Jeff Haxer: How Biopharma Can Reward Shareholders



Although biopharma companies have been getting bigger, size doesn't necessarily correlate to higher shareholder returns. Jeff Haxer, a partner in Bain's Healthcare practice, shares two ways that biopharma companies can spur shareholder returns by strategically managing their portfolios.

Read the Bain Brief: Focus Matters—How Biopharma Can Reward Shareholders

Read the transcript below.

JEFF HAXER: We've noticed that for decades, biopharma companies have just been getting bigger and bigger. And they've done that to drive down their SG&A costs and to try and drive shareholder return through reducing their costs. And it's worked to a degree.

We notice that companies above a certain size have one to two percentage points lower SG&A costs than smaller companies. But interestingly enough, it hasn't led to higher shareholder returns. And shareholder returns are just the increase in stock price, plus the dividend yield, so the cash the share investor would get back for investing in your stock.

And we looked at that and we analyzed what's driving shareholder return if it's not size? And it comes down to two things. It comes down to the number of category leadership positions that you have, meaning if we talk about different categories within pharma, how many of them are you in where you're the market leader?

The other side of that and the other driver of shareholder return is how many tail positions do you have? How many positions do you have that make up less than 5% of your revenue? And the two of those combined actually do drive shareholder return.

And the sweet spot is you have a large number of category leadership positions and few tails. And the reasons for that, though they may seem obvious, are the large category leadership positions mean you understand the doctors. You understand the patient populations. You're investing behind categories where you can win.

And the large number of tail categories, all they do is distract you. You'll never be in a position where you have no tail categories. But if you're making trade-offs across 20 different categories where you're not the market leader, the odds of you getting one of those categories to become a category leader are very, very small, unless ... you have a strategy that says, here are the two categories that I'm going to drive and become category leaders in.

What we noticed is a lot of companies aren't doing that. They're trying to invest in all 20. And as a result, they're not driving category leadership positions. And they're not getting the shareholder returns.

So what should our clients do? Well, the clients that do this really well bake into their strategic planning process an overview of their portfolio. And all that means is they actively look at which categories can I be a market leader in and which categories do I need to exit or not invest behind.

And the investment is both, where do I put cash? Where do I put my scientists against trying to solve problems? Where do I put my sales force against it?

It's also, where do you spend your management time? Because your management time, if it's on these tail positions, is not a worthwhile investment. You've got to put it in the category leadership positions where you understand the market and you have a right to win. So in summary, the two things that drive shareholder return in biopharma are the number of category leadership positions you have and investing behind those, and trimming the tail, trimming those positions that make up less than 5% of your portfolio, where you don't see a path to category leadership.

Read the Bain Brief: Focus Matters—How Biopharma Can Reward Shareholders