The New Pharma Landscape

The pharmaceutical industry has found itself beset by problems in recent years, not least the slowing of the blockbuster model. How can the sector shake off its lethargy?

After years of giddy growth, the pharmaceutical industry’s present predicament has been a dose of salts. The global pharma market failed to reach double-digit growth in 2004 for the first time in almost a decade. And with the industry only expected to grow around seven percent through 2008, according to experts such as Delphi Pharma, the long-term health of the sector is in question. But what has happened to leave an industry that was one of the most robust on the planet in such an ailing state?

Certainly the stuttering growth would appear to be the culmination of a series of factors. Concerns over drug safety have grown from a murmur to a cry in recent years, reaching a zenith with the withdrawal of Merck & Co’s painkiller Vioxx in September 2004. In the last decade over 15 drugs have been permanently withdrawn from the market due to safety concerns but none has had such a profound impact on the industry as Vioxx, which has heralded a period of heightened regulatory scrutiny for pharma firms the world over.

With intense examination of sales and marketing practices, clinical operations,
post-approval safety surveillance systems and quality control activities accompanying the crusade to achieve Sarbanes-Oxley compliance, the scrutiny has been an unwanted complication. Nevertheless, with a spate of high-profile investigations and aggressive prosecutions, there has been no room for mistakes. As such we have recently witnessed a sustained push towards enterprise-wide compliance management programs to reduce risk and ensure compliance as a result.

To compound these problems, scrutiny over government drug price reporting has also served to heighten the public dissatisfaction of drug costs, particularly in the US marketplace. Critics such as Marcia Angell and her book The Truth About Drug Companies have savaged the sector for the ‘soaring’ prices of prescription drugs. Angell’s book depicts a greedy sector earning outrageous profits by selling overpriced drugs – often that hailed from taxpayer-funded research at academic institutions rather than their own innovation.

Meanwhile, competition from cheaper generic drugs is also a major concern. The 80 percent decline in sales of Eli Lilly’s Prozac within months of generic competitors entering the market in late 2001 is a clear indication of the damage done when a drug’s market exclusivity is lost. But this will be the inevitable fate of an increasing number of major products in the coming years. By 2009, for instance, all major cardiovascular drug classes will be off-patent, throwing the largest and most lucrative product area wide open to competition. And it is this concern over the commoditization of key products that provides a telling glimpse into another of the most serious issues dogging the sector.

“A huge number of patent expiries are on the horizon – around 25-40 percent of the value of the market goes off patent over the next four years,” says Stewart Adkins, a pharmaceutical industry expert with over 20 years experience, now Commercial Director at Marketing Performance Limited. “This wouldn’t matter were there lots of new products. But R&D productivity has been very poor for a number of years and the number of new product launches is way down.” In order to grow by 10 percent, today's big pharmaceutical companies need to launch two or three new blockbusters per year according to an estimate by Business Monitor. But it would appear that it is these blockbuster drugs are drying up.

“The low hanging fruit has all been picked,” continues Adkins. “Science gets a lot harder now to identify new targets and new drugs for those targets. Many of the drugs for the existing targets have already been discovered. The majority of products that are being launched now are actually secondary or specialty care products which tend not to have the potential of primary care products because by definition they are for a limited number of people.”

Cracks in the blockbuster bedrock

Certainly a glance at the pharma landscape from the 80s and 90s reveals an environment where firms could successfully discover and launch drugs that would smother the market. But these markets are now flooded whilst generics have successfully attacked most areas. With an increasing number of blockbusters going off-patent, this bedrock of many pharma firms is being compromised. From 2005 to 2008, total blockbuster sales are forecast by Business Monitor to demonstrate a CAGR of only 1.6 percent compared with the 9 percent forecast for the period 2002 to 2005.

The likes of Merck and Pfizer are in a situation where they have some sizeable drugs coming off of the market, but with fewer products fitting into the category of ‘blockbuster’ replacing them is going to be hard. While firms may opt to look instead for five or six medium-sized drugs that are going to impact the market, when you consider how many compounds are needed to produce six successful drugs compared to one successful drug, it requires a significant change at the front of the R&D process.

Guenther Illert, Vice President of Capgemini and Head of the Life Sciences practice in Central Europe believes that the present dearth of innovative drugs is less to with a lack of targets than conservative spending. “In 1987 there were figures that the average cost to bring a drug to market was $231 million and this figure has gone up to US$900 million - $1.2 billion today,” he highlights. “There has been a tremendous increase in R&D cost. And this has unfortunately coincided with a time when the exclusivity period is rapidly coming down. It is not a problem of having enough creativity – if you go to the discovery areas, whether it is the large pharmaceutical companies or the biotech sector, you find huge amounts of potentially new drug targets. But when it comes to taking a drug candidate and developing it to become a product, that is when the big money is required, and that is when the industry becomes cautious about taking a bet on the future.”

It could be argued that the industry has brought much of it on itself. As Adkins concedes: “For many years now we have probably been focusing more on me-too drugs than we have on completely new and innovative medicines.” But there have been other complications. Technologies such as genomics and proteomics, for instance, have produced a surge of new poorly validated targets that may have ultimately increased the rate of compound attrition and the costs of R&D.

“Throughout the 1990s, genomics was supposedly going to be a source or great opportunity to discover new drug targets and then new drugs,” says Adkins. “A lot of the large drug companies devoted a lot of their research resources to genomics but unfortunately it represented a bit of a blind alley. Some new targets were discovered but they also discovered that biologically validating them was difficult, as was finding new drugs as a result of these new targets. You could argue that resources were wasted in the belief that genomics was going to be the solution to R&D issues for the future when it turned out not to be the case.”

A turning point

Yet, for all its difficulties, there is a surprising – and burgeoning – well of optimism in the pharmaceutical industry. The pharma landscape has altered inexorably this decade and new external pressures have conspired to further complicate matters as firms fear the end of the blockbuster model. However, an increasing number feel that they are now becoming accustomed to the new landscape and are comfortable enough to try out new business models. Simon Friend, Global Pharmaceutical Industry Leader at PricewaterhouseCoopers, says he is far more optimistic about the industry than he has been for some time.

“The pipelines have been affected because the low hanging fruit has been taken and so the model has had to change,” he explains. “The reality is that it takes time to affect that change. It is an 8-10 year process and there is a window during which there is going to be very little activity. We are sitting in the middle of that window at present. But if you look towards the end of 2007 through to 2010 you will start seeing drugs coming through – it is just going to take a little while for the companies to get there.”

One of the turning points for the industry was arguably heralded by the arrival of Genentech’s breast cancer drug Herceptin. Traditional belief held that blockbuster drugs had to be primary care products, but the sensational success of Herceptin has opened up a new world – the blockbuster specialist product. With Merck’s vaccine for ovarian cancer, Gardasil, recently winning approval by the FDA, Friend is optimistic that further shifts in the pipeline direction will herald a new period of renewed growth.

“With the investment that went into genomics and oncology you are starting to see a change in the way that drugs are coming to market, targeting different therapeutic areas,” he continues. “We will gradually see some of the benefits of the genomics revolution, with much more biologically based medicines and targeted molecules rather than the broad brush approach. In the likes of GSK and Pfizer and other life science companies, you are beginning to see different types of medicines coming through the pipeline and targeting very specific areas.”

Blockbusters have played a key role in driving strong pharmaceutical market growth for the last 25 years. But with question marks over the future for me-too drugs – which in the past have been fertile ground for blockbusters – and the generic competition in blockbuster areas, the move towards niche drugs looks set to power strong future sales. Analyst Datamonitor, in its recent report From Blockbuster to Nichebuster, concludes that niche therapies will drive future drugs growth and incentivize R&D investment.

Dependence on blockbuster-generated revenue is set to fall from 2004-2010 according to the report, as the industry turns to a ‘nichebuster’ strategy, utilizing increased licensing activity, R&D collaborations and small-scale M&A deals to harness innovation and provide access to niche markets with a high unmet need. “The shift into niche markets is helping drive a more personalized approach to therapy,” it concludes. “Central to the development of the nichebuster model is the raised importance of personalized therapies, which is being driven by increased used of diagnostics. This trend is helping to clarify market segmentation and will boost the size of the total drug industry.”

A different beast

In the meantime, whilst the industry refocuses to these more targeted drugs, big pharma is looking to branch out in a bid to cut its risk. Alliances, buy-outs and licensing with related fields such as biotechnology are emerging as increasingly critical strategies for pharma firms to access innovation in novel areas of science and new products in different therapeutic areas. “The collaboration between the biotechnology industry and the pharmaceutical industry will continue to increase because the pharma industry recognises that innovations in R&D are particularly strong in the biotech field, while the pharma industry is relying on other things such as regulatory clinical development, patent filing and so on,” suggests Capgemini Life Sciences’ Senior Consultant Dr Aldo Ammendola. “Novartis, for instance, is entering a new field via its acquisition of Chiron. Other companies are looking at other small biotech firms. And this will be the future way to concentrate knowledge and research and discovery in large pharma companies.”

With Novartis and its mix of vaccines, generics and branded pharma businesses, and Roche and its diagnostics business attached to its pharma operations, as well as Johnson & Johnson with its combination of branded drugs and consumers businesses, it is clear that pharma firms are a far different beast than in the past. But as the FDA approved far fewer new molecular entities last year than in previous years, the industry is wise to be looking at different ways of diversifying to spread the risk.

Despite prevailing concerns over the health of the pharmaceutical sector, however, one fact is critical: the demand for pharmaceuticals is rising and prescription volumes are increasing. Illert dismisses the notion that there is a crisis in the industry. “In most Western countries there is a heavy debate about restructuring the healthcare systems and reform in the industry and having to cut costs,” he suggests. “But if you look at what people are spending on their health and how conscious they are about their body then this is a huge growth market. And that is why I would say there is a huge reason to be optimistic – although you need to change your current business model.”

‘Change’ is definitely the order of the day. It has been a period of unprecedented change for the industry and the firms operating within it have been faced with the choice: adapt or die. What is certain is that there is no going back to the old days. “Looking back two or three years, the industry was wrestling with a whole host of different issues,” concludes Friend. “It was grappling with the pipeline issue, pricing, the regulatory challenges, as well as the impact of generics. At that point the industry was at the dividing line between the heady days of 20-30 percent returns to where we are now, and it was a watershed period in terms of how the industry would react to it. I believe the industry has started to turn the corner. This doesn’t mean the issues have gone away, however, but they have become embedded. They are now just part of the way of life of the pharmaceutical industry.”