The Small Company That Grew

Once a minor force in the world pharmaceutical market, Nycomed became a major player following its acquisition of Altana Pharma in 2006. CEO Håkan Björklund tells Marie Shields how the company is positioned to meet the challenges of its extraordinary growth.

“I can tell my people what we think and how things are going, which I could not do in a public company because of the risk of it getting into the public domain”
-Håkan Björklund

When Håkan Björklund became CEO of Nycomed in 1999, it was still a relatively small company based in Denmark. Then in 2007 Nycomed acquired Altana Pharma, and almost overnight the combined company was catapulted into the top 30 in the world. What has it been like to oversee such a huge transformation?

“You rapidly forget how it used to be,” Björklund says with a chuckle. “You think that where you are today is the most natural thing on earth. But when I compare the figures, I realise that we are about 12,000 people now, and we were fewer than 2000 people in 1999. And of course we have considerably more subsidiaries as well. What it means is that you need to change your management style from being directly involved in a lot of things to having a more overseeing attitude.

“I have many very competent collaborators and experts in every field. There is no need for me to be involved in the details. I look upon myself as more responsible for strategy and for creating the culture in the company, which is absolutely essential, especially when you’ve been through a merger like ours with Altana. You need to create a winning culture where people are proud of being with Nycomed; where they feel empowered and where they are happy to go to the work every morning, and thereby are contributing more and having a good time as well.”

You can’t institute a big change like the Altana merger without meeting some challenges, however. Björklund says the most obvious of these was the fact that Altana was twice the size of Nycomed – like David buying Goliath. In addition to coping with the size issue, Björklund’s other aims for the new company were to make the culture more open and to change its R&D structure.

“I think a lot of people in the former Altana organisation were questioning the new strategy,” he says. “They wondered if it would work, and also would we do what we said we intended to do. It took a lot of effort in the beginning to convince people that yes, this strategy would work, and that we were very committed.

“Our other challenge was that we had to reduce costs significantly, which inevitably means reducing the number of employees, which is never a fun thing to do. It’s always nicer to open a new plant than to close a plant. Fortunately, the Altana organisation was aware of the fact that they would have needed to restructure even if they had not been acquired, so there were no surprises when we said we would reduce the number of employees and thus cut spending.”

Merger trend
Björklund talks about his career path as “a long and winding road from academia to pharmaceuticals.” He started out as a medical student at the Karolinska Institutet in Stockholm in the mid 1970s. He describes himself at that time as a basic scientist, and his intention was to remain in academia. But in 1984 he saw a job advertised at Pharmacia for a scientist to lead a small biology group focusing on ophthalmology, which is how he got into the pharmaceutical industry.

He moved up the ranks of R&D before switching to the commercial side, running Northern Europe for Astra before it became AstraZeneca. From there is was but a short step up to his current position.

Having gone through the merger experience with Altana has given Björklund a unique perspective on the recent trend of mega mergers that have swept through the global pharmaceutical industry. “There is a difference between these mergers and the previous mega-mergers,” he emphasises. “This time around, cost-cutting will be absolutely essential in order to make them successful, whereas previously people always talked about how with a bigger R&D organisation, one plus one would equal three.

“I don’t think the mergers have anything to do with the current financial situation. They are more about developments in the pharmaceutical industry that have been going on for a number of years. If you look at the 10 biggest companies, they have lost market share as a group over the last five to 10 years. There are exceptions, of course – Roche is one of them. But the idea of ‘the bigger, the better’ no longer applies.

“So cost-cutting is important, and if we look outside in the market, the pressure on our industry is totally different than it used to be, and this will also mean that we need to be more cost-effective.”

It’s a well-known fact that the global pharmaceutical industry is facing some serious challenges in the immediate future, including an upcoming wave of patent expiries and a scarcity of new blockbusters. Björklund says that in order to cope with these issues, the industry needs to shrink.

“The industry needs to be more selective in R&D. It used to be that a lot of money was spent developing follow-up compounds and me-too compounds, with a new patent life but with limited medical advantage compared to what was on the market. But you were still fine – you could get a decent price for it and you could take market share. That is no longer the case. The market will go with the generics as long as you don’t have a significant advantage with a new compound.

“For instance, to launch a new statin today – or maybe even more difficult, to launch an expensive new protein pump inhibitor – when you have generics out there at a fraction of the original price is going to be very, very difficult. That’s going to change the R&D model, and medical utility will be absolutely essential. If you cannot prove that your new product adds medical benefits, and hopefully also reduces costs for society, you will not be able to convince the payers that they should pay for it. That process has been going on for quite some time here in Europe, and I’m convinced that it will also come to the United States.

“So R&D will need to be more focused, and if anything, the R&D part will be reduced. Sales organisations will also be smaller: we’ve seen that happening now for a number of years, and there is still more to come. Access to doctors is becoming more difficult, and it just does not pay off to have these huge armies of sales reps any longer, not in the mature market.”

Partnerships
Nycomed’s own pipeline strategy is somewhat unusual for a big pharma players. Rather than producing the majority of new compounds internally, it has chosen to create four-fifths of Nycomed’s pipeline growth through in-licensed products. Björklund points out that the biotech industry has grown exponentially over the past two decades, with a huge number of potential new products in different phases of development.

“Most biotech companies will not have the resources to bring these products to the finishing line on their own; they need a partner at some stage in development. There is also reason to believe that the biotech industry – which in most cases is small and entrepreneurial – has been more effective in developing new drugs than the big R&D organisations and big pharma companies.

“When it comes to creativity, I don’t think there is an advantage of scale – it could actually be a disadvantage of scale. If you put together more people in an organisation, they do not necessarily become more creative; maybe it’s the other way around. Because to be creative you have to think outside of the box, and it’s probably easier to do this in a small biotech organisation.”

Björklund also explains that when he started at Nycomed in 1999 it was obvious to him that the company did not have the resources to do its own discovery research, which made in-licensing a necessity. After the merger with Altana, Nycomed did gain an R&D organisation, which it intends to maintain, because early stage in-licensing requires the company to have its own R&D capabilities in order to evaluate and work on what it’s bringing in.

“When you bring in a pre-clinical project you need to have a lot of these functions yourself,” Björklund says. “And that four-fifths is not written in stone. Whether that’s 60 percent, 70 percent or 80 percent, only the future will tell. Of course we hope that our own discovery research will also be productive, but we don’t depend on it. We assume that the majority of the products will come from the outside,” he continues with a smile, “Although if my own scientists prove me wrong, I’ll be extremely happy.”

Pursuing an in-licensing strategy naturally meant having to make changes to Altana’s existing R&D structure. One major impact was the significant reduction of the pre-clinical unit. Nycomed also outsources a lot of its clinical work to avoid having a large fixed cost structure internally. When an interesting phase III project comes along, the company is able to ramp up clinical trials with the help of external partners. Björklund puts it this way: “I like to have the brain power inside the company, whereas the people doing the clinical trials and monitoring can to a large extent be outsourced.”

Nycomed’s strong emphasis on partnerships and external collaboration extends beyond R&D and into marketing. “In R&D, most of our partnerships are earlier stage projects from smaller biotech companies,” Björklund says. “But we also pursue collaboration on the marketing side, where we out-license products. The biggest product we have out-licensed is Pantoprazole to Wyeth in the United States. We’ve also recently completed a deal with Baxter around TachoSil, which they will launch in the US, and we’ll do some of the development for the US market together.

“A large part of our product portfolio in Russia is in-licensed. Our biggest partner there is Merck Serono, where we acquired their portfolio and have been very successful in growing it. I always tell my people that partnership, regardless of whether it’s in-licensing or out-licensing, R&D or marketing, is absolutely essential. We’re not big enough to do everything on our own, and we should only do the things in which we can add value, and in many cases someone else can add more value.

“Partnership is a skill; you need to be good at it, and you need to approach it with the attitude of ‘I need my partners.’ It’s never easy with partnerships, because you don’t always get your way. There is a famous quotation by Winston Churchill that I often paraphrase, in which he says that the only thing worse than fighting a war with allies is to fight it without them. Maybe it’s difficult to work with partners, but it’s more difficult to work without them.”

Focus on growth
Nycomed has had a strong presence in Russia-CIS since the early 1990s, and even before that under the old Soviet Union. Since 2000, its Russian sales have grown from US$25 million to US$480 million. As Björklund explains, emerging markets are becoming increasingly important for the pharmaceutical industry as a whole. “Growth in the pharma industry is coming from two places: emerging markets and specialist products in the more mature markets. We have been successful in Russia-CIS, and we’ve also got a strong presence in Latin America. We believe in investing in these markets. We’ve also clearly stated that we would like to expand in Asia, where we’re not sufficiently strong.

“I always tell people, both internally and externally, that if you’re in the emerging markets you need to be in, you have to be willing to ride the ups and downs. Now we’re seeing an economic crisis, which of course is hitting the emerging markets a little more than the rest of the world. This is not the time to get scared and withdraw; this is the time to take market share. For example, in Russia, yes, we have been hit by currencies, but we’re still growing in local currency and we’re taking market share. You have to be resilient and persistent.”

Closer to home, Nycomed has two products that are nearly at the marketing stage: Instanyl and Daxas. Instanyl is a nasal spray of fentanyl, the short-acting opioid that has been on the market for some time. The nasal form is new, and is indicated for the treatment of breakthrough pain in terminal cancer patients. These patients normally have a fentanyl patch, which treats the day-to-day pain from which they suffer, but many also experience breakthrough pain.

The advantage of fentanyl in a nasal form is that it offers a very quick onset of action because it’s rapidly taken up into the bloodstream, so pain relief begins within five minutes. Fentanyl is also quickly eliminated from the bloodstream. Björklund says Instanyl has seen a lot of interest, both from specialists and from the authorities.

Instanyl is a specialist product, to be used primarily in cancer clinics and hospices, and also at home. The second product, Daxas, is a little further away from the market but Björklund says it offers a bigger commercial opportunity. “Daxas is a possible phosphodiesterase-4 inhibitor , so it acts in the inflammatory cascade in patients with COPD – smoker’s disease. These patients are suffering from an inflammation, which in many cases leads to exacerbation of the condition. In some cases, people have to be admitted to the hospital.

“COPD is a huge disease worldwide: it’s the fifth largest killer, with many millions of patients are affected. Currently we don’t have any good anti-inflammatory treatment for COPD. Most patients will be treated with inhaled corticosteroids, which were originally developed for asthma and are very effective in countering the inflammation that asthmatics suffer from. But they are considerably less effective in COPD, because the inflammation in COPD is different. Daxas is a once-daily tablet, the first anti-inflammatory that has been specifically designed for COPD.”

According to Björklund, clinical trials have shown that Daxas offers a significant reduction in exacerbations and a significant improvement in lung function. When Daxas is added on top of the bronchodilators that most COPD patients are treated with, it gives a further improvement in lung function.

Expiry date
The good news around Daxas could not come at a better time: Nycomed desperately needs a new superstar to bolster its product list. The patent on Pantoprazole, the company’s biggest product, expired a couple of months ago in most European markets and is due to expire in the US in 2011. This will inevitably lead to a decline in sales, and Björklund says this was one of the reasons why the cost-cutting exercise was necessary after the Altana acquisition.

“We needed to prepare ourselves for a time without patent protection on Pantoprazole,” he emphasises. “Although more than 40 percent of our Pantoprazole sales do come from markets where there is no patent protection or where there has not been a patent protection for a long time, so we’re convinced that we’ll be able to maintain a significant portion of our sales. Even though we will lose sales with the patent expiry, Pantoprazole will remain the largest selling product for us for the next few years. But it’s important that new products are coming along to compensate for the eventual drop in Pantoprazole sales.”

Nycomed has taken the unusual step of launching its own generic version of Pantoprazole in partnership with Wyeth in the US, even though the drug’s patent has not yet expired there. In the American market, it is not unheard of for generics manufacturers to create copycat versions of patented drugs, with the assumption that they will be able to invalidate the patent in a court case.

In the case of Pantoprazole, Björklund says that the first generics were launched in the US about 18 months ago. Nycomed immediately countered with a lawsuit, but because the American legal system moves quite slowly, the lawsuit is still ongoing and the generic versions are still being sold. “We’re convinced the patent is enforceable and strong,” Björklund underlines, “and that we will eventually prevail in the courts. But the reason we launched the generic was to counteract those that had already been launched, and thereby be able to compete more strongly in the market as it is now.”

In private
In contrast to many of its big pharma competitors, particularly in the US, Nycomed is privately owned. Other non-public European based companies tend to be family-controlled, but Nycomed’s main shareholders are two private equity firms, Nordic Capital and DLJ Merchant Banking.

Given the current state of the global economy, has private ownership helped insulate the company from market fluctuations? Björklund says it has. “We’ve been privately owned now for 10 years by various groups, and it has served us very well, because it has allowed us to focus on building long-term value in the company. We don’t need to focus on next quarterly result. It has also aligned the interest of the shareholders and management; everyone has the same ambitions to grow the company and create value. There are no politics.

“When it comes to the culture, I think it has also been good in the sense that we’ve been able to be considerably more open in a private equity-owned company than if we were  a publicly owned company, because I don’t need to worry about following the rules of the stock exchange in terms of what I can and can’t communicate. I can tell my people what we think and how things are going, which I could not do in a public company because of the risk of it getting into the public domain and having an impact on the stock price. It’s easier to be open in a private company.”

Of course privately owned companies do not have the same requirements around transparency as public companies do, but Björklund that the information Nycomed publishes doesn’t differ from that of its public rivals. “If you read our annual report, which we publish and which is readily available, you won’t see any difference in the way we report compared to a public company.

“We’re just as transparent and open with everything. You can even find my salary in there. We are reporting as a public company, and also preparing for the possibility that in the future that we may go public, which is not out of the question.” Björklund won’t be drawn on when this might happen, saying only that the current situation in the financial markets will need to stabilise before the idea is given serious consideration.

When asked what the future holds for Nycomed, Björklund’s response is an optimistic one. He doesn’t foresee any restructuring as a consequence of the current recession, provided it doesn’t worsen significantly. He points out that the financial crisis has had an impact primarily in emerging markets in Eastern Europe, because of the weakening of currency that has taken place there. The economic downturn has also had an impact, with GDPs in the Baltic countries, for example, decreasing by 15 percent in the first quarter of this year.

“That is also affecting peoples’ ability to buy drugs,” Björklund continues. “But it’s not dramatic, and this industry is relatively resilient to downturns. So I’m not so worried about the financial crisis – at least not in the mid term or long term.

“On the other hand, within the big five EU countries, I think the pharmaceutical industry will see very little growth, and it will be primarily in specialist products and only certain of them. The growth will come from Eastern Europe and from Russia-CIS: emerging markets.”

In the case of his own company, Björklund’s optimism does not seem misplaced. Nycomed, the small company that grew, seems to have its place among the top 30 pharma players firmly established. And who knows, if it continues to play its cards right, in a few years it could be knocking on the door of the top 10.

Håkan Björklund is Chief Executive Officer of Nycomed. Before joining Nycomed, Björklund was Regional Director at Astra (now AstraZeneca), and was President of Astra Draco from 1991 to 1996. He is a member of the Board of Directors of Atos Medical AB, Coloplast and Danisco A/S and holds a PhD in neuroscience research from Karolinska Institutet, Sweden.

This article was first published in our European edition of Next Generation Pharmaceutical magazine: http://www.ngpharma.eu.com/article/The-small-company-that-grew/.