Forget In-house R&D: Enter the Fully Outsourced Drug Discovery Model - PharmaPhorum re-run

A month ago Bioassociate covered an emerging Pharma market trend: the emergence of a fully outsourced "shell" drug discovery model. Below is a re-run of the article for those who have missed it.

Original article can be found here.

Fifty years ago, in-house R&D must have seemed like a great idea. Therapeutic targets flowed like wine, innovation was rife, and internal R&D capability was one of pharma’s sole keys to success. For decades, mammoth pharma conglomerates have prided themselves on being self-sufficient wonder emporiums, opening their doors only to announce the arrival of yet another life-saving formula. Half a century ago, an industry observer could hardly imagine a world where carcasses of groggy, unproductive R&D departments would litter the landscape as a brooding reminder of pharma’s glorious past.

The industry situation today is one of decadent demise. Hit hard by the patent cliff, pharma ran dry of capital which could be frivolously thrown at the pipeline in hopes of a miracle. A bitter truth dawned: in-house R&D has become horribly unproductive. Clinical trial costs soared, drug approvals plummeted, and the traditional business model became totally unsustainable (see figure 1). Around 100,000 job cuts later, an overwhelming majority of leading pharma companies can now be seen actively downsizing, if not parting with, their R&D departments.

Figure 1: R&D spending vs. NME Approvals for nine leading pharmaceutical companies. Source: Nature, “Getting Pharmaceutical R&D Back on Target”

Where did pharma go wrong?

In truth, in-house R&D was probably never an optimal model for pharma, but rather a circumstantial tactic which arose from lack of a better alternative. If you get down to the fundamental logic, having your own drug development department in the current economic context makes about as much sense as having your own textile factory if you are a clothes designer. And that is because there are now better, more economical ways of reaching the market without the need to invest in capital-intensive facilities. It seems that Big Pharma may have followed a far too outdated platform, for far too long.

Capitalizing on in-house R&D: the CRO revolution

Contract research organizations (CROs) begun to spring up roughly a decade ago, at a time when the pharma industry was enjoying immense success. Few would have predicted that this sector would eventually threaten to make the R&D department obsolete. Today, a substantial portion of CROs are ex-R&D departments of failed pipelines, with one crucial twist. Rather than being a means to reaching the market, R&D facilities have become a capital asset throughout the whole development process.

Because of this, CRO providers are now able to offer Big Pharma generous savings of 30-40% on overall drug development costs, and many are turning innovators, too. Galapagos NV, for instance, runs a successful hybrid CRO slash innovator business model which works because a significant part of the company’s revenue originates from their very own in-house R&D department. Talk about effective risk hedging.

The fully-outsourced business model

The contract services industry is in full steam ahead: there are contract service providers of just about anything, ranging from R&D to manufacturing, sales and marketing. As per the actual discovery phase, in-house departments have not done that for years, anyway. In-licensing from academia and small biotechs has long become the strategy of choice for market leaders. Lilly and Bristol-Myers-Squibb, for instance, already boast elaborate “lead scouting departments”, whilst 50% of GSK’s pipeline is partnered in one way or another. In 2011, licensing agreements were up 14% on 2010 and 178% on 2000. In 2012 the majority of top licensing deals were in pre-clinical stages (figure 2).

Figure 2: Top pharma partnership and licensing deals in Jan-Nov 2012

Where little alternative to “The Big Exit with Big Pharma” existed before, contract sales and marketing organizations now make it theoretically possible for start-ups to reach the market entirely without the help of large co’s. Logically, contract service providers are also realistically able to accommodate an almost entirely “hollow” pharma business model.

Expertise can prevail over capital

The fully outsourced business model relies heavily on expertise and effective project management. For Big Pharma, minimizing on bulky facilities means the business model can focus on intellectual capital as the most important asset. For smaller players, where immense capital was previously required to compete with large conglomerates, expertise alone is now sufficient for challenging the leaders.

BioLineRx and Eli Lilly’s Chorus as the “Hollow R&D” proof-of-concept

The idea of an “innovation brokerage” is no longer a phantom of past speculation. A number of prototypes of the fully outsourced business model are already in operation, with remarkably promising success.

BioLineRx

BioLineRx (Nasdaq:BLRX) is a public Israeli drug development company established in 2003. BioLineRx’s business model targets the current trend of late-stage in-licensing by Big Pharma. Outsourcing every step of development, BioLineRx in-licenses promising early-stage compounds, takes them through to late Phase II clinical trials and enters into out-licensing agreements with larger players to complete the process. BioLineRx’s economical and risk-averse strategy has allowed it to initiate 4-6 projects annually, and the company can efficiently advance up to 17 projects at any given time. This stands in stark contrast with one-lead pipeline players whose capital-heavy assets in essence serve to minimize possibilities and maximize risk.

To date, BioLineRx has already entered a major partnering agreement and its pipeline consists of 6 clinical and 8 pre-clinical programs targeting schizophrenia, oncology, gastrointestinal and cardiovascular disorders, amongst others.

Chorus Pharma

Chorus is an Eli Lilly company created almost entirely around the R&D outsourcing model in 20023. As part of an outsourcing platform, which bears a striking resemblance to that of BioLineRx’s, Chorus aims to in-license early-stage compounds and to advance them through to a clinical proof-of-concept stage. The difference is perhaps that Chorus may have gone a notch further in the notion of outsourcing — the company’s list of Third Party Providers (TPPs) includes a wide array of consultants in addition to their core expertise.

To date, Chorus has advanced a dozen of compounds through to Phase IIa trials at a cost of US$ 4.5 million and in an average of just 29 months per project. In comparison, it has been estimated that Phase I trials alone have cost Big Pharma’s in-house R&D departments an average of US$ 32 million1.

Will the fully outsourced model stick?

A fully outsourced discovery-to-market entity does not, and may never, exist. However, companies such as BioLineRx and Chorus are emerging and growing in momentum and success, bearing bold testimony to the fact that outsourcing doubtlessly delivers immense savings and profoundly minimizes risk. An even more insightful lesson which can be learned from the existing “hollow R&D” players is perhaps the fact that the pharmaceutical industry may finally be transforming from a capital-driven to an expertise-driven market. And perhaps this natural evolution is precisely what is needed to bring waning innovation back on track.

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"