Acquisitive Innovation: Acquiring Assets to Grow Consumer Healthcare
As discussed previously acquisitive innovation is the act of acquiring assets that are partially, or wholly, developed outside the acquirer such that the time to market and business risk is diminished. Acquisitive innovation is most often employed by companies, or brands, seeking assets that are rapidly incremental to their established business. Spurts of brand acquisition are often driven by third-party divestitures due to industry consolidation and mergers. Less frequently platform technology might be purchased, or licensed, that provides brands with ownable superiority over competitors. Rarely do major players launch wholly new brands relying instead on brand extension and upgrades. These behaviors suggest the least risky path to growth is acquisition.
Notwithstanding, a primary source of acquisitive innovation over the last 40 years has been switching Rx drugs with proven activity and adequate safety from prescription to over-the-counter status. Assuming a fair market multiple to acquire these assets the primary risk to a buyer is the probability that the FDA will not approve an OTC NDA and the lost opportunity cost associated with that rejection. Originators of Rx properties with sister OTC divisions may switch their own assets; Rx companies without an OTC division can partner up, or divest, aging Rx properties (to recoup residual net present value) to proven OTC switch players. Thus, from an OTC perspective it is fair to consider switching as an acquisitive process.
Switching active ingredients from prescription status to free sale (OTC) status in the US arguably goes back to 1951 when the Durham-Humphrey amendment created these two regulatory categories. The effort to take advantage of the potential energy available in the pharmacopeia of prescription drugs gained momentum as the DESI (1962) and FDA Monograph processes (1972) began review of active ingredients in Rx and OTC products respectively. The initial post-monograph switch approvals began in 1976 with the switch of several well-known antihistamines and nasal decongestants. Major first-in-class switches thereafter include: ibuprofen (NSAID, 1984), loperamide (antidiarrheal, 1988), famotidine (H2 acid reducer, 1995), loratadine (non-sedating antihistamine, 2002), omeprazole (proton pump inhibitor, 2003), levonorgestrel (day after contraceptive, 2006), PEG (laxative, 2006), and triamcinolone nasal spray (intranasal steroid, 2013).
Switching has been the primary source of saltatory growth in the OTC market for over 40 years. These acquisition opportunities derived from a pent-up reservoir of at-risk drug discovery investments made by their prescription originators over decades. The opportunity to acquire the OTC rights to Rx properties facing patent expiry and trenchant generic competition is a post-invention process that leads to growth, not an invention as Szent-Györgyi would have defined it. Thus, acquiring Rx switch rights is tantamount to acquiring a brand, that is to say it is growth through acquisition.
Arguably the potential energy stored in the Rx switching reservoir after 40 years of depletion is at a low ebb. The chief reason for this is simple input/output. The backlog of switchable drugs in the reservoir created by older regulation has been largely drained and the rate of development of new Rx properties suitable for switch is low in an age of biotechnology driven drug discovery. First-in-class switching always depended on proving the safety and efficacy of the indication as represented by its first-in-class active ingredient. Many switched properties had the advantage of having indications wholly or partly subsumed within established monographs. Still the challenge to approve wholly new indications inversely increases in relation to the depletion of candidates with monograph consistent indications. Now fewer clearly switchable Rx indications exist, or they exist in that grey area between self-diagnosis/self-treatment and physician oversight and management. Candidate indications remaining Rx now tend to be chronic conditions requiring medical management. Not often appreciated switching is a retrospective process in a limited market where the acquirer has a narrow range of technology options to consider. Thus, switches will be increasingly difficult to approve and a less reliable and diminishing source of acquisitive growth for the CHC industry.
In response to secular change industry has renewed its innovation playbook. Thus, we have been witnessing a shift towards reservoirs of technology in many ways more parallel to the Rx development model in which independent biotechnology companies, acting as front-end discoverers provide potential access to game-changing assets. Many OTC multinationals have devised external innovation systems such as P&G's Connect & Develop (2002), perhaps the first, or more recently others such as Bayer's G4A Generator (US, 2017). Typically sponsors announce areas of specific interest soliciting inventors, or start-ups, a chance at applying then pitching their assets. Moreover, technology accelerators and incubators have also given smaller startups opportunity leading to potential strategic acquisition.
Thus, innovation in the consumer healthcare space is no longer solely internal, sequestered and dependent on a company's product developers. Likewise traditional CHC business development has been recast as innovation groups who scout and evaluate technology wherever found. This evolution effectively broadens the arc of the search making it less dependent on fixed internal development assets. These efforts will provide a second stream of product opportunities in the near and mid-term. The challenge for management will be how to integrate the opportunities presented by inventive (internal) and acquisitive (external) activities into a coherent growth plan for its brands and businesses both in time (forecasts) and space (markets).
As interest in innovation expands the field of view is widening, particularly to assets adjacent to, or even distant from, mainstream product development. Oddly the OTC consumer product sector has never really had a venue for technology vendors, that is to say its own tradeshow. Since adjacencies now are ripe for scouting, for example, digital platforms, devices, apps, merchandizing, delivery, and wellness monitoring, venues of increasing interest include, for example, the Consumer Electronic Show (CES) held in Las Vegas each year.
Finally, the branded industry faces secular disruptions as the Amazon effect will pressure branded marketers with customer loyalty, generic offerings, everyday low pricing, reduced foot traffic, and rapid delivery. Another emerging trend, the "mini-clinic" often allied with major retailers, might promote generic products that offer better margin for their retail partners and better bargains for their customers.
Given the natural decline in switch opportunities brand marketers must not only continue to give attention to growth through acquisitive innovation, but also to inventive innovation at home — back to the future in the next installment.