Big pharma is slimming down

Market Access

The last few years have been marked by many big pharma companies opting to move away from diversification and towards more focused operations. Ben Hargreaves explores what is driving this strategic shift, and where the energy and capital is instead being directed.

The pharma industry has seen a recent slowdown in major acquisitions. Instead, the trend has been a broad decision across the largest companies to divest or spin off sections of their businesses. Though it is generally standard practice for businesses to occasionally prune back in certain areas, this recent trend has been characterised by a strikingly similar approach.

The focus has often been to trim away consumer healthcare operations, and generics medicine divisions, with the latter category extending into biosimilars. With the current economic climate being marked by a degree of instability, which has seen banking failures and inflation across many countries, the move away from low growth, but steady revenue seems odd. However, the macroeconomic climate in the last few years has not stopped this trend for a more refined, slimmed down version of big pharma.

Smaller big pharma

The reality is that big pharma has been transitioning away from broad businesses even when the economy was booming, and the recent market dynamics have done little to change that. Pfizer was one of the early movers in shifting its business away from consumer healthcare and generic products. In 2018, Pfizer announced it would form a joint venture with GSK to create a consumer health company. A few years later, the former company announced it would exit the joint venture, once it had become a standalone company. Not long after the consumer health merger was announced, Pfizer followed the same blueprint to merge its generics and biosimilar portfolio with Mylan to create Viatris, a standalone company.

Pfizer was not the only company following such a pathway, Merck KGaA divested its consumer health unit in 2018; the US Merck also spun off its older drugs and biosimilars into a standalone business in 2020; Sanofi divested certain consumer health brands to Stada during 2021; GSK spun out its consumer health joint venture during 2022, in the largest listing on the London Stock Exchange for a decade; and Novartis is pursuing the spin out of its generics unit, Sandoz.

Johnson & Johnson has become the latest company to pursue the strategy of separating its consumer health unit through the creation of Kenvue this year. The process saw the creation of a business with a market capitalisation of around $48.5 billion, with J&J holding approximately 91% ownership of the business.

The move leaves J&J focusing on its prescription medicine and medical devices businesses, which together brought in just under $80 billion in revenue during the financial year 2021. Explaining its decision to separate its consumer health unit, former CEO and chairman, Alex Gorsky, stated at the time of the announcement: “For the new Johnson & Johnson, this planned separation underscores our focus on delivering industry-leading biopharmaceutical and medical device innovation and technology with the goal of bringing new solutions to market for patients and healthcare systems, while creating sustainable value for shareholders.”

Narrow interests

In a report published by Oliver Wyman, a management consultancy firm, entitled ‘The end of the big pharma conglomerate’, the authors suggest this recent trend towards reducing the size of pharma businesses is due to a shift towards a more focused approach. The authors cite three areas where big pharma want to concentrate: on the prescription pharmaceutical business, on innovative products, and on fewer targeted therapeutic areas.

The overall reasoning is that creating a separation between innovative products, consumer healthcare products, and generics businesses allows for the independent businesses to specialise in their area more effectively. The authors of the study conclude that the “key driver behind this is the recognition that different capabilities are needed to run each of these life sciences businesses, and that they are better off making their own resource allocation decisions. Consumer healthcare requires the skills and talent closer to fast-moving consumer goods companies. Similarly, generics players need a different operating model and cost base and will also benefit from their separations.”

For the pharma-specific companies that are left, this allows them to concentrate on exercising their influence and R&D in their specialist therapeutic area. For many of the bigger companies, this means ensuring that they are competitive in the areas with the highest growth, such as oncology, rare disease, and immunology. Oncology, in particular, is the area where almost all big pharma companies have a substantial presence, with oncology trial starts reaching historic highs in recent years. Such a competitive environment requires concentrated investment and expertise to be successful; the authors at Oliver Wyman found that none of the companies with the broadest portfolios achieved a top three position in the larger therapeutics areas, with J&J being the only exception in their analysis.

Divest to invest

Another reason that companies are choosing to divest is to prepare for the future. Although large M&A deals have recently taken the backseat in favour of cleaning house, at some point the market environment will be suited to deal making. In its analysis, PwC stated that it expects M&A activity to be focused into areas of high growth, particularly in oncology and immunology. In order to free up capital for such expenditures, the accountancy firm outlined that it expects companies to continue to engage in portfolio management and optimisation to “drive value for shareholders, generate investment capacity, or unlock trapped value.”

This proved to be true for Pfizer, after it had completed its consumer health sale. Of the few large acquisitions that have occurred in 2023, Pfizer is behind the biggest one so far, as it agreed to acquire Seagen for $43 billion. Merck also joined in with the $10.8 billion takeover of Prometheus Biosciences, which was preceded by GSK’s decision to acquire Bellus Health for approximately $2 billion. As such investments become more regular, the industry could enter into another period of consolidation and expansion within their chosen niches – with the cycle of adding and trimming continuing, ensuring more therapies emerge, and shareholders are kept happy.