5-year plans and Biotech: China is becoming an innovator, begins by revamping Pharma and Biotech

China's mammoth manufacturing power needs no introduction. China's innovative sector, however, is perhaps something you have never heard of - for legitimate reasons. Innovation has really not been China's forte, and why should it, after all? Sans world-renowned tech visionaries and science gurus China has already made its way into anything between 80 and 100% of your everyday life - be it through the TV you watch all the way down to the vitamins you take. 

In the Pharma world, China has naturally made a mark as the manufacturing hub for many global drug producers, and generally feeds its own domestic market with the help of massive local generic players (the likes of Harbin Pharma and SinoPharm) which can easily stomp out any or all of the global pharma conglomerates by comparison. 

But one needn't be a leading economist to foresee obvious limitations to a manufacturing and, to some extent, imitation-driven economy. Intrinsically dependent on developments beyond its own borders, such an economy is characteristic of a follower, rather than a leader. 

Whichever way you look at it - China's seemingly exponential growth is only as exponential as is the growth of the economies which produce the novel technologies on which it relies. And China knows it. 

Over the next weeks we will be blogging about China's shifting pharma landscape, everything from the novel government initiatives to what is currently slowly brewing in this domestic industry's primordial bio-broth. 

Follow us for weekly updates on one of Pharma industry's most monumental changes! 

"Made in China” to “Designed in China” part 1: the 12th Set of 5-year Plans

5-year plans are China's social and economic development initiatives and goals for the subsequent 5 years, drafted by the Central Committee and national congresses on behalf of the Communist Party of China (CPC). In 2011 the CPC released the 12^th set of 5-year plans (2011-2015). This latest set of guidelines has been referred to as the most innovation-focused government initiative China has ever faced, and one which explicitly emphasizes innovation in the bio-industry.

In 2006, the National Congress used the word “innovation” for the first time, realizing the country’s massive potential for innovative growth, and in 2011, China’s utmost objective through to 2020 has become to make a transition from a manufacturing-based economy to one guided by innovation-driven growth. The government’s spending on R&D has already been on a steady increase from just 0.6% of GDP in the 90’s to 1.6% in 2011, with plans to reach 2.5% by 2020.

One of the major goals of the latest plans is universal and more accessible healthcare coverage, which will give a necessary market boost to the pharma industry. Domestic developers of pharmaceuticals are encouraged to consolidate, as the industry remains highly fragmented and dominated by a multitude of small-scale players. Foreign investment is being directed towards cutting-edge developments in the country, and domestic players can now take advantage of a 159% increase in the R&D budget  (now amounting to US$ 6.7 billion for biotech alone, from a total of US$ 48 billion), allocated by the government in order to acquire novel IP or establish in-house R&D.

Some of the goals the latest 5-year plans advocate are:

• Emphasis on Intellectual Property rights 

• Government support of joint research programs with foreign companies

• The addition of innovative medicines to the National Essential Drugs List in order for innovators to be compensated for R&D investment
• Applied tax reduction for the pharmaceutical industry
• Development of 30 kinds of innovative drugs and 150 kinds of diagnostic reagents within the next 5YP timeframe
• Initiation of more than 10 clinical trials of new vaccines
• Development of at least 40 biological drugs
• Strengthening of on-site verification of drug registration
• Strict control of development site supervision and drug registration
• Strict control of drug review and approval standards
• Effective control of fraud
• Strong focus on national support of entrepreneurship and innovation
• Active participation in the globalization of drug development and research
• Focus on learning from the scientific supervision concepts of the FDA

Sales of patented drugs have already been steadily on the rise, in line with total biopharmaceutical sales (figure 1),  but as a result of the latest 5-year plan initiatives, domestic Rx pharma sales are expected to exhibit marked growth over the next decade, and to potentially hit sales of US$ 60 billion by 2020.

Perhaps more so than in other industries, the pharmaceutical industry has historically benefited from dedicated government support. The most scientifically innovative countries, the likes of which are Switzerland, Germany, Israel and the US, benefit from higher-than-usual R&D-per-capita budgets, and the Chinese government has not remained oblivious of this fact. The latest set of 5-year plans will inevitably induce visible changes in the innovative pharma industry, and the new decade is likely to see a substantial increase in the volume of foreign investment in China’s developing bio sectors.

Check back next week for Part 2 of "Made in China" to "Designed in China": China's domestic Pharma market situation & stats, plus a briefing on its current industry players who are already innovating!

If you want to skip straight to the point, check out our latest white paper, 

Pharmerging Markets: China – the Next Innovative Pharma Market?

Why the Pharma Industry No Longer Warrants Public Trust 2: Medicalization and the Placebo Effect

There is a prevailing notion that the Western world, in particular USA, is over-medicated and over-diagnosed. There is also a prevailing notion the the Pharma industry is almost completely void of public trust.

The patent cliff may have encouraged dubious antics on the part of pharma conglomerates, but it would be safe to presume that consumer trust in the industry has begun to decline significantly earlier. It has been suggested that pay-for-delay cases alone have cost the consumer nearly US$ 3.5 billion annually, and such agreements are alarmingly on the rise, despite being illegal.

Extrapolating from the same principle, a recurring conundrum becomes evident: how much of the high drug cost would be accepted and justified by patients, and how much of this cost is compensating for activities which consumers are blatantly against? Some examples of such practices are evergreening and pay-for-delay practices, coercion of doctors, ghost writing, in particular with the aim of “medicalizing” conditions, endless clinical trials of the same compound for a variety of indications, and the list goes on.

Medicalization

It is a fact that the number of officially recognized disorders is soaring in the world, despite there being no obvious novel symptoms, and patients are increasingly becoming uneasy about medical practice as a whole. For instance, GSK’s new smoking cessation drug, Zyban, is nothing more than a long-acting form of its anti-depressant Wellbutrin, whilst its anti-depressant, Zispin, is also being marketed for sleeping disorders, which happen to be one of the primary symptoms of depression.

Understandably, in an industry which is slowly transforming from a "pull" to a "push" market, expanding the target customer base by blurring prescription lines can be a powerful business strategy, in particular at times when companies are desperately dashing around for short-term revenue boosts. To present it straight from the horse’s mouth, Barry Brand, the product director of Paxil at GSK, declared in a recent interview, “Every marketer's dream is to find an unidentified or unknown market and develop it. That's what we were able to do with social anxiety disorder." 

As companies are currently fishing around for novel business strategies, medicalization or analogous practices may become a legitimate item on multinationals’ agendas, and can be particularly applicable in emerging markets where the sphere of social disorders still comprises massive potential. 

Emergence of medicalized ailments for the most part takes place through medical journals, whose primary target audience are doctors and nurses. In a widely publicized case, research conducted by pharma journalist Ray Moynihan led to the conclusion that expert-industry links are not hard to find. For instance, a study published in the Journal of the American Medical Association on female sexual dysfunction (FSD), a relatively novel medical phenomenon, found that 43% of women were FSD sufferers. Incidentally, the authors of the study were found by Moynihan to have close links to Pfizer, which was conducting clinical trials of “Viagra for women” at the time.

Tales of a similar nature are ubiquitous, but perhaps the system is to blame as much as Big Pharma for lack of transparency. Pharma-sceptics argue that a regulatory system as part of which corporations are allowed to come in direct contact with and to essentially coerce medical professionals entices corruption at the least. Appointment of accountable government-approved entities, such as those in operation in Europe, would invariably benefit patients in this medicalized day and age. In some developing economies, however, it may take decades before governments are able to adopt systems of this sort.

 The Placebo Effect

The “placebo effect” is an emerging phenomenon promising to be a worthier challenger to the pharmaceutical industry than many other threats. The miraculous ability to self-heal, powered purely by the human body’s will to live (animals have not been found to respond to placebo), has been a well-documented occurrence for some time, but only recently has the potential of the placebo seriously attracted the attention of scientists and medical practitioners. The effect used to be nothing more than a nuisance attributed to gullibility and neurosis in patients, but the emergence of neurological proof of its action finally put this phenomenon on scientific agendas.

Acupuncture, Reiki, and similar practices bear testimony to Placebo’s power, but, ironically, so does the pharmaceutical industry itself. An overwhelming number of clinical trials, in particular trials which are conducted with the use of questionnaires, have failed because placebo pills were shown to be more than, or at least as effective as, the drugs being tested. That is to say, the compounds in trials were able to improve the patients’ conditions, only the placebo improved them more. Even in the case of previously approved CNS drugs, such as anti-psychotics and anti-depressants, the compounds’ effectiveness over placebo is sometimes so insignificant that companies would have a hard time bringing them to market in the current regulatory environment. This applies even to blockbusters, such as Prozac, which has performed rather poorly against sugar pills in recent follow-up trials. Pfizer’s "female Viagra" and Amgen’s Parkinson’s disease drug have also fallen victims to the Placebo Effect in recent years, sparking much-needed debate about deepening our understanding of the body’s innate ability to heal itself.

Probably a little to pharma’s dislike, progress is being made in the sphere: Harvard Medical School recently initiated a new program in placebo studies, headed by placebo guru Ted Kaptchuk. The program has conducted a number of breakthrough studies to date, including curing cases ranging from chronic bronchitis to stomach ulcers. As the cellular and molecular pathways of placebo action are en route to becoming elucidated, therapy of the mind is likely to gain more traction in modern medicine. Various forms of hypnotherapy are already being approved by the NHS in the UK, and governments are certainly eager to explore alternatives to drugs in light of pharma’s reputation. In addition, clinical trials previously conducted by pharmaceutical companies could hold a wealth of information useful for placebo studies, but this is unlikely to ever see the light of day.

Perhaps the biggest threat of the placebo effect to pharma is its role in the media and society: the issue is becoming widely publicized and bears the message “drugs don’t work”, or at least not as well as the brain. Up until now, even despite bad reputation, pharma stayed afloat because everybody conventionally needed drugs, but the placebo effect happened to be one of the proofs presented to patients that medication is in fact something they can occasionally do without. And so much effort was spent by companies on building relationships with doctors and insurers, that they have seemingly neglected or simply ignored their public perception. Thus, in a rapidly shifting pharma environment, especially where out-of-pocket payers will shortly constitute a huge portion of pharma’s customers, it is imperative that multinationals begin to take their public image seriously.

Pharma Must Act to Restore Public Trust

Documented cases of Big Pharma misconduct have been on a frightening rise in recent months. Both Roche and Novartis were accused of under-reporting and concealing side effect data of several of their drugs, whilst a number of other companies were accused by governments of the developing world of severe over-pricing (the Indian government recently revoked Roche's patent for the company's Hepatitis C drug Pegasys due to its extortionate cost). 

In the West, scepticism in the pharmaceutical industry has reached of point where patients have begun to develop a habit of reflexively looking for non-pharmaceutical alternatives as therapy for non-life-threatening ailments.  Studies into the Placebo effect may have negligible repercussions on the industry at this point, due to a general lack of knowledge and faith in "Placebo practices". But the sheer fact that alternative therapies for many blockbuster disorders have been proven feasible and effective renders this practice a potentially very powerful pharma competitor. 

At the moment, Big Pharma's interest in developed markets may have waned, and it has subsequently lost interest in maintaining an immaculate public image, amidst a frantic gold rush for pharmerging shores. Markets such as China, India and Brazil may still lack the public awareness of this industry, and are likely to look much more favourably upon the business of saving lives. For the time being,  to maintain its success, pharma is merely changing its location, rather than changing its conduct. But as Einstein's famous quote goes, "Insanity is doing the same thing over and over again and expecting a different result"; the industry is in dire need of a new modus operandi. If drugs can no longer effectively and safely reach the market without concealed data and unlawful acts, the industry can only anticipate an inevitably unanimous public reaction globally. And, unfortunately for pharma, effective alternatives to medicine are beginning to emerge and to slowly win over the public.

Above was an excerpt from Bioassociate's white paper, "The significance and apparent repercussions of the 2009-2015 pharmaceutical patent cliff", the full version of which can be downloaded here.

The New Age Pharma Business Model: Part 3 - The Case of the No-Exit Biotech

With virtually no R&D department, no blockbusters, and stifling generic pressures Big Pharma is not in a happy place today. Many multinationals have gone the licensing and acquisition way, but increased crowding on the shop floor is resulting in largely over-priced deals. Vaccines are a seemingly hot area of acquisition, whilst oncology has seemed to be all the rage for the past three years. Amgen paid a whopping US$ 1 billion to the vaccine specialist BioVex for its OncoVex cancer vaccine in 2011, Biogen acquired Stromedix for US$ 562 million and Gilead acquired Calistoga for US$ 600 million—all relatively over-priced deals, even for unmet niche targets.

In fact, the average takeover premiums for biotech companies are nearly double the premiums of acquisitions in other industries in the current markets. The game of panicky music chairs occurring in the industry is generally indicative of the multinationals’ desperate efforts to explore cost-cutting alternatives in the R&D department, as well as to access new areas of growth.

Big Pharma Eager to Acquire

The number of licensing agreements has also increased by a substantial 16% in the last five years. Notably, in anticipation of the patent cliff, the majority of licensing deals struck in Q2 of 2010 involved molecules in marketing stages of development; leads in phase III trials were the second most popular licensing target. In-licensing cost Big Pharma US$ 25 billion in 2010, and sales from licensed products amounted to ~26% of total sales. In the US, venture-backed Life Science M&A exits massively soared last year, and exit volume reached unprecedented levels, even in comparison with biotech’s 2007 peak (Fig 1). 

Figure 1. Exit volume & number for US Biotech, 2005-2011

Source: Silicon Valley Bank, 2012

In-licensing activity stats show that oncology and neurology currently dominate the target disease field (by licensing activity - Fig. 2). Interestingly, in line with vigorous pharmerging expansion, infectious disease has made a comeback hit last year. All of this is in stark contrast with the biggest blockbusters of the last decade, who have for the most part targeted pervasive “first world” conditions such as stroke, heartburn and asthma. Because like the likes of Lipitor have now gone generic, cardiovascular health has dropped to the bottom of the popularity rankings.

Figure 2. Licensing activity volume by therapeutic area, 2011

Source: Deloitte Licensing Deals, 2012

The Biotech Declaration of Independence

With shrinking pipelines, Big Pharma are left with little choice but to streamline efforts towards partnerships and licenses. Bristol-Myers’ “String of Pearls”, and Lilly and Merck’s novel aqcuisition-focused business models, discussed in our previous post, serve as testimony to that. However, the visible whithering of the pharma giants’ power is also strong incentive for smaller players to challenge industry leaders and to dodge “Pharmocracy’s” sphere of influence. 

Enough lone biotech examples have now emerged to conclude that the No-Exit trend is now a dawning reality, rather than mere speculation.  Beside the fact that US equity valuations already prefer Biotech to Big Pharma, there is now an impressive collection of biotechs valued between US$ 500 million and US$ 3 billion who have chosen the independent route, with impressive results. Big Pharma are uncomplexed when it comes to making obvious their objects of desire: GSK recently placed a whopping US$ 2.6 billion bid on Rockville, while everyone else is visibly eyeing the San Diego-based Amylin Pharma, who could potentially dig any large pipeline out of the ditch in the current markets. But the lone wolves are standing proud - for now, at least. 

Why Big Pharma Has Lost its Appeal

Intuitively speaking, the traditional exit model postulates that a biotech’s value is commonly created, and indeed dictated, by “the exit”—a highly coveted event for a small player. But in the current industry scenario this may no longer be so. For starters, Big Pharma are now nowhere near as intimidating in terms of scientific capital and IP as say, ten years ago—which means that biotechs now have a realistic chance at competition with conglomerates. Secondly, investor confidence in the lone biotech is growing as markets are beginning to fathom the actual benefit ratio of a modern Big Exit.

All factors considered, today, a small player transfers substantially more value to Big Pharma in a licensing deal than it receives in return. After all, both are now likely to use the same tools in reaching the market—Contract Research, Manufacturing, Sales and Marketing organizations. Even the famous marketing departments—the force Big Pharma could proudly boast to exit anticipators—are on a visible decline. In turn, the CRO (contract research) and the CSO (contract sales) industries have grown at lightning speeds since the onset of the Patent Cliff, as they have received the shifting volumes of Big Pharma’s R&D projects and became a viable, affordable option for small biotechs. Almost all of the future growth CROs are poised for is expected to be driven by biotechs, rather than by pharma multinationals.

Access to Global Markets

Luckily for Big Pharma, the CSO market at the moment is still heavily concentrated in developed economies. In China, only a small number of CSOs are currently in operation; leaders include NovaMed, with 500 representatives, and Invida with roughly 600. In India the number of CSO players is lesser still. For the most part, this is due to lack of appropriately skilled personnel on the ground, but global talent migration is likely to compensate for low volumes in the not-too-distant future.

It is because of their pharmerging market presence that pharmaceutical giants remain confident that their lingering, unbeatable allure rests with their global coverage. DIY biotech strategies may pay off in local markets, but the chances of unpartnered companies reaching global markets are still rather slim. Needless to speculate, burgeoning service provider industries are just as eager as Big Pharma to reach foreign shores, and the lone player may be granted global market access sooner than multionationals would like to believe.

Raising Capital the DIY Way

In terms of financing, Big Pharma are now in much lesser possession of cash flows than before they went on a cliff-induced panic shopping spree. Furthermore, pharma executives are naturally shopping around the therapeutic areas which are highly lucrative on their own, namely areas of unmet need and with well-defined patient populations which would warrant a lesser marketing force. In the charts of investors’ priority lists, clinical trial success and FDA approval are fast becoming top hits, pushing out the traditional value-creating partnership. As investors are beginning to understand that clinically and comercially sound lone players have the potential to generate more value than partnered ones, the markets are beginning to reward the DIY system, generating more cash for biotechs who would otherwise have no choice but to resort to the exit.

Crowdfunding

Governments are likely to play a role in Biotech survival too. France has had a crowdfunding  scheme, titled “Fonds Communs de Placements dans l'Innovation”—roughly meaning the Communal Innovation Fund—for over 15 years, raising around US$ 6 million from the crowd for the greater scientific good. The British Bioindustry Association has recently picked up and improved on the idea, initiating the “Citizens’ Innovation Fund” which promises lucrative tax breaks and reasonable returns for those supporting the bio-industry with investments of over £15,000 a year. Crowdfunding is probably a rather infantile notion as of yet - but with schemes such as the CIF this way of raising capital likely to play an increasingly crucial role in safety-netting the lone biotech arena. 

It seems the giants may be under a realistic over-shadowing threat from audacious young biotechs eager to go it alone. Perhaps it is too early to tell who will win out in the long term, but Big Pharma could certainly do with a disruptive business strategy in order to regain its appeal in the eyes of the biotech--and the world. Change is undeniably in the air, but only time will tell whether Big Pharma will be able to gracefully regain composure, or whether the industry will once again return to its very foundations of lone players and great innovations.

The New Age Pharma Business Model: Part 2 - The New Big Pharma Business Models

Amidst mass generification of history’s bestselling drugs, Big Pharma is extensively finding itself cornered by aggressive competition from generic drugs which only recently ceased to be their very own blockbusters. As market share and annual revenues plummet off the patent cliff, pharma multinationals have resorted to a series of radical changes to restore the precarious equilibrium between the ever-battling yin and yang that are the originator and the generics industries.  

Our last post addressed the trend of the visibly shrinking R&D departments, particularly what has become of them, and how their lingering potential could still be of interest to downsizing pharma.

This week we will be looking at the colourful abundance of individual strategies companies are adopting in these austere times. Some trends may be more fashionable than others, but one thing seems certain: no pharma player has remained unmoved by the industry’s desperate cries for change.

In-licensing and later-stage acquisitions

There is an undeniable R&D productivity crisis in the pharmaceutical industry. Output of in-house R&D has been at its lowest in the past 5 years, despite an increase in the number of projects and in the availability of funds. The ratio of the number of FDA-approved NMEs to R&D spend for nine Big Pharma companies (fig 1) demonstrates a harsh reality that in-house R&D as it is conducted in the industry today is simply no longer sustainably efficient.

Figure 1. Number of total NMEs approved by the FDA versus R&D spending by: AstraZeneca, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Merck, Novartis, Pfizer, Roche and Sanofi-Aventis-Aventis, 2005-2010

Source: “The significance and apparent repercussions of the 2009-2015 pharmaceutical patent cliff”, Bioassociate, 2012

It has been argued that R&D turnout has been so poor in recent years due to the decreasing number of “easy targets” - that is, companies are addressing less well-elucidated disease pathways in a tunnel-vision search for the next blockbuster, increasing the risk of their ventures. In other words, basic research has apparently not caught up with the demands of the industry.

Pipeline collaborations, partnerships and in-licensing as a way to dilute the costs and potential hazards, and 91% of industry executives believe that in the next decade the industry will be riddled with pharma-biotech mergers; 69% also believe that consolidation amongst small biotechs will be on the rise.

Notably, in anticipation of the patent cliff, the majority of licensing deals struck in Q2 of 2010 involved molecules in marketing stages of development; leads in phase III trials were the second most popular licensing target. Most pharma executives anticipate a significant influx of later-stage, clinical molecules into their pipelines over the next two years (Fig. 2).

 Figure 2. Pipeline changes anticipated by pharma executives over the next two-three years (2011—2014)

Source: Life Science Strategy Group and William Blair & Co, 2011

GSK, Merck, Novartis, AstraZeneca, Pfizer and Roche have announced that in-licensing is to become a core part of their business strategies, and have already secured over 50% of all Top 20 Pharma in-licensing deals struck in the 2005-2010 period. The number of licensing agreements has increased by 16% in the last five years, and the majority of licensing deals struck in Q2 of 2010 involved molecules in marketing stages of development; leads in phase III trials were the second most popular licensing target.

Companies who strongly oppose diversification, such as Bristol-Myers and Roche, have divested from their non-Rx portfolios but have streamlined their efforts towards partnering and in-licensing rather than towards in-house innovation. Bristol-Myers’s “string of pearls” strategy is exclusively aimed at partnerships and licenses which would address a vast array of target disease niches and compliment the company’s existing pipeline. . As part of “pearl acquisitions” the company purchased the immuno-oncology specialist Medarex for US$ 2.3 billion, obtaining an abundant cancer and biologics pipeline in the process. Other pearl acquisitions included Kosan Biosciences and the protein biologics developer, Adnexus Therapeutics.

Similarly Merck’s chief licensing officer, Dr. Barbara Yanni, has revealed the company’s “scientific scout” model, as part of which licensing “detectives” are trained to hunt for lucrative deals amongst academia, small biotechs and even large multinationals. In 2009 the scouting strategy has lead the company to close 51 licensing deals.

Shifting Therapeutic focus

Based on the in-licensing activity in the industry, oncology, central nervous system disorders, cardiovascular health and autoimmune diseases currently dominate the target disease field, whilst the biggest blockbusters of the last decade have for the most part targeted pervasive “first world” conditions such as stroke, heartburn and asthma.  With Lipitor going generic, Pfizer declared that the company will no longer focus on cardiovascular health in their pipelines, shifting resources to oncology and Alzheimer’s disease instead. GSK is also set to diversify into oncology, cardiovascular health and vaccines, whilst Takeda will focus on metabolic & central nervous system disorders and oncology.

The ageing population of the world, which will reach 19% of the global population by 2030, is becoming pharma’s most faithful client. In the US, prescription use is sizeably dominated by the 65+ age group and R&D focus is shaping accordingly, with diabetes, osteoporosis, Parkinson’s disease and other chronic illnesses becoming the target of choice for applied research.

Outsourcing

For companies who chose to retain a certain level of home-brewed innovation, scientific outsourcing with contract research organizations (CROs) appears to be a more cost-effective alternative to in-house R&D. Global CROs such as Quintiles, Charles Rivers Laboratories, ICON and Parexel are expected to profit lavishly from the current industry turnaround.

In 2011, pharma companies have outsourced US$ 36.6 billion worth of R&D expenses to contract organizations - up 6.6% from 2009, and have as a consequence lowered their research expenditures from 74% to 62% in the past year. 

Smaller pharma and biotechs are expected to be responsible for the majority of outsourcing activity, as in-licensing will remain a priority for large pharma. The shift towards outsourcing has been made inevitable by expanding pipelines and shrinking R&D departments, and rates of outsourcing are expected to increase by 10% across all research areas by 2015, with growth rates exceeding 60% within the next decade.

Commercial Outsourcing

Drug commercialization is a process with a bulky price tag for Big Pharma, and one which is strongly dependent on an array of ever-shifting variables - i.e. fluctuating markets and exclusivity times. Occurrences like patent expirations may suddenly make obsolete massive product-specific sales teams, resulting in redundancies or substantial amounts of resources spent on product re-focusing. Essentially, pharma commercial teams have an “on and off” switch which begs for immense flexibility not afforded by the current pharma model. Since marketing is astonishingly as costly a process as R&D itself, it invariably possesses an equally large potential for cost cutting. 

CROs like Quintiles and Charles Rivers are beginning to develop specialized commercial outsourcing units, and numbers of global Contract Sales Organizations (CSOs) are on the rise, having already secured some Big Pharma customers. Sales outsourcing potentially eliminates the danger of post-expiration redundancies and the uncertainty which surrounds commercial matters in the industry. By 2016, the global CSO market is expected to be worth over US$ 9.2 billion, up from US$ 3.7 billion in 2009, and the US$ 200 billion Big Pharma spent on marketing in 2010 testifies to the potential of this niche. 

Diversifying into the generics, biologics, biosimilars, consumer healthcare and vaccine markets

As pharmaceutical innovation is decelerating due to a decreasing number of target diseases, diversifying into a competitor’s realm is continuously becoming a more attractive strategy for multinational pharma. According to Roland Berger Strategy Consultants, 78% of pharma executives perceive generics to be the most important area of diversification, followed by consumer health (50%) and vaccines (42%). Importantly, the strongest potential of generic and consumer health diversification is perceived to be in pharmerging markets.

Pfizer’s acquisition of Wyeth was in part motivated by the diversification potential of the deal, which gave Pfizer access to the established vaccines, consumer health and biologics departments of Wyeth. On a similar note, Sanofi-Aventis announced plans to become a diversified global healthcare leader in 2009 increasing non-patented drug and other product sales from 5% to 12% in recent years. GSK, who faces losses of US$ 9.3 billion during the patent cliff, was one of a select few multinationals to report Q3 2011 sales growth, for the most part due to a 21% increase in the sales of vaccines and a significant consumer healthcare sales growth in emerging markets.

Diversification is not on every multinational’s agenda, however. Eli Lilly and Bristol-Myers Squibb, for example, remain dedicated to their Rx programs, as investors and analysts are weary that conglomerates are likely to trade below the sum of their parts.

The Unmet Need Arena

In the current context, new innovative drugs entering the market must not only demonstrate that they are en par with or better than their marketed competition, but to differentiate enough from growing numbers of cheaper generic alternatives, and to justify the price premium over them.

Of particular importance over the next few years will be novel action or delivery mechanisms in major disease areas to accommodate those patients for whom current methods are unsuitable. Novel classes of diabetes drugs, such as the new SGLT-2 class, will be particularly prominent. Drugs targeting orphan diseases will also be on the rise, but will not be a significant source of revenue.

“Pharmerging Markets”

Currently, major global drug consumers are the US, Japan and the EU, but the growth rate of these markets is predicted to slow down to as low at 1% in the next decade. In contrast, pharmerging markets, such as the BRIC countries, South America and Eastern and Central Europe, have the potential to grow at 14-17% and to rake in up to US$ 180 billion annually for the pharma industry. Growth of income in these markets, which is normally 80% correlated with growth in affordability of and spend on medication, is extremely robust, and serves as the primary allurement for major pharma investors.

Defined by IMS Health as a “Tier 1” pharmerging market, China presents the greatest opportunity, with a predicted annual growth of 20% in terms of pharmaceutical demand, in contrast with the average global growth of only 5-8% through to 2014. China’s immense market growth is predicted to be mainly due to a significant rise in chronic illnesses, which currently amount to 80% of total deaths in the country. The IMS “Tier 2” Brazilian, Russian and Indian markets are expected to grow at 13-16% in the next five years, even despite the lack of adequate governmental patent protection. “Tier 3” countries such as Egypt, Indonesia, Mexico, Pakistan, Turkey, Romania and Ukraine, among others, are also steadily picking up pace. By 2014 pharmerging markets will represent 49% of the global pharmaceutical demand, in contrast with only 8% in 2001. 

Befriending Academia Still in the Cards

Basic research happening in the academic arena and government facilities has been identified as a profitable force by Big Pharma for some time now. Companies have nurtured academic links through the building of research incubators, offering of industrial placements, funding of PhD projects and sponsorship of individual labs. In the new era business model, however, friendship with academia has seemingly waned as a result of diminishing in-house R&D and increased outsourcing. According to latest research by the Association of the British Pharmaceutical Industry, industrial placements have been on a steep decline: from 530 in 2007 to 355 in 2009 and 268 in 2011. But this is simply the result of less in-house work, as other numbers show that industry has in no way lost interest in keeping in touch. In 2009, the number of sponsored PhD partnerships was 384, whilst in 2011 this number rose to 644.

This seems to re-iterate the notion that pharma is “down but not out”—in other words, declining annual revenues have called for more economical ways of maintaining contacts, but companies are  by no means less enthusiastic about scouting potential “socially”.

The trends the industry is following today are a result of a single apparent variable: lesser funds. With less money to throw against the conservative R&D model, companies have been able to isolate and target the root of pharma’s problem: the unproductive beast that the in-house R&D strategy has become along the way.

In-licensing and outsourcing may eventually lead to a new pharma “shell” model, whereby giants merely reign over countless contracts and licenses. But there may yet be a hindrance to this development. Come back to the Bioassociate blog next week for Part 3 of the New Era Pharma Business Model: The Case of the No-Exit Biotech.

For more in-depth details and numbers of the shifting trends, have a look at our report: "The Significance and Apparent Repercussions of the 2009-2015 Pharmaceutical Patent Cliff"

Why the Patent Cliff is Likely to Jeopardize Global Drug Safety

[Source: RSC.org]

The patent cliff has been a hard-to-miss event in the pharma industry: not only has it been extensively covered in pharma news and blogs, its notoriety frequently extends into mainstream media in the context of global pharma pricing pressures and Obamacare.

The immediate effects of the cliff are well understood: between 2009 and 2015, the innovative pharma industry is facing the sharpest and most abrupt revenue decline in history. Of the 20 historically best-selling drugs, 18 will lose patent protection. The total annual losses inflicted on the industry by patent expiry during the 2009-2015 patent cliff period will amount to ~US$ 170 billion - a figure which is already rocking the pharma world. Pfizer’s Lipitor and Viagra, Eli Lilly’s Zyprexa and Sanofi-Aventis’s Plavix, will face patent expiry and inevitable engulfment by the generics industry, which stands to gain lavishly from this tremendous event.

Amidst aggressive cost-cutting strategies on the part of Big Pharma, and alongside increased competition and consolidation in the generics sector, the effects of this colossal event rocking the world’s second largest industry reach further than what meets the eye.

One of the natural seismic shifts induced by the cliff is steadily sailing the industry towards unfathomed shores—namely, the much-hyped-about “Pharmerging markets”. India, China, Russia and Brazil are some of the more obvious novel destinations for large pharma to nest in—but the likes of Ukraine, Romania and Egypt are there too.

IMS-defined "Tiers" of Pharmerging markets: 

The projected growth of “pharmergers” is undeniably seductive for pharma: the spending on branded medications in China is expected to double by 2015, and to grow nearly six-fold since 2010 for generics. Other markets are steadily following suit.

Domestic markets are not likely to provide for the demand, at least not in the innovative sector: currently only 15% of the domestic pharma market in China is captured by patented products. Despite the heavy focus of the next set of 5-year plans on inducing innovation, the unpronounced local interest in originator medication is not likely to skyrocket in the immediate future, and multinational pharma have taken notice of this.

So how is the industry whose R&D and production facilities are still largely based in Europe and North America going to cope with accommodating such unprecedented, and geographically inconvenient, demand?

As one of the first proactive partakers in the Pharmerging phenomenon, Roche has pledged to spend over US$ 310 million in China in order to take it up three spaces up to its second largest market. Roche will be opening offices across nine cities and heavily investing into “Personnel development, recruitment, instruments and systems”, according to Daniel O’day—Roche Diagnostics’ COO.

Similarly, in 2010, Novo Nordisk had pledged US$ 100 million to expand its R&D centre in Beijing, and GSK announced that it will be moving its anti-bacterial facility to Shanghai.

With a wave of new entrants in emerging markets, and increased cost-cutting through offshore manufacturing, drug safety will inevitably become a concern for the public.

According to a 2010 survey by Pew Prescription Project, Americans already hold very low esteem in foreign-made pharmaceuticals, and perhaps rightfully so. Manufacturing issues have shaken the pharma world on several occasions: in 2009, at the very onset of the patent cliff, the number of FDA recalls shot up by a staggering 309%, for the most part due to faulty packaging and labelling, as well as contamination. Generally, generic medicines are the culprits of recalls, though Pfizer, Novartis and Bristol-Myers Squibb have all issued drug recalls in the past year, in addition to common global GMP violators, such as Aurobindo and Ranbaxy, against whom a consent decree of permanent injunction was recently filed by the US Department of Justice.

Inductively speaking, unless pharmerging governments are able to categorically instil the importance of GMP in domestic pharma sectors, the industry is in for a rocky road ahead. Governments of emerging economies must prepare for the new high-volume drug era: healthcare efforts must focus on drug safety as well as availability, and appropriate penal codes must be put in place for repeated violators. WHO is putting forth pharmacovigilance guidelines which will accommodate offshore manufacturing for developing countries, food and medical safety are high priority on the next G20 agenda, and local governments are generally expected to increase focus on novel healthcare regulations in the near future.

It seems that the parallel shifts created by the patent cliff are travelling at velocities with a potentially dangerous mismatch, and public awareness is perhaps the first step to ensuring that governments and Big Pharma put enough focus on ensuring safety first and foremost.

To read more in detail about these, and many other cliff-related developments, check out Bioassociate’s latest report: “The significance and apparent repercussions of the 2009-2015pharmaceutical patent cliff”.