Checkmate

By Marie Shields, Editor

Generic drugs, having long been minor players in the pharmaceutical marketplace, appear to be gaining a strategic advantage. Is this end game for branded products?

Thanks to President Obama’s recommendation that they should used as a way of making cheaper treatments available to the public, the fortunes of generic drugs are on the rise. What effect will this have on research-based pharmaceutical companies, which have argued for years that extended patents on their products are necessary in order for them to recoup the millions they invest in research and development?

Add to that the fact that big pharma companies are facing a host of other pressures at the moment: problematic pipelines, a dearth of new blockbusters, patent expiries ¬– not to mention the global financial crisis – and you have a potentially explosive situation for the industry.

According to Barath Shankar, Senior Industry Analyst, Pharmaceuticals and Biotechnology for Frost & Sullivan, big pharma is facing an almost unprecedented amount of competitive pressure. “They’re losing their pipelines and losing out on their big drugs to generic versions that are flooding the market, especially in areas like cardiovascular.

“It’s taking a leaf out of Europe’s book: in many European countries generics account for a significant number of the prescriptions being written, whereas in the US, branded drugs do drive price and revenue growth. Putting more focus on generics will bring prices down in the US by a significant percentage.”

Big pharma companies may be forced to change their business models. Rather than focusing on finding blockbuster drugs, they will need to look at developing their pipelines for the long term. Companies will need to be come more flexible, perhaps combining several cores specialties, and perhaps even producing their own generics. If reviews of competing drugs and treatment and clinical trials become the norm, companies with expertise in handling these issues within different parts of the business will do well.

Big investment
Big pharmaceutical companies point out that they put a lot of money into developing their products, and if they the money that comes from patent exclusivity is withdrawn, the drug development process will come to a halt. For example, Robert Spiegel, Chief Medical Officer at Schering-Plough, argues that “if we say that generics are good enough, that the current medicines you have today in 2009 are probably good enough and we don’t really need any new medicines, 20 years from now we’re going to have major issues with an aging population and many diseases that still have major unmet medical needs.”

Shankar, at least, doesn’t buy it. “I think that argument held true back in the ’90s and probably even the early 2000s,” he stresses. “But if you look at the way innovation is being driven in the current scenario, it’s a global market. Companies need to drive down costs. There’s a lot of outsourcing happening with regard to clinical trials and contract manufacturing, so companies have to re-look at their business models and understand what their core competency is and then look at areas they should invest in.

“Overall, the idea that profits from branded products are needed to invest in new research is tapering off. Having a comprehensive business model that works in the current situation is more important.”

The situation the pharmaceutical industry finds itself in can be compared to that of the automakers. In times like these, it’s important to stick to your core business ¬– designing the product – and then having a solid supply chain. Companies may also need to look at other areas, such as vaccines and perhaps biologics, in order to provide a steady income flow.

Some companies have already been smart enough to move in this direction ¬– the specialty areas where the returns and reimbursement rates are high. One company that has done this very successfully is Shire. Its Human Genetic Therapies division, for example, focuses exclusively on the rare diseases known as ‘orphan diseases’. As Sylvie Grégoire, President of the division, explains, “Our portfolio of products focuses on the very rare end of orphan diseases – the populations we treat are between 2000 and 3000 worldwide. We are able to gain sufficient revenues and profits even though there’s a rarity of patients by commanding a high price for these products. If they don’t receive these replacement therapies or the drugs that we develop, their quality of life declines and they suffer from a very high morbidity as well as often early mortality.”

It’s certainly been a successful strategy for Shire, with six product launches in the past three years, and within Human Growth Therapy, 300 additional staff taken on in 2007, and another 275 in 2008.

Biologic battle
In addition to focusing on specialty therapeutic areas, many big pharma companies are also investigating the potential of biologics. President Obama’s budget proposed the development of a faster pathway for generic biologics, and as competition within the industry increases and margins grow smaller, generics producers may also see biologics as their next big opportunity.

While this could spell yet more trouble for big pharma, it seems like great news for generics producers. When the budget proposal was announced, Kathleen Jaeger, Chief Executive of the Generic Pharmaceutical Association, said, “As the White House and Congress work to reform health care, our shared goal must be to work together to increase generic use. By doing so, we will increase access to care while also saving our government and consumers money.”

The biotech industry was understandably less thrilled by the prospect of  a greater emphasis on generic biologics. Commenting on a bill introduced in March to establish a pathway for the approval of biosimilars, Biotechnology Industry Organization President and CEO Jim Greenwood said, “Unfortunately, the legislation introduced today would take patients and our industry down the wrong path – a path that jeopardizes the continued development of new breakthrough therapies and potential cures for debilitating diseases such as multiple sclerosis, HIV/AIDS and Alzheimer’s. This bill seeks to cut prices but instead cuts corners. This proposal leads us off the map as we seek an effective, fair and safe pathway to a biosimilars market.”

Despite opposition from big pharma and biotech companies, it seems likely that the development process for generic biologics will be improved. However, there are still hurdles to be overcome. Frost & Sullivan’s Shankar sees the main problem as the lack of a clear ideas as to how the regulatory pathway ¬will work. “It’s early to comment on that, but I believe the FDA will require a stronger proof of bioequivalency and potentially also require some small-scale clinical trials, because the way in which biologics work is completely different to the way small molecules or traditional pharmaceuticals work.

“That could create some complications. It could be a situation where companies are following a ‘wait and watch’ policy, but it is definitely something that will happen because in the current situation, with the way the pricing of biologics has been moving, this is a way to introduce a competitive marketplace and to encourage companies to compete more and create more opportunities.”

One problem may be the FDA and whether it decides to require proof of bioequivalency. If it does, this could make things much more complicated for generics manufacturers; and if it doesn’t, this could mean that people don’t trust generic biologic drugs to be true copies of the originals.

Shankar points out that the first concern for the FDA is from the biotech lobbies. “The biotech lobbies are saying this is not going to work because it completely differs from traditional generics. When you’re working with proteins, if you make a small change to the process, you’ll end up with a completely different drug. Whereas with small molecules, it doesn’t matter what process you use, the end product will have the same chemical composition. That’s their argument. Then the generic manufacturers are saying that this is not something they can’t do. It’s been done before.”

Both parties have a fairly strong argument, and at some point a decision will need to be made.  There is no doubt, however, that the approval timeframe and marketing process for biologics will be different. Generic companies could see this as an opportunity to make more money with less competition, by building core competencies in a particular set of biologics.

Outside competitors
As if the growing competition from generics weren’t enough, in March four senators introduced a bill that would allow US-licensed pharmacies to import cheaper FDA-approved medicines from outside the country. And in May, President Obama himself proposed allocating $5 million to the FDA to “develop policies to allow Americans to buy drugs approved in other countries.”

Barath Shankar says that one potential roadblock to these plans is the issue of oversight. “The problem is maintaining oversight over the FDA-approved manufacturing plants where these products come from,” he says. “That has been a problem. The FDA ran into trouble with some overseas generic manufacturers in the recent past where they had problems with safety records and contamination issues.

“The lobby that is against importing drugs from other countries could then question whether the FDA has the capability to have oversight over these areas. Though I know that the FDA is moving in that direction in the sense that they’ve established offices in India, which has the second-largest number of FDA-approved manufacturing locations outside of the US.”

The opening of the FDA’s Indian offices seems to indicate that cheaper imports could be allowed at some time in the future, which could help lower costs because it would increase competition. But the concerns about safety are bound to persist, along with the questions about whether the FDA would be able to manage those locations and make sure they were regularly audited.

Another potential pressure point for the pharmaceutical industry is the new government’s tax reform proposals, which could raise the effective tax rate from an average of 23 percent to 30 percent by closing loopholes and cutting R&D tax credits.

“For big pharma it’s going to affect where they raise the effective taxes,” Shankar says. “That could have a negative impact on the work that companies do, because they’re already starting to bleed, especially the big pharma companies. And for smaller companies, again in the current economic downturn many are going out of business due to lack of funding, and companies that are just about starting to make money could obviously take a bigger hit because of it. However, I doubt these reforms will come into effect. I personally believe the government will open up channels for companies to get credits on other fronts and effectively neutralize any change in these rates.

“The key for these companies is building the supply chain, whether it be the big pharma company or big biotech, or small biotech. It’s important that they have a strong supply chain in place, similar to that of a more mature manufacturing industry.”

It seems, in the long run, that big pharmaceutical companies will have to change the way they do business. They will need to collaborate, which will enable them to play to their strengths and let their partners take on the work that isn’t essential to their core businesses.

This could mean a change in the supply chain, which could then impact a number of different areas. If a pharmaceutical company hires a contract research organization to deal with potential changes in the way clinical trials are carried out, for example, this will be one less thing the company has to worry about.

With generics on the rise and the potential for competition from cheap imports and changes in tax legislation also posing threats, the future looks challenging for pharmaceutical and biotech companies. But this is a powerful sector, with a lot of money and experience behind it. Chances are, most will find a way to come through unscathed.