Will big pharma become a collection of marketing and distribution firms?
As research, development, manufacturing, and clinical studies are increasingly outsourced, whats left for big pharma to do? Angelo DePalma reports
According to the 2010 Pharmaceutical R&D Factbook from CMR International, just 7% of drug industry sales comes from medicines launched in the past five years, and the number of compounds failing in late-stage human trials has doubled.
The quality and variety of third-party R&D, moreover, makes externalization of small molecule R&D a real option with highly attractive economics, according to the Factbook.
Reallocating small molecule research spend to licensing could triple the number of new drugs reaching the market every year, and would increase net present value by an average of [about 19%] for large cap pharma, on our estimates.
In early 2010, Morgan Stanleys European subsidiary even urged the pharmaceutical industry to exit research activities entirely.
Recent events suggest this trend may already be under way.
But if research, development, manufacturing, and clinical studies become increasingly outsourced, will big pharmas end up being just marketing distribution firms?
Reallocating capital
In a 2008 cost-cutting move, Eli Lilly entered a 10-year, $1.6-billion lab services deal with testing company Covance.
The agreement called for Covance to take over some toxicology, pharmacology, and quality control services that Lilly previously conducted in-house.
As part of the deal, Covance acquired a 600,000 sq ft testing facility from the drug giant for $50 million.
This followed a 2007 move by Amgen to divest itself of its clinical field staff; here the beneficiary was Quintiles Transnational.
More recently, GlaxoSmithKline spun off its Verona, Italy research operations to Aptuit, a move viewed as part of a growing trend among larger companies to divest themselves of unprofitable activities, in this case GSKs 500-person neuroscience research group.
Aptuit will provide R&D services for existing GSK programs at the facility and conduct drug development work for other clients.
In its study, Morgan Stanley said it expected material cuts to internal small molecule research spend in 2010/11 and a reallocation of capital to in-licensing and other non-pharma assets.
The investment bank cited statistics indicating that the industrys current economic model is unsustainable:
- A tenfold rise in development costs, to about $2 billion, in the past two decades;
- New drug approvals have not kept pace with rising R&D spend;
- Higher regulatory (mostly safety-related) hurdles;
- Longer development times and shorter periods of market exclusivity;
- A preponderance of spending on phase II or earlier, where the probability of approval is approximately 10%.
Pharma challenges
The problems facing the worldwide drugs industry are familiar: patent expirations, the rise of generics, an innovation gap reflected in the dearth of new medicine approvals, and cost pressures from every direction.
Mergers, acquisitions, and their inevitable consequencelayoffshave been legendary as even skilled positions in medicinal chemistry are increasingly filled overseas.
The pharmaceutical industry cut more than 100,000 jobs during 2008 and 2009.
Sam Isaly, managing partner at healthcare investment firm OrbiMed Advisors, believes that top-tier drugs firms will shed 200,000 more jobs over the next five years20% of their workforce.
Losses will occur in R&D but also in sales and administrative positions.
Recent initiatives in personalized medicine, comparative effectiveness, and post-approval safety monitoring threaten to fragment the large disease or indication franchises and further provide payers with reasons not to reimburse at premium prices, even for drugs that today are considered safe and effective. (For more on comparative effectiveness, see Health data and comparative effectiveness and Why comparative effectiveness research is a market opportunity.)
The patent story is particularly dire.
Ninety drugs, with combined 2008 sales of $157 billion, will lose patent protection between 2010 and 2015, according to a report from HDFC Securities.
These include Mercks Singulair asthma drug and Pfizers Lipitor cholesterol-lowering blockbuster.
Innovator firms can expect to lose 80% of sales almost overnight when generics hit the market.
Nor can big pharma continue to count on ever-growing revenues.
Writing in Health Affairs, Murray Aitken noted that growth in prescription drug spending averaged 9.9 percent during 19972007 but slowed to 1.6 percent in 2007.
Aiken attributes the slackening to patent expirations, generics, and the decline in new drug approvals.
Increased payer scrutiny of drug costsaided by the global recessionhave no doubt contributed as well. (For more on payers, see Marketing with patients, payers, and providers in mind and Market access: The importance of understanding payers .)
While all this has been going on, the cost of bringing a new drug to market has risen steadily, to the $1.5 to $2 billion range.
Disappointed with results of in-house innovation efforts, drug companies have gone on a shopping spree for third-party drugs.
Yet even these include some notable failures, for example, Pfizers Tru-015 (Trubion Pharmaceuticals), Roche/BiogenIdecs ocrelizumab for rheumatoid arthritis, and Mercks vicriviroc antiretroviral (Schering).
Aggressive outsourcing
Despite calls for a complete overhaul of operations, experts warn against moving too quickly, pointing out that competencies within big pharmaceutical organizations are difficult to duplicate.
Big pharma still excels, says Bill Cooney, CEO of MedPoint Communications, on major aspects of drug development, including late-stage clinical trials, regulatory submissions and management, post-approval risk-management programs, manufacturing and distribution, health economic analysis, medical affairs support, and various other scientific services.
Expertise in these areas, Cooney says, is still lacking in smaller firms: Plus, the global reach of big pharma assures it will always have a place in drug development and global marketing.
Yet one wonders if big pharma itself believes this.
According to financial writer Stephen Simpson, the more than 1,000 contract research organizations worldwide now capture about 20% of the pharmaceutical industrys R&D budget.
Cooney admits this level of outsourcing suggests a shift, and that traditional core activities like basic research may not be immune.
R&D productivity has been remarkably bad, he says.
Some companieslike Novartis, Roche, and GlaxoSmithKlinehavent done bad, but otherslike Pfizer, AstraZeneca, and SanofiAventishave spent tens of billions on failures from their own pipelines.
You can site example after example of this kind of aggressive outsourcing of specific activities, Cooney says.
But he believes big pharma still retains a unique big-picture feel for commercializing new medicines that smaller firms lack.
Drug development, according to Cooney, is a multi-faced endeavor, and big pharma are the only companies with the resources to fully develop innovative molecules, particularly across multiple jurisdictions.
The role of smaller companies
The reason for this, says Daniel Chain, Ph.D., CEO of Intellect Neurosciences, is that larger companies lack the translational skills needed to bridge the gap between discovery and the clinic.
The role of smaller biotechnology or biopharmaceutical companies is nowhere more apparent than in [Intellects specialty] Alzheimers disease research, a field in which the pharmaceutical industry relies heavily on smaller companies to discover new treatment strategies, and bring them to the point where they become developable.
Yet, according to Chain, the idea that big pharma can sustain itself solely on drugs developed internally is outdated, if it was ever the case.
Rather than eliminating these groups, though, he suggests the emphasis should be on transforming them to focus on translational activities and to continue focusing on an organic approach to clinical development.
Large companies, he says, bring an enormous amount of expertise in the conduct of clinical trials, despite the fact that they outsource those activities.
One wonders, however, if this is just wishful thinking.
To mitigate risk, molecules are being in-licensed at later and later stages, after many important decisions and investments have already been made.
Only big pharma has the resources to proceed through phase III and beyond.
But one could imagine large contract research organizations taking over late-stage development and regulatory activitiesas they already do in some cases on behalf of sponsorsperhaps in return for a piece of the action or funded by investors.
In such a virtual development world, risk would be spread among a panoply of stakeholders: academic labs, small discovery/development companies, CROs and CMOs, and investors.
Such a scenario would resemble todays virtual biotech model, except it would be much broader and reach much more deeply into the nuts and bolts of the spectrum of delivery-through-commercialization.
This idea begs two questions. Could enough efficiencies be wrung from the development process to offset threats from dangerously short exclusivity times, patent expiries, cost pressures, and the fragmenting effects of comparative effectiveness and personalized medicine?
Where would that leave big pharma?
Engines of creativity
Cutting the size of internal discovery groups may be necessary, as may be the acquisition of late-stage in-licensed molecules.
Intellects Chain believes big pharma is in danger of adopting the right tactics but the wrong strategy.
Drug discovery talent adds value to the process, but their focus must be to switch from finding new drugs to taking those molecules forward through pipelines, he says.
Similarly, by simply acquiring smaller companies the industry is devouring its engines of creativity, particularly with respect to important drug discovery tools.
Despite calls for abandoning traditional core activities like drug discovery and early-stage R&D, this is not likely to occur any time soon.
The main reason: money.
Almost every small company today is cash-starved, which increases the difficulty of organic growth, Chain says.
Eventually, they run out of money. There are many, many biotechs out there doing great science and generating new, enabling technologies.
Whats missing, according to Chain, is a way to support these activities.
The venture capital model doesnt fit this type of development well, and big companies are not investing sufficiently.
Sounds like an opportunity for big pharma