BIG PHARMA RESPONSE TO THE PIPELINE PROBLEM

So, what are big Pharma doing to try and solve their pipeline problem? Well, they’re certainly spending a lot on R&D – in excess of $40bn in 2005. The real question is better put in terms of where this huge amount of money is going. If we consider projects that are active in R&D as the location for the spend, we find the average is over $20 million per project in 2005. I know this is a relatively meaningless number as the range of spend is enormous, but $20 million on average seems to me to be a huge number given that most biotech wouldn’t dream of needing to spend that much per project (in fact, many biotech companies would love to have half that amount for their entire clinical program).

There is another really interesting trend and it relates to licensing. We all know that big pharma has been increasing their demand for in-licensed products in recent years. What I hadn’t realized was just how substantial this trend really is. In the years from 1984-99 the top 10 companies completed about 50 in-licensing deals of late-stage products (Phase 3 and later), and this was about equal to the number of early stage product specific deals. From 2000-05 they completed about 40 late-stage product deals but over 100 early stage deals. Not only did they do about 150 deals in 6 years (as opposed to 100 deals in 15 years), but the number of early stage deals more than doubled.

But that isn’t all; in addition to the product specific deals, for the same time periods, the number of development collaboration deals went up from about 30 to nearly 400!!

What this says to me is that the top ten companies have accepted that their huge research organizations are not able to improve their efficiency at discovering key new products and that this is best done by small specialist companies with particular expertise and incredible motivation (helped by deals that include full funding of research, milestones and royalties). This is looking more and more to me like the Hollywood model – more and more movies aren’t made by the big studios, they acquire the marketing and distribution rights from production companies.

The real problem that the top 10 still have is that their 30% of the late stage compounds is probably not enough to maintain their growth and profitability while they wait for these development deals to increase their share of the early stage compounds beyond the current 25%. This must mean that they are more vulnerable to patent expiry than in previous years, and that doesn’t bode well for their long term viability as independent entities. Does that mean that another round of big company acquisition activity is on the way? I don’t see how they can all avoid it – but the question is who is buying and who is selling?

THE EMPTY PIPELINE

So what is the problem? The industry has over 300 products in Phase 3, another 120 or so in pre-registration. I haven’t looked at the historical record, but this many products in the late stages of development cannot be bad news for the industry. I suspect that the problem most people are talking about is, of course, the pipeline of the major companies – the ones with all the current business, the engine that drives the industry (and all the industries that provide support services).

A closer look at the top 10 is a little worrisome; the top 10 represent over 40% of industry sales but they only have an interest in about 30% of the pre-registration products, and only about 30% of the Phase 3 products. Now I’m not about to discuss a complex and detailed analysis of all the forecasts for all of those compounds, but I think it is possible to explore some possible causes and likely effects that come from these top-line numbers.

By definition, if 30% of pre-registration products are with the top 10, then 70% are being developed by companies outside the top 10. Closer examination also shows that only about a third of the pre-registration products involve only one company. This is no surprise – we all know that there has been a huge increase in licensing deals in recent times, but you don’t necessarily expect to see small companies going it alone these days. I think this is actually not a surprise.

All small companies have to make a strategic choice regarding their development strategy, and some are clearly attempting to become the next Amgen (namely, a company that builds itself into a major force by developing its own products, supported by sales and marketing agreements in the early days if necessary). So, for example, we see Sepracor moving out of the licensing deals that were the foundation of company strategy and into the competitive world of COPD, first with short-acting beta agonist Xopenex, and now with long-acting beta-agonist arformoterol. With revenues growing at an incredible rate and further products in the pipeline, Sepracor is a perfect example of the new strength in the pharmaceutical industry – small companies growing on the back of a highly focused and well managed product development and marketing strategy.

Is Sepracor unique? Clearly not. Multiple companies are following growth strategies that do not rely on the big-pharma companies. In fact, I am sure that many of these up-and-coming companies are actively avoiding relationships with big Pharma as the latter are seen as behemoths in which you have to have a $2bn+ product in order to get any attention at all. In some respects the same is true within the big Pharma companies. As a colleague said to me recently “How do you move the needle to achieve double-digit growth when you’re losing 15% of sales to generics next year and sales are already over $25bn?” This is a tough challenge that I do not think big Pharma can meet with the current model (some might say that any model makes this an impossible task).

I don’t subscribe to the “end of the world” model espoused by some, but I certainly think that big Pharma (or most of them) have to rethink their structure and approach before they are going to be able to be able to effectively meet the multi-faceted challenges of the market as it evolves.

INTRODUCTION TO A BLOG

The pharmaceutical industry has always been an industry experiencing change, but what is unusual about the current environment is that so much change is occurring simultaneously, and all of it appears to threaten the future of the industry. Permitting generic importation in the absence of a compulsory license, outcomes-based drug approval and reimbursement, automatic generic substitution, ten-fold drug safety margins at the start of clinical research, the absence of effective venture funding for early stage companies, and the fact that the top 10 pharmaceutical companies appear to have weak pipelines – all combine to paint a dire view of the next few years in this industry. And I haven’t started to mention managed care and Medicare impact on profitability in the profit power house US market.

In this blog I want to start conversations about these and many other issues facing our industry. Using analysis and interpretation of the news of the day, trends seen over the years and insights drawn from exposure to many of the extraordinary people in our industry, I hope to develop thoughts and ideas that will encourage us to find ways to help meet these multitude challenges.