iSight - Ambition in healthcare
Entrepreneurial ambition
The pharmaceutical world is going through significant long-term changes, creating opportunities for new businesses to build a key strategic position in their chosen niches. 3i is working with outstanding entrepreneurs and companies to do exactly that.
It’s a strategy very much of the times – take top healthcare and pharmaceutical entrepreneurs, fund them with significant investment and let them loose on markets ripe for commercial exploitation. That’s precisely what 3i and other investors are doing with two firms set up last year: EUSA Pharma, headed by Bryan Morton, and Healthcare Brands International (HBI), with Barry Clare at the helm.
The two companies are attacking very different markets, but both CEOs share a common purpose in adopting a “buy and build” strategy, where untapped value from existing products and companies can be realised with the right commercial approach. As Morton says: “The tide is turning – in the past there has been increasing investment in research with less and less on the commercial side. Now it’s going the other way. Researchers in smaller companies are less interested in doing the commercial work themselves and investor groups, some of which have traditionally gone for developing the science and technology, are now starting to see the value in our commercial model”.
There’s another major pragmatic reason, according to Clare. “When working with the Healthcare team at 3i in 2004, we were worried that the price of buyouts was getting
too high amid the huge amount of M&A activity driven by corporates that could finance deals with low cost debt. The prices were going through the roof – and private equity would find it difficult to compete with trade buyers returning to the market. It was a market we should have been selling into, not buying into.”
Both use the same description for their new companies – machines for launching undervalued and undermarketed product lines into international markets, where the key differentiator is the quality of the management team and the company infrastructure. Both are also driven by the same desire – to have hands on control of their own enterprises with top financial backers such as 3i.
EUSA Pharma has certainly convinced its investor syndicate – it has raised $175 million, which Morton says is the largest sum yet in his sector in Europe, and the second largest in the US. HBI is operating on a smaller scale, with some £25 million of venture capital, but there is no other firm like it, reckons Clare. Both have helped carve out a rather different type of investment vehicle, one that many typical venture investors are not used to.
Exploiting consumer brands
Clare was a main board director at Boots and the architect of its over the counter (OTC) pharmaceuticals operation, Boots Healthcare International. Boots the Chemist also had the opportunity to evaluate thousands of products to satisfy constant demand for new products. “I have great experience at taking new concepts to retailers and consumers internationally, and saw a continuing, huge opportunity in underexploited brands,” he says. At Boots, he bought undervalued products such as the Clearasil skin care range as part of a highly successful international push. “That was a perfect acquisition for Boots – the retailers were thrilled because the sector had been neglected not just by Procter & Gamble, which sold us the brand, but by all the other players.”
Barry Clare, Healthcare Brands International (HBI) Big pharma may have massive budgets for their primary brands but, as Clare points out, there are areas that do not get much resourcing. “It is clear that the industry consolidators only have sufficient resources to manage half their portfolio. The big players are mainly interested in cardio-vascular, mental health, central nervous system, HIV/AIDS and oncology – if you swim round the edges there are plenty of opportunities, such as in dermatology.”
When Clare left Boots he set up a new company to work with private equity sponsors to acquire under-managed assets. He worked with 3i on two large opportunities in the
German market, a territory he knows very well. At Betapharm, a generic drug firm, he masterminded new infrastructure that rapidly moved the company up to the number four German player and to a successful trade sale. While at Lichtwer, an OTC supplier, he led a turnaround, disposing of a manufacturing base and refocusing on core brands.
It was then that Clare had the idea for HBI – but this time taking single products or small single brand companies and applying the same kind of rigour to growing their markets. “We do prefer to buy products, but of course where it’s a single brand company we have to buy it [the company] as well,” he says. “We are looking at products that have robust clinical data and IP protection, and we look for either unmet demand or to take on a current offering that is not delivering. Typically, the brands we are looking at are developed by companies that don’t have the ability to commercialise them properly in their home market, and certainly not internationally.”
So far, HBI has secured two products. Sambucol is an elderberry extract with anti-viral properties that studies show cuts the duration and severity of symptoms of flu. It was acquired from Israeli firm Razei-Bar, which was founded by a virologist whose research led to Sambucol – and which, although being available in some major markets for 10 years, really requires the sales and marketing clout that HBI’s team is now bringing to existing and new territories. It’s a classic example of the buy and build approach, and of turning science into a successful consumer brand.
Another HBI product is Docosanol, a cold sore treatment licensed from Avanir Pharmaceuticals in certain European markets. The fact that it is already licensed by the giant GlaxoSmithKline in the US, and is the only cold sore product available there without a prescription, indicates that Clare and his team have spotted an important opportunity. Apart from being an OTC product, Clare notes it is not an antiviral agent such as Zovirax. “European pharmacists aren’t happy about the over-use of anti-viral products,” says Clare. It’s got the ingredients he’s looking for – proven clinical use, OTC availability, a unique selling proposition and, of course, the all important gap in key pharmacy markets.
For both Morton and Clare, their “secret weapon” is undoubtedly the quality of the management teams they’ve brought with them from previous firms that allow them to address these gaps. Both express some surprise that talented people are easily accessible through legal “poaching” or by being let go after other buyouts.
Transatlantic trading
Meanwhile Morton is already on his second buy and build company. After a long track record in big pharma, principally at Merck and latterly at Bristol-Myers Squibb, he witnessed the spin-off of Zimmer, the orthopaedic player. “People did very well out of this and it prompted me to go down the entrepreneurial route. My first venture –
Zeneus Pharma – was a European-only company with some very good products in oncology and critical care that we built and sold to Cephalon in just 22 months. EUSA Pharma, in contrast, is a transatlantic operation – as reflected in the name – where we are acquiring sophisticated, often life saving treatments also in oncology and critical
care, plus pain management.”
Transatlantic trading is the key for Morton. “There are a lot of good, small pharma companies that don’t have the wherewithal to get into the US, and vice versa. If our systems are good enough there is no reason why we can’t mimic the big players – albeit on a smaller scale – and avoid giving up much of the margins to licensing products
in other markets.”
EUSA Pharma has so far bought French orphan drugs firm OPi, and also Talisker Pharma, a pain management firm, acquiring a portfolio of some 15 drugs, some of which are core to the company’s strategy (those that aren’t will be licensed out or divested). “We are going for IP-protected niche products that are economically strong but which aren’t in the big league – our space is about $25 million to $150 million in sales at the peak. This is not a space that big pharma is interested n.” To prove the point EUSA recently nnounced its third acquisition – rights to three additional products outside the US from Innocoll Pharmaceuticals.
The sales strategy is to go direct to main European, US and Canadian markets, and via distributors in other territories. “Internationalising drugs is more and more about relationships and regulations, which is why our international infrastructure is so important,” says Morton. “Our competitors may claim they operate in both Europe and North America – but when you look closely they often do only three or so countries. We have strong coverage in all the main territories.”
Identifying the right opportunities
If the sales and marketing execution is a given – after all, that’s what Clare says his team does for a living – identifying the right opportunities is also crucial. HBI, says Clare, is getting regular approaches thanks to the team’s reputation, and there is also a systematic search strategy in place using an industry product database. “We are also being
approached by a number of firms that have developed products for the prescription market but have found that, thanks to healthcare cost pressures, there is no reimbursement available. They’re looking for us to take them over the counter instead.”
Morton does similar tracking in his sector but he adds that a number of potential opportunities can emerge as a surprise – which is where having highly experienced healthcare investors on the board can pay off. “Financial institutions are often approached early and quietly – and we’ve received several leads I didn’t know about through our partners at 3i.”
Morton and Clare consider having a syndicate of investors to be very important to maximising such networking coverage. “We want an active not passive investor group,” says Morton. They both also share, as a board member, 3i’s Fraser who, says Clare: “has great experience at looking at healthcare assets”.
Morton adds that a primary lesson from Zeneus Pharma – which had just one, albeit very good investment partner – is that it’s far better to have a syndicate that offers both
deep knowledge and wide coverage. Comments Fraser himself: “This is a very interesting space for 3i – we can use both our healthcare knowledge and the firepower of our balance sheet in tandem with some fantastic CEOs and entrepreneurs who really know their markets”.
The pace these two firms are working at is fast and discussion on more product acquisitions is to the fore. On the market potential, obviously a prime investor concern, Clare and Morton are as one – there are simply hundreds if not thousands of pharma and healthcare brands that could be considered for the internationalising treatment. With present scope to launch two to three product families a year, the businesses they are building will surely crank up more as the fixed infrastructure costs stabilise.
The companies do differ in their exit plans, however. HBI, says Clare, is most likely a vehicle for a trade sale, while Morton says an IPO is certainly a possibility for EUSA Pharma.
Exit strategies
One entrepreneur who certainly knows how to make a great exit is Peter Chambré – who has recently joined 3i as an industrialist in residence – and opportunities for a similar buy and build model are bound to figure. Chambré turned Cambridge Antibody Technology (CAT) into a billion dollar acquisition by AstraZeneca, one of the very
few British biotechnology success stories of this size. From 2002 to 2006, during his tenure as CEO of CAT, he reshaped the company into a much sharper commercial
proposition – maintaining its “remarkable” science base, but ending licensing arrangements that gave away far too much margin and replacing them with strategic partnerships, especially with AstraZeneca.
“The goal was to increase shareholder value and AstraZeneca, which started by acquiring 19.9% of CAT as part of the strategic alliance, ended up taking the whole, ”says Chambré, who picked up a UK Trade and Investment Outstanding Achievement Award for his work at CAT. He says there is now a time of great opportunity in healthcare markets for private equity.
“There are two areas I see shaping events,” he says. “First, the underlying science has developed and matured thanks to 30 years of investment in biotechnology and, as a result, there’s an emerging company sector with many new products and services, which offers significant opportunity for buy and build strategies. Second, there are multiple
pressures on big pharma – including patent expiries, pricing pressures from payers and lack of R&D productivity. These will lead to more buyout opportunities for private equity as the companies look to divest their noncore business.”
In short, Chambré’s work with 3i could span everything in the portfolio, from early stage ventures to large buyouts. “What attracts me to 3i is its expertise and commitment in
the healthcare sector, and the breadth of its investment models,” he concludes. And lest there’s any doubt about the bottom line, over to Morton. “We’re not going to be a typical R&D player, constantly raising money for further delays. We’re aiming to be a profitable, billion dollar company.”