large sales force. However,
unlike Lundbeck, Forest is not solely concentrating on CNS indications but has
broadened its pipeline to include cardiovascular and respiratory products.
The current most important factor for Forest’s growth is the success of Lexapro.
Forest’s ability to switch patients in advance of generic citalopram competition,
expected in 2003, is vital for its continued growth and is the key activity that investors
are tracking. If Lexapro sales take off, it will create transparency in the company’s
revenues, boosting investor confidence. Beyond Lexapro, Forest has a deep pipeline
built from product acquisitions and co-promotion agreements. This should help to
remove its dependence on its depression franchise over the long term.
As with Celexa, Forest in-licensed Lexapro from Lundbeck and will be its sole
marketing force in the US. As Lexapro is a purified enantiomer of citalopram, it does
not represent a new mechanism for the treatment of depression but may differentiate
itself on the basis that it would be taken as a lower dose formulation and may work
quicker than established selective serotonin reuptake inhibitors (SSRIs). Phase III
studies, presented at various conferences in 2001, have further illustrated this point,
as 10mg Lexapro differentiated itself from placebo at week two under double-blind,
randomized conditions. However, the data did not include any analysis of sexual
dysfunction, the major side effect of the SSRI class, and this needs to be seen before

Company analysis
any judgment of Lexapro’s side effect profile can be confirmed. Nevertheless, data is
encouraging, particularly concerning the drug’s potential onset of action, as the highly
competitive nature of the SSRI market means that new products require multiple
points of differentiation from the established opposition.
Datamonitor believes that Forest will follow a similar strategy to that which ensured
that Celexa was a success upon its launch, but enhance its scope due to the greater
experience and resources that it now has. Lexapro is expected to be priced at up to
10% less than Celexa, as Forest has recently been increasing the price of Celexa to
create the void for Lexapro. When it originally launched Celexa, it positioned the drug
as cheaper to Prozac to try to establish a competitive position.
Current leading antidepressant brands have so far suffered little from the introduction
of generic fluoxetine. Therefore, Forest has presented comparative data between
Lexapro and existing SSRIs. Furthermore, the company is aiming to extend the
patient potential for Lexapro by gaining additional licenses for the compound in
various anxiety disorders. Although citalopram was approved for panic disorder in the
EU, Celexa has only ever gained an indication for major depressive disorder in the
US. Data were presented at the Anxiety Disorders Association of America Annual
Meeting in March 2002 from three double-blind, placebo-controlled trials that
illustrated the efficacy of Lexapro for these conditions.
Forest’s aggressive product acquisition strategy has resulted in a diverse pipeline

compared to its marketed portfolio, with seven drugs in late stage development, as
detailed in Table 10.

Company analysis
Table 10: Forest’s late stage pipeline, 2002
Brand (generic) Indication Phase Originator Date Agreement
Aerospan Asthma Approved Follow-on n/a n/a

(flunisolide HFA) compound to
Forest’s
AeroBid
Benicar Hypertension Approved Sankyo 2001 Co-promotion in
(olmesartan Pharma of (Dec) US
medoxomil) Japan
acamprosate Alcoholism Registration Lipha 2001 Development
(Oct) and marketing
rights in the US
lercanidipine Hypertension Registration Recordati 2000 Development
(Nov) and marketing
rights in the US
oxycodone Moderate to Registration n/a n/a n/a
ibuprofen severe pain
memantine Alzheimer’s Phase III Merz 2000 Development
disease, (Jun) and marketing
neuropathic rights in the US
pain and AIDs
related
dementia
dexloxyglumide Constipation- Phase III Rotta 2000 Development
prone irritable Research (Aug) and marketing
bowel Laboratorium rights in the US
syndrome
ML 3000 Osteoarthritis Phase III EuroAlliance 2000 Development
(consortium of (Apr) and marketing
Alfa rights in the US
Wassermann,
Lacer and
Merckle)
n/a = not applicable
Benicar is a key growth driver in Forest’s late stage pipeline. The drug will be
promoted by Forest’s cardiovascular sales team, which currently markets Tiazac
(diltiazem HCL), a calcium channel blocker used in the prophylaxis and treatment of
hypertension. The addition of Benicar to Forest’s portfolio should further its presence
in this area and aid the penetration of lercanidipine, as cardiologists and primary care
physicians use multiple classes of drugs to treat hypertension.

Company analysis
Partnership network
Forest’s growth strategy requires the company to continually in-license products to

market in the US, either from companies without their own sales forces, such as
biotechnology companies, or from companies whose sales forces focus on other
parts of the world. Its ability to attract licensors has been substantially enhanced by
its success with Celexa. Forest’s strongest asset is its US sales force, which puts it
on a competitive footing with larger US pharmaceutical companies.
Traditionally, Forest has relied on European pharmaceutical companies with little US

presence but of a similar size to itself from which to in-license products. Forest has
successfully forged an alliance with Lundbeck to obtain the US rights to some of its
promising compounds. Following the success of citalopram, Forest has maintained
this relationship, which resulted in it gaining the US marketing rights to escitalopram,
citalopram’s follow-up compound, and to LU 28-179, an anxiety treatment in phase II
development. A European ally such as Lundbeck should provide marketing
opportunities in the future, providing it remains European based with no US sales
force of its own.
The agreement with Sankyo to co-promote Benicar, detailed in Table 10, represents
Forest’s first deal with a Japanese company. Forest must build on this agreement and
position itself as the marketing partner of choice for Japanese companies. This is
particularly important as more European companies are looking to enter the US
market independently rather than relying on marketing partners. Lundbeck, a key
partner, has stated its intention to follow this strategy in the long term. Many
Japanese companies will also wish to enter the US market eventually, but they are
typically working to a longer time scale than their European counterparts. Forest can
capitalize on companies trying to move into the US by co-promoting products while
the new company establishes itself. However, this is a short term strategy and
highlights one of the key limitations to the growth-by-acquisition model: the dwindling
availability of appropriate acquisition targets.
ICOS
Summary
ICOS is a development company with a diverse pipeline. It is on the verge of making

the transition into the specialty pharma market though the commercialization of its
first product, Cialis (IC351), indicated for erectile dysfunction, which it will promote

Company analysis
through a joint venture agreement with Eli Lilly. ICOS has pursued a diverse growth
strategy, rather than focusing on one particular indication and is developing a pipeline
of compounds in many indications. A further facet of its strategy is that it is prepared
to develop products that face extensive competition from large pharmaceutical
companies. The key elements of ICOS’ growth strategy include:
• a diverse pipeline with small molecule and protein products;
• risk management by commercializing products through joint venture agreements;
• M&A activity to boost in-house development efforts.
Figure 18 details ICOS’ current strategic position.
Figure 18: Assessment of ICOS’ strategic position, 2002
BUILD
Strengths
- Diverse pipeline with 3
products in late stage
development
- Strong partnership network
with large pharma
Build sales force Threats Opportunities

through organic
CAPITALIZE
- Products aimed at - Leverage partnership with
growth and highly competitive market Eli Lilly to build S&M
acquisitions and - Dependence on capabilities
use experience Eli Lilly for successful ICOS - Develop therapeutic focus
of marketing transition into specialty to make cost savings and
partners. Retain pharma market position company as
product rights to - Pfizer patent challenge development and marketing
future drugs to on Cialis partner of choice
ensure growth
Weaknesses
- Reliance on R&D payments
due to lack of marketed
products
- Poor visibility in earnings until
Cialis is launched
Acquire marketed products to

build portfolio and reduce
reliance on current growth
drivers

Company analysis
Financial analysis
Table 11 provides a snapshot of ICOS’ financial health.
Table 11: ICOS: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 111 80 91 94
Research and development 34 64 47 55

collaborative revenue
Licensing 75 15 43 31
Other 2 1 0 8
R&D (77) (101) (87) (112)

S,G&A (4) (5) (7) (9)
Operating profit 30 (26) (3) (27)

Operating profit margin (%) 27.0 (32.5) (3.3) (28.7)

EPS n/a (0.8) (2.1) (1.5)
n/a = not available
Source: Datamonitor, ICOS annual report DAT AM ONIT OR
ICOS achieved a modest 3.3% growth to record $94m of revenue in 2001. It is

dependent on partner companies, with $54.8m or 58.5% of its revenue derived from
reimbursement costs relating to the development of Pafase (rPAF-AH) and
sitaxsentan. ICOS’ R&D costs increased by 28.7% in 2001, due, in part, to the
development of these drugs. Revenue from technology licenses declined, mainly
because of the completion of Cialis’ development activities, ahead of its NDA. ICOS
has seen a rise in earnings following the start of contract manufacturing services in
Q4 2000, to account for $7.4m in 2001.
With no long term debt and high cash reserves generated from a public offering in
2000, ICOS is in a good position to make small acquisitions to support the growth of
its business.

Company analysis
Portfolio analysis
ICOS lacks a therapeutic focus and develops drugs for a wide array of indications.
This strategy prevents the company making cost savings on internal expertise in one
therapy area. Its pipeline strategy differs from that employed by a number of specialty
pharma companies, as manifest in:
• a lack of therapeutic focus results in a diverse pipeline, with indications ranging

from erectile dysfunction to hypertension. Most specialty pharmas focus on a
limited number of therapy areas to make cost savings and build a presence in a
small number of areas to focus in-licensing opportunities;
• product development that faces competition from far larger companies, notably
Cialis, indicated for erectile dysfunction. The company has compensated for this
by recruiting a major pharmaceutical partner, Eli Lilly.
ICOS’ most advanced product, Cialis, is being developed by Lilly ICOS, a 50:50 joint
venture. The successful commercialization of Cialis is the key event that will allow
ICOS to move into the specialty pharma sector. The drug, a phosphodiesterase V
inhibitor, is in phase III development for the treatment of erectile dysfunction in
Europe and the US. In July 2002, the European Committee for Proprietary Medicinal
Products issued a positive opinion for Cialis, and it was approved by the European
Commission in November 2002. However, it will not be launched until 2003 because
of a switch in manufacturing sites in Europe.
In April 2002, Lilly received an approvable letter from the FDA for Cialis. Approval is
contingent upon the successful completion of additional clinical pharmacology
studies, labeling discussions and manufacturing inspections. Lilly ICOS will conduct
discussions with the FDA on the exact data requirements requested by the agency for
final product approval. The US launch for Cialis was projected to be in 2003,
however, in October 2002, Pfizer announced that it had filed a law suit against Lilly
ICOS alleging that the proposed marketing of Cialis would infringe a newly issued
’method of use’ patent. Previously, Pfizer’s European ‘method of use’ patent was
ruled to be invalid. Lilly ICOS has pledged to fight the lawsuit but it is a threat to the
launch of Cialis. Pfizer has filed the same lawsuit against GSK and Bayer for the
proposed marketing of their erectile dysfunction drug, Levitra (vardenafil HCl).

Company analysis
Partnership network
ICOS has developed joint venture relationships with Eli Lilly, Suntory and Texas
Biotechnology for the commercialization of Cialis, Pafase and endothelin receptor
antagonists, respectively. ICOS states that it intends to continue partnering with large
pharmaceutical companies, specialty pharmas and biotechnology companies. Such a
strategy allows ICOS to reduce the risks of development significantly, although there
is a corresponding loss of downstream revenue.
ICOS’ use of joint ventures demonstrates an advanced approach to risk. Typically,

the long term aim of a development company is to maintain complete downstream
product rights. However, this requires the company to fund development
independently. While collaborations serve to reduce costs, joint ventures have certain
advantages. Firstly, ICOS can more easily formalize the role of each partner in a joint
venture, which may reduce the risk of failure due to poor cross-company
management and buy-in. Secondly, a joint venture reduces the financial impact on
the parent company should a product fail. Finally, a joint venture to commercialize a
limited range of products will be highly focused and can increase the input of the
smaller partner to the sales and marketing efforts.
ICOS’ acquisitive strategy potentially places it in competition with other companies for
targets. However it is of value to understand how ICOS gains access to such
compounds when it has more restricted finances and, correspondingly, can only offer
less attractive terms. In contrast to other development companies, ICOS does not
offering marketing rights in lieu of cash. Rather, it seems to be in-licensing niche
products that do not appeal to other companies. Table 12 summarizes ICOS’ M&A
and agreement activity since 1997.

Company analysis
Table 12: ICOS’ acquisitions and agreements, 1997-2002
Date Company Details
2001 (Nov) Afferon Exclusive global rights to RTX(TM) (resiniferatoxin),

indicated for the treatment of urological disorders
2001 (Aug) Array Collaborative agreement to discover and develop small
BioPharma molecule drugs directed at two specific disease targets
containing the I-domain allosteric site (IDAS) structural
motif
2001 (June) Biogen Cross license LFA-1 antagonist technology, including
IC74. Share cost of product development and co-
promotion with equal profit split
2000 (Jun) Texas A 50/50 partnership to develop and commercialize
Biotechnology endothelin receptor antagonists. The partnership retains
Corporation global marketing rights and shares profits. ICOS paid $2m
to Texas Biotechnology, with up to $53.5m in further
payments
1999 (Apr) Abbott Collaboration to discover small molecule drugs which
modulate intracellular signaling adhesion molecules.
Expanded September 1997 to include extra cellular
targets. Each partner received commercialization rights to
drugs with royalties and milestones due to the other
partner. Expanded June 2000 by acquiring global product
rights from Abbott to all products developed. Abbott will
receive royalties and milestone payments. Includes IC747
1998 (Oct) Eli Lilly Joint venture to develop and commercialize PDE5
inhibitors, including Cialis/IC351. ICOS received $75m
when the joint venture was established and $15m on
entering phase III. Lilly ICOS will market products in the
US and EU. In other markets, Lilly will market products
and pay Lilly ICOS royalties
1997 (Feb) Suntory Joint venture, Suncos, to commercialize Pafase. Global
rights, subsequently licensed to Suntory in Japan and
ICOS in the US. Suncos retains rights in all other markets.
Set up with $30m cash from Suntory, matched by capital
from both partners
n/a Johnson & Sub-licensing agreement for IC14. ICOS gains intellectual
Johnson property rights for IC14 in return for royalty payments
n/a Array IC485 R&D agreement. ICOS funds Array's medicinal
BioPharma chemistry in return for license of intellectual property rights
and royalties. ICOS has global marketing rights
n/a Array DNA repair inhibitors. ICOS funds medicinal chemistry
BioPharma performed by Array against a number of targets. Gains
intellectual property rights in return for royalty payments
n/a = not available


Company analysis
IDEC
Summary
With its roots in the biotechnology sector, IDEC is a development company that is
transitioning towards FIPCO status. The catalyst for this change is the launch of
Zevalin (ibritumomab tiuxetan), IDEC’s first major self-marketed product. To date,
IDEC has been considered a one product company, relying on the revenues that
Genentech generates from sales of IDEC’s Rituxan (rituximab) in the US. Although
IDEC has a sales and marketing capability, it is limited to a co-promotion agreement
for Rituxan. However, it has pledged to market Zevalin alone, at least in the US,
marking a significant step in its evolution. Figure 19 details IDEC’s current strategic
position and outlines its strengths and potential future growth opportunities.
Figure 19: Assessment of IDEC’s strategic position, 2002
BUILD
Strengths
- Strong growth of Rituxan
leads to a healthy financial
position
- Monoclonal antibody expertise
Use M&A
Opportunities
CAPITALIZE
activity to Threats - Expand oncology sales

establish a - New wave of emerging force to drive Zevalin growth
wider antibody technologies
therapeutic IDEC - Utilize strong cash position
focus and - Failure to expand the to in-license or acquire
bolster current clinical pipeline pipeline products
pipeline
Weaknesses
- High dependence on sales of
Rituxan
- Lack of commercial
experience could inhibit Zevalin
uptake
Leverage experience from co-

promoting with Genentech to
expand sales force. Utilize
cash reserves to invest in
promoting Zevalin

Company analysis
Financial analysis
With a healthy balance sheet and sustained profitability, mainly driven by sales of
Rituxan, IDEC is in a strong position to drive its further growth in the specialty market,
as summarized in the following table.
Table 13: IDEC: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 87 118 155 273
Sales n/a 107 139 263

R&D contracts n/a 11 16 10
R&D (31) (43) (69) (86)

S,G&A (17) (19) (28) (55)


EPS 0.2 0.3 0.3 0.6
n/a = not available
Source: Datamonitor, IDEC annual report DAT AM ONIT OR
IDEC’s revenues have shown strong growth since 1998 and increased by 76.2% in
2001. This growth was mainly driven by sales of Rituxan, which earned $251m in
2001, an increase of 88.7% over 2000. Remaining income in 2001 was derived from
R&D contract revenues of $10m and license fees of $12m.
S,G&A expenses totaled $55.2m in 2001 compared with $27.8m in 2000, equating to
a 98.6% increase. This was primarily the result of increased legal and patent filing
fees and escalating sales and marketing expenses relating to the commercialization
of Rituxan and Zevalin. S,G&A expenses are expected to increase to support the
expansion of IDEC’s sales and marketing operations. R&D costs were $86.3m in
2001, having risen with a CAGR of 26.3% since 1998. IDEC will continue to incur

Company analysis
substantial additional R&D expenses because of the expansion of its R&D programs
and the costs of in-licensing new technologies. R&D and S,G&A costs represent
32.7% and 20.9%, respectively, of total sales. These ratios are high and reflect the
drug discovery and development activities that the company carries out, but they are
in line with IDEC’s biotechnology peers, Biogen, Genentech and Amgen. As IDEC
switches its focus to sales and marketing activities and begins to generate more
significant sales, its R&D to sales ratio should fall into line with those of other
specialty pharma companies.
Datamonitor believes that IDEC has enough cash to purchase new technologies or
even to proceed with the acquisition of a small biotech or pharmaceutical company.
This would allow it to expand its infrastructure and sales and marketing capabilities
immediately.
Increasing stock volume resulted in a substantial increase in IDEC’s shareholders’

funds, up from $160m in 1999 to $956.5m in 2001. In addition, IDEC’s strategy of
continuous integration activity led to a rise in the company’s long term debt, from
$131.5m in 1999 to $149.4m in 2001. IDEC may attempt to offer a number of new
share options in the near future, with the aim of increasing its shareholders’ funds and
providing enough cash to reduce its debt and to support potential joint ventures or
M&A activity.
Portfolio analysis
IDEC is primarily engaged in the R&D and commercialization of antibody therapies

for the treatment of cancer, autoimmune and inflammatory diseases. Its first
commercial product Rituxan, indicated for certain B-cell non-Hodgkin's lymphomas
(NHL), was the first cancer antibody to be approved by the FDA. However, because
IDEC has played only a small part in the commercialization of this drug, it is not a key
lever that will transform the company into a specialty pharma. Rituxan has provided
IDEC with the funds to develop its proprietary pipeline, but Zevalin is the first drug
that IDEC will market alone.
Zevalin was designed to act as a complement to the Rituxan franchise and is

indicated for NHL patients who are refractory to Rituxan treatment. Like Rituxan, the
product faces minimal competition in the area of radiolabeled antibodies, with a lead
of at least 12 months over its nearest competitor, Corixa/GlaxoSmithKline’s Bexxar
(tositumomab, iodine I 131 tositumomab), in the US market. However, Zevalin could
experience relatively slow sales growth in the first instance, until physicians become
familiar with prescribing the drug. IDEC received FDA approval to market Zevalin in

Company analysis
February 2002, but European approval has been delayed due to technical
compliance issues. IDEC has been developing Zevalin with Schering AG, which has
the marketing rights to the drug outside the US.
IDEC has a narrow therapeutic focus and only develops antibody molecules.
Maintaining this narrow focus is a risky strategy because there is a new wave of
emerging antibody technologies. These include those developed by Seattle Genetics
and Mabtech, which in the long term could compete with IDEC’s basic technology for
licensing, funding from big pharmaceutical companies or additional venture capital
financing. IDEC must exploit new technologies and continue its transition into the
specialty pharma sector, marketing its own products and generating higher returns.
Patented new technologies include platforms such as genomics-based drug
discovery or new protein and antibody engineering methods. This should reduce the
time needed to complete preclinical studies and diversify R&D risk by adding new
drug candidates to the pipeline.
Partnership network
As a development company, IDEC has used partners to co-develop its in-house

products and to gain expertise and funding, rather than in-licensing products for
development, which is the favored strategy of many other specialty pharmas. IDEC
has a number of collaborations that are central to its growth strategy and detailed in
Table 14. It is significant that in most of these, IDEC trades European and Japanese
marketing rights in return for R&D funding. The largest of these collaborations is for
Rituxan, for which promotion rights are licensed to Genentech or Zenyaku for all
markets with the exception of the US. Much of IDEC’s growth as a biotechnology
company can be traced back to its co-development partnership with Genentech in
1995 for Rituxan. Genentech was a key partner because it provided the regulatory
and scientific expertise to pave the way for Rituxan’s approval. Although such
agreements were signed in response to IDEC’s requirement for development income,
they ultimately restrict the amount of revenue that IDEC can expect to receive. In the
foreseeable future, IDEC will remain reliant on collaborations for funding and will be
limited to self-marketing products in the US only. As Zevalin sales increase, IDEC will
have more funds available for R&D and sales and marketing activities and will not
rely as heavily on partner companies.

Company analysis
Table 14: IDEC’s acquisitions and agreements, 1996-2002
1993 (Nov) Mitsubishi Collaborative development of IDEC-114, currently in phase II

2001 (Oct) trials for moderate to severe psoriasis. This agreement was
extended with a further $35m in R&D funding. Mitsubishi will
undertake Japanese phase II trials
2000 (Jun) Taisho Collaboration with Taisho to develop and commercialize antibody
therapeutics against macrophage migration inhibitory factor, for
the treatment of inflammatory and autoimmune diseases. Taisho
provides up to $32m in development payments over four years in
return for Asia and Europe marketing rights
2000 (Feb) GSK Amended agreement with GSK resulted in all anti-CD4 program
rights (incl. IDEC-151) returning to IDEC. GSK retains an option
on the first anti-CD4 antibody to enter phase II
1999 (Jun) Schering AG Development and commercialization of Zevalin. Schering AG
provides up to $47.5m in development milestone payments.
Schering AG receives marketing and distribution rights to Zevalin
outside the US
1998 (Mar) GSK Commercialization agreement for IDEC-151 for rheumatoid
arthritis
1995 (Dec) Eisai Collaboration developing humanized antibodies against CD40
ligand. Potential uses for transplantation and autoimmune
diseases. The lead product, IDEC-131, started a phase II trial for
patients with chronic, refractory ITP in Jan 2001 and a separate
phase II trial for moderate to severe psoriasis. Up to $37m in
milestone payments, of which $33m had been paid by Dec 2000.
Eisai has exclusive European and Japanese marketing rights
1995 (Nov) Genentech Joint development, supply and license agreement. Zenyaku
& Zenyaku received exclusive rights to develop, market and sell Rituxan in
Japan. Royalty payments to IDEC. Co-promotion of Rituxan with
Genentech in the US, which was subsequently licensed by
Genentech to Roche
1995 (Mar) Genentech Collaborative agreement with Genentech for the clinical
development and commercialization of Rituxan, its anti-CD20
monoclonal antibody for the treatment of B-cell non-Hodgkin’s
lymphoma
1994 (Dec) Seikagaku Collaborative development of IDEC-152. In phase I trials for
allergic rhinitis, asthma and other allergies. Also development of
other anti-CD23 antibodies. Development cost of up to $26m.
Seikagaku receives Asia and Europe marketing rights

Company analysis
King
Summary
King Pharmaceuticals has driven its revenue growth by adopting a simple strategy. It
buys old, under-promoted products from major pharmaceutical companies and
focuses its resources upon them. King has executed this growth-by-acquisition model
with great success. It has grown from revenues of $20m in 1996 to $825m in 2001.
The cardiovascular product Altace (ramipril), purchased from Aventis in 1998, has
been King’s key growth driver to date.
King falls within the little big pharma sector of the specialty pharma market because it
has established an almost compete in-house infrastructure. The company boasts
sales and marketing, manufacturing, regulatory affairs, management and R&D
expertise. Much of this structure has come from acquiring other companies and puts
it in a strong position to develop into a FIPCO.
King is a US focused company, headquartered in Bristol, Tennessee. It derives all of

its sales from the US and Puerto Rico. Like other US based specialty pharmas, it has
no disclosed plans to enter new geographic markets. Figure 20 details King’s current
strategic position and highlights its strengths and future opportunities for growth.

Company analysis
Figure 20: Assessment of King’s strategic position, 2002
BUILD
Strengths
- Solid short term growth
prospects of flagship products
- Broad therapeutic focus
Form more
CAPITALIZE
partnerships Threats Opportunities
to build - Risk of generic
pipeline and competition for Levoxyl - Exploitation of Levoxyl
share risk of and Altace King - Partnership opportunities
drug - Acquisition target by - Further acquisitions
development large pharma
Weaknesses
- Limited pipeline
- Dependence on few drugs
In-license more products to

reduce dependence on current
growth drivers
Financial analysis
King is in a good financial position with strong revenue growth and expanding
operating profit margins. The company has high liquidity, which is essential to
maintain its current business model of expanding via M&A activity. Despite this strong
position, it has stated that if it is to carry out further acquisitions, it is likely to require
funding through further borrowing or the issue of debt and/or equity. Table 15
provides a snapshot of the current financial health of King.

Company analysis
Table 15: King: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 294 512 620 872
Sales n/a 481 579 825

Royalties n/a 32 41 47
R&D (11) (18) (25) (27)

S,G&A (59) (107) (133) (241)


Shareholders’ funds 101 495 988 1,908
EPS 0.5 0.5 0.3 0.9
n/a = not available
Source: Datamonitor, King annual report DAT AM ONIT OR
King’s revenue stream over the period 1998-2001 shows consistent growth, with a
CAGR of 43.7%. Sales in 2001 demonstrated a 42.6% increase over 2000, rising
from $579m to $825m. This was driven by 67% and 58% growth in the cardiovascular
and women’s health franchises, respectively. King has kept its R&D costs low, at
3.3% of sales, by in-licensing products that are already marketed and require minimal
further development. Historically, King has conducted no research and only a limited
amount of drug development. However, with the purchase of Medco Research in
February 2000, King has moved upstream in the value chain. It has stated that it
plans to use the R&D branch it has gained primarily for lifecycle management, for
example to extend the life of its key products through reformulation.
Although S,G&A costs at 29.2% of sales are much higher than King’s R&D expenses
as a proportion of sales, they are slightly lower than the average for large
pharmaceutical companies. This is impressive considering the large sales force that
King maintains compared to its size. In 2001, this cost jumped by 81.2%, primarily
due to the co-promotion of Altace with Wyeth. The fees and expenses associated
Company analysis
with this agreement, assuming continued sales growth of Altace, will continue to rise.
During 2001, King increased its sales force from 520 to 715 across the US and
Puerto Rico.
King displays healthy profit margins, which in 2001 expanded by 39.9%. At over 40%
in 2001, they are higher than most other specialty pharmas, as seen in Figure 3,
Chapter 1. In 2001, King raised $1bn of funds through equity and short term debt
issues and signed a commitment letter for a $400m credit facility. With high cash
reserves of $924m, relatively low long term debt and access to further credit, King is
in a strong position to make further acquisitions.
Portfolio analysis
King has a broad portfolio that it believes gives it an advantage over its specialist
competitors, as it can exploit in-licensing opportunities in a variety of therapy areas.
The company operates in four therapy areas: cardiovascular, women’s
health/endocrinology, infectious disease and critical care. Although King markets a
number of products, only two recorded sales of over $100m in 2001: Altace and
Levoxyl (levothyroxine sodium). In the short term, King is dependent on these two
products to drive growth.
Revenue growth drivers

Since 1998, a single product, the ACE inhibitor Altace, has primarily driven King’s
revenue growth. The drug was approved for the treatment of hypertension in 1991
but, given the large number of ACE inhibitors on the market, the former Hoechst
Marion Roussel (HMR) had not been able to grow its sales satisfactorily. In 1998, for
example, the drug generated revenues of $400m globally, but only $90m of this was
derived from the US. Since the new Aventis (formed by the merger of HMR and
Rhône-Poulenc in 1999) would have a number of other cardiovascular products with
greater growth potential in its portfolio, HMR sold the US rights to Altace prior to the
merger. King purchased the product with two others from HMR for $363m in
December 1998.
King’s sales of Altace reached $122m in 1999. Together with a number of mergers,
its purchase was a major driver of the growth of total product revenues from $262m in
1998 to $481m in 1999. In 2001, Altace recorded sales of $285m, or 34.5% of King’s
sales. This growth was due to three main factors:

Company analysis
• King was able to change the price of Altace to position it more attractively
against other ACE inhibitors, as well as focusing its sales force on the
product. HMR had not been able to do this;
• in October 2000, Altace became the only ACE inhibitor approved to reduce
the risk of stroke, heart attack and death in high risk patients, following
positive results in a clinical study, the Heart Outcomes Prevention Evaluation
(HOPE) study;
• in June 2000, King entered a co-promotion agreement with American Home

Products (now Wyeth) for Altace. This increased the number of reps
available to detail Altace from 520 (King’s total field force in 2000) to 2,000.
Altace is believed to have over 10% of the US ACE inhibitor market. King competes
with large pharmaceutical companies’ drugs in this market including AstraZeneca’s
Zestril (lisinopril), Pfizer’s Accupril (quinapril), Merck’s Prinivil (lisinopril), Novartis’
Lotensin (benazepril) and Bristol-Myers Squibb’s Monopril (fosinopril). Looking
forward, Altace’s position within the ACE inhibitor market may be enhanced in 2002,
given that Merck’s Prinivil and AstraZeneca’s Zestril lost exclusivity in June 2002. The
aggregate 2001 sales for these products was $1.9bn, so it is clear that there may be
a substantial upside for King.
Altace also has growth opportunities through the expansion of its indications. Among
the secondary outcomes of the HOPE study were the striking results seen in heart
failure complications associated with diabetes and in new diagnoses of diabetes.
King hopes to build on this data with the phase III Diabetes Reduction Approaches
with ramipril and rosiglitazone Medications (DREAM) trial. This 4,000 patient, five and
a half year study in conjunction with GlaxoSmithKline, is designed to investigate
whether Altace and/or GlaxoSmithKline’s Avandia (rosiglitazone) can prevent the
onset of type 2 diabetes.
Despite the potential of Altace, there is a cloud on the horizon for King’s growth
driver: it loses patent protection in 2005. King must build up its portfolio of products to
replace the expected lost revenues. It will be insufficient to fall back on the company’s
other key product Levoxyl.
Levoxyl is a branded version of levothyroxine sodium, which has strong growth

potential for King, as demonstrated by its 78% rise in sales in 2001 of $105m.
Levothyroxine sodium is a synthetic isomer of the thyroid hormone thyroxine and is
indicated as a replacement therapy for any form of diminished or absent thyroid
function. King acquired the product with the acquisition of Jones Pharma in August

Company analysis
2000. However, King must fight hard to secure patent protection for the drug
expected in H1 2003, otherwise its sales potential could be significantly diminished.
Levoxyl has faced the threat of generic competition since it gained approval in May
2001. However, as a reference listed drug, generic manufacturers will not have to
petition the FDA to use the product as a reference product, although generic
penetration will be discouraged by the fact that it is difficult for generics companies to
show bioequivalence with levothyroxine products. King has submitted in excess of 20
patent applications relating to the product’s new formulation, specifically its
manufacture and uptake profile. While at present it is not clear whether it will be
successful in getting these patents approved, if King does succeed, it could get the
patents added to the list in the FDA’s Orange Book and thereby achieve an automatic
30 month stay on generic approvals.
Product acquisitions
With no long term growth drivers developed in-house, King made two acquisitions in
2001 to expand its business:
• Estrasorb (17-β-estradiol), a topical estrogen replacement therapy in phase

III trials, was acquired from Novavex for King to promote, market, distribute
and sell worldwide, except in the US where both companies will co-promote;
• three branded products and a paid license to a fourth from Bristol-Myers

Squibb (BMS).
Estrasorb will add to King’s women’s health portfolio and will compliment its oral and
injection based estrogen replacement products, Menest (esterified estrogens) and
Delestrogen (estradiol valerate). Once approved, King will pay Novavax a royalty
based on the percentage of net sales outside the US and Puerto Rico, while Novavax
will pay King a co-promotion fee equal to 50% of net sales less COGS within these
markets. Marketing costs will be shared equally. Phase III trials are complete but, in
April 2002, Novavax announced that it had withdrawn its NDA due to the FDA
bringing up chemistry, manufacturing and controls issues. It is believed that the
company will re-submit the application for a potential launch in 2003.
In September 2001, King announced that it had purchased the US rights to four
products from BMS:
• a beta-blocker/diuretic combination drug, Corzide (nadolol +

bendroflumethiazde);

Company analysis
• a beta-blocker, Corgard (nadolol);
• an injectable estrogen, Delestrogen;
• a corticosteroid for the treatment of various endocrine disorders, Florinef

(fludrocortisone acetate).
With two cardiovascular products to complement Altace and another hormonal

product to add to the women’s health therapies it already markets, King will derive
significant synergies from this agreement with BMS. The company is focusing on the
cardiovascular area and added a further 45 specialist cardiovascular sales reps to its
field force in October 2001. The reps were hired from Essentia, a US pharmaceutical
promotion specialist that had been promoting Corzide on behalf of BMS prior to
King’s purchase of the product. These reps will be in a good position to enhance
King’s promotion of Altace as well as Corzide.
Partnership network
King has relied on M&A activity to expand its product portfolio and grow its business,
and has made few co-development and co-marketing agreements. King’s strategy
has been to acquire branded prescription drugs outright and reap the rewards
independently. However, in recent years, the company has made more licensing
deals, for example with Novovax in 2001. King’s management has also recognized
when a strategic partner is valuable, demonstrated by its co-promotion agreement
with Wyeth. Table 16 lists King’s key acquisitions and agreements between 1997 and
2002.

Company analysis
Table 16: King’s acquisitions and agreements, 1996-2002
Date Company Product Value
2002 (May) Ortho-McNeil

Ortho-Prefest (17ß-estradiol, $108m + milestone
norgestimate) payments
2001 (Aug) BMS Corzide, Delestrogen and $287m
Florinef and a license for
Corgard
2001 (Jan) Novavax Estrasorb and Androsorb King to pay Novavax
$7.5m and 9% of net
sales
2001 (Jan) Novavax Nordette 50% on co-
promotion sales
2000 (Dec) Novavax License to use cell line to $25m convertible
develop recombinant human debenture
papillomavirus virus-like investment in
particle vaccines Novavax & a 17%
royalty on net sales
2000 (Aug) Jones Pharma Acquisition of company $2,400m
2000 (June) Wyeth Co-promotion Agreement for n/a
Altace
2000 (Feb) Medco Research Acquisition of company $366m
1999 (Aug) Eli Lilly Lorabid $92m
1998 (Dec) Aventis Altace & 2 branded products $363m
1998 (Feb) Pfizer 15 branded products $128m
1997 (Nov) GSK Neosporin & Polysporin
1997 (May) GSK Viroptic & 6 branded $54m for all three
products agreements
1997 (Mar) GSK Cortisporin
BMS = Bristol-Myers Squibb

n/a = not available

Company analysis
Lundbeck
Summary
Lundbeck’s future growth strategy will build upon its core CNS competencies,
leveraging its focused European sales force across a small number of potentially
lucrative CNS markets, namely Parkinson’s and Alzheimer’s diseases. In the
meantime, it out-licenses product rights in its non-core geographic markets,
generating nearly $200m from the US market in 2001 via Forest.
Lundbeck falls into the category of a little big pharma, conducting some in-house
R&D and bolstering its pipeline with in-licensed products. By focusing on a small
number of therapeutic and geographic markets, the company is attempting to become
the European licensing partner of choice within the CNS market. However, it is
virtually a one-product company, with 87.2% of 2001 revenues derived from sales of
and royalty payments from its antidepressant, Cipramil (citalopram, branded Celexa
in the US). Lundbeck is wisely investing proceeds from this revenue source into
acquisitions to build its pipeline and diversify future risk.
Lundbeck’s earnings visibility is limited because it is undergoing a growth driver

switch from Cipramil to the follow-up compound Cipralex (escitalopram). With only
one other potential growth driver in its pipeline, Ebixa (memantine), Lundbeck has
little to fall back on and is dependent on successfully switching patients. If Cipralex
successfully takes the place of Cipramil and continues the growth of this line of
products, Lundbeck’s longer term visibility will be clearer, as the drug will not lose
patent protection until 2009.
Figure 21 details Lundbeck’s current strategic position and outlines its strengths and
future opportunities. Attention is drawn to the company’s weaknesses, central to
which is its over-reliance on one revenue stream.

Company analysis
Figure 21: Assessment of Lundbeck’s strategic position, 2002
BUILD
Strengths
- CNS expertise
- Marketing partner of choice in
northern Europe
- Strong US partner, Forest
Conduct head-to-
head trials of
CAPITALIZE
Threats
citalopram and - Lack of differentiation of Opportunities
escitalopram to escitalopram over - Expansion into niche
convince neurological markets, e.g.
physicians of
citalopram Lundbeck Alzheimer’s disease
- Europe too small to
the benefit of the - Expansion into US market
support growth into a
new compound
FIPCO
and facilitate
patient switching
Weaknesses
stream – citalopram
- Only two potential future
growth drivers
- Poor earnings visibility until
company can prove successful
switch to escitalopram
In-license more promising

compounds to reduce reliance
on antidepressant market.
Establish escitalopram’s
revenue stream to boost
investor confidence
Financial analysis
Lundbeck’s finances are relatively healthy. Although it is in a strong position to take

on additional debt to finance small acquisitions, it does not have sufficient cash
reserves to fund a major corporate acquisition. Key indicators of Lundbeck’s financial
health include:

Company analysis
• strong revenue growth, fueled by strong sales of Cipramil;
• high cost base, indicative of a specialty pharma company expanding its

operations;
• expansion of operating profit margins driven by royalties from Forest;
• low liquidity but good debt/equity ratio.
These indicators are discussed in greater detail below, while Table 17 provides an
overview of Lundbeck’s financial position.
Table 17: Lundbeck: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 388 479 637 920
Key products:
Cipramil 275 368 415 545
Royalties from sales of Celexa n/a 73 142 199
R&D (74) (99) (170) (185)

S,G&A (178) (206) (248) (349)


EPS n/a 1.4 0.5 0.7
n/a = not available
Source: Datamonitor, Lundbeck annual report DAT AM ONIT OR
Lundbeck achieved strong revenue growth from 1998 to 2001, with a compound
annual growth rate (CAGR) of 30%. Growth has been driven by Cipramil sales and by
royalties received from sales of the drug in the US by Forest, which accounted for
23.3% of 2001 revenues. Revenue derived from Cipramil has given clear visibility to

Company analysis
company earnings in recent years, a key attribute of an attractive specialty pharma

company.
Lundbeck’s costs have risen considerably over the last four years, as would be
expected of an expanding specialty pharma. The company’s continued expansion of
its sales force in major European markets and Canada and Australia, as well as
preparations for the launch of Cipralex, led to a 40.9% rise in S,G&A costs in 2001.
Lundbeck’s S,G&A as a proportion of sales is typically around 40%. This high figure
reflects the fact that the company markets a number of products across many
national markets and is similar to those of larger pharmaceutical companies like
GlaxoSmithKline and Pharmacia.
Lundbeck has a high R&D spend, representing 21.7% of sales in 2001. This shows
the company’s commitment to improving its pipeline products to secure revenue
growth. R&D costs jumped by 71.7% in 2000 due to the large number of agreements
the company undertook in that year, including deals with Solvay, Maxagen and M&E
Biotech.
Lundbeck’s operating profit margin increased between 1998 and 2001 with a CAGR
of 29.3%. This increase is attributable to the large proportion of revenues that the
company receives as royalties. Expanding operating profit margins is a key
performance indicator of specialty pharmas and contributes to investor confidence in
the company. Lundbeck should be able to leverage this high margin to take on
greater debt to fund further product acquisitions.
In 2001, Lundbeck’s cash levels remained fairly constant, increasing slightly to $83m
from $81m in 2000. Short term investments decreased significantly from $155m to
$41m, mainly as a result of the acquisition of the remaining 50% of Lundbeck GmbH
from Byk Gulden Lomberg, a subsidiary of Altana. Lundbeck is, therefore, not
currently in a position to finance any major corporate acquisitions with cash.
However, it has a good debt/equity ratio, indicating that debt financing is an
appropriate alternative.
Geographic focus: Europe cannot sustain long term growth

Within its home territory of northern Europe, Lundbeck has an enviable reputation in
CNS. Further afield, the company has been able to achieve excellent geographic
coverage through partnerships and licensing. It also runs many subsidiary
organizations abroad, although at present these do not contribute greatly to
revenues. Comments from Lundbeck’s Managing Director suggest, however, that the
company’s long term goal is to enter the US market independently. This is a key step
Company analysis
to achieving FIPCO status because the US is the largest pharmaceutical market.

Moving directly into the US is an ambitious plan and one that looks to be some years
away from implementation. Not only does the company not have the necessary
funding, but it also lacks pipeline drugs with sufficient potential that have not already
been out-licensed to partners in the US.
Portfolio analysis
Lundbeck has developed a high degree of therapeutic specialization to drive growth.

The company’s marketed drugs are concentrated in the depression and
schizophrenia therapy areas and its revenues are currently dominated by sales of
citalopram, an antidepressant that generated direct sales of $545m in 2001. During
the period 1996-2001, citalopram sales increased steadily but, due to its recent
patent expiry in many European countries, sales are forecast to decline in 2002 as
generic competition arrives on the market. In addition to its European revenue
stream, Lundbeck gains considerable royalty payments from Forest Laboratories,
which markets citalopram under the brand name Celexa in the US. Although Celexa’s
US patent does not expire until 2003, there is already increasing competition in the
US antidepressant market from generic products following the patent expiry of Eli
Lilly’s Prozac (fluoxetine). In response to its dependence on the depression market,
Lundbeck is changing the focus of its pipeline products compared to its marketed
products by investing in in-house R&D and licensing agreements. Lundbeck’s new
pipeline of drugs is targeted at attractive CNS markets such as Alzheimer’s and
Parkinson’s disease, niche areas that are primarily served by a relatively small
number of specialist physicians, making sales and marketing more cost-effective.
Table 18 details Lundbeck’s acquisition activity since January 1999. The company
has not only made numerous product acquisitions to boost its clinical pipeline but has
also made several research collaborations to discover new compounds for future
development. Such upstream integration reflects Lundbeck’s transition towards little
big pharma status and is a more cost-effective and sustainable growth strategy than
expensive late stage development compound acquisition.

Company analysis
Table 18: Lundbeck’s in-licensing activities
Brand Indication Phase Originator Date Agreement

(generic)
almotriptan Migraine Launched Almirall 1999 Marketing rights in

Prodesfarma select countries
Ebixa Alzheimer’s Approved Merz 2000 Global rights (not
(memantine) disease Feb 2002 (Aug) US & Japan)
Oral Copaxone Multiple Phase III Teva 2001 (Feb) Co-dev. European
(glatiramer sclerosis rights
acetate)
etilevodopa Parkinson’s Phase III Teva 1999 Co-dev. European
(TV-1203) disease rights
rasagiline Parkinson’s Phase III Teva 1999 Co-dev. European
(TVP-1012) disease rights
bifeprunox Parkinson’s Phase II Solvay 2000 Co-dev. European
(DU127090) disease (Dec) rights
gaboxadol Sleep Phase II Max Planck n/a n/a
disorders Institute
CEP 1347 Parkinson’s Phase I Cephalon 1999 Co-dev. European
disease rights
LU 35-138 Psychoses Phase I Neurochem 1999 Global rights
Co-dev. = co-development
n/a = not available
As citalopram will lose patent protection in most European countries in 2002,

Lundbeck has two potential drugs to take over as growth drivers:
• Cipralex (escitalopram), the follow-up compound to citalopram, launched in

Sweden, Switzerland, Denmark and the UK in 2002;
• Ebixa (memantine), indicated for Alzheimer’s disease and currently in

registration in Europe.
Lundbeck’s continued growth is dependent on its ability to switch patients from

Cipramil to Cipralex. It must switch patients to the new drug immediately if it is to
continue to grow on a corporate level as Cipramil’s sales dwindle.
Lundbeck is the originator of escitalopram, with Forest acting as licensee in the US,
as was the case with citalopram. Escitalopram, a purified enantiomer of citalopram,
Company analysis
does not represent a new mechanism for the treatment of depression but
differentiates itself on the basis of its lower dose formulation. It will be the first 10mg
per day antidepressant. Another differentiating factor is the removal of R-enantiomer,
which was thought to cause the side effects associated with citalopram. However,
opponents of the drug, who have suggested that the side effects are intrinsic to the
mechanism and, therefore, present solely in the active enantiomer, contest this
theory. The outcome of this debate is unlikely to have a major effect on the success
of escitalopram, as citalopram already has a reputation for having few side effects.
The launch of Ebixa (memantine) in H2 2002 represents Lundbeck’s first marketed

product within its new CNS focus. Ebixa was approved in the European Union in May
2002 to treat moderate-to-severe Alzheimer’s disease, the first drug to gain a license
for this patient sub-group. Ebixa is a key drug for Lundbeck. It competes within a
small market that is served by specialist physicians, a relatively easily targeted
medical community for Lundbeck compared to promoting to the large numbers of
primary care physicians that treat depression. Furthermore, Ebixa will benefit from its
first to market advantage. A patient population of over 2.5 million across the seven
major markets should provide Lundbeck with strong returns. Datamonitor estimates
that the severe Alzheimer’s disease indication alone could be worth over $250m in
drug revenues annually, in these markets.
Partnership network
Lundbeck is committed to launching a new chemical entity every three to five years.
To meet this target, the company has devised a three-pronged strategy:
• in-house discovery and research;
• acquisitions of products in early and late stage development;
• research alliances.
To achieve the latter two goals, Lundbeck combines an opportunistic search strategy
with specific strategic partners. It has in-licensed nine products over the last three
years.
Lundbeck has acquired products from a number of different companies. It has not
disclosed an active search strategy but makes acquisitions as the opportunity arises.
Although the company has a narrow therapeutic focus, the CNS area encompasses
many diseases, providing Lundbeck with sufficient acquisition targets with which to
build its pipeline to date.
Company analysis
Lundbeck has a long term co-operation agreement with Teva regarding the
development and marketing of three development stage compounds. Teva benefits
from Lundbeck’s expertise not only in CNS but also in gaining regulatory approval for
branded products within Europe. As a generics company, Teva has little experience
in these two areas. In this instance, Lundbeck has successfully positioned itself as
the marketing partner of choice, which in turn should create further licensing
opportunities in the future and not necessarily just with Teva.
Lundbeck typically in-licenses products into its pipeline for continued development,
rather than directly for marketing. The company obtains the marketing rights for
Europe and other select countries outside of the US and Japan, such as Australia
and South Africa. This type of deal structure allows Lundbeck to contribute its
expertise to the development of a drug and retain the marketing rights to its key
geographic market, Europe. Lundbeck can thus obtain products at a cheaper price
than if it acquired global rights, but this is higher risk than acquiring products that
have already been approved. The company’s CNS expertise plays a key role in
creating in-licensing opportunities through its reputation as a marketing partner of
choice and in boosting investor confidence that it can successfully take a CNS
product to market.
Shire
Summary
For a specialty pharma company, Shire has a broad business covering a number of
therapy areas and major geographic markets. It focuses on conditions that are
treated by specialists rather than primary care physicians. This enables its relatively
small sales force to compete effectively with those of larger pharmaceutical
companies.
Shire has made the transition from a small UK based pharmaceutical company into
one of the fastest growing specialty pharma companies through an aggressive
program of M&A. The key event that changed the dynamics of Shire’s growth was the
acquisition of Richwood Pharmaceuticals in 1997, adding the attention deficit
hyperactivity disorder (ADHD) therapy Adderall (amphetamine salts) to its marketed
portfolio. The high dependence of Shire on Adderall for growth has become a
potentially significant weakness, as the drug accounts for 48% of 2001 sales but is
now susceptible to generic competition. However, Shire is in the process of switching

Company analysis
patients to a sustained release formulation. This has created uncertainty in its stock
and Shire must prove to investors that it has successfully switched patients.
Shire’s merger with BioChem Pharma in 2001 has reduced its dependence on
Adderall’s sales, but its exposure to the ADHD market remains substantial. However,
the rollout of several promising pipeline products, a strong early stage pipeline from
BioChem Pharma and continuing growth from BioChem’s HIV royalties will drive long
term growth. Furthermore, cash acquired from the merger will facilitate Shire’s
ongoing search and development strategy, fuel future M&A activity and aid
geographic expansion in the EU and Japan.
Figure 22 details Shire’s strategic position, showing its current threats and
opportunities.
Figure 22: Assessment of Shire’s strategic position, 2002
BUILD
Strengths
- Lamivudine royalties provide
new revenue stream, easing
dependence on Adderall
- Diversified portfolio
- Strong cash reserves
Focus on
switching patients
CAPITALIZE
to Adderall XR - Adderall franchise at - Continued M&A activity to
and releasing risk of generic erosion build product portfolio and
sales data to
investment
- Increased competition Shire fund growth
for acquisition targets - Increase penetration in EU
community to
forces company to pay and Japan
create confidence
over the odds
in success of the
franchise
Weaknesses
- Lacks a genuine global
presence
- Broad therapeutic portfolio
makes cost synergies difficult to
achieve
Focus on current three

therapy areas and make
acquisitions to strengthen
them, with aim of becoming
marketing partner of choice in
each area

Company analysis
Shire’s growth strategy combines organic growth from its current base with company,
product and project acquisitions. Although competition is increasing within the
specialty pharma sector, Shire states that it expects the flow of emerging smaller
pharmaceutical companies to be maintained, providing it with acquisition targets. The
company has acknowledged that there is greater competition for acquisitions and has
stated its willingness to pay higher prices for its M&A activities.
Financial analysis
Shire’s aggressive M&A strategy has directly impacted its profit levels, which have
fluctuated widely since 1998. The company has achieved strong revenue growth and
has high levels of liquid assets, placing it in a strong financial position to make further
acquisitions. Table 19 summarizes Shire’s current financial health.
Table 19: Shire: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 309 537 671 878
Product sales 292 401 520 724

Licensing and development 12 14 14 6
Royalties 5 120 136 145
Other n/a 2 1 3
R&D (59) (141) (155) (171)

S,G&A (132) (195) (236) (311)
Operating profit 23 (37) 151 98

Operating profit margin (%) 7.8 (9.1) 29.1 13.5

EPS 0.1 (9.8) 42.8 7.7
n/a = not available
Source: Datamonitor, Shire annual report DAT AM ONIT OR

Company analysis
Shire’s total revenues grew at an impressive rate between 1998 and 2001, realizing a
CAGR of 41.6%. Growth has been fueled by Adderall, acquired in the merger with
Richwood Pharmaceuticals in 1997. In 2001, the Adderall franchise contributed 48%
of product sales.
Shire’s major cost is S,G&A, which rose by 31.8% in 2001, the equivalent of 43% of
ethical sales. As it focuses on promoting to specialist audiences, Shire does not need
the same size sales force as it would if it focused on therapies that are primarily
prescribed by primary care physicians. However, as the majority of Shire’s promotion
is focused on the US, it must still maintain a large sales force. This makes it similar to
many other specialty pharmas, such as Forest and Schwarz Pharma, both of which
have S,G&A cost in excess of 36% of sales. However, unlike Forest and Schwarz
Pharma, Shire’s R&D spend is relatively high as a proportion of sales. This reflects
the company’s strategy of conducting discovery, research and development in-house,
rather than relying solely on acquiring products that have already reached clinical
development.
Shire’s profitability has varied considerably during the time period under investigation
due to its aggressive M&A activity. The company reported operating and net losses in
1997 and 1999, reflecting the impact of the Roberts Pharmaceutical merger and the
Pharmavene acquisition, while posting net gains in 1998, 2000 and 2001. Despite a
30.8% increase in revenue, the 49.8% rise in Shire’s cost base resulted in its
operating profit margins dropping by over 15 percentage points in 2001.
Shire has relatively high liquid assets for a company of its size, allowing the continued
funding of growth through further product and, potentially, company acquisitions. With
a history of six major mergers in the period 1994-2001, Shire can be expected to
continue this trend. A key advantage of the merger with BioChem Pharma is the
ability of the group to generate substantial amounts of cash accretive to earnings.
BioChem will boost cash flow through high margin royalties, given its minimal COGS
payments, limited marketing infrastructure and abnormally low tax charges. This will
enable Shire to continue its existing search and development strategy of in-licensing
compounds and taking them through the development and approval process.
Shire’s operations are financed primarily through private and public offerings of equity
securities, the issue of loan notes and collaborative licensing and development fees.
In 2001, Shire significantly increased its long term liabilities to $416m. However, they
remain well below the value of shareholders’ funds and Shire’s cash levels, leaving
the company in a strong financial position.

Company analysis
Shire’s growth would be limited if it specialized in its domestic UK market. Shire has,
therefore, pursued an aggressive geographic expansion strategy to optimize its global
position. It states in its 2001 annual report that its aim is to sell its own and in-licensed
products directly in all eight major pharmaceutical markets. For a specialty pharma,
Shire has a large reach, with a significant position in the US and a presence in most
European markets, although its operations in Japan are currently limited. It believes
that this makes it attractive to potential out-licensers, as it can maximize the revenue
potential of the products it sells. The company is now aiming to move into Japan
before 2004. If successful, it would be on a similar footing to other Western
pharmaceutical companies that have not yet firmly established themselves in the Far
East. The company currently has both Agrylin (anagrelide hydrochloride) and Foznol
(lanthanum carbonate) in development in Japan, where it intends to have a marketing
presence by the time it expects to launch the drugs. It is likely that Shire will seek to
continue its recent acquisition strategy, enabling it to enter the market with an already
established operation, although it has not ruled out the possibility of establishing its
own presence from scratch. However, Datamonitor believes that cultural differences
between the Western and Japanese markets will make it difficult for Shire to establish
itself by 2004 without the acquisition of an existing and fully functional operation.
Portfolio analysis
Shire’s therapeutic strategy is two-pronged. Firstly, it focuses on products prescribed

by specialist physicians in niche markets as, in these areas, it can compete on an
almost equal footing against larger pharmaceutical companies. Secondly, it has three
main areas of therapeutic interest: CNS, cancer and infectious disease. The company
originally adopted a strong CNS focus, but its series of mergers have expanded this.
Shire’s short term growth is dependent on its ability to switch patients from Adderall to
Adderall XR, a sustained release formulation. Its merger with BioChem has provided
an alternate source of revenue in the form of royalties from lamivudine, which will be
a key growth driver. Several pipeline products are expected to reduce Shire’s
dependence on these two growth drivers over the longer term, namely Reminyl
(galantamine HBr), Foznol and Dirame (propiram fumarate). Shire’s pipeline of
products retains a strong CNS focus, particularly in its core area of expertise, ADHD
(SPD 503, SPD 420). As a result, Shire is well positioned to sustain earnings growth,
with a total of 25 products in development, four of which are in phase III.
Adderall is not patented but the manufacturing process is difficult. Until recently, no
other company has been able to produce this exact mix of amphetamine salts.
However, in February 2002, Barr received approval from the FDA to market the first
Company analysis
generic version of Adderall. Ranbaxy Pharmaceuticals and Core Pharma also

received FDA approval to market generic Adderall in June 2002. Shire has made
good progress in switching patients to Adderall XR, with the drug achieving a 19%
market share by July 2002. However, until continued solid sales growth figures are
released, the company’s earnings visibility is impaired and its share price is falling
accordingly.
Through the BioChem Pharma merger, Shire gained access to a valuable revenue
stream related to sales of therapies that include the non-nucleoside reverse
transcriptase inhibitor lamuvidine. The drug is marketed globally by GlaxoSmithKline
(GSK) under the brand Epivir/3TC for the treatment of HIV. It forms one component of
GSK’s market leading HIV therapy Combivir (lamivudine/zidovudine) and is also one-
third of the triple combination therapy Trizivir (abacavir sulfate, lamivudine, and
zidovudine). In addition, lamuvidine is marketed by GSK as Zeffix for the treatment of
hepatitis B. As well as royalty payments that amounted to $145m in 2001, Shire gains
revenues from co-marketing products containing lamuvidine in Canada with GSK.
Other benefits that Shire has already made from its purchase of Biochem Pharma
include a contract with the Canadian Government to supply influenza vaccine for a 10
year period, which it estimates could be worth over $200m in total.
Partnership network
Following a change in management in early 1994, Shire has grown both organically
and through a series of acquisitions. Datamonitor believes that although Shire’s broad
therapeutic portfolio has advantages in terms of risk diversification, continuing
acquisition activity must focus on exploiting greater therapeutic synergies if the
company is to sustain earnings growth and improve its profitability. Table 20 details
Shire’s six mergers since 1995, outlining the additions that each deal has made to the
company.

Company analysis
Table 20: Shire’s merger activity, 1995-2002
Date Company Benefits to Shire
2001 BioChem Pharma Royalty revenue stream and development

pipeline
1999 Fuisz Companies Access to several European markets
1999 Roberts Marketed portfolio of products and increased US
Pharmaceutical sales and marketing penetration
1997 Pharmavene Reformulation technologies
1997 Richwood US sales and marketing capabilities and Adderall
Pharmaceutical
1995 Imperial Hormone replacement therapy products
Pharmaceuticals
If Shire decides to continue its recent expansion through M&A activity, it is likely that
its first targets would be European or Japanese sales and marketing based
operations with complementary portfolios. As Shire’s acquisition strategy has been so
varied it is difficult to identify potential targets, although Datamonitor believes that a
relatively small European sales and marketing operation would offer the best
prospects in the short term, as both Foznol and Agrylin are awaiting approval and
would benefit from a larger promotional platform.
As well as expanding its business through company acquisitions, Shire utilizes

product acquisitions and takes research partners. Table 21 details Shire’s
agreements from 2000 to 2002. There is a notable dip in the number of agreements
made in 2001, during which time the company was in the process of merging with
BioChem Pharma. Shire does not rely on long term strategic partners to provide in-
licensing opportunities but instead utilizes a wide variety of companies.

Company analysis
Table 21: Shire’s agreements, 2000-2002
Date Company Agreement Cost ($m)
2002 (Sep) Atlantic Manufacturer to support 17

Pharmaceutical growth
Services
2002 (May) SkyePharma/ European rights for Solaraze 15
Bioglan
2002 (May) Giuliani and In-licensed rights to n/a
Cosmo mesalazine MMX technology,
a novel system for treating
ulcerative colitis
2001 (Nov) DevCo SPD473, a phase II product n/a
Pharmaceuticals indicated for Parkinson's
disease
2001 (Oct) ML Laboratories European rights to Adept n/a
2000 (Dec) CeNeS A research, development and $7.5m plus
Pharmaceuticals licensing agreement for the royalties and
development of CeNeS’s milestone
dopamine D1 agonist program payments
for the treatment of
Parkinson’s disease
2000 (Nov) Solvay Pharma Purchase of a gastrointestinal n/a
product
2000 (May) Salix Rights to balsalazide, a 24
Pharmaceuticals treatment for ulcerative colitis
for select European countries
2000 (April) Cortex Evaluation of the use of n/a
Pharmaceuticals Ampakine CX516 for Attention
Deficit Hyperactivity Disorder
2000 (March) D-Pharm Exclusive development and n/a
marketing rights to DP-VPA
n/a = not available

Company analysis
Teva
Summary
As a generics company moving into the specialty pharma sector, Teva has adopted a
different strategy to the other generics companies profiled in this chapter. Instead of
leveraging its drug delivery technologies or developing branded generics as a
stepping stone into branded products, Teva has opted to move directly into
discovering and developing proprietary branded products in-house. This is a high risk
strategy. Teva reduces its risk by taking strategic partners to share drug development
costs and to benefit from the expertise of more experienced players.
Teva’s branded business rests on one product, Copaxone (glatiramer acetate),

indicated for multiple sclerosis. Copaxone is one of four leading drugs for multiple
sclerosis, and, as the only non-interferon treatment option of the four, has the
potential to be a blockbuster product, with revenues of $1,104m forecast for 2007.
The drug forms the basis of Teva’s branded business and its sales provide the
funding for the development of new products. Its success is, therefore, vital for Teva’s
continued presence in this market. This one drug has been the focus of much of
Teva’s R&D activity, but Datamonitor believes that if Teva wishes to develop its
position in the branded market place, it should increase the contribution of other
products, as reliance on a single product leaves the business vulnerable to failure.
As well as investing in developing branded pharmaceutical products, Teva has built

up its sales and marketing activities to promote Copaxone. The formation of Teva
Neuroscience in February 2002 may indicate Teva’s desire to be responsible for its
own sales and marketing in the US, reducing its reliance on partnerships (Teva
Neuroscience replaces Teva Marion Partners, a joint venture between Teva and
Aventis for the promotion of Copaxone). The next step would be the independent
global marketing of Copaxone and any additional pipeline products; this would be a
costly venture for a company with only a small branded business. To achieve this,
Teva could consider the acquisition of a small, US based company with established
sales and distribution networks and further branded products. Teva’s current
acquisitions focus on expanding its generics business, but setting up the branded
franchise as a separate entity would enable Teva to use earnings from the branded
portfolio to fund any acquisition, thereby ensuring that this did not have a negative
impact on the performance of its generics business. Figure 23 details Teva’s strategic
position, highlighting its key opportunities.

Company analysis
Figure 23: Assessment of Teva’s strategic position, 2002
BUILD
Strengths
- Leading position in generics
market
- Strong generic pipeline to fund
expansion of branded business
- Potential blockbuster in
Copaxone
Invest in Threats Opportunities
CAPITALIZE
promotion of - Failure of oral - Product acquisitions to
Copaxone in Copaxone bolster branded marketed
Europe to - Pfizer entry into multiple portfolio and pipeline
replace any sclerosis market
Teva - Expand sales force in US to
potential lost - High long term debt produce maximum
sales in the US levels penetration of Copaxone
by Pfizer
marketing Rebif
Weaknesses
stream to fund branded
business, Copaxone
- No pipeline products with
potential to generate significant
sales
In-license branded pipeline

products and form more
alliances to share risk of drug
development
Financial analysis
As a leading generics company, Teva is in a relatively strong financial position with

increasing revenues and profit margins. Its one branded product, Copaxone, has
continued to build the company’s presence in branded pharmaceuticals, with sales
growth of 47% in 2001 to $363m. Although Teva has high cash reserves to fund
acquisitions, it has high debts that could restrict its financial flexibility. Table 22
summarizes Teva’s financial health.

Company analysis
Table 22: Teva: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 1,116 1,282 1,750 2,077

Branded pharmaceuticals n/a 160 247 363
R&D (68) (82) (105) (107)

S,G&A (208) (234) (307) (364)


Long term debt 240 434 921 1,341
EPS n/a 1.0 1.1 2.0
n/a = not available
Source: Datamonitor, Teva annual report DAT AM ONIT OR
Teva achieved significant revenue growth in 2001, with sales passing the $2bn mark
for the first time, increasing by 18.7% from $1,750m in 2000 to $2,077m in 2001.
Growth was organic rather than through acquisitions, as was previously the case in
2000, with approximately 67% of sales growth coming from the consolidation of the
companies Novopharm and Copley. Copaxone accounted for 35.5% of the overall
growth in sales, despite representing only 17.5% of total sales, highlighting the
importance of Teva’s branded, newer business.
Gross R&D expenses increased by 28% to $132m in 2001. However, higher

participation from strategic partners (including Lundbeck, Aventis and Israel’s Chief
Scientist) meant that net R&D expenses increased just 1.9% from $105m in 2000 to
$107m in 2001. Growth in R&D costs was a result of higher spending on both
innovative and generic R&D, and reflected the increased efforts by Teva in research.
Expansion in third party R&D participation reflects Teva’s strategy to limit the effect of
innovative R&D expenses on its results and overcome a key barrier to entry into the
specialty pharma market: higher costs reducing margins on an already low margin
business.

Company analysis
S,G&A expenses increased by 18.4% in absolute terms in 2001, but remained

unchanged as a proportion of sales at 17.5%. The primary contributors to growth
were the launch of Copaxone in Europe and provisions for doubtful debts in Argentina
due to the uncertain economic environment in this country.
Relatively stable costs compared to strong revenue growth resulted in Teva

increasing its operating profit by 47.3% and expanding its profit margin by over three
percentage points in 2001. Teva has a high level of liquid assets, totaling $790m in
2001. A portion of this cash will be required to fund the $108m acquisition of Bayer
Classics, which leaves Teva with sufficient reserves to make further acquisitions if
desired. The company does, however, have a high debt to equity ratio of 90.3%, so it
needs to curtail its spending as it has little room to raise further debt.
Portfolio analysis
Teva has adopted a narrow therapeutic focus in its branded pharmaceutical business,
researching compounds for CNS indications. This is a strategically sound move for a
company whose current branded sales force is focused on marketing to neurologists.
Its relatively small sales force would be unable to market products effectively in other
therapy areas or to primary care physicians.
Teva’s branded portfolio consists of just one product, the multiple sclerosis treatment
Copaxone. This product has exhibited strong growth since it was launched in 1997
and has been an important driver of Teva’s ethical business. Sales growth has been
almost solely derived from the US, but its European launch in August 2001 and the
recent launch of Copaxone in prefilled syringes have provided a further boost to
sales. The US launch of Serono’s Rebif (interferon beta-la) in March 2002, combined
with the co-promotion of the drug by Pfizer will increase competition in the US
multiple sclerosis market. However, it does not pose a significant threat to Copaxone
since interferons are seen as a separate drug class to Copaxone, and it is the other
interferons that will suffer most from the increased competition.
The compounds in its pipeline will not reduce Teva’s dependence on Copaxone.
Datamonitor forecasts that new products will make up just 11% of total revenues in
2007, as the company is clearly focusing on extending the revenue potential of its
proven product, Copaxone, rather than investing heavily in novel products. Of the
seven compounds in development, four are novel compounds and the remainder is
new formulations or new indications of existing or pipeline products.

Company analysis
In September 2001, Teva announced disappointing results from an interim analysis of

its multi-center phase III CORAL trial, involving the oral form of Copaxone in over
1,600 patients with relapsing remitting multiple sclerosis. Data showed that while
there was a trend favoring the higher dose of Oral Copaxone over placebo, the
difference was not statistically significant. There was no benefit from lower doses of
medication compared with placebo, although the drug was safe at both doses. These
results are a considerable blow to Teva, as the launch of an oral formulation would
place Copaxone well ahead of its competition in terms of dosage convenience.
Multiple sclerosis patients are likely to regard any formulation that eliminates the need
for frequent injections extremely favorably. Teva is considering a new phase III trial
with doses of at least 300mg per day, although the start of such trials is expected to
be delayed for at least 12 months while the company considers its options and the
design of the trial. Oral Copaxone is not likely to reach the market before 2007.
Teva has two other phase III compounds, both indicated for Parkinson’s disease, in
co-development with Lundbeck. However, neither drug has the potential to generate
significant revenues and reduce Teva’s reliance on Copaxone, although the
agreement will enable Teva to benefit from Lundbeck’s CNS expertise.
Partnership network
Teva has various CNS products in development but has little proprietary R&D
experience and is dependent on partnerships. These reduce the risk and costs
involved in developing proprietary products, but also reduce Teva’s profits from the
resulting products. For a successful product such as Copaxone, high revenues mean
that all partners see a significant return on their investment. However, Teva’s current
development projects are for Parkinson’s disease and are likely to face strong
competition, including from generic versions of the current gold standard treatment,
levodopa. Any products entering the market that do not represent a significant
improvement over current treatments will have to be competitively priced and so will
achieve lower margins. Royalty payments made to development partners will also
have a significant impact on the profits of Teva’s branded portfolio.
Table 23 details Teva’s historical acquisition activity and corporate agreements.

Company analysis
Table 23: Teva’s acquisitions and agreements, 1997-2002
Date Company Agreement Value ($m)
2002 Honeywell Acquisition of Honeywell Pharmaceutical Fine n/a

(May) International Chemicals
2002 Bayer Acquisition of Bayer Classics SA, a French 87
(April) generic pharmaceutical marketing company,
and related manufacturing facility
2001 Oxford Rights to marketing and distribution of n/a
(Nov) GlycoSciences Vevesca (OGT-918) in Israel
2001 Impax Strategic alliance for 12 controlled release $15m plus up
(June) Laboratories generic products to $22m in
milestone
payments
2001 Lundbeck Strategic alliance with Lundbeck, extended to n/a
(Feb) include oral Copaxone in Europe, with most
development costs borne by Lundbeck
2001 Aventis Teva Marion Partners becomes a wholly n/a
(Feb) owned subsidiary of Teva, renamed Teva
Neuroscience
2000 (Apr) Novopharm Acquisition of company 326
2000 Bio-Technology Teva to market Bio-Technology General’s n/a
(Mar) General Corp. recombinant human growth hormone
exclusively in the US
1999 Bio-Technology Exclusive marketing rights to bio-generic Teva to make
(Sep) General Corp. products developed and manufactured by Bio- up to $20m in
Technology General. milestone
payments and
product rights
1999 Copley Acquisition of company 220
(Sep) Pharmaceutical
1999 Sigma Tau 50/50 joint venture n/a
(Feb)
1999 AutoImmune Out-license of Teva’s oral immune modulation n/a
(Feb) technology and related patents for
development of an oral formulation of
Copaxone
1997 Biovail Marketing and product development n/a
(Dec) agreement
1998 Pharmachemie Acquisition of company 87
(May) Group
1997 Pharbil Acquisition of company n/a
n/a = not available

Company analysis
Watson
Summary
Watson is a company in transition, moving away from its traditional business model
as a generic drug producer towards becoming a specialty pharma company. It has
successfully made the first step through the development of branded drugs. However,
its drugs are typically branded products that have lost patent protection, with the
company estimating that only 20% of its branded products have patent protection.
This strategy carries less risk than transitioning immediately into developing
expensive proprietary products. Watson is now on the verge of taking the next step,
the successful commercialization of the first drug in its late stage proprietary pipeline,
Oxytrol (oxybutynin patch), which is indicated for urinary incontinence. The launch of
this drug will be closely watched by the investment community as this high margin
product, with patent protection for many years, will give Watson enhanced visibility.
Figure 24 details Watson’s current strategic position and outlines its strengths and
future opportunities.

Company analysis
Figure 24: Assessment of Watson’s strategic position, 2002
BUILD
Strengths
- Women’s health reputation in
the US
- Key technologies that can be
leveraged to produce branded
drugs
- Strong late stage pipeline
Increase
Opportunities
CAPITALIZE
promotion of Threats
- US market not keen to - Potential of Oxytrol
the merits of
embrace transdermal - Approval of additional
transdermal
indications for Ferrlecit
products to technology Watson - Further M&A activity to
the public - Competition in the
generic contraceptive develop new franchises
and medical
market - New COO should help
community
further transition into FIPCO
Weaknesses
- Problems attaining FDA
approval for Oxytrol
- Only 20% of current branded
portfolio has patent protection
In-license more promising

patent protected compounds.
Attract development and
marketing partner to help
gain FDA approval for
Oxytrol and optimize
commercial potential
Financial analysis
Watson is in a relatively strong financial position, with good revenue growth and a
healthy balance sheet, rendering it well-placed to make further acquisitions to
facilitate its transition into a FIPCO. Key indicators of Watson’s financial health
include:
• strong revenue growth and an improved mix of branded and generic product
sales, at nearly 50% each;

Company analysis
• low R&D and S,G&A costs relative to sales, typical of a generics focused
company;
• fluctuating profit margins attributable to acquisition activity;
• increasing shareholders’ funds and high long term debt.
Table 24: Watson: financial health, 1998-2001
($m) 1998 1999 2000 2001
Revenues 596 705 812 1,161
R&D (51) (51) (67) (64)

S,G&A (109) (128) (162) (210)


Shareholders’ funds 799 1,059 1,548 1,672
EPS 1.2 1.8 1.5 1.1
Source: Datamonitor, Watson annual report DAT AM ONIT OR
Watson has achieved strong revenue growth over the last three years, with a CAGR
of 24.9%. However, it is the company’s branded franchise that has exhibited
explosive growth. Within four years, the branded portfolio has grown to account for
nearly 50% of Watson’s revenues and contributed 76% of profits in 2001. It is this
revenue stream that has given Watson the visibility in earnings that it needs to satisfy
investors and to raise cash for further expansion.
The cost structure supporting the branded drugs that Watson produces is similar to
that of unbranded generics because most of its branded drugs are branded generics.
Watson’s R&D spend represents only 5.5% of sales in 2001, which is typical of a
generics company. Watson’s S,G&A to sales ratio is around the average for a
generics company, but is low considering that branded generics make up a large
proportion of its business. This situation is likely to change as Watson invests
considerable resources in gaining approval for and launching Oxytrol, expected in
2003.

Company analysis
Fluctuating operating profit margins are typical of specialty pharmas making

acquisitions to build their operations. Watson’s operating profit increased from $8m in
2000 to $101m in 2001. Its low operating profit in 2000 was attributed to a one-off
charge of $125m associated with the write-off of acquired in-process R&D relating to
the acquisition of Schein.
Watson has a strong balance sheet with cash and short term investments totaling
$329m. Although its long term debt is higher than in previous years, the company has
already taken steps to reduce this. Furthermore, it has access to a $250m credit line,
putting it in a position to make further acquisitions.
Watson operates solely in the US and has no disclosed plans to branch out of this
profitable market. It is the fourth leading generics firm in the US and holds second
position within the US contraceptives market.
Portfolio analysis
Watson focuses on therapy areas that are perceived to have high growth
opportunities and an identifiable base of specialist physician prescribers that can be
successfully penetrated with relatively small sales forces. Watson’s therapy area
specialization is spread across: women’s health, general and pain management
products, nephrology and urology.
Watson has experienced considerable success in developing its women’s health

franchise. The company kick-started this therapy area through the acquisition of off-
patent oral contraceptives from GD Searle in 1998 and generic oral contraceptives.
Watson invested heavily in physician detailing to convince the medical community of
the safety of generic hormone based products that were previously not widely
accepted. Now that Watson has established itself in this therapy area, it is making
further acquisitions to expand its portfolio while maintaining the same focused sales
force. In January 2002, Watson acquired the US rights to PapSure, an examination
method that can be combined with the traditional Pap smear from Trylon Corporation.
Such acquisitions are key to the continued growth of this franchise as more generic
producers are moving into the area, including Barr and KV Pharmaceuticals.
In the face of increasing competition in the nephrology market, Watson has predicted
flat revenues for the nephrology franchise in 2002, compared with the 152% growth in
sales it achieved in 2001. To counteract this, Watson has expanded its sales force to
76 reps and entered a co-promotion deal with Baxter, adding another 60 reps to the
sales force that promotes Ferrlecit (sodium ferric gluconate injection). As well as

Company analysis
expanding its promotional efforts, Watson is following a similar route to that taken by
Johnson & Johnson in its promotion of Procrit (epoetin alpha) by expanding its
opportunities outside of hemodialysis. Phase II/III studies of Ferrlecit in combination
with Procrit are underway for chemotherapeutic anemia, which could expand the
market potential for Ferrlecit by over one million patients. These additional efforts to
convert Ferrlecit back into a growth driver are important for the company’s
progression towards a FIPCO, with the nephrology franchise accounting for 34.2% of
its branded revenues in 2001.
Oxytrol: the key to growth as a specialty pharma company?

The successful commercialization of Oxytrol, a transdermal patch indicated for
urinary incontinence, represents the key challenge for Watson in its continued
development as a specialty pharma. Oxytrol is the first proprietary drug in Watson’s
branded pipeline and marks the transition from producing branded generics to patent
protected drugs with higher margins.
Oxytrol’s transdermal delivery mechanism was developed by TheraTech and offers a

definitive therapeutic and thus commercial advantage. In addition, the patch has a
better side effect profile than orally delivered oxybutynin, the current gold standard
treatment for overactive bladder disorder, as a result of the elimination of metabolites
associated with oral delivery. The most common side effect (dry mouth) was
significantly reduced, with an 80% lower incidence than that associated with
Pharmacia’s Detrol LA (tolterodine tartrate), the market leader.
The market for overactive bladder therapies is considerably underserved. However,

several big pharmaceutical companies have products in the late stages of
development, including Eli Lilly and Pfizer. To compete successfully against the
marketing power of such companies, Watson may need to enlist the help of a partner,
although it has already acknowledged the need to invest heavily in its in-house sales
and marketing force. Watson is committed to backing the launch of Oxytrol with
considerable resources and is projected to spend $115m on marketing the drug. As
its first propriety product, a high profile launch is essential to gaining maximum
physician awareness and generating investor interest.
An NDA for Oxytrol was submitted in April 2001 but in March 2002 the FDA issued a
not approvable letter and requested additional clinical data. Watson had already
carried out a phase IIIb trial and is hoping that its data will be sufficient to satisfy the
FDA. The investment community is focusing its attention on the approval of Oxytrol
because the company’s future earnings visibility is limited until this key growth driver

Company analysis
hits the market. If Watson suffers further set backs in the approval of Oxytrol it could
reflect badly on its ability to work with regulatory authorities and may limit future in-
licensing opportunities for patented drugs.
Partnership network
Acquisitions and alliances have accelerated Watson’s expansion into producing

proprietary drugs. The company has utilized a combination of product acquisitions
and corporate M&A activity to develop its business, as detailed in Table 25 and Table
26, respectively. Watson does not have long term strategic partners but instead
operates an opportunist search strategy for in-licensing targets.
Table 25: Watson’s product acquisition activity, 1997-2002
2002 (Mar) Baxter Co-promotion of Ferrlecit

2002 (Jan) Trylon Corporation Acquisition of US product rights to PapSure and
Speculite
2002 (Jan) Novartis Acquisition of US rights to Actigall
2000 (Nov) Genelabs Collaboration and licensing agreement for lupus
drug
1999 Procter & Gamble Reacquisition of rights to Alora
1999 SmithKline Reacquisition of US and Canadian rights to
Beecham Androderm
1998 Searle Acquisition of three oral contraceptives, Tri-
Norinyl, Norinyl and Brevicon
1997 Rhône-Poulenc Acquisition of Dilacor XR
Rorer

Company analysis
Table 26: Watson’s merger and acquisitions, 1997-2002
Date Company/target Division
2000 (Nov) Makoff R&D Labs Branded

2000 (Aug) Schein Pharmaceuticals Generics
1999 TheraTech R&D
1997 Rugby Group Generics
1997 Andrx Generics
1997 Royce Laboratories Generics
1997 Oclassen Pharmaceuticals Branded
1995 Circa Pharmaceuticals Generics
Deal analysis
Although Watson is making the transition into the specialty pharma sector, it is also
maintaining some of its focus on the generics industry. This is demonstrated by four
out of its seven M&A agreements since 1997 focusing on the generic side of
Watson's business. However, corporate M&A activity has also been critical to the
development of Watson’s branded business. The merger with Circa in 1995, a
developer of generic and proprietary drugs with drug delivery technology, marked
Watson’s first step towards specialty pharma status. Subsequent company and single
product acquisitions have provided Watson with its branded portfolio. Ferrlecit was
acquired as part of the acquisition of Makoff R&D Laboratories in 2000, while
TheraTech provided the technology for the development of Oxytrol.
Future partners
Watson is in a good financial position, with a low debt to equity ratio compared to
other generics companies. This suggests that there is potential for further borrowing
to fund either the acquisition or in-licensing of additional products, or merger or
acquisition of companies. Watson has already embarked on product acquisitions to
bolster existing therapy areas, including PapSure from Trylon Corporation and
Actigall (ursodiol) from Novartis. Further M&A activity would enable Watson to branch
out into new therapy areas, enhance its sales and marketing force or even enter new
countries.

Company analysis
Taking a large pharmaceutical company as a marketing partner to help promote

Oxytrol is another partnering opportunity for Watson. This would help it compete with
Pharmacia, Eli Lilly and Pfizer, and build its reputation in urology. Despite its
commitment to investing in the promotion of Oxytrol, Watson will not have the
resources to compete on the same scale independently. The company is in a good
position to recruit a strong marketing partner with an NDA already filed, data
demonstrating the efficacy and superior safety profile of the drug, and strong head-to-
head trial data with the current market leader. However, the company must provide
the additional data requested by the FDA in March 2002 to help secure approval.

Future growth opportunities
CHAPTER 3 IDENTIFYING AND EXPLOITING FUTURE

GROWTH OPPORTUNITIES
Key findings
– Greater collaboration in R&D and sales and marketing will help specialty
pharmas compete with the power houses of larger players. Companies
operating in the same therapy areas should pool their resources to
diversify risk, speed up drug development and increase the market
penetration of their drugs. Their ultimate goal should be to build a
portfolio of shared products that are developed and promoted more
efficiently than by one small company alone
– Preparation is fundamental to approaching a potential partner and

structuring a deal. Specialty pharmas often fail to complete extensive
background research on a potential acquisition and propose a deal
structure before even approaching the target company
– Most biotechs that are moving downstream do not have the in-house
sales and marketing infrastructure or expertise to launch their products
alone. Specialty pharmas should partner with them, offering a more
favorable deal in terms of royalties than large pharmas. Deals are also
likely to be more successful, since both partners are more reliant than
larger companies on a positive outcome for future growth
– The relaxation of regulations in Japan is opening up the market for

specialty pharmas. Two keys barriers to entry are decreasing in
significance: clinical trial requirements and regulatory approval times.
Shire aims to expand into Japan by 2004 to support its launch of Agrylin
and Foznol
– Orphan status for drugs serving truly niche markets is a driver of

specialty pharma market growth. Teva has benefited from having orphan
status conferred on its multiple sclerosis drug, Copaxone. Although its
patent has expired, Copaxone has orphan drug status in the US, which
ensures additional marketing exclusivity until 2004
– A new niche market is opening up for specialty pharmas:

gastroenterology. This market was valued at approximately $10bn in the
US alone in 2001. Celltech, a leading European biotech, has restructured
its US primary care sales force to exploit this specialist indication

This chapter discusses short and long term drivers and resistors to specialty pharma
growth and predicts their likely effect on the sector. The result is a set of future
scenarios, which form the basis of identifying winning strategies for specialty pharmas
to adopt if they are to exploit upcoming growth opportunities successfully.
Short term growth opportunities for specialty pharma, 2002-

07
Growth drivers
Datamonitor’s analysis and primary research with senior executives in specialty

pharma companies suggest that a number of major factors will determine growth in
the specialty pharma market from 2002 to 2007, specifically:
• deepening productivity problems among top tier companies, leading to

continued consolidation to fill pipeline gaps and to increase absolute
investment in R&D and sales and marketing. Increasing consolidation in turn
releases products with lower revenue potential for divestment to specialty
pharmas;
• to maintain growth and meet investors’ expectations, large pharmaceutical

companies must focus on larger disease areas with concomitant higher
revenue potential and vacate smaller markets for specialty pharmas to
exploit;
• multiple blockbusters are due to lose patent protection, fueling generic and
drug delivery company growth;
• larger biotechnology companies are moving downstream, creating

opportunities for specialty pharmas to form co-promotion agreements;
• increasing accessibility of the Japanese market to specialty pharmas.
Productivity crisis leads to consolidation among large pharmas

The pharmaceutical industry is experiencing a deepening productivity crisis. The
industry’s preferred escape mechanism from this predicament has been to increase
investment in current business activities – primarily R&D and sales – to sustain
productivity levels or, ideally, to exploit economies of scale. This has been

implemented through organic growth of critical resources and more recently through
M&A.
Although Datamonitor believes that the assumption by large pharmaceutical

companies that increased size leads to higher profit margins is flawed (see
Datamonitor’s 2002 publication, Networked Pharma: Innovative Strategies to
Overcome Industry Margin Deterioration), it also believes that this will not prevent
companies from adopting M&A as a legitimate strategy for driving both earnings and
revenue growth. Indeed, Datamonitor’s primary research results show that most
senior executives believe that top tier consolidation is not over and that it will continue
at least for the foreseeable future. The pharmaceutical market remains fragmented
compared to other industries, with the leading company, Pfizer Inc. (incorporating
Pharmacia), holding an estimated 11% market share compared to Nokia, for
example, which holds a 35.6% share of the mobile phone market.
The new Pfizer is faced with the task of generating double-digit growth from its $40bn
base. As a senior executive from a specialty pharma based in the US commented,
“To achieve 10% growth, Pfizer now needs to launch four to six $1bn products per
year. The entire pharmaceutical industry does not even achieve this.” Unless the
company manages to achieve the productivity improvements that have alluded it in
the past (and drive its continued growth through M&A), Pfizer will likely have to merge
or acquire again. Similarly, its competitors will follow suit as they try to keep pace.
Specialty pharmas will benefit from continuing consolidation in the form of product
divestments arising from mergers and tail-end divestments of products that do not
provide the high sales that large pharmaceutical companies require. For every large
merger that takes place, participating companies generally divest a number of
products, typically in two waves. The first wave reflects anti-competition laws as both
companies’ portfolios are combined. The second wave comes at a later stage as the
newly formed company assesses its business and divests products that do not fit its
revised growth strategy. As consolidation in the industry continues, specialty pharmas
can capitalize on both waves of divestment but must be quick off the mark, as
competition to acquire the most attractive compounds will be intense.
The continued pursuit of blockbusters by large companies means that small products
have little value to them and are thus available for specialty pharmas to acquire. As
companies get bigger, they require larger growth drivers, which in turn increases the
size of products they are prepared to divest. These acquisition targets should
continue to be available to the specialty pharma sector, but their bigger size means
that they will come at a higher price than has historically been the case.

Leading companies will divest tail-end brand products that are no longer generating
or have never generated significant revenues. Merck & Co., for example, focuses
almost purely on innovative blockbuster products and divests older brands. It sold the
US rights to Vasotec (enalapril) and Vaseretic (enalapril + hydrochlorothiazide) to
Biovail in April 2002 for $155m, after the active ingredient lost patent protection.
Vasotec was the leading anti-hypertensive until it was overtaken by Pfizer’s calcium
channel blocker, Norvasc (amlodipine), in 1998. Vasotec sales declined 41.3% in
2001 to $1,050m, following patent expiry in 2000 and active promotion of Merck’s
angiotensin II receptor blocker, Cozaar (losartan), in favor of Vasotec.
Vasotec/Vaseretic should be a major growth driver for Biovail, expanding its
cardiovascular offering and complementing its 2001 acquisition of Aventis’ Cardizem
product line.
Large pharmas ignore therapeutic markets with lower revenue potential

A further side effect of consolidation among top tier companies is that they require
larger products to drive double-digit growth. This forces them to concentrate on high
value markets that support blockbuster sales. This has traditionally left smaller
markets free for specialty pharmas to compete in, enabling them to avoid head-to-
head competition with their larger counterparts.
As leading companies get larger, the threshold of disease market sizes in which they
operate also gets bigger. For example, top tier companies typically avoid the
dermatology market because returns are low. In 2001, Bristol-Myers Squibb
attempted to divest its dermatology franchise, which generates approximately $240m
annually. However, the dermatology market is still worth $5bn and offers considerable
opportunities for companies with lower revenue and growth requirements. This and
other similar opportunities should kick-start growth of those specialty pharmas that
are currently outgrowing the growth-by-acquisition model because they are unable to
acquire sufficiently large products.
Orphan status for drugs serving truly niche markets also drives the growth of the
specialty pharma market. Teva has benefited from having orphan status conferred on
its multiple sclerosis drug, Copaxone. Although its patent has expired, Copaxone has
orphan drug status in the US, which ensures additional marketing exclusivity until
2004. This secures Teva’s US branded revenues until 2004 which, given that the
company has launched one branded product, is vital because, although multiple
sclerosis is a niche market, it is not free from competition from leading companies. In
2002, Serono announced that it had formed a co-promotion agreement with Pfizer for
Rebif (interferon beta-la) in the US market. However, this is an exception rather than

the rule and specialty pharmas should continue to focus on niche markets where they
have the resources to be market leaders.
The benefits of orphan drug status vary across the seven major markets. The US was
the first to introduce legislation but Japan and Europe have followed. The Orphan
Drug Act was established in 1983 in the US and defines orphan products as those
used to treat diseases or conditions affecting fewer than 200,000 persons in the US.
The Act grants special privileges and marketing incentives because such small
patient populations reduce the profit potential for sponsors. The most powerful
incentive is marketing exclusivity, whereby once an orphan drug is approved,
exclusivity gives companies legal protection against the introduction of an identical
competing product for seven years. This means that specialty pharmas with orphan
products in their portfolios have been able to reassure investors that their drugs will
not be infringed by competitors. Other advantages of US orphan drug legislation
include:
• research grants in the region of $100,000 to $200,000 per year are available
for companies whose products have entered clinical trials;
• developers of orphan drugs have been able to apply for tax credits of 50% of
direct research and development costs;
• the FDA has no provision to control the price of orphan drugs and, as such,
the marketing company is free to set a premium price to maximize its return
on investment.
Orphan drug legislation in Japan was introduced in October 1993. Under this system,
pharmaceutical companies that have successfully gained orphan drug status for a
particular chemical entity receive preferential treatment to encourage the
development of the drug. However, orphan drugs in Japan are not awarded
marketing exclusivity and financial compensation is less than that awarded in the US,
with lower tax credits and no fee waivers.
One advantage of the Japanese system is the preferential treatment that products
receive in terms of re-examination following approval. Following marketing approval
in Japan, all products are subject to re-examination after four to six years, the exact
timing dependent on whether a drug is a new chemical entity or a reformulation. The
current re-examination procedure necessitates that the marketing company provides
efficacy and safety data that confirm the market suitability of the drug concerned. For
drugs that have been granted orphan drug status, 10 years is allowed to elapse
before re-examination data must be submitted. This is advantageous to orphan drug

manufacturers since they are not required to show that their drugs display favorable
therapeutic characteristics at such regular intervals.
In January 2000, a new EU regulation came into force enabling substances to be

designated orphan medicinal products. The regulation is directly applicable in all
member states and, therefore, requires no further implementation at a national level.
It was long-awaited as is evidenced by the number of applications for orphan status.
By 15 May 2000, the European Agency for the Evaluation of Medicinal Products
(EMEA) had already received 10 formal applications for orphan medicinal drug
designations and a further 35 notifications from parties registering their intention to
make applications.
European legislation is more generous than in other countries, with a period of

exclusivity of 10 years. The disease also need only occur at a lower incidence for a
product to qualify, although the scope of exclusivity may be reduced to six years if the
product no longer meets the qualification criteria or is sufficiently profitable not to
justify maintenance of market exclusivity. Exclusivity may also be lost if the holder of
the marketing authorization is unable to supply sufficient quantities of the orphan
product or if a second applicant can establish that its product is safer, more effective
or otherwise clinically superior. General advantages of the European system include:
• research grants are provided by the EMEA for both drug discovery and late
stage clinical trials although, while favorable towards orphan drug
developers, they are not specifically targeted at them;
• tax credits have not been incorporated into legislation and are left at the
discretion of member states. However, fee waivers are permitted through
legislation, such as a reduction or omission of the payment usually necessary
for protocol assistance, marketing authorization application and annual fees.
Revenue window of opportunity for specialty pharmas

As leading companies merge, specialty pharmas can move into their former revenue
space. This space reflects the fact that, as discussed above, larger companies need
products with higher revenue potential to fuel their growth. Table 27 and Figure 25
illustrate Datamonitor’s forecasts of how the structure of the pharmaceutical market
as a whole will change to 2005. Datamonitor believes that consolidation among
companies of all sizes is not yet over, particularly as former market leaders are forced
to merge simply to maintain their market share in the face of competition from Pfizer’s
mega-merger with Pharmacia. Even those companies that have stated that they will
not partake in the current round of merger activity may not be immune to the next
wave of consolidation. For example, in January 2002, Merck & Co. announced that it
was spinning-off its pharmacy benefit management subsidiary, Merck-Medco. The
company has previously insisted that it is committed to an organic growth strategy but
Datamonitor believes that Merck may now make acquisitions using the cash
generated by the spin-off.

Table 27: Pharmaceutical industry structure in 1998, 2000 and 2005
Ethical Number of Number of Number of

revenues ($m) companies, 1998 companies, 2000 companies, 2005
>30 3 from merger

25–30 1 grows organically
1 from merger
20–25 GlaxoSmithKline 1 grows organically
Pfizer Inc. 1 from merger
15–20 Merck & Co. 2 from merger
AstraZeneca 2 grow organically
10–15 Glaxo Wellcome BMS/DuPont 1 from merger
Pfizer Aventis 1 grows organically
BMS Pharmacia
Merck & Co. Johnson & Johnson
AHP
Novartis
Lilly
5–10 HMR Abbott/BASF 1 grows organically
Johnson & Johnson Bayer 1 from merger
Novartis Roche
Roche Schering-Plough
Astra
SmithKline Beecham
AHP
Warner-Lambert
Lilly
Schering-Plough
2–5 Schering AG Schering AG 5 SMEs grow
Searle Sanofi-Synthélabo organically or
Sanofi BI through merger
BASF Novo Nordisk
Abbott
Rhône-Poulenc
Bayer
Pharmacia & Upjohn
BI
<2 More than 100 More than 100 More than 100
AHP = American Home Products BI = Boehringer Ingelheim

BMS = Bristol-Myers Squibb HMR = Hoechst Marion Roussell
SME = small and medium sized entity e = Datamonitor estimate

Figure 25: A handful of mega-companies will dominate the industry by

2005
>100
1998
2000
2005
15
Number of companies
Decline in medium-sized companies

with opportunities to become large
10
Birth of the
5 ‘mega- company’
0
<2 2-5 5-10 10-15 15-20 20-25 25-30 >30
Ethical revenues ($bn)
Patent expiries fuel generic and drug delivery company growth

Datamonitor’s analysis suggests that 42 of the 52 blockbuster drugs with global sales
in excess of $1 billion in 2001 will face US patent expiry by 2007. These 42 drugs had
combined global sales of almost $82bn in 2001, highlighting the scale of the
opportunity for the generics industry. Coupled with increasingly stringent cost-
containment policies across Europe, generics companies will experience a period of
rapid growth to 2007. This will in turn provide them with the funds needed to transition
into the specialty pharma market and move towards FIPCO status.
The wave of patent expiries will also have a positive effect on the drug delivery
industry. Large companies facing multiple patent expiries on key products and poor
pipelines with which to fill the revenue gap, must reformulate their products to extend
their exclusivity. This has driven and will continue to drive growth of the drug delivery
industry, which will subsequently enable them to develop and market products in-
house that utilize their own delivery technologies.
Biotechs move downstream

Biotechnology companies have traditionally been subordinate partners in their
relationships with large pharmaceutical companies, supplying a service in exchange
for payment. This is illustrated by the November 2000 agreement between Lilly and
Medarex, in which Medarex receives royalties and license fees in exchange for
generating antibodies against multiple targets but has no role in the
commercialization of products. Such agreements do not present significant growth
opportunities to the biotechnology company because income is restricted to the
simple payment of royalties and milestones.
Increasingly, biotech companies are trying to avoid such restrictive agreements with
pharmaceutical partners, instead favoring deals with other biotech players with
complementary offerings. The driver of this phenomenon is the small number of
leading biotechnology companies that can apply each other’s capabilities to develop
therapeutic products by collaborating. This gives them greater commercial freedom to
drive their own growth. By excluding the powerful pharmaceutical companies,
biotechnology players are able to receive similar benefits without sacrificing potential
future revenue. However, there is no reason why such win-win deals should be
limited to the biotech sector. Opportunities exist for biotechs and specialty pharmas to
work more closely together.
Most biotechnology companies that are moving downstream in the value chain do not
have the in-house sales and marketing infrastructure or expertise with which to
launch their products alone. There is thus an opportunity for specialty pharmas to
partner with them, offering a more favorable deal in terms of royalties than large
pharmas traditionally would. Both types of company are growing from a relatively
small base and striving to achieve high growth, making them suitable partners. Since
one of the most common reasons for the failure of deals between leading
pharmaceutical companies and biotechs is a lack of shared goals and commitment to
projects, deals between companies of similar size are more likely to be successful
because both partners are equally dependent upon the agreement for future growth.
In July 2002, the biotechnology industry had over 360 products in clinical
development, presenting numerous opportunities for specialty pharmas to co-promote
or acquire product rights for certain geographic markets.

Japanese market opens up to specialty pharmas

The relaxation of regulations in Japan is opening up this market for specialty
pharmas. Two keys barriers to entry are decreasing in significance:
• clinical trial requirements;
• regulatory approval times.
One of the key barriers to launching a product in Japan has been the requirement
that phase III clinical trials are carried out in the Japanese population. However, the
International Conference of Harmonization (ICH) eliminated this requirement. Instead,
it introduced bridging studies or the ‘drug organization’ consultation system in
October 2000. Bridging studies allow the use of clinical data generated overseas in
Japanese regulatory submissions, so long as no differences in the absorption,
distribution or biochemical efficacy of the product exist. For example, bridging studies
allowed AstraZeneca’s Arimidex (anastrozole), indicated for the treatment of
postmenopausal breast cancer, to be approved and launched in Japan in January
2001. Companies no longer face the cost of duplicating clinical trials and so are able
to develop products for all markets simultaneously.
The time taken to approve a drug in Japan has traditionally been significantly longer
than in the US and Europe. Until recently, it was not unusual for final approvals to
take three years from the time of filing. However, regulatory improvements by the
Japanese Ministry of Health and Welfare look set to reduce approval times. Japan is
now committed, under bilateral trade and deregulation initiatives, to process new drug
applications (NDAs) within one year. This should benefit specialty pharmas like Shire,
which has already announced its commitment to operating within the Japanese
market by 2004.
Barriers to growth
Counteracting the drivers of specialty company growth outlined above is a set of

potential resistors. These include:
• the deepening productivity crisis forces large companies to promote smaller

products;
• a reduction in top tier consolidation leads to fewer products being divested

for specialty pharmas to acquire;

• emerging technologies increase the costs of discovery and R&D;
• increasing competition to in-license products with good sales potential

pushes up the cost of agreements;
• difficulties in obtaining financing;
• competition from biotechnology companies.
Large pharmas focus on small drugs

If products with blockbuster potential do not emerge from large pharmaceutical
companies’ pipelines or are not available for them to acquire, they may be forced to
refocus their promotional efforts on products with lower revenue potential.
Consequently, these previously unattractive products will not be available for
divestment to specialty pharmas and, when looking for in-licensing opportunities, top
tier companies will come into direct competition with specialty pharma companies.
Specialty pharmas are unable to compete against the licensing budgets of their larger
competitors and would be priced out of the market. A senior executive from a
specialty pharma company interviewed by Datamonitor acknowledged this threat but
stated that his company was prepared to pay more for licensing deals and company
acquisitions. However, such a strategy is unsustainable over the long term and would
cap the number of acquisitions and agreements that specialty pharmas could make.
Although undesirable as a long term growth strategy, large companies can readily
leverage their existing sales forces to promote smaller products to the same specialist
physician groups that specialty pharmas typically target. For example, in July 2002,
Pfizer announced its agreement with Serono to market Rebif, indicated for the
treatment of multiple sclerosis, a small market. As Ms Legatos-Philips, Vice-President
at Banc of America Securities, commented in an interview to The Wall Street
Transcript:
“I had always perceived multiple sclerosis to not necessarily be a big pharma

therapeutic area of focus. However, because some of these larger pharmaceutical
companies have tentacles in so many therapeutic areas, it’s so easy for them to
leverage their existing sales forces for virtually no excess cost. Therefore, what might
have previously been thought of as a ‘niche area’ where big pharma might not
previously focused may still be one worth pursuing for them.”

Emerging technologies increase the costs of discovery and R&D

At least 5,000 of the 30,000-40,000 genes identified by the Human Genome Project
could either be important targets or produce therapeutic proteins. However, the
promise of numerous drug targets will come at a high cost because innovative
technologies, such as structural genomics, functional genomics, pharmacogenomics,
toxicogenomics and proteomics, have so far only increased the need for upfront R&D
investment. The rising costs of drug discovery and development will continue to
restrict many specialty pharmas from developing a pipeline in-house, forcing them to
focus on what is currently an unsustainable growth-by-acquisition strategy.
The hub of the new technology is dominated by the biotechnology sector. The
development of niche technology platforms has increased the financial cost of
collaborative/networking alliances between pharmaceutical and biotechnology
companies. For example, Bayer formed a record-breaking agreement with Millennium
in 1998 for an upfront fee of $100m and a further potential $465m payment based on
milestones and research funding. The upfront payment alone was equivalent to 5% of
Bayer’s R&D spend in that year. Within the first two years of the five-year alliance, the
deal had rewarded Bayer with access to 80 new targets, a substantial achievement
given that the industry had previously been working with an average of only 400-500
targets. Undeniably, the rise in targets came at a high price. Datamonitor estimates
that Bayer should expect to increase its clinical pipeline by 11 products as a result of
its collaboration with Millennium, at a cost per phase I product of approximately $9m
(Datamonitor, 2001: Genomics: Pharmaceutical Investment, Integration and
Partnerships). This almost doubles the upfront investment of $5m that Datamonitor’s
primary research suggests that companies typically pay to in-license a phase I
product. Consequently, the high initial costs of accessing new drug targets may be
limited to the top tier of the pharmaceutical industry, preventing specialty pharmas
from developing the full range of downstream capabilities in-house
Difficulties securing funding

Specialty pharmas are reliant on raising capital from external sources to fund their
acquisition activities. The finance market is currently suffering a downturn, making it
difficult for all companies to raise funds. This pushes the onus onto a healthy share
price that can be leveraged by issuing shares to raise equity. The closure of the
finance window in the short term is a significant hurdle that specialty pharmas must
overcome if they are to sustain or exceed their current rates of growth.

Biotech moves into the specialty pharma space

Biotechnology companies are moving down the value chain and establishing their
own sales and marketing functions, which will eventually allow them to register all
revenues directly rather than relying on upfront and milestone payments from out-
licensing partners. While this is also a driver, giving specialty pharmas the opportunity
to co-promote these products that have previously been out-licensed to larger
companies, failure to form such agreements will squeeze their competitive space.
Longer term growth opportunities for specialty pharma,

2007-12
Growth drivers
Datamonitor’s analysis suggests that a number of factors will drive growth in the
specialty pharma market from 2007 to 2012, including:
• continuing top tier consolidation;
• genomics and related enabling technologies yield more drug targets and,
therefore, reduce competition within the pharmaceutical industry;
• pharmacogenomics micro-segments existing markets, with larger companies

focusing on dominating indications that collectively comprise larger therapy
areas, leaving smaller areas free for specialty pharmas to exploit;
• lower costs of enabling technologies (a function of increasing choice and

access) make drug discovery and R&D less expensive;
• the introduction of biogenerics boosts generic and drug delivery companies’

growth prospects and supports their evolution into FIPCOs.
The most significant of these are evaluated in further detail below.
Genomics and related technologies lead to more drug targets

Traditionally, the pharmaceutical industry has worked with between 400 and 500 drug
targets. This has resulted in intense competition, a relative lack of clinical
differentiation (and hence a significant number of me-too’s) and over-reliance on
promotion, reformulations and line extensions to distinguish between products and

drive sales growth. However, the explosion of information generated by large-scale

genomics and other enabling technologies has generated an exponential increase in
the number of potential genes and proteins available for therapeutic and diagnostic
research and development. Datamonitor conservatively estimates the number of drug
targets in the next decade to be in the region of 5,000, although the figure could be in
the tens of thousands. This should significantly increase the productivity of R&D
investment, something that specialty pharmas can capitalize on when seeking to
develop their own novel products or in-license drugs/targets from larger companies.
However, a new and significant bottleneck must be overcome before specialty
pharmas can capitalize on this opportunity: target validation.
Target validation is limited by the lack of knowledge about proteins’ cellular functions
and interactions that could allude to the pathophysiology of disease. Therefore, the
previous bottleneck in target identification has been pushed downstream to target
validation. Target validation links a viable drug target with an actual treatment
population and is a major hurdle to further drug development. McKinsey&Co. has
estimated that, where previously there may have been 100 academic papers
evaluating each target, there is now an average of eight. This increases the
probability that a novel target’s value and ultimate success in clinical trials may be
less certain than is the case with targets that have been widely researched and
scrutinized through peer reviews. Consequently, pharmaceutical companies run the
risk of higher attrition rates further upstream when safety concerns emerge in
expensive human trials.
Pharmacogenomics leads to micro-segmentation of disease markets

The emergence of new drug discovery and patient response technologies, such as
genomics, pharmacogenomics and proteomics, has heralded new opportunities for
the industry to generate products of higher and more selective efficacy that can
dominate specific, genotype-defined markets. Considerable debate currently
surrounds whether this spells the end of traditional blockbusters, sales of which are
driven in part by their use in non- and partial responders within patient populations
that are defined by phenotype. However, Datamonitor believes that, instead, the
definition of high earning products will evolve into that of ‘multi-busters’, a series of
personalized therapies marketed by one company that are able to dominate a range
of genotypes associated with a particular condition. Combined revenues of these
multi-busters will exceed $1bn.
Until multi-busters emerge from top tier companies’ pipelines, there will be a large
number of pharmacogenomics derived products with more limited patient potential

that specialty pharmas will be able to acquire (or develop themselves). Although the
small patient population size could potentially limit revenues, Datamonitor suggests
that this will not be the case. Improved efficacy and outcomes will enable specialty
pharmas to justify premium prices and benefit from cost savings associated with
highly targeted promotional campaigns.
Biogeneric introduction
Biogenerics are generic copies of biologic proteins: drugs derived from living
organisms that are typically complex molecules and thus difficult to manufacture. By
2006 a pathway for the approval of biogenerics will be established (Datamonitor,
2002: Therapeutic Proteins: Strategic Market Analysis and Forecasts to 2010). In
other words, there will be a clear process for proving bioequivalence between the
original protein and a generic protein produced in a different cell line. The 50% of the
$27bn therapeutic protein market in 2001 that will lose patent protection by 2005
presents a considerable growth opportunity for generics companies to exploit, with
widespread generic competition becoming a reality by 2010. This will drive generics
company development into specialty pharmas. Furthermore, specialty pharmas with a
drug delivery focus will benefit from the reformulation demands of companies with
branded therapeutic proteins that need to protect their revenues from generic
competition. Such competition will be intense, driven by the value of the therapeutic
protein market and the fact that therapeutic protein products are expensive, so any
cost savings to the payer, regardless of how small, will be well received.
There are high barriers to entry in the therapeutic protein market and this will result in
companies that develop biogenerics having to make considerable upfront
investments. These include the high costs of manufacturing biologic products, gaining
regulatory approval for this new class of products, and reassuring the medical
community of product safety. In addition, generics companies will experience
considerable opposition from pharmaceutical companies with branded biologic
products, adding numerous court cases to the hurdles that must be negotiated.
Amgen, for example, has already demonstrated its commitment to defending its
biologic products through legal disputes with Johnson & Johnson and the
Aventis/Trankaryotic Therapies partnership. However, the absence of an approval
pathway for generic biologic products is the only legitimate barrier to the introduction
of generic competition.
Although Datamonitor anticipates that an approval process will be in place by 2006,

the initial uptake of biogenerics will be slow. The main reason for this is that although
biogeneric products will be positioned at a lower price point to branded biologic

products, they will be unable to offer the same significant proportionate decrease in
price as small molecule generics. After the first generics company has lost its six
month exclusivity on a small molecule product, prices can be pushed lower than 50%
of the branded drug, depending on the number of generics companies in the market.
The high costs of manufacturing coupled with other barriers to entry will mean that
biogenerics will enter the market at approximately 80% of a branded drug’s price. A
lack of confidence among physicians and reluctance to switch patients to different
therapies for the chronic conditions that therapeutic proteins often treat, will result in
slow market penetration by biogenerics. However, once the market takes off in 2010,
it will be a significant growth driver for specialty pharmas with their roots in the
generics business.
There is substantial opposition to the introduction of a biogeneric approval process

from the pharmaceutical and biotech sectors. If an approval process for biogenerics is
not introduced, specialty pharmas could benefit by producing branded biogenerics,
approved as NDAs. For example, Aventis and Transkaryotic Therapies are
developing Dynepo (epoetin delta), an equivalent protein to Amgen’s Epogen
(epoetin alpha), which is manufactured in a different way and is therefore considered
a new drug. This type of approach is likely to be beyond that of traditional generics
companies that compete on the basis of cost and conduct little promotion. Specialty
pharmas can leverage their in-house development and sales and marketing
capabilities to produce these branded biogenerics. This would be viable if only a few
companies produce copies of therapeutic proteins and prices are kept high to recoup
investment.
Divestment of franchises by large pharma

By 2015 pharma companies will be more focused, with the peripheral interests of
individual companies substantially reduced compared to the early years of the 21st
Century (Datamonitor 2002: Networked Pharma: Innovative Strategies to Overcome
Industry Margin Deterioration). Well-defined core capabilities of networked
organizations will grow organically and by the acquisition of complementary
specialists and entire therapeutic franchises divested as other companies also
streamline their activities. These divestments will allow specialty pharmas to acquire
new franchises or substantially bolster their existing ones, fueling the growth of the
specialty pharma market, much in the same way as, Bristol-Myers Squibb attempted
to divest its dermatology franchise to Bioglan in July 2001.

Barriers to growth
Datamonitor’s analysis suggests that a number of factors could act as barriers to

growth of the specialty pharma market from 2007 to 2012, including:
• market micro-segmentation, courtesy of pharmacogenomics;
• licensing deal prices increase as targets become more complex and force
specialty pharmas out of the bidding market;
• large pharmaceutical companies break down into therapy area specialists

instead of continuing to consolidate.
The impact of pharmacogenomics

As discussed previously in this chapter, the application of pharmacogenomics to drug
development will result in large pharmaceutical companies dominating particular
therapy areas and squeezing specialty pharmas into the smaller, peripheral disease
markets. While this is a driver of specialty pharma growth because it allows them to
operate with reduced competition from top tier companies, competition in these small
disease markets could be intense. Furthermore, niche markets are, by definition,
small and thus offer limited growth opportunities. Larger specialty pharmas could
rapidly outgrow them but then be inhibited from moving into larger therapy areas that
are dominated by leading companies with greater resources and experience.
Major pharmas break down into therapy area companies

As the pharmaceutical industry’s productivity crisis intensifies and leading companies
fail to develop the blockbuster drugs they require to sustain their growth, they may be
forced to fragment into therapy area units that can be more profitably run
independently. This will allow each unit to operate with a small, specialized base, like
specialty pharmas, but enjoy the economies of scale that a large pharmaceutical
company can offer, such as sharing manufacturing and R&D facilities. As a senior
executive from a specialty pharma based in the US commented to Datamonitor:
“Large companies will have to break down into franchise groups because their
blockbuster products are just not there.”
This poses a significant threat to specialty pharmas, increasing competition and

removing any advantages they have over their larger counterparts. It could also result
in the franchise units of large companies merging or acquiring specialty pharmas that
fit their therapeutic focus. Furthermore, the number of products divested by leading
companies would reduce and competition to in-license drugs would be high, with
specialty pharmas potentially being priced out of the bidding market.
Novartis has already begun to move towards this model and is reorganizing its
pharmaceutical business, splitting its ethical business into three divisions: Primary
Care, Specialty Businesses and Mature Products. This reorganization allows each
business to focus its efforts on the different marketing strategies required for each
sector, allowing the units to develop their own corporate identities in line with their
needs. The next step is to segment these business units by therapy area.
Future scenarios of specialty pharma market growth
Datamonitor has produced three potential future focused scenarios (best case, most
likely and worst case) that will define growth of the specialty pharma market by
varying the impact of the series of short and long term drivers and resistors presented
above. Table 28 and Figure 26 detail the key drivers and resistors in each scenario,
and illustrate their combined effect on the growth of the specialty pharma industry to
2012.

Table 28: Drivers and resistors of specialty pharma market growth
Short term impact Long term impact

Scenario Best Most Worst Best Most Worst
case likely case case likely case
Drivers
Large pharma continue to High Med None High Med None
consolidate and focus on
large disease areas
Patent expiries fuel generics High Med Low High High None
and drug delivery
companies’ growth
Biotechs move downstream High Med None Med Med High
Reduced costs of enabling High None None High Med None
technologies make drug
discovery and R&D less
expensive
Biogeneric approval n/a n/a n/a High Low None
pathway created
Resistors
Productivity crisis forces None None Med None Low High
large pharma to rely on
smaller products
Emerging technologies Low High High None Med High
increase costs of drug
discovery and R&D
Large pharmas break down None None High None Low High
into therapy area units
Key
High = high impact of driver/resistor
Med = medium impact of driver/resistor
Low = low impact of driver/resistor
None = no impact of driver/resistor
n/a = not applicable at that time

determined by the therapeutic focus and favored growth
strategy of top tier companies
Ongoing consolidation Best case

leads to spin-off of
entire therapeutic scenario
franchises
Greater consolidation
Relative specialty pharma
among large pharmas

significantly increases Most likely
small product
divestments
scenario
market size
Continued consolidation Pharmacogenomics increases

makes smaller products number of drug targets and reduces
available for specialty competition within pharma market as
pharmas to acquire. Co- a whole. Biogeneric approval
promotion opportunities pathway opens up
arise with biotechs
Worst case
scenario
Large pharma splits into therapeutic franchise

focused companies. Pharmacogenomics
intensifies competition in micro-segmented
markets
~$80bn
2002 2007 2012
Decreasing
productivity forces
large pharma to focus Year
on smaller products
It is clear that the future prospects of the specialty pharma market will be determined
by the growth (both in terms of rate and strategy) of top tier companies. While on the
one hand no sector wants to be beholden to another for its future survival, on the
other hand specialty pharmas must grow or die.
The key differentiating factor between the best and most likely outcomes with respect
to the future growth of the specialty pharma market is the intensity of consolidation
among large pharmaceutical companies. In the best case scenario, consolidation
increases at the same or a higher rate than at present. To maintain growth, top tier
companies must continue to focus on larger therapeutic markets and, consequently,
will continue divesting smaller non-core products and tail-end brands to specialty
pharmas. This scenario is predicated on the fact that leading companies will continue
to favor growth via M&A above organic growth or improving productivity. In the worst
case outcome, leading companies can neither acquire nor develop in-house products
of a sufficient size to fuel their growth and are forced to rely on smaller products to fill
pipeline gaps. This brings them into direct competition with specialty pharmas in small
therapeutic markets and reduces the number of lower revenue potential products that
they are able to divest. Alternatively, they may elect to fragment into small therapeutic
business units. With the cost synergies that being linked to a larger company network
offers and more extensive expertise throughout the value chain, they will present
tough competition to specialty pharmas that are active in the same areas.
A second key factor that will shape the growth of the specialty pharma sector is the
movement of biotechnology companies downstream. The rate at which this happens
will be significant. Between 2002 and 2007, only the largest biotechs are likely to
develop a full range of capabilities across the value chain. Since they lack sales and
marketing expertise and are geographically limited, they will seek to form co-
promotion agreements with appropriate specialty pharmas. After 2007, such
agreements will become less attractive to both sectors as they increasingly strive to
‘go it alone’ and competition between them intensifies.
Winning growth strategies
Based on its scenarios of future growth within the specialty pharma market,
Datamonitor has identified a number of winning strategies that specialty companies
must pursue if they are to capitalize on the revenue opportunities that exist in the new
industry space. In particular:
• improved product search strategies and better structured agreements will

enable them to benefit more from product and franchise divestments from
consolidating top tier companies;
• focusing on the right therapy areas/indications will reduce competition with

more experienced leading companies;
• forming partnership networks with other specialty pharmas and vendors to

access resources and expertise, and to improve profit margins and
competitive positioning against top tier companies;
• working closely with biotechs will, at least in the short term, offer a new
source of revenue and products;

• developing or acquiring upstream capabilities will reduce reliance on the

growth-by-acquisition strategy and enable companies to benefit from the
increase in drug targets in the post-genomics era.
These strategies are summarized in the figure below and subsequently evaluated in
more detail.

Figure 27: Exploiting revenue opportunities in the new industry space
Opportunities for
Potential strategies
specialty pharmas
Improve search strategies and better

structure agreements
Consolidation among large
pharmas leads to product Form active search strategies to locate
franchise divestment potential acquisition targets. Approach
deal in structured manner and position
company as partner of choice
Target the right therapy areas
Selecr disease area that provides

significant returns yet is small enough to
Large pharmas focus on deter competition from large pharma
high value disease areas
only Form partner network
Collaborate with peers and other

specialist vendors to improve position
against large pharmas and profitability
Raise profile with biotechs
Leverage existing sales force to form co-

Biotechnology companies
promotion agreements with biotechs.
move downstream Acquire development stage compounds
outright or for certain geographic
markets
Move upstream/conduct vertical

Genomics and integration
pharmacogenomics
increase drug targets Reduce reliance on growth-by-
acquisition strategy

Improved search strategies and better structured agreements
Critical to an effective search strategy are:
• pro-active and focused searches by dedicated resources;
• a structured approach to deal-making, particularly in the pre-deal stage.
Continued consolidation among large pharmaceutical companies provides specialty

pharmas with the opportunity to acquire products divested due to anti-competition
laws and tail-end divestments of old brands. To capitalize on this opportunity,
specialty pharmas must first form active search strategies to find potential acquisition
targets. Datamonitor recommends that such searches are therapeutically focused
rather than opportunist, which in turn requires that specialty pharmas streamline their
portfolios. A lack of therapeutic focus theoretically increases the number of products
that are suitable acquisition targets and reduces the chances of having to bid for high
priced products to fill specific portfolio gaps. However, having a therapeutic focus
enables synergies in sales and marketing to be exploited (thereby improving margins)
and, by gaining a reputation in a particular area, increases the probability of being
viewed as a partner of choice.
A structured approach to deal-making enables divestments to be made and revenues

from acquired products to contribute to the top line as quickly as possible. This is
important because few large pharmaceutical companies have a dedicated team that
handles product divestments, so agreements are typically made between existing
contacts within the industry, leaving specialty pharmas out of the loop. Most specialty
pharmas utilize their business development teams to search for acquisition targets.
Datamonitor recommends that they should dedicate greater resources to their search
strategies to ensure that they are covering all potential sources of acquisitions, from
consolidating companies to the biotech sector.
Preparation is fundamental to structuring a deal. Specialty pharmas must complete

extensive background research on a potential acquisition and propose a deal
structure before approaching the target company. As a senior executive in a major
pharmaceutical company who has been involved in several product divestments
commented to Datamonitor:
“Of the enquiries I get from companies looking to acquire products, 99% are
unstructured and unprepared. I am not going to hold a conference call with every
potential bidder. I tell them to go away, do their homework and come back to me with
an offer.”

This is sensible, practical advice. To meet his requirements, specialty companies

must not only have clear corporate priorities and a strong portfolio strategy, they must
also understand the competitive position of the drug, the company that is making the
divestment and, importantly, why. This knowledge is vital to constructing an
agreement that is attractive to the other company.
Forest has a well managed search strategy and has successfully in-licensed a
number of products over the past two years, at a time when other specialty
companies have expressed concerns over the lack of acquisition targets. As Richard
B. Silver, Senior Vice President at Lehman Brothers, commented in an interview with
The Wall Street Transcript (August 2001):
“We’ll have to see if the products get approved, and how well they do commercially,
but based on in-licensing activities over the last year, Forest certainly has proven that
there are attractive products to be found.”
Silver went on to highlight three in-licensed products that represent attractive

commercial opportunities for Forest: ML3000 indicated for osteoarthritis, memantine
indicated for Alzheimer’s disease, and lercanidipine, an anti-hypertensive.
Targeting the right therapy areas
The therapeutic focus that specialty pharmas adopt is crucial to their growth
prospects, as discussed previously in Chapter 2. Choosing the wrong therapeutic
focus will restrict company growth if, for example, the market in question is dominated
by large pharmaceutical companies, in which case a specialty pharma will struggle to
compete. A number of factors must be considered when selecting a therapeutic
focus, including:
• assessing how easy it is to capture and defend a sizeable share of the

market;
• avoiding therapy areas in which top tier companies are active;
• avoiding overly niche markets in which returns will be low because premium
prices cannot be justified;
• potential synergies with existing areas of expertise.
There is a fine balance between choosing a therapy area that provides significant
returns but is small enough to deter competition from top tier companies. Prior to

2002, multiple sclerosis was considered a niche market, having been worth
approximately $2bn globally in 2001. Key players in this market include Teva, Biogen,
Schering AG and Serono. These companies have generated significant returns by
providing premium priced drugs that address an area of unmet need within the
market. It has been estimated that the cost to the manufacturers of providing these
therapies is approximately $500m (McKinsey Quarterly, 2001), providing a potential
profit of $1,500m. In the past, this level of return has been too small to attract large
companies to enter the market. However, Pfizer has recently announced an
agreement with Serono to promote Rebif (interferon beta) in the US by tapping into
existing expertise and coverage in its sales force. As discussed previously, this is a
threat to specialty pharma growth, although remains a unique occurrence at the
moment.
Ophthalmology and dermatology are examples of niche markets in which specialty

pharmas have operated with some degree of success. Allergan, for example, is the
third leading player in the ophthalmology market. CNS indications, such as
Alzheimer’s and Parkinson’s disease, are also attracting increasing interest from the
specialty pharma sector. This is partly because a number of CNS indications share
the same pathophysiology, set of symptoms, or are treated by the same specialist
physicians. For example, the US company Diacrin has developed a technique for
replacing damaged neurons using pig neurons in Parkinson’s disease patients. The
company has widened the use of its therapy to Huntington’s disease. Since
neurosurgeons treat both diseases, Diacrin achieves cost synergies by promoting
both therapies simultaneously.
A new niche market is also opening up for specialty pharmas: gastroenterology. This
market is valued at approximately $10bn in the US in 2001. Celltech, a leading
European biotechnology company, has restructured its US primary care sales force to
concentrate on specialist indications. It acquired the US marketing and distribution
rights to Pharmacia’s Dipentum (olsalazine), indicated for ulcerative colitis, in July
2002. The acquisition has allowed Celltech to accelerate towards its strategic goal of
developing a specialist gastroenterology sales force, ahead of the launch of its
gastroenterology pipeline products. Furthermore, Celltech has an option to acquire all
rights to Dipentum, excluding Europe, in 2005.
Creating partnership networks
Research collaborations between specialty pharmas is not a new idea and is a

strategy that has already been utilized by, for example, Teva and Lundbeck.
However, greater collaboration in R&D and in sales and marketing will help specialty
pharmas compete with the power houses of large industry players. Specialty
companies operating in the same therapy areas should work together, sharing
knowledge and resources, to speed up drug development and then pool their sales
and marketing resources to increase the market penetration of their drugs.
The ultimate goal of collaborations between specialty pharmas should be to build a

portfolio of products that are shared and hence developed and promoted more
efficiently than by one relatively small company alone. By sharing facilities like
manufacturing capacity and drug development technology, specialty pharmas can
achieve some of the economies of scale that top tier companies enjoy, while
maintaining their independence as small, profitable company units.
The value of partnering also extends beyond specialty pharmas working together. It is
possible to craft productive and more profitable organizations from a physically
dispersed set of operations, with a specialty pharma company at the hub. In the
traditional pharmaceutical business model, an average of 80% of the burden of
fluctuating resource needs is borne in-house. In a partnership network model,
perhaps only 40% of resource needs are retained in-house. Outsourcing additional
requirements transfers a significant proportion of otherwise fixed costs into variable
costs. When industry dynamics change, or at times when performance exceeds
expectations, a networked company can respond quickly and optimally, without being
constrained by investments that have already been made in-house. Equally, when
revenue growth is slow or erratic, or when diluting the risks of R&D, lowering variable
costs protects gross operating profit margins. This is a particularly valuable strategy
for small companies that have yet to start, or have only just started, generating
revenue. By building a network of alliances, the sponsor specialty pharma can access
resources where and when required. Furthermore, the specialization of a vendor may
enable it to generate efficiencies that it can pass on to clients in the form of lower
costs. Even if the unit costs of outsourcing are higher, a networked company is still
more efficient if its vendors offer greater returns than would be achieved by investing
the same amount in-house.
The investment risks inherent in networked growth are lower for large than specialty
pharmas. A large company can distribute risk across a wider alliance network and,
should a partnership prove unsuccessful, it can focus investment elsewhere or use its
brand equity to attract a replacement. A specialty company may need only one
partner to drop out or fail to meet its objectives for investors to lose confidence in the
entire network. However, since specialty pharmas have fewer growth options
available to them, this is precisely the sector of the pharmaceutical industry where
Datamonitor believes that growth through networking will initially prove its worth. For

example, in its search and development strategy, Schwarz Pharma displays certain
characteristics of a networked company. It conducts very little high risk, basic
research itself. Instead, the company in-licenses new molecules and product ideas,
which it then develops and markets through alliances with partners. The majority of
these alliances complement Schwarz’s core therapy areas: cardiovascular, urology,
gastrointestinal and, increasingly, CNS.
Datamonitor advises that specialty pharmas that are not ready or do not wish to
establish an upstream infrastructure in-house should make greater use of contract
research organizations (CROs). CROs are increasingly critical to reducing R&D
investment risks. Historically, CRO services have been under-utilized. However,
growth in the sector is gaining pace; Parexel International, one of the four largest
CROs in the world, predicts that CRO R&D spend as a proportion of total R&D spend
will increase from 8.7% in 1997 to 10.2% in 2002. Consolidation among CROs means
that the larger players (e.g. Quintiles, Parexel and Pharmaceutical Product
Development Inc.) now offer an exhaustive range of core and ancillary R&D services.
They are essentially ‘one-stop-shops’ for several processes in the drug lifecycle and
can pass on associated cost and efficiency savings to their pharmaceutical clients.
Specialty companies’ investment risks will further decrease as (a) outsourcing
becomes a strategic rather than an ad hoc tactical decision and (b) risk sharing
agreements (e.g. where the CRO receives royalties on future sales or an equity stake
in the sponsor company) replace traditional fee-for-service deals. These are still
relatively uncommon; for example, only about one in five of Quintiles’ research
agreements are risk sharing, with the first occurring in 1999.
Working with biotechs
To date, few agreements exist between specialty pharmas and biotechnology

companies. This is because biotechs traditionally look to large pharmaceutical
players to commercialize their pipeline products, attracted by their larger sales and
marketing capabilities. Datamonitor recommends that specialty pharmas should raise
their profile within the biotech industry to tap into this increasingly valuable source of
products.
A more intimate partner

Specialty pharmas have a number of advantages that they can offer biotechnology
companies over large pharmas when competing to in-license a product or form
collaborative agreements to take biotech products to market:

• favorable royalty rates compared to those offered by top tier pharmaceutical

companies;
• they are as reliant as biotech companies on their deals to be successful;
• the greater importance that any agreement will have to a specialty pharma
compared to a larger company that has multiple other agreements and
products. Hence, a specialty pharma can attach greater priority to a
collaboration with a biotech, which reduces the chances that a collaboration
will fail;
• personnel overseeing an agreement in a specialty pharma are likely to be

more senior than their counterparts in a bigger company, making them closer
to the key decision makers and again giving the agreement greater
importance.
The cumulative benefits to a biotech company are that an agreement with a specialty
pharma can potentially be more profitable and receive more experienced resources
and attention by the partner company, compared to their current agreements with
large pharmaceutical companies. Specialty pharmas must therefore promote
themselves as more intimate and equable partners to biotechnology companies.
Acquire or co-promote?
As more biotech companies move downstream and prepare to launch their first self-
marketed products, there is an opportunity for specialty pharmas to leverage their
existing sales forces to form co-promotion agreements with inexperienced biotechs.
Such agreements should serve the same need for biotechs as co-promoting with
large pharmaceutical companies has for specialty pharmas, and enable specialty
pharmas to secure short term growth drivers. For example, Forest’s January 1999 co-
promotion agreement with the former Warner-Lambert for the antidepressant Celexa
gave the drug the initial boost it required to build awareness with physicians and
patients. Upon termination of the agreement, Forest successfully promoted the drug
alone.
An alternative to co-promoting with biotechs is for specialty pharmas to acquire

development stage compounds outright or for certain geographic markets. A current
lack of confidence in the investment community has resulted in biotechnology
companies running out of the funding they need to take their drugs through clinical
trials. Companies that are funded by venture capital are under pressure to
demonstrate faster returns on investment. Venture capitalists now expect to see a
return in 24 to 30 months, compared with the traditional five to six years. This
pressure can force companies to rush drugs through clinical trials or encourage them
to look elsewhere for funding. This is an opportune point for specialty pharmas to get
involved. While in the past specialty pharmas may have been priced out of licensing
deals by their larger competitors, the latter are increasingly cautious about paying
high prices for unproven compounds following a number of high profile failures, such
as that for ImClone’s anti-cancer drug Erbitux (cetuximab). Under the original deal,
Bristol-Myers Squibb agreed to pay $1bn (a considerable amount by any measure)
for a 20% stake in ImClone and contribute an additional $1bn to be paid in three
installments upon completion of specific milestones.
Moving upstream to reduce reliance on acquisitions
The growth-by-acquisition strategy traditionally adopted by specialty pharmas is, as

Datamonitor has previously noted, self-limiting. The bigger they get, the larger and
more expensive products that specialty companies must acquire to maintain their
growth. This propels them into direct competition with larger pharmaceutical
companies, against which they have fewer chances of winning expensive bidding
wars to in-license attractive compounds. One way in which they can escape this
situation is by developing their own upstream capabilities, enabling them to balance
acquired growth drivers with those created in-house. Over the long term, this is also a
more cost-effective and sustainable growth strategy.
Excluding development companies, few specialty pharmas have significant R&D

capabilities. There are clearly risks to conducting in-house R&D but it does reduce
reliance on expensive acquisitions to fuel growth. Furthermore, the costs of in-
licensing compounds at an early stage of development are much lower because the
probability of success is less although, clearly, returns upon successful
commercialization are much greater. To take advantage of these benefits, specialty
pharmas like Forest and King, which have traditionally focused on acquiring marketed
drugs, are moving upstream to include drug development in their capabilities.
To facilitate the development of R&D capabilities, specialty pharmas should acquire

companies rather than just compounds. This offers the technology and infrastructure
to conduct further drug development. King, for example, acquired Medco Research in
February 2000, representing the beginning of what is likely to become a much more
substantial R&D arm over time. There is also an opportunity for European specialty
pharmas to acquire small US biotech companies to gain access to this lucrative
market, while simultaneously building their proprietary R&D pipeline.

Datamonitor does not recommend that, at this stage, specialty pharmas advance
directly into drug discovery. However, they can certainly benefit from the flood of drug
targets that new enabling technologies create. Through to 2012, specialty pharmas
have unprecedented opportunities to develop innovative products and to create new
markets that are not in direct competition with larger pharmaceutical companies.
Industrial scale target identification will significantly increase the number of targets
that the industry has to work with. Pharmacogenomics-assisted pre-selection of trial
patients will be enhanced, reducing the time to recruit, improving outcomes, and
potentially reducing trial sizes by as much as 50%. However, at least initially, gaining
access to these technologies will be expensive, prohibitively so in the case of many
companies. For example, although trials may become shorter, the cost savings this
offers may be over-written by the increased costs of genetic screening. Genetic tests
are still relatively slow and expensive (in some cases as much as $2,000 per test) but
will become much cheaper over the next decade as test kits improve and are more
widely used. Ultimately, productivity in R&D will decline in the short term before
improving over the longer term because the major cost and time savings will not
come until phase III trials. Other productivity benefits must flow down the discovery
and early development phases of the value chain before they can be realized further
downstream in phase III.

The specialty pharma landscape to 2012
CHAPTER 4 THE SPECIALTY PHARMA LANDSCAPE TO

2012
Key findings
– Specialty pharmas with a US sales focus are attractive acquisition

targets for European and Japanese manufacturers. The appeal of King
and Forest, with their 715 and 2,200 US sales reps, respectively, is
enhanced because their sales forces detail primary care physicians and
could be retrained to promote a large company’s primary care portfolio
– Consolidation among specialty pharmas will occur. Investors have high

growth expectations but, after a specialty company breaches a certain
size threshold, it can no longer rely solely on the growth-by-acquisition-
model
– Allergan is in the most well positioned specialty pharma for future growth,
due to its established infrastructure, global presence and niche
therapeutic focus. It is effectively a small FIPCO already and a licensing
partner of choice in its three chosen therapy areas. However, it is not an
attractive acquisition target, given its geographically dispersed sales
force and niche specialist focus
– Forest and King have successful search strategies but, as acquisition

targets become scarcer and bidding wars more expensive, they must
develop a network of partners to share facilities and the risks of drug
development and marketing. Both companies can afford to take bigger
financial risks and continue product and corporate acquisitions through
greater leverage of debt
– Andrx is poorly positioned for future growth as a specialty pharma.

Although still in the early stages of transitioning away its generic drug
roots, it lacks of a partner network and has a poorly executed search
strategy. Without these, the company has limited access to new products
with which to fuel growth
– ICOS has maintained broad therapeutic interests, with indications

ranging from erectile dysfunction to hypertension. This strategy is
unsustainable over the long term and it will need to focus its resources if
it is to progress successfully along the path towards becoming a FIPCO

Future specialty pharma critical success factors
Chapter 3 presented a series of winning growth strategies that will enable specialty
pharmas to capitalize on the revenue opportunities available to them between 2002
and 2012 as they move towards FIPCO status. This chapter builds upon these
strategies, ranking them in order of their significance to growth and benchmarking
against them each of the 12 specialty pharmas profiled in this report. In declining
order of significance, specialty pharma critical success factors are:
• an established partner network;
• sophisticated search strategies and well structured collaborative agreements;
• targeting the 'right' disease areas;
• alliances with the biotech industry;
• extensive geographic reach, with direct US market penetration;
• a strong and deep late stage pipeline, which can be leveraged for continued
vertical integration.
Subsequently, rankings for each of these criteria are brought together and assessed
against one further key factor that cannot be ignored when assessing a company’s
growth potential: access to capital and ability to raise debt. Having identified which of
today’s specialty pharmas display the greatest potential for growth over the next
decade, Datamonitor ends with an evaluation of the impact of their continued
development on the wider pharmaceutical industry.
Partnership networks
Specialty companies rely heavily on partners to fund growth and provide compounds,
expertise and/or facilities at different stages of the life cycle. Since the acquisition of
compounds is a fundamental element of the specialty pharma business model,
establishing long term partnerships reduces the need for an opportunist, and
generally less effective, product search strategy. The wider a specialty pharma’s
partnership network and the more compounds that the network supports, the lower
the risk that the failure of one deal will undermine growth of the company as a whole.
Although partnership networks become less significant over time (i.e. when, as a
FIPCO, a full complement of operations is established in-house), none of the

specialty pharmas profiled in this report are as yet independent of other companies
for growth. There will also continue to be a flow of emerging specialty companies for
which partner networks are vital to growth.
Figure 28 benchmarks 12 specialty pharmas according to the strength of their

partnership networks. Their locations reflect the number and size of the key partners
they utilize for R&D and sales and marketing collaborations, their long term strategic
partnerships that provide in-licensing opportunities, and their current position en route
to FIPCO status.
Figure 28: Development companies display the most extensive

partnership networks
Strength of partner network
ICOS
Watson Forest Elan Allergan IDEC
Andrx Shire King Biovail Lundbeck Teva
10 9 8 7 6 5 4 3 2 1
No partners > 2 key Fully established

partners network
Development stage specialty pharmas are more heavily reliant on partner networks
than, for example, their little big pharma counterparts, since they lack an in-house
sales and marketing infrastructure. For example, ICOS’ highest profile agreement to
date is a joint venture with Lilly (named Lilly ICOS) to co-promote ICOS’ first product,
Cialis, which is indicated for the treatment of erectile dysfunction. The success of this
venture will determine ICOS’ viability as a specialty pharma company. Working with
companies with a sales and marketing arm enables specialty pharmas to fund their
continued growth through royalty and milestone payments, until they reach the point
at which going it alone or co-promoting/marketing is feasible. Thus, it is appropriate
that IDEC and ICOS are favorably positioned on Datamonitor’s benchmarking scale.
Both companies have established strong networks, with partners contributing
financial support for R&D. However, it is important that development companies do
not lose sight of their goal – to become a FIPCO – since, although network
partnerships are central to their growth, they also limit the revenues that a company
receives from sales of its products. Network partnerships must, therefore, serve the
growth objectives of the specialty pharma, eventually enabling it to become
increasingly independent of other companies for growth once it has developed in-
house expertise and facilities across the value chain.
As a development company, IDEC has used partners to co-develop its in-house

products and to gain expertise and funding, rather than in-licensing products for
development, which is the favored strategy of many other specialty pharmas. Indeed,
IDEC has a number of collaborations that are central to its growth, most of which
involve an exchange of European and Japanese marketing rights for R&D funding.
The largest of these collaborations is for the cancer drug Rituxan, for which promotion
rights are licensed to Genentech or Zenyaku for all markets with the exception of the
US. Much of IDEC’s growth as a biotechnology company can be traced back to its
1995 co-development agreement with Genentech for Rituxan. Genentech provided
the regulatory and scientific expertise to pave the way for Rituxan’s approval.
Teva is moving into the specialty sector to improve its long term growth prospects
and reduce its reliance on the low margin generics sector. In preference to leveraging
its delivery technologies or developing branded generics as a stepping stone towards
producing branded products, Teva has moved directly into discovering and
developing proprietary branded products in-house. This is a high risk strategy. The
company is attempting to manage this risk by forming strategic partnerships to share
drug development costs and to benefit from the expertise of more experienced
players. It now needs to use these partnerships to reduce its reliance on the multiple
sclerosis drug, Copaxone.
Allergan and Lundbeck have formed several major long term partnerships to assist
with R&D and/or sales and marketing operations. Allergan’s partners share the risk of
drug development and add expertise to its drug development strategy. The company
has an established sales and marketing team and a wide geographic reach and thus
has less need for partners downstream. In contrast, Lundbeck has a more balanced
approach, with partners for both R&D and commercialization. However, it does not
have the same depth of collaborations as Allergan. Lundbeck utilizes Teva as a
research partner and has a long standing relationship with Forest, out-licensing its
antidepressant to Forest to market as Celebrex in the US.
The strength of Forest, King, Watson and Shire’s search strategies has enabled them
to operate more independently than, for example, IDEC and ICOS, in-licensing
products as needed, without maintaining a network of partners. However, to improve
their future growth prospects, Datamonitor suggests that they consider forming such
networks to compensate for increasing competition for acquisition targets.

Active, structured search strategies
Despite its reliance on acquiring products for growth, the specialty pharma sector’s
product search strategies are relatively unsophisticated. Datamonitor recommends
that, for growth to be sustained over the long term, search strategies should be
proactive and focused, rather than reactive and opportunist.
Figure 29 positions each specialty pharma according to the strength and organization
of search strategy. This reflects primary research with specialty pharma industry
executives and the number of promising compounds that each company has in-
licensed since January 2000. The figure shows that the little big pharma category of
the specialty market is characterized by the most effective search strategies. This is
because, historically, they have relied more heavily on the growth-by-acquisition
strategy than development, generics and drug delivery companies that have greater
in-house R&D facilities. These companies also tend to have better partner networks
to fund their R&D activities, which simultaneously reduces their need for opportunist
search strategies.
Figure 29: Little big pharmas have the most effective search strategies
Effectiveness of search strategy

Shire
Watson
Allergan
ICOS Andrx Elan King
IDEC Teva Lundbeck Biovail Forest
10 9 8 7 6 5 4 3 2 1
No active Opportunist Active well
search search strategy structured search
strategy strategies
King, for example, has acquired a large number of products from a wide range of
companies, including from its merger with Jones Pharma in 2000 and from in-
licensing agreements for individual drugs with major pharmaceutical companies like
Wyeth and Bristol-Myers Squibb. It has driven its revenue growth by buying old,
under-promoted products from major pharmaceutical companies and focusing its
resources upon them. King has executed this growth-by-acquisition model with great
success, growing its revenues from $20m in 1996 to $825m in 2001. The

cardiovascular drug Altace (ramipril), purchased from Aventis in 1998, has been the
company’s major growth driver.
King has a relatively wide therapeutic focus, covering cardiovascular, women’s

health, endocrinology, infectious disease and critical care. Such breadth increases
the range of products it can acquire and requires a more opportunist search strategy
than if it had a greater therapeutic focus. Although one of the best positioned
specialty pharmas on Datamonitor’s benchmarking scale, there is still room for
improvement; a narrower therapeutic focus would support King’s development of
more proactive and targeted search strategies and allow partner networks to be
established.
Targeting the 'right' disease areas
Specialty pharmas have neither the resources nor the expertise to compete against
major pharmaceutical companies in large therapeutic markets. Therefore, they
typically focus their small sales forces on niche, specialist markets, taking advantages
of economies of scale. Although by definition such markets offer lower revenue
potential, this is precisely the reason why they are less attractive to larger players.
This also provides successful specialty pharmas with the opportunity to become a
licensing partner of choice in specific niche markets. However, while there are many
small therapeutic markets, they are not all equally appealing. The most desirable are
associated with high levels of unmet need in which premium prices can be justified
and hence profitability optimized. Figure 30 benchmarks 12 specialty pharmas with
respect to their therapeutic strategies.
With the exception of ICOS, all of Datamonitor’s profiled specialty companies have
relatively narrow therapeutic foci. ICOS has to date maintained broad therapeutic
interests, with indications ranging from erectile dysfunction to hypertension. Its
opportunist approach to in-licensing appears to reflect the fact that it acquires
products that are insufficiently attractive for their originators to continue developing
them, rather than offering marketing rights in lieu of cash. Datamonitor suggests that
this strategy is unsustainable over the long term and that the company will need to
focus its resources if it is to progress successfully along the path towards becoming a
FIPCO.
At the other end of the spectrum to ICOS is Allergan, which has successfully chosen
three specialist disease areas that are relatively well protected from top tier company
competition but still offer relatively high revenue potential: neurology, dermatology
and ophthalmology. It accrued $305m from sales of its neurology drug Botox in 2001

and is continuing to build its presence in dermatology, a market estimated to be worth

over $5bn. Watson and Shire have adopted a similar approach, although both
operate in disease areas with higher competition (CNS and women’s health,
respectively).
Forest, King and Biovail focus on primary care indications that require large sales
forces to detail large numbers of prescribing physicians. For example, Forest runs a
sales force of 2,200 reps just to penetrate the US market and, even then, primarily
promotes only antidepressants. In contrast, Allergan operates a sales force of 1,600
that covers specialists in three therapy areas across more than 100 countries. One
advantage of targeting primary care physicians is that, once the costs of creating the
sales force have been absorbed, reps can be leveraged to promote products across a
wide range of therapy areas. However, few specialty companies can claim to be in
this position and thus are not yet able to exploit any potential cost synergies.
Figure 30: Selecting an appropriate therapeutic focus is key to maximizing

profit margins
Therapeutic focus
Forest
IDEC King Teva Watson
ICOS Andrx Biovail Elan Lundbeck Shire Allergan
10 9 8 7 6 5 4 3 2 1
No Focused on Fully focused on

specialization primary care niche disease
indications areas. No large
pharma competition
but high revenue
potential
Alliances with biotech
Opportunities exist for biotechs and specialty pharmas to work more closely together.
As discussed in Chapter 3, most biotechs that are moving downstream lack the in-
house sales and marketing infrastructure or expertise with which to launch their
products alone. There is thus an opportunity for specialty pharmas to partner with
them, offering more favorable deals in terms of royalties than large pharmas
traditionally would. Since one of the most common reasons for the failure of deals
between leading pharmaceutical companies and biotechs is a lack of shared goals

and commitment to projects, deals between companies of similar size are more likely
to be successful because both partners are equally dependent upon the agreement
for future growth. In July 2002, the biotechnology industry had over 360 products in
clinical development, presenting numerous opportunities for specialty pharmas to co-
promote or acquire product rights for certain geographic markets. Figure 31
summarizes the degree of collaboration between selected specialty pharmas and the
biotechnology industry. Companies are benchmarked according to the number and
type of biotech alliances they have made since January 2000.
Figure 31: Elan leads the way in working with biotechs
Alliances with biotech industry
IDEC ICOS
King Lundbeck Teva
Forest Watson Allergan
Andrx Biovail Shire Elan
10 9 8 7 6 5 4 3 2 1
No > 2 partners < 4 partners

agreements
with biotechs
Elan has forged numerous alliances with biotechnology companies to support its
discovery and development capabilities. For example, one of its phase III compounds
that has the potential to be a key growth driver is Antegren, a treatment for multiple
sclerosis and Crohn’s disease. The drug was the subject of an exclusive
development, manufacturing and commercialization agreement in 2000 between Elan
and Biogen, from which it was in-licensed. Antegren will follow Johnson & Johnson’s
Remicade to market. Elan has demonstrated its confidence in Antegren and the
importance of its success by repurchasing the rights to all product revenues from its
originator, Autoimmune Research Development Company.
Elan has not stopped at acquiring biotech products. In May 2000, it acquired The
Liposome Company, a biotechnology company with compounds in the oncology and
fungal infections areas. The company had one marketed product, Abelcet, for the
treatment of severe, systemic fungal infections in patients who are refractory to or
intolerant of conventional therapy. The Liposome Company’s product pipeline

included several drugs for the treatment of various cancers and vehicles for the
delivery of gene therapy. Under the terms of the agreement, Elan acquired all of The
Liposome Company’s stock in a tax-free, stock-for-stock transaction. The agreement
provided for a cash payment of up to $98m, with $54m contingent on certain
approvals of the cancer therapy Myocet reaching sales milestones outside of the US.
It represented an attempt by Elan to move into the oncology and anti-fungals
markets, diversifying its historic reliance on CNS.
While other specialty companies have made one-off agreements with biotech
companies, they have not leveraged biotech expertise to the same extent as Elan. In
fact, IDEC, King, Forest and Andrx have made no recent major biotech alliances. As
an increasingly important source of products, technology and expertise, they must
raise their profile within this sector.
Geographic reach
Figure 32 shows the geographic presence of each of 12 specialty pharmas.

Companies are benchmarked according to the proportion of sales derived from each
region. Shire and Teva have successfully expanded within Europe and gain
significant sales from the US market, propelling them a step closer to FIPCO status.
Elan and Biovail operate in two key markets: the US and their respective domestic
markets, Ireland and Canada. Both companies have entered the US through
corporate acquisitions, preferring to secure the expertise of pre-established
companies rather expanding organically. As development companies, IDEC and
ICOS have yet to establish significant sales and marketing operations in any market,
although IDEC has begun the process following the approval of Zevalin in February
2002.
Companies headquartered in the US (Forest, Watson, King and Andrx) have not yet
expanded beyond this market because its size and lucrative nature offers sufficient
sales and profit growth potential, as discussed in Chapter 2. Allergan is the one
exception. Although based in the US, it has expanded to cover over 100 countries. Its
niche therapeutic focus (ophthalmology, dermatology and neurology) has supported
such expansion, with small, focused sales forces penetrating the necessary specialist
physician bases. Its total sales force comprises only 1,600 reps. The company has a
strong position in the ophthalmic market, moving from fourth to third position in 2001.
Allergan’s strategy is to offer a full line of ophthalmic products that are each leaders in
their indication, the most important of which, in terms of sales, is glaucoma. The
company has a strong product line, with over seven marketed products and eight
pipeline products. Furthermore, geographically and therapeutically, it is well
positioned as the marketing partner of choice in ophthalmics, which should ensure

that this franchise remains a strong growth driver.
Figure 32: US based specialty pharmas do not yet need to expand beyond
their domestic market – only Allergan has a global presence
Geographic reach
King
Watson
IDEC Forest Elan Shire
ICOS Lundbeck Andrx Biovail Teva Allergan
10 9 8 7 6 5 4 3 2 1
Negligible US only Seven Global

sales and major presence
marketing markets
operations
Strength and depth in the late stage pipeline
A strong late stage (phase III to registration) pipeline improves visibility in earnings,
boosts investor confidence and reduces reliance on opportunist acquisitions to
sustain specialty company growth. Figure 33 benchmarks selected specialty
pharmas’ late stage pipelines on the basis of their number of compounds and the
sales potential of key products. While no specialty companies score one, which would
denote the existence of a deep pipeline of high revenue potential products, Forest is
in a more favorable position than its peers, with over five compounds in phase III and
beyond that have yet to be launched. The majority of companies have just one late
stage product with an annual sales potential in excess of $200m. IDEC, for example,
has no phase III drugs, although it has poured much of its resources into developing
Zevalin, its first self-marketed product, which was approved in the US in February
2002 having been co-developed with Schering AG.

Figure 33: Forest’s organized search strategy is apparent in the strength

of its late stage pipeline
Strength of late stage pipeline
Allergan Teva
Biovail Watson
King Elan Shire
IDEC Andrx ICOS Lundbeck Forest
10 9 8 7 6 5 4 3 2 1
No novel late > 4 late Deep Deep

stage stage pipeline pipeline of
products products with > 5 high
but with late revenue
limited stage potential
sales products products
potential
Forest has benefited from its active search strategy. It traditionally in-licenses
products in late stage development from European specialty pharmas for
development and marketing in the US. As acquisition targets become less widely
available, the company has broadened its CNS therapeutic focus to include
cardiovascular and respiratory indications and is moving further upstream, conducting
its own internal drug development and in-licensing products at earlier clinical stages.
This change in focus is clouding the visibility of the company’s revenues but is a vital
step for Forest to maintain growth and achieve FIPCO status.
Future success of selected specialty pharmas to 2012
Datamonitor has weighted the aforementioned future critical success factors

according to their significance to specialty pharma growth. Figure 34 illustrates each
company’s position with respect to their relative growth potential. It should be noted
that, since specialty companies with partner networks are less likely to have well
developed search strategies (and vice versa), to avoid scores from these two criteria
canceling each other, they were combined into one score.

Figure 34: Allergan is the most favorably positioned to transition

successfully to FIPCO status
Relative future growth potential

Lundbeck
Andrx King Teva
IDEC ICOS Biovail Forest Watson Elan Shire Allergan
10 9 8 7 6 5 4 3 2 1
Worst positioned Well positioned for

for future growth future growth
in specialty
pharma market
Little big pharmas
Little big pharmas are well positioned for future growth and are more advanced in
their progress towards achieving FIPCO status compared to other specialty pharma
company types. Allergan is in the strongest situation, due to its established
infrastructure, global presence and niche therapeutic focus. It is effectively a small
FIPCO already. The company benefits from its network of partners, collaborating to
develop products, and its strong reputation in its three chosen therapy areas. This
presents the company as a marketing partner of choice to its peers and larger
companies and creates more in-licensing opportunities. Financially, Allergan appears
to be in a relatively good position to finance such opportunities. At the end of H1
2002, its long term debt was elevated to $890m, with shareholders’ funds of $843.5m.
Although it is relying marginally more on higher risk debt to fund its growth, it has a
large cash pile of $855m.
Like Allergan, Shire operates with a niche therapeutic focus and has a wide
geographic reach. Using cash and equity, the company has been highly acquisitive
and must now build further on its acquired capabilities. Shire is in a strong financial
position to do this, with cash reserves of $715m in H1 2002 and moderate long term
debts of $402m. However, the announcement in November 2002 that the CEO, Rolf
Stahel, is to leave the company, places Shire in a period of uncertainty while it
replaces this strong leader who built the company from a small British player to the
global specialty pharma it is today. Furthermore, it must reduce its reliance on the
attention deficit hyperactivity disorder (ADHD) therapy, Adderall. If Shire can

overcome these hurdles and retain shareholder confidence, it is well positioned to

continue its progress towards becoming a FIPCO.
Forest and King are in relatively similar positions from which to drive future growth.
Both companies have successfully exploited the growth-by-acquisition strategy in the
past, in-licensing marketed or late stage development products. However, unlike
certain other specialty pharmas, they lack the R&D infrastructure that is needed to
develop proprietary products. Forest and King have demonstrated successful search
strategies but, as acquisition targets become scarcer and bidding wars more
expensive, they should consider developing a network of partners to share the risks
of drug development and marketing, and to share facilities. Both companies are in a
relatively strong financial positions, having relied heavily on equity to fund their
growth to date. However, they can afford to take bigger financial risks and continue
product and corporate acquisitions through greater leverage of debt.
As a little big pharma, Lundbeck has good coverage of the value chain but it is
currently limited from developing further into a FIPCO by its lack of a direct US
presence. It has a strong therapeutic focus and is successfully positioned as a
European partner of choice for the CNS market, although it must expand its product
portfolio. The company has a small cash pile but a corresponding low level of long
term debt, giving it the potential to exploit this channel further to fund future
acquisitions.
Generics companies
The generics companies that are moving into the specialty pharma sphere are behind
their little big pharma counterparts in moving towards FIPCO status, because they
are still diversifying away from a purely generic drug focus. The key challenge for
these companies is funding the development of the necessary infrastructure from the
low margin generics business.
Teva has overcome this barrier by taking on research partners to finance the
development of novel drugs and add expertise in CNS drug development. The
company appears to be relatively well positioned for future growth with a wide
geographic reach and a narrow therapeutic focus. However, at the end of H1 2002 it
was not in a strong financial position to fund further acquisitions, with long term debts
of nearly $1.4bn.
Watson occupies a similar position to Teva on Datamonitor’s benchmarking scale.

The company has a good therapeutic focus and a well executed search strategy. Its

key challenge is developing propriety patented branded products that have higher
margins than its current branded generics business and developing a partner network
to reduce the risks of drug development. The imminent launch of its first branded
drug, Oxytrol, from its proprietary pipeline drug will also be closely watched by the
investment community. Financially, Watson is in an acceptable position. Although its
long term debt is higher than in previous years, the company has taken steps to
reduce this and has access to a $250m credit line with which to make further
acquisitions.
Together with IDEC, Andrx is currently the worst positioned specialty pharma for
future growth. It is in the early stages of transitioning away from a generic drug focus
towards FIPCO status. Its key weaknesses include its lack of a partner network, with
no alliances with biotechnology companies and a poorly executed search strategy.
Without these three critical success factors, the company has limited access to new
products with which to fuel future growth. However, it does have drug development
technologies in-house, although it has yet to utilize them to produce a strong or deep
branded pipeline. Andrx had limited cash reserves of $214m at the end of H1 2002
but almost no long term debt, so could leverage this channel to raise funds for
acquisitions.
Drug delivery companies
With its roots in drug delivery, Elan has made considerable moves towards FIPCO
status. On the basis of its pharmaceutical business, the company is in a strong
position for future growth. However, its financial position is weak due to accounting
concerns and an investigation by the US SEC. The company must overcome these
problems without sacrificing its growth strategy. Elan has divested a number of
products with the aim of raising $1.5bn by 2004.
Biovail is relatively poorly positioned compared to other specialty companies. It is at

an earlier stage of transitioning away from its drug delivery routes compared to Elan.
It lacks a late stage pipeline but is generating a portfolio of products by utilizing its
drug delivery technologies to produce improved formulations of off-patent brands.
However, the company must improve its reputation in its chosen therapy areas to
create in-licensing opportunities and increase its cash reserves, which were just
$36m in H1 2002. The company raised long term debt in Q2 2002 to acquire Merck’s
Vasotec brand, but this has affected its leverage potential and, at least temporarily,
left it with fewer opportunities to fund further acquisitions.

Development companies
As development companies, IDEC and ICOS have a longer transition time to achieve
FIPCO status compared to, for example, little big pharmas that have much of the
necessary infrastructure already in place. Development companies need to establish,
acquire or network to gain access to a sales and marketing division and products to
build up their marketed portfolios. They cannot afford to depend on in-house R&D to
provide sufficient marketed products alone and should make product acquisitions.
IDEC has a weak late stage pipeline, although its lead product, Zevalin, has just
recently been launched and will be a key growth driver. At the end of H1 2002, IDEC
had a high cash pile with which to fund acquisitions but its long term debt was also
high at $863m and must be reduced. ICOS has a better late stage pipeline and has
accessed the biotechnology industry for products, putting it in more a favorable
position compared to IDEC. The company’s key challenge is the successful
commercialization of Cialis, its lead product. Once this is achieved, ICOS must
strengthen its marketed portfolio through in-licensing agreements and by taking on
more collaborative partners.
Impact of specialty pharma growth on the wider industry
Growth of the specialty pharma industry will have three key effects on the wider
pharmaceutical industry:
• certain specialty companies could become attractive acquisition targets for

larger pharmaceutical, Japanese and biotechnology companies;
• specialty pharmas with complementary areas of expertise could merge to

become more significant competitors to today’s market leaders in specific
geographic or therapeutic markets;
• as leading specialty pharmas increase in size, they will start to divest their
smaller products and tail-end brands to emerging specialty companies,
perpetuating the growth-by-acquisition strategy that supports this sector of
the industry.
Are specialty pharmas attractive acquisition targets?
Since the most successful specialty pharmas display relatively high degrees of
specialization, either geographically or therapeutically, as potential acquisition targets

they present opportunities for other companies to rapidly establish themselves in new
markets. This enables the latter to overcome gaps in their pipelines and revenue
streams or to escape poor growth prospects and/or declining productivity in their
existing areas of expertise. Three key factors may motivate acquisitions of specialty
pharmas:
• geographic expansion – it is quicker and more cost-effective to acquire

facilities and expertise in a foreign market than it is to penetrate it through
organic growth;
• sales force expansion – a feature of niche marketers is their targeted, expert

sales forces, with the most successful specialty companies having
considerable brand equity in their chosen fields;
• R&D capabilities – pipeline compounds, drug discovery technologies and/or

the delivery capabilities of specialty pharmas makes their acquisition an
effective means of closing pipeline gaps.
Appeal to medium and large pharmaceutical companies

The value, size and free market status of the US means that it is the source of the
majority of pharmaceutical company profits. Even the largest companies are
continuing to penetrate the US, generally as a means of escaping the current limited
growth potential of Europe: Novartis is a case in point. However, the US is difficult to
penetrate from scratch; geographically, it is vast and competition is intense, making
the market expensive to operate in, and pricing and promotional strategies are more
varied (a function of fewer regulations). It is, therefore, easier to acquire a company
that is already established in the country than to go it alone. This makes specialty
pharmas with a significant US focus a particularly attractive acquisition target for
European and Japanese manufacturers. Potential purchasers include Novartis and
Roche, both of which are headquartered in Europe but building their businesses in
the US, and the Japanese companies Fujisawa and Chugai, both of which are trying
to gain access to the US.
Despite the presence of direct-to-consumer marketing in the US, physician detailing

remains the channel of choice in pharmaceutical promotion. For most larger
companies, maximizing rep headcount is a priority. As this report has previously
shown, sales are directly proportional to rep headcount since there are few
economies of scale in pharmaceutical sales operations. This makes those specialty
pharmas with relatively large sales forces, such as King and Forest with their 715 and
2,200 sales reps, respectively, attractive acquisition targets. The appeal of these
companies is enhanced because their sales forces detail primary care physicians and
could, therefore, be retrained to promote a large company’s portfolio of primary care
products. For these reasons, Allergan is not such an attractive acquisition target
because its geographically dispersed sales force has a narrow focus on specialists
who treat ophthalmic, neurological and dermatological conditions. However, if
Allergan’s lead product, Botox, becomes a blockbuster, the company could become a
target for a larger company that needs to fill gaps in its revenue stream and is not
interested in in-licensing a drug for co-promotion/marketing.
If they have strong pipelines and attractive technologies, development companies

could be appealing acquisition targets for larger companies that are sales and
marketing power houses but lack pipeline depth. At this stage, no development
company can lay claim to being in such a position. Indeed, it is more likely that search
and development companies will be more attractive acquisition targets. However, little
big pharmas or niche marketers with their lower absolute growth requirements may
be interested in acquiring development companies and, as discussed below,
consolidation between different categories of specialty pharma may increase.
Datamonitor believes that, based on these aforementioned factors, the specialty

pharmas that are most at risk from acquisition are Forest, King and Biovail. Forest
qualifies on all three accounts: it has a large, primary care focused sales force, is
based in the US and has a strong pipeline. However, the company currently has a
high share price, making it prohibitively expensive for many companies that might
otherwise consider a takeover bid. Lundbeck shares Forest’s attributes but is based
in Europe and thus might be attractive for specialty pharmas wishing to gain a
foothold outside the US or for Japanese companies wanting to expand into the
continent. However, its ownership structure makes a conventional acquisition difficult
because the Lundbeck family still owns a significant proportion of the company.
Appeal to Japanese companies

Specialty pharmas are likely to remain attractive to Japanese companies that are
trying to branch out into either Europe or the US to escape tough economic
conditions in their domestic market. A lack of experience operating within foreign
regulatory environments makes acquiring another company a more attractive option
than merely opening new offices. A number of leading Japanese players have
partnered with foreign pharmaceutical companies to establish new subsidiaries:
Takeda and Abbott, for example, formed TAP Pharmaceuticals. However, companies
like Kyorin Pharmaceuticals, which had sales of $513m in 2001, is too small to create
an independent overseas presence, but its strong cash position and low debt-to-

equity ratio may enable it to acquire a small foreign outfit, like a specialty pharma.
This would give Kyorin an immediate international presence and reduce its
dependence on its domestic market.
Appeal to biotechnology companies

Large biotechnology companies are increasingly focusing on acquisitions, driven by
their need to overcome the same declining productivity problems that beset their
pharmaceutical counterparts. This is, for example, illustrated by Amgen’s purchase of
Immunex in December 2001. Amgen reached its market-dominating position by
focusing its efforts on internal R&D and, using this strategy, has created two
blockbusters, Epogen and Neupogen. However, it has been unable to replicate this
success through in-house R&D alone and, to maintain its position, has acquired
another biotechnology company. The $16bn deal for Immunex supplies Amgen with
another potential blockbuster, Enbrel, and a ready-made sales force to promote it.
The purchase of Immunex is attractive to Amgen because, unlike acquisitions
between larger companies, there are minimal overlaps between the two companies’
products and sales forces, while those from duplication of facilities are likely to be
small.
There is no reason why biotech-specialty pharma consolidation should not serve

similar purposes to intra-biotech M&A, with either sector initiating the transaction.
M&A activity would likely be financed through an exchange of stock coupled to some
cash elements. Just as has been apparent in biotech-biotech deals, this will mean
that driving up stock prices could become a prime objective to specialty pharmas.
Although healthy share prices are desirable from an investor’s perspective, as a
means of funding an acquisition the strategy requires that one company’s stock price
is low relative to the other, if the acquirer is to avoid paying a premium. Thus, the
timing of a deal is not completely within the control of the participating companies.
Furthermore, any significant cash exchanges involved in the deal may deplete the
majority of the acquirer’s cash reserves, reducing its ability to capitalize on cash
based licensing opportunities in the future.
Specialty pharma consolidation
There is potential for consolidation among specialty pharmas because of the pressure
for high growth that, after a company reaches a certain size threshold, can no longer
be satisfied solely by the growth-by-acquisition-model. Appropriate acquisition targets
become increasingly scarce and prohibitively expensive. This pressure is similar to
that which has forced major pharmaceutical companies to consolidate to hit their
double-digit growth targets. While large companies need blockbuster products,

specialty pharmas seek products with annual sales of $200-300m to kick-start their
growth. Datamonitor believes that merging is not a long term answer to a productivity
crisis but there is still room for specialty pharmas to merge in preference to building a
network of partners. This is because many specialty companies have only limited
capabilities at the various points of the value chain. Arguably, horizontal integration is
a more cost-effective means of achieving vertical integration than through organic
growth.
Forest and Lundbeck already have a long-standing strategic relationship. However,

they are unlikely to merge because of Lundbeck’s complicated ownership structure,
Forest’s wider therapeutic focus and because their relationship continues to benefit
both companies. There would be few further synergies to be gained from their merger
and, after all, one of the key motivations for merging is the cost savings that can be
made. This does not mean that either company will not grow through M&A over the
short term. As a leading industry executive interviewed by Datamonitor commented:
“Consolidation is just a way to buy time and maintain a growth rate. The growth
achieved is unsustainable. However, it will happen due to the pressure that specialty
pharmaceutical companies are under. They are expected to achieve higher growth
rates than large pharmas.”
Under these conditions, two leading specialty pharmas could merge and result in a
company that is propelled out of the specialty pharma market and into the medium
sized company arena. Here, competition with top tier companies is more intense,
capabilities must extend much further across the value chain, and geographic
coverage encompasses the US and all major European markets and, increasingly,
Japan. Meanwhile, therapeutic coverage broadens, with typically three or more major
areas of focus plus other secondary interests. Investors’ interests in revenue growth
are replaced by profit margin growth and earnings per share. It is an entirely new ball
game and one that is arguably more desirable to play with the guidance of a larger
partner than with a specialty pharma peer.
The next generation of specialty pharmas
As specialty pharmas get larger, they require larger products to sustain growth. Like
major pharmaceutical companies that divest their smaller, non-core drugs, specialty
pharmas will also be forced to divest small products as they streamline their portfolios
and concentrate their resources on key growth drivers. This will provide an
opportunity for a new wave of smaller specialty pharmas to follow the growth-by-

acquisition model and acquire these divested drugs. Elan and Allergan, for example,
have divested smaller products or slow growing business segments to concentrate on
their core specialty pharma businesses. In August 2002, Allergan divested its
ophthalmic surgical devices and contact lens solutions. Elan has divested a number
of products, although admittedly this has been linked to its financial recovery plan. In
October 2002, it sold its US, Canadian and Japanese rights to Abelcet and its
injectable amphotericin B lipid formulation to Enzon for $370m.

Appendix
CHAPTER 5 APPENDIX: SUPPORTING DATA
Datamonitor Healthcare’s pharmaceutical strategy

capabilities
Datamonitor’s strategy team offers both ad hoc and syndicated analysis, the latter
under the 21st Century Insight and eHealthInsight brands. Team members are
regularly interviewed by, for example, the Wall St Journal, Washington Post, Financial
Times, In Vivo, Pharmafocus and MedAdNews, and frequently present at industry
conferences in the US and Europe. Below is a brief overview of Datamonitor’s
strategic analysis capabilities, together with key contact details.
About 21st Century Insight
21st Century Insight analysis reflects four main areas of functional expertise – sales
and marketing; R&D and licensing; pricing; executive, cross-industry issues. All
studies comprise the following features:
• operational tactics and strategies to improve return on investment across the

value chain;
• opinion leader intelligence and best-in-class case studies, leading to

actionable recommendations;
• predictions and scenarios of future investment and growth strategies.
Recent analysis focuses on the key issues that drive industry profitability, highlighting
how pharmaceutical companies can exploit new technologies in R&D and sales and
marketing to improve productivity. Growth strategies have also been examined from
the perspectives of the biotechnology sector, small and medium sized entities, and
top tier pharma.
About eHealthInsight
The impact of the Internet on the global healthcare marketplace is profound and far-
reaching, presenting new ways to enhance business functions and interactions
across the industry. Datamonitor’s eHealthInsight products and services aim to
provide an independent commercial assessment of the eHealthcare market,
Appendix
identifying new opportunities for leveraging the power of the Internet to clients’
advantage. eHealthInsight builds its methodology on three core, primary-researched
foundations:
• consumers – IMPACT survey: a twice-yearly survey of almost 10,000

consumers in Europe and the US, gathering data on general and healthcare
specific Internet trends;
• physicians – Physician Insight Survey: a quarterly survey of physicians’ use

and attitudes towards the Internet in the seven major healthcare markets;
• pharmaceutical – B2B Survey Series: a survey series that examines trends in

pharmaceutical companies’ eBusiness strategies and investment.
Datamonitor’s strategic consulting expertise
Datamonitor Healthcare’s Strategy Consulting complements and builds upon

Datamonitor expertise in syndicated strategic market analysis, to provide a full range
of timely, customized solutions to strategic questions facing the pharmaceutical
industry.
Datamonitor’s consultancy value proposition

Consulting Strategic
expertise expertise
• Expertise in marketing & sales strategies, • 21st Century Insight strategic analysis
R&D and licensing, pricing & team
reimbursement, and executive issues (e.g., • PharmaVitae competitive intelligence
biotech growth, portfolio management and team
market entry strategies)
• eHealthInsight e-business team
• Proprietary epidemiological and
econometric forecasting models
Therapeutic Neutral
expertise perspective
• Sales and epidemiology databases • Independent perspective

across multiple indications • Challenge of common perceptions
• Contracted expert panel in multiple • Facilitation
disease areas
• Experienced analysts in 7 disease areas

Appendix
Datamonitor’s pharmaceutical strategy team
Jennifer Coe, Strategy Director
Jenny is Datamonitor Healthcare’s Strategy Director. In this capacity she leads the
development of 21st Century Insight (offline operational strategy) and eHealthInsight
(online operational strategy) syndicated services. Jenny is also responsible for co-
ordinating Datamonitor’s European business development activities and for
developing the Healthcare Practice’s online products and services.
Jenny has worked at Datamonitor for 6.5 years. In this time she has managed and
worked directly on a broad range of consultancy projects and strategy reports,
covering topics that include growth strategies, productivity improvements, DTC
promotion, drug delivery, patent protection, generics, and pharmacoeconomics. She
presented at the PBIRG AGM in 2000 and 2002 and run workshops on competitive
intelligence methodologies and drug delivery strategies for major pharmaceutical
companies. Jenny was also previously Director of 21st Century Insight and Director of
Datamonitor's PharmaVitae competitive intelligence services.
Education: First Class MA (University of Oxford), D.Phil. (University of Oxford)
Contact details: tel. +44 20 7675 7301, email jcoe@datamonitor.com
Johannes Inama, Consultancy Director
Johannes Inama is Datamonitor Healthcare’s European Consultancy Director.

Focusing on best practice benchmarking, Johannes leads a team that has extensive
experience in market entry strategies, portfolio management, licensing/partnering
opportunities, e-Health, marketing, and sales force strategies, as well as identifying
growth opportunities for biotechnology companies.
Before joining Datamonitor, Johannes worked as a management consultant for

McKinsey&Co., focusing on the healthcare industry in Europe and the US. He has
conducted and managed several strategic projects in pharmaceutical and medical
device corporations, ranging from blockbuster marketing and sales strategies to
partnering opportunities.
Education: PhD (Economics)
Contact details: tel. +44 20 7675 7692, email jinama@datamonitor.com

Appendix
Nick Bennett, Strategy Lead Analyst
Nick Bennett manages Datamonitor Healthcare’s pharmaceutical strategy team

where he is responsible for analysis published under the 21st Century Insight and
eHealthInsight brands. Nick’s experience at Datamonitor includes analysis of
pharmaceutical globalization, structuring pharmaceutical eBusiness departments, and
the use of emerging technologies to develop CRM strategies. He has also conducted
extensive strategic analyses of pharmaceutical sales and promotional activities.
A secondment to Datamonitor’s New York office presented Nick with unparalleled

opportunities to assess the continued evolution and integration of eBusiness in the
pharmaceutical sector. Nick has also worked within Datamonitor’s cross-industry
eCommerce group and presented on pharmaceutical and eBusiness strategies at
numerous forums, including the EphMRA 2001 conference.
Education: First Class BSc (Biochemistry, University of Sheffield)
Contact details: tel. +44 20 7675 7307, email nbennett@datamonitor.com


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Exploiting growth opportunities in the new industry

Reference Code: DMHC1752

Publication Date: 11/02

Datamonitor Healthcare (http://www.datamonitor.com/healthcare/home) provides the

Cardiovascular Central Nervous System

For inquiries about the content of this report, please contact:

Nick Bennett, Lead Analyst – nbennett@datamonitor.com or +44 20 7675 7307

For sales inquiries, please contact Healthcare Sales:

Europe and Rest of World – mmeek@datamonitor.com or +44 20 7675 7311

USA – jforringer@datamonitor.com or +1 212 686 7400

All Rights Reserved.

Specialty Pharma DMHC1752

The specialty pharma sector encompasses a range of company types, from

Specialty Pharma benchmarks the relative position of 12 specialty pharmas against a

Specialty Pharma DMHC1752

Datamonitor insight into the specialty pharma market

1. To achieve FIPCO status successfully, specialty pharmas must improve their

2. The current growth-by-acquisition model is unsustainable. Specialty pharmas

3. A network of long term partners is key to sustained growth. Specialty pharmas

Specialty pharmas must improve their search strategies, work

• an established partner network;

• sophisticated search strategies and well structured collaborative agreements;

• targeting the 'right' disease areas;

• allying with the biotech industry;

• extensive geographic reach, with direct US market penetration;

Datamonitor has weighted these critical success factors according to their

Specialty Pharma DMHC1752

Figure 1: Relative future growth potential of 12 specialty pharmas

Relative future growth potential

•Poor search strategy •Effective search strategies •Effective search strategy

Source: Datamonitor DAT AM ONIT OR

Specialty Pharma DMHC1752

The current growth-by-acquisition model is unsustainable

Specialty Pharma DMHC1752

However, there is a limited shelf-life to single product acquisitions in terms of

To sustain growth, specialty pharmas must reduce their dependence on large

Specialty Pharma DMHC1752

Figure 2: Future growth of the specialty pharma market will be primarily

Ongoing consolidation Best case

among large pharmas

Continued consolidation Pharmacogenomics increases

Large pharma splits into therapeutic franchise

Source: Datamonitor DAT AM ONIT OR

Specialty Pharma DMHC1752

A network of partners is key to sustained growth

Specialty Pharma DMHC1752

numerous opportunities for specialty pharmas to co-promote or acquire product rights

Specialty pharmas with a US sales focus are attractive acquisition

• geographic expansion – it is quicker and more cost-effective to acquire

Specialty Pharma DMHC1752

• sales force expansion – a feature of niche marketers is their targeted, expert

• R&D capabilities – pipeline compounds, drug discovery technologies and/or

Specialty pharmas are attractive acquisition targets to medium and large

Despite the presence of direct-to-consumer marketing in the US, physician detailing

Specialty Pharma DMHC1752

Large biotechnology companies are increasingly focusing on acquisitions, driven by

Specialty Pharma DMHC1752

Datamonitor insight into the specialty pharma market 4

The current growth-by-acquisition model is unsustainable 6

A network of partners is key to sustained growth 9

CHAPTER 1 SPECIALTY PHARMA – THE STORY SO FAR 26

The specialty pharma market: definition 27