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A Potential Game Changer For Pharma R&D

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The ghost of ‘Patent Cliff’ has been haunting the ‘Big Pharma’ since quite some time. This situation has been further aggravated by cost containment pressures of various Governments both in the developed and the emerging markets together with contentious issues on Intellectual Property Rights (IPR).

The ‘dream run’ that the innovator companies enjoyed in launching patented products so frequently and making many those blockbuster drugs of billions of dollars, is no longer a reality.

According to the findings of ‘Pharmaceutical R&D returns performance’ by Deloitte and Thomson Reuters of December 2012, the R&D Internal Rate of Return (IRR) of leading pharmaceutical companies had fallen to 7.2 percent in 2012 from 7.7 percent in 2011.

Many would, therefore, tend to believe that the paradigm is changing significantly. The new paradigm in the brand new millennium throws some obnoxious challenges, including some related to IPR, triggering a process of churning in the global pharma industry. Some astute CEOs of ‘Big Pharma’, having a deep introspection, are bracing for restructuring, not just in the business processes, but also in the process of organizational behavior, mindset, ethics and values. Unfortunately, there are many who seem to believe that this giant wheel of change can be put on the reverse gear again with might.

A new PPP initiative in pharma research:

This trying situation calls for collaborative initiatives to achieve both knowledge and cost synergies for a quantum leap in harnessing R&D output.

One such big laudable initiative has come to the fore recently in this arena. Having experienced something like the ‘law of diminishing return’ in pursuit of high resource intensive R&D projects aimed at critical disease areas such as Alzheimer’s, 10 big global pharma majors reportedly decided in February 2014 to team up with the National Institutes of Health (NIH) of the United States in a ‘game changing’ initiative to identify disease-related molecules and biological processes that could lead to future medicines.

This Public Private Partnership (PPP) for a five-year period has been named as “Accelerating Medicines Partnership (AMP)”. According to the report, this US federal government-backed initiative would hasten the discovery of new drugs in cost effective manner focusing first on Alzheimer’s disease, Type 2 diabetes, and two autoimmune disorders: rheumatoid arthritis and lupus. The group considered these four disease areas among the largest public-health threats, although the span of the project would gradually expand to other diseases depending on the initial outcome of this project.

Not the first of its kind:

AMP is not the first PPP initiative of its kind. The Biomarkers Consortium was also another initiative, not quite the same though, of a major public-private biomedical research partnership managed by the Foundation for the NIH with broad participation from a variety of stakeholders, including government, industry, academia, patient advocacy groups and other not-for-profit private sector organizations.

Open innovation strategy of GlaxoSmithKline (GSK) to discover innovative drugs for malaria is yet another example, where GSK collaborated with the European Bioinformatics Institute and U.S. National Library of Medicine to make details of the molecule available to the researchers free of cost with an initial investment of US$ 8 million to set up the research facility in Spain, involving around 60 scientists from across the world to work in this facility. 

Nearer home, ‘Open Source Drug Discovery (OSDD)’ project of the Council of Scientific and Industrial Research (CSIR) is a now a global platform to address the neglected tropical diseases like, tuberculosis, malaria, leishmaniasis by the best research brains of the world working together for a common cause.

Challenges in going solo:

In this context, it is worth mentioning that the CEO of Sanofi, Chris Viehbacher reportedly said in an interview on April 15, 2013 that his company “Won’t push hard to find an Alzheimer’s treatment because the science isn’t advanced enough to justify the costs to develop a drug. Therefore, Sanofi definitely won’t commit major resources seeking to discover an Alzheimer’s therapy.” He further stated, “I think we have to do a lot more basic science work to understand what’s going on. We really, at best, partially understand the cause of the disease. It’s hard to come up with meaningful targets.”

The above report also mentioned that the first Alzheimer’s drugs, should they prove successful, would lead to a market worth US$ 20 billion as estimated in 2012.

Long desired OSDD model:

The new AMP R&D model in the United States seems to have derived its impetus from the “open-source” wave that has swept the software industry. Keeping that spirit unchanged, in this particular ‘open source’ model too, the participants would share all scientific findings with the public and anyone would be able to use these results freely for their own research initiatives.

The collaborators of this PPP project are expected to gain a better understanding of how each disease type works, and thereafter could make use of that collaborative knowledge to discover appropriate new molecules for the target disease areas.

AMP is also expected to arrive at methods to measure a disease progression and its response to treatment much more precisely. This will enable the pharma participants getting more targets right and early, thereby reducing the high cost of failures. Just to cite an example, there have been reportedly 101 failures since 1998 in late-stage clinical trials by Pfizer, J&J and Elan Corp.

Commendable initiative in the uncharted frontier:

The ‘open source’ AMP initiative of ‘Big Pharma’ in the uncharted frontier is indeed very unusual, as the innovative drug companies are believed to be not just quite secretive about the science that they are engaged in, but also near obsessive in pursuing and clinging-on to the Intellectual Property Rights (IPR) through patents for each innovative steps related to potential new drugs.

It is worth noting that like any OSDD model, this PPP agreement also denies the participating players from using any discovery for their own drug research up until the project makes all data public on that discovery.

However, as soon as the project results will be made public, fierce competition is expected all around to develop money-spinning winning drugs.

Participating companies:

Ten pharma companies participating in AMP are reportedly, AbbVie, Biogen Idec, Bristol-Myers Squibb, GlaxoSmithKline, Johnson & Johnson, Eli Lilly, Merck & Co., Pfizer, Sanofi and Takeda. It is good to find within the participants some staunch business rivals. According to a report, a number of foundations, including the American Diabetes Association and the Alzheimer’s Association have also agreed to get involved in the project.

Some key non-participants:

For various different reasons some key pharma majors, such as, Amgen, Roche and AstraZeneca have decided not to participate in AMP.

AMP project and cost:

AMP reportedly has reportedly articulated its intent to: “Map molecular paths that each disease follows and to identify key points that could be targets for treatment. In Type 2 diabetes, for instance, researchers hope to catalog the genetic changes that raise or lower a person’s risk for developing the disease. It also will seek novel methods to measure each disease’s course while assessing if a potential drug is working. Being able to measure a disease’s progress in that way, could speed drug development by raising a company’s confidence that an experimental drug is working, or let it more quickly end a project if a drug isn’t working.”

The participating companies and the NIH have jointly agreed that the AMP would put together a research system on cost sharing basis by pooling the brightest minds who are experts on each disease, along with the best drug discovery laboratories, relevant data and samples from clinical trials to decipher the diseases in ways, which none of these pharma players has been able to achieve just yet on its own.

To achieve all these, the total cost has been estimated at roughly just US$ 230 million, as compared to US$135 billion that the global drug industry claims to spend in a year on R&D.

This should also be seen in context of a study of December 2012 carried out by the Office of Health Economics (OHE), UK with a grant from AstraZeneca, which estimated that the cost of developing new medicine has risen by ten times from US$100 million in the 1970s to as high as US$ 1.9 billion in 2011.

As a head honcho of a global pharma biggie had put it earlier, a large part of these R&D expenses are the costs of failure, as stated above.

Criticism:

As usual, criticism followed even for this path-breaking project. Critics have already started questioning the rationale of the choice of the above four disease areas, with an exception perhaps for Alzheimer’s and wondered whether the participating players are making use of the federal fund to push hard the envelope of their respective commercial intents.

Another new collaborative approach: 

In another recently announced collaborative initiative, though not of the same kind, where Merck & Co has reportedly entered three separate collaboration agreements to evaluate an immunotherapy cancer treatment that is part of a promising new class of experimental drugs that unleash the body’s immune system to target cancer cells.

Conclusion:

There could still be some hiccups in the process of effective implementation of the AMP project. Hope, all these, if any, will be amicably sorted out by the participants of stature for the benefits of all.

Be that as it may, ‘open source’ model of drug discovery, as believed by many, would be most appropriate in the current scenario to improve not only profit, but also to promote more innovative approaches in the drug discovery process.

On May 12, 2011, in an International Seminar held in New Delhi, the former President of India Dr. A.P.J. Abdul Kalam highlighted the need for the scientists, researchers and academics to get effectively engaged in ‘open source’ philosophy by pooling talent, patents, knowledge and resources for specific R&D initiatives from across the world for newer and innovative drugs.

According to available reports, one of the key advantages of the ‘open source’ model would be substantial reduction in the high cost of failures of R&D projects, which coupled with significant saving in time would immensely reduce ‘mind-to-market’ span of innovative drugs in various disease areas, making these medicines affordable to many more patients.

Thus, PPP initiatives in pharmaceutical R&D, such as AMP, are expected to have immense potential to create a win-win situation for all stakeholders, harvesting substantial benefits both for the pharmaceutical innovators and the patients, across the world.

By: Tapan J. Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

 

 

 

 

Biologic Drugs: The hunt for the ‘Magic Bullets’ is on

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The global pharmaceutical industry is now navigating its way through very cautiously while negotiating an unprecedented ‘patent cliff’, simultaneously with gradually drying-up R&D pipelines. This unique situation has triggered off several global mega Mergers and Acquisitions (M&A) not only involving better protected biologic drugs business, but also in the large generic space mostly in the emerging markets of the world, which used to be ignored by many before the turn of the new century.

Patent Expiry in next 12 months:

According to an article published in the ‘FiercePharma’ dated October 24, 2011 titled, ‘10 largest U.S patent losses’, over the next 12 months the following best-selling drugs, ranked not by US sales volume but by their weight in each company’s US revenue stream, will face patent expiry:

Company Brand
1 Forest Laboratories Lexapro
2 Takeda Pharmaceuticals Actos
3 Bristol-Myers Squibb Plavix
4 AstraZeneca Seroquel
5 Eli Lilly Zyprexa
6 Pfizer Lipitor*
7 Merck Singulair
8 Novartis Diovan
9 Teva Pharmaceuticals Provigil
10 Abbott Laboratories TriCor

* Patent expired on November 30, 2011

Opening a new vista of opportunity:

In the midst of such a critical situation within the global pharmaceutical industry, application of biotechnology in the drug discovery process opened up a new vista of a broad range of new class of therapies. These include monoclonal antibodies, therapeutic protein hormones, cytokines tissue growth factors, cell or gene therapies and vaccines, just to name a few.

A recent report of the Organization for Economic Cooperation and Development (OECD) predicts that 80% of the total biotech products, which are expected to be commercialized by 2030, will be medicines and medical diagnostics.

Old business model signals a diminishing return:

Over a period of decades, the business model of small-molecule based blockbuster drugs has successfully catapulted the global pharmaceutical business to a high-margin, dynamic and vibrant industry. However, a time has now come when the golden path from the ‘mind to market’ of the drug discovery process is becoming increasingly arduous and prohibitively expensive.

Deploying expensive resources to discover a New Chemical Entity (NCE) with gradually diminishing returns in the milieu of ‘me too’ types of new drugs, does no longer promise a strong commercial incentive.

A shift in focus from ‘small molecules’ to ‘large molecules’:

Since last several years, the success of biologic drugs compared to conventional small-molecule chemical drugs, has been changing the area of focus of pharmaceutical R&D altogether, making the biotech companies interesting targets for M&A.

As per published data, although the market capitalization of the top ten large pharmaceutical companies dropped more than US$ 700 billion since 2001, the same for the biotech companies, on the other hand,  has gone up by more than 50% during this period. This trend signifies proliferation of biotech drugs in the years ahead for meeting unmet needs of the patients.

To keep pace with the biotech led growth of the global pharmaceutical industry, many companies have started imbibing biotech-like R&D structure within their respective organizations. For examples, the pharmaceutical majors GsK and Pfizer have already articulated the strategic intent to restructure their respective large monolithic R&D set-ups to smaller independent drug discovery units.

Such restructuring is expected to foster ‘can do’ spirit of the biotech entrepreneurs within the recreated smaller units of large R&D setups to accelerate overall R&D productivity for enrichment of the new product pipelines. However, future will be the best judge to evaluate the success of this experiment.

As if to vindicate this emerging scenario, on November 30, 2011 Bloomberg reported, “U.K.’s largest drug maker has broken up research into competitive teams and put scientists back at the center of the process. But freedom carries a price: researchers who don’t adapt must go. Scientists now ‘live or die with their project.’ This month, Glaxo (GsK) completed the first appraisal of its new model. The company is now deciding which teams deserve more funding and which ones don’t. The conclusions will probably be made public in February when Glaxo (GsK) reports full-year earnings.”

Biologic drugs offer greater promise to meet more unmet needs:

Unlike conventional chemical drugs, most genetically modified biologic drugs work with a very high degree of precision and accuracy on the cells of the diseased organ. Many clinical studies have amply demonstrated that such drugs not only ensure faster recovery, but also help saving incremental treatment cost because of their excellent safety profile.

As we see today, more and more of those global pharmaceutical companies, who used to spend around 15% to 20% of their annual sales for R&D projects are channelizing a large part of the same to effectively compete in the fast evolving market of biologic drugs mainly through M&A. This strategy well justifies their strategic intent to make good the loss of income from the blockbuster drugs going off-patent quite in tandem with their fast dwindling R&D pipeline, as it were.

The bottom-line impact of a successful well targeted new biologic molecule to treat intractable ailments like, various types of cancer and blood disorders, auto-immune and Central Nervous System (CNS) related diseases, neurological disorders such as Parkinson’s, Myasthenia gravis, Multiple Sclerosis and Alzheimer’s disease, are expected to be huge.

Faster growth of biologic drugs:

Despite patent cliff, large molecule biologic drugs like Enbrel, Remicade, Avastin, Rituxan and Humira continue to contribute more than the small molecule drugs of chemical origin to overall growth of the large global pharmaceutical majors. Many of these drugs were sourced by them either through acquisitions or collaborative arrangements.

Cash strapped biotech companies with molecules ready for human clinical trials or with target molecules falling in the well sought after growth areas like, monoclonal antibodies, vaccines, cell or gene therapies, therapeutic protein hormones, cytokines and tissue growth factor are becoming attractive acquisition targets of the small molecules dominated large pharmaceutical companies having deep pockets.

Global Market Scenario:

According to IMS Health, biologics contribute around 17% of global pharmaceutical sales and generated a revenue of US$ 120 billion during MAT March 2009

In 2010 Biologic drugs increased their turnover to US$ 140 billion in the total market of US$ 850 billion. The sale of Biosimilar drugs outside USA exceeded US$ 1 billion.

Six biologic drugs featured in the top 12 and eight in the top 20 best selling global brands. Remicade emerged as the highest-selling biologics in 2010, ahead of Enbrel. Roche remained the top company by sales for biologics with anticancer and monoclonal antibodies. (source: Knol 2010)

Major acquisitions from 2005-2011 for Biologic drugs:

The opportunity of meeting the unmet needs of the patients with effective biologic drugs, especially in high-growth therapy areas, has given the M&A activities in the pharma-biotech space an unprecedented thrust in the recent times.

Following are the major acquisitions in the field of biologic drugs from 2005 to 2011:

Company

Target company

The deal: $billion

Products
Roche Genentech 47 Rituxan, Avastin, Herceptin, MoAbs, Oncology
Sanofi Aventis Genzyme 20 Orphan biologicsCerezyme, Fabrazyme, Renagel, Synvisc
AstraZeneca MedImmune 15.6 Monoclonal Antibodies
Merck Serono 13.5 Biologics
Takeda Millennium 8.8 Velcade, Oncology
Lilly ImClone 6.0 Erbitux, Oncology
Novartis Chiron 5.8 Vaccines
Teva Cephalon 6.2 Nuvigil, Provigil, Treanda CNS, Oncology
Abraxis American BioScience 4.2 Oncology
Astellas OSI Pharma 4.0 Tarceva, oncology
Eisai MGI Pharma 3.9 Aloxi, Salagen, Hexalen, Oncology
Celgene Pharmion 2.9 Oncology
Celgene Abraxis 2.9 Oncology
Gilead Myogen 2.5 Biotechnology
BMS Medarex 2.4 Monoclonal antibodies
J&J Crucell 2.3 Vaccines
Amgen Abgenix 2.2 Monoclonal antibodies
Boehringer Ingelheim MacroGenics 2.1 Monoclonal antibodies
Gilead CV Terapeutics 1.4 Cardiovascular
Genzyme Osiris 1.4 Prochymal, Stem cells
GSK ID Biomed 1.3 Biologics
AstraZeneca Cambridge Antibody Technology 1.3 Monoclonal Antibodies
Merck Sirna 1.1 RNAi
Amgen BioVex 1 OncoVex

(Source: Mergers and Acquisitions Review2005-2011 Pharma Biotech by Knol)

Why do so many companies want to enter into the biotech space?

The answer to the key question of why do so many companies want to enter into the biotech space of the business, in summary, could lie in the following:

  1. Truly innovative small molecule discovery is becoming more and more challenging and expensive with the low hanging fruits already being plucked.
  2. More predictable therapeutic activity of biologics with better safety profile.
  3. A higher percentage of biologic drugs have turned into blockbuster drugs in the recent past.
  4. Market entry barrier for biosimilar drugs, after patent expiry of the original molecule, is much tougher than small molecule generics.
  5. A diverse portfolio of both small and large molecules will reduce future business risks.

A recent study:

In one of their recent collaborative studies published in an article titled, “Is R&D Earning its Investment?” Deloitte and Thomson Reuters (2009) have reported that the top 12 global pharma majors have 21% to 66% biologic drugs in their late stage product pipeline with the average being at 39%.

Another interesting trend:

Besides mega acquisitions, relatively smaller pharmaceutical players have started acquiring venture-backed biotech companies to enrich their product pipelines with early-stage drugs at a much lesser cost. For example, with the acquisition of Calistoga for US $ 600 million and venture-backed Arresto Biosciences and CGI Pharmaceuticals, Gilead known for its HIV drugs, expanded into blood cancer, solid tumor and inflammatory disease segments. In 2009 the same Gilead acquired CV Therapeutics for US $1.4billion to build a portfolio for cardiovascular drugs. In November 2011, Gilead acquired ‘Pharmasset’ for US$ 11 billion to include in its product pipeline a future Hepatitis C drugs offering 95% cure rates.

Smaller biotech companies usually do not get engaged in very large deals unlike the top pharma players, but make quick, decisive and successful smaller deals more effectively.

Much less generic competition for biologic space:

After patent expiry of NCEs, innovators’ brands become extremely vulnerable to cut throat generic competition with as much as 90% price erosion. This happens as the small molecules are relatively easier to replicate by the generic manufacturers. Moreover, the process of getting regulatory approval of NCEs is also not as stringent as biosimilar drugs in most of the markets of the world.

On the other hand biosimilar drugs involving difficult, complex and expensive processes for development with stringent regulatory requirements for getting their marketing approval in the developed markets of the world like the EU and the USA, offer significant brand protection from generic competition for quite some time, even after the patent expiry.

Mainly due to this reason, brands like the following are expected to go strong for some more time without any significant competition from the biosimilar drugs:

Brand Company Launch date
Rituxan Roche/Biogen idec 1997
Herceptin Roche 1998
Remicade Centocor/J&J 1998
Enbrel Amgen/Pfizer 1998

Smaller biotech companies to be the prime targets:

In my view, the voracious appetite of large pharmaceutical companies for inorganic growth through mega M&A, will ultimately subside due to various compelling reasons.  Instead, smaller biotech companies, especially with products in Phase I or II of clinical trials, without wherewithal to take them to subsequent stages of development, will be the prime targets for acquisition by the pharma majors at an attractive valuation.

Cost of treatment:

Despite so many positives, high priced biologic drugs do raise a critical concern about the incremental load on already ballooning healthcare costs to the patients.

The Wall Street Journal (WSJ) in its September 29, 2010 issue highlighted that biologic drugs can cost as much as $1.5 million annually to the user. Similarly Forbes.com on April 12, 2009 reported, “Biologic drugs can cost up to 22 times more than traditional medications – some as much as $400,000 a year”.

This is indeed a very serious issue that needs to be resolved sooner. Speedy entry of biosimilar drugs will partly address this critical issue.

Conclusion:

Although the large pharma majors have already started experimenting to work with the pure biotech companies in terms of M&A and strategic alliances, it will be interesting to watch the long term ‘DNA Compatibility’ of the business models, organization/ work/employee culture and market outlook of these two different types of organizations while improving the global business performance of the overall entity, significantly.

Only future will tell us whether or not just restructuring of the R&D set up of companies like, Pfizer, Merck, Roche and perhaps Sanofi at a later date, helps synergizing the overall R&D productivity of the merged entities.

Be that as it may, despite serious cost concern, experts still believe that biologic drugs have all the potential to deliver the ‘magic bullets’ in the fight against many intractable diseases of mankind in not too distant future.

Hence the hunt is on.

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

‘Frugal Innovation’ in Healthcare: Ahoy!

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Patented new products have been the prime growth driver of the research based pharmaceutical companies, the world over. Probably because of this reason the world has seen over a period of time about four different molecules of H2 Blockers and six different molecules of proton pump inhibitors to treat peptic ulcers, nine varieties of statins to treat lipid disorders, ten variants of calcium channel blockers to treat hypertension, three new compounds of similar drugs to address erectile dysfunction and the list could go on. Most of these molecules attained the blockbuster status, backed by cutting edge innovative marketing strategies.

Whether all these patented molecules met significant unmet needs of the patients could well be a contentious point. However, the key point is that all these drugs did help fueling growth of the global pharmaceutical industry very significantly, including our own Indian Pharmaceutical companies, though through immaculate copying during pre-product patent regime of before January, 2005.

Since last few years, because of various reasons, the number of market launch of such patented products has greatly reduced. To add fuel to the fire, 2011-12 will witness patent expiries of many blockbuster drugs, including the top revenue grosser of the world, depleting the growth potential of many large research-based global pharmaceutical companies.

Blockbuster drug ‘Business Model’ is no longer sustainable:

The blockbuster model of growth engine of the innovator companies effectively relies on a limited number of ‘winning horses’ to achieve the business goal and meeting the Wall Street expectations. In 2007, depleting pipeline of the blockbuster drugs hit a new low in the developed markets of the world. It is estimated that around U.S. $ 140 billion of annual turnover from blockbuster drugs will get almost shaved-off due to patent expiry by the year 2016.  IMS reported that in 2010 more than U.S. $ 30 billion was adversely impacted because of patent expiry.  Another set of blockbuster drugs with similar value turnover will go off patent in 2011.  It will not be out of context to mention, that the year before last around U.S. $ 27 billion worth of patented drugs had reportedly gone off-patent.

Decline in R&D productivity with a thin silver lining though:

The decline in R&D productivity has not been due to lack of investments.  It has been reported that between 1993 and 2004, R&D expenditure by the pharmaceutical industry rose from U.S. $ 16 billion to around U.S. $ 40 billion.  However, during the same period the number of applications for New Chemical Entities (NCEs) filed annually to the U.S. FDA grew by just 7%.

It was reported that total global expenditure for pharmaceutical R&D reached U.S. $ 70 billion in 2007 and is estimated to be around U.S $ 90 billion by the end of the year just gone by.  75% of this expenditure was incurred by the U.S alone. It is interesting to note that only 22 NMEs received marketing approval by the US FDA during this period against 53 in 1996, when expenditure was almost less than half of what was incurred in 2007 towards R&D.

The silver linings:

There seem to be following two silver linings in the present scenario, as reported by IMS:

  1. Number of Phase I and Phase II drugs in the pipeline is increasing.
  2. R&D applications for clinical trials in the U.S. rose by 11.6% to a record high of 662 last year.

Funding high cost R&D will be a challenge:

Patent expiry of so many blockbusters during this period will obviously fuel the growth of generic pharmaceutical business, especially in the large developed markets of the world. The market exclusivity for 180 days being given to the first applicant with a paragraph 4 certification in the U.S. is, indeed, a very strong incentive, especially for the generic pharmaceutical companies of India.

In a scenario like this, funding of high cost R&D projects is becoming a real challenge.

Cut in R&D Expenditure has already begun:

Following its acquisition of Wyeth in 2008, Pfizer announced plans to reduce their R&D budget from the US $11 billion to between $8 and $8.5 billion by 2012. Similarly, GSK also announced a reduction of £500 million from its costs by 2012 and half of these costs are from their R&D budget.

As reported by Chemistry World in January 2010, “AstraZeneca announced its plans to reduce around 1800 R&D positions as part of a restructuring process that will see 8000 jobs go as it looks to reduce its costs by $1 billion a year by 2014”.

The time for ‘Frugal Innovation’:

In a new and fast evolving scenario when the erstwhile ‘Blockbuster Drugs Business Model’ with commensurate huge R&D spends does no longer seem to be a practical proposition. Unmet needs in the healthcare space should now be met with cost efficient ‘Frugal Innovation’, which has already dawned in the healthcare space of India.

April 15, 2010 issue of ‘The Economist’ in an article titled, “First break all the rules – The charms of frugal innovation” has described some of health related ‘Frugal Innovations’ as follows:

  • Bangalore Center of General Electric (GE) has come out with a low cost hand-held electrocardiogram (ECG) called ‘Mac 400’, which has reduced the cost of an ECG test to just US $1 per patient.
  • Tata Consultancy Services (TCS) has come out with lower-tech, yet robust, portable and relatively cheap water filter, which uses rice husks to purify water. This water filter could provide even to a large family an abundant supply of bacteria-free water for an initial investment of about US $24 and a recurring expense of about US $4 for a new filter every few months. Tata Chemicals, which is making the devices, is planning to produce 1m over the next year and hopes for an eventual market of 100m.

11th Five Year Plan of India and ‘Frugal Innovation’:

The panel set up for the appraisal of the 11th Five Year Plan of India observed that innovation needs to be “inclusive” and “frugal”.

To accelerate growth of the nation and to meet the unmet needs particularly in healthcare and education, besides others, India needs more ‘frugal innovation’ that produces more ‘frugal cost’ and high quality products and services, quite affordable to the common man of the country.

It also highlighted that a paradigm which bases its assessment of innovativeness on the quantum of expensive inputs deployed, like the numbers of scientists, expenditures on R&D etc. will always tend to produce expensive innovations because the cost of innovation must be recovered in the prices of the products it produces.

The above appraisal report goes on saying:

“This is indeed the dilemma of the ‘innovative’ companies in the pharmaceutical industry. They find it economically difficult to justify development of low cost solutions for ailments that affect poor people.”

‘National Innovation Council’ moots ‘inclusive growth’ through innovation:

To encourage the culture and process of ‘inclusive growth’ through innovation in India, Mr. Sam Pitroda , the Chairman of the ‘National Innovation Council’ had mooted a proposal for creation of a Rs 1,000 Crore corpus in the country, where the Government of India should initially take 10% to 20% share of the corpus and then its equities will be bought by the public. 

Conclusion:

The R&D model of companies like GE and TCS, as mentioned above, are taking the affordability of the common man as a starting point and then working backwards to satisfy unmet needs of the people, just as what Tata Motors did for the ‘Nano Car’ in India.

In an environment of continuous diminishing return from the big ticket R&D expenditure of the global pharmaceutical companies, across the world, I sincerely hope and pray that the world witnesses increasing number of cost effective ‘Frugal Innovation’ in healthcare, including medicines, sooner than later…just for the sake of humanity.

By: Tapan J Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Explore the Emerging Markets with the ‘Wings of Courage’.

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Overall growth rate of the global pharmaceutical industry is currently hovering around 5%. Similar situation has been prevailing since last several years. There is no indication of acceleration of growth rate from any of the top 3 regions of the world namely the USA, EU and Japan, at least in the near future.

According to IMS, the global pharmaceutical market is expected to grow around 5%-7% in 2011 to US$ 880 billion, as compared to around 4%-5% of 2010.

The reasons of the slowdown, I have discussed several times in the past through this column and do not intend to dwell on that, at least, in this Article.

The Emerging Markets of the World:

Unlike developed markets, emerging pharmaceuticals market of the world, like, India, China, Brazil, Russia, Mexico, Turkey and Korea, are showing a robust growth rate, quite commensurate to the ascending GDP growth trend of these countries.

According to IMS, the projected CAGR trend of the developed and Emerging Markets for the period of 2007–11, are as follows:

Mature Markets

CAGR 2007-11

Emerging Markets

 CAGR 2007-11
USA 4-7% China 13-16%
Canada 6-9% Korea 8-11%
Japan 2-5% Brazil 9-12%
Germany 3-6% Russia 17-20%
France 2-5% Mexico 6-9%
Italy 3-6% India 11-14%
UK 4-7% Turkey 9-12%
Spain 5-8%

(Source IMS)

Branded Generics/Generics are now key growth drivers in the Emerging Markets:

It is worth noting, unlike the developed markets of the world, where high priced branded patented drugs drive the value growth of the industry, in the emerging markets, where investment towards R&D is relatively less, branded generic and the generic products are the key growth drivers.

Such an evolving situation has prompted large global majors like Pfizer, GSK, Sanofi-aventis, Daiichi Sankyo and Abbott Laboratories, to name a few, either to acquire large generic or Biosimilar drug companies or ink various interesting and win-win collaborative deals, in these markets, to maintain their respective business growth with the branded generic and generic products in the fast growing emerging markets of the world.

Will Emerging Markets be lucrative enough only with Generic and Branded Generic products, in the long run?

Some experts do feel that, in the long run, the emerging pharmaceutical markets, like India, may not prove to be as lucrative to the global pharmaceutical majors.

The key reason being, around 80% ‘out of pocket’ expenditure for medicines in India, could be the key impediment to expanded access to higher priced innovative medicines, in general. Such a situation could seriously limit the success of branded patented drugs in India following their global strategy, compared to the developed markets of the world. The issue of affordability of such medicines will continue to be a key factor for their improved access in India, if the ground reality remains unchanged. Top line business growth only with Generics and Branded Generics in the emerging markets may not be sustainable enough, in the long run, for the innovator companies to adequately fund their R&D initiatives to meet the unmet needs of the patients.

The other school of thought:

The other school of thought, however, argues that ‘out-of pocket” characteristic of  India is indeed more sustainable in terms of cost containment pressure, than those  markets where the government or health insurance companies cover a large part of the medical expenses for the population.

Every year around 1% of population comes above the poverty line in India together with a growing ‘middle income’ segment with increasing purchasing power. This cycle, in turn, will keep fueling the growth of healthcare space, contributing significantly to the progress of the pharmaceutical industry of the country.

‘One size fits all’ global strategy unlikely to succeed in the ‘Emerging Markets’:

In my view ‘One size fits all’ type of strategy, especially in the area of pricing, is unlikely to succeed in the emerging markets of the world. Pharmaceutical Companies will need to have  different types of ‘tailor made’ strategic approaches for markets like Brazil, Russia, India, China, South Africa, Mexico, Korea and Turkey.

Pricing Strategy will be a key determinant to success:

For better access to medicines, ‘differential pricing strategy’ has been the stated policy of large global companies like, GSK and MSD. If this trend continues, a win-win situation could be created, when unmet needs of a large number of patient groups could be met with innovative medicines, paving the way for the innovator companies to register a healthy, both top and bottom line, business growth in these markets to effectively fund their R&D projects, besides others.

The most successful brand launch in India, so far:

The credit for the most successful new patented product launch (launched in 2008) in the recent times, I reckon, should go to Januvia (Sitagliptin), an oral anti-diabetic molecule from the global major MSD. The reported global sales of Januvia in 2008 was US $1.4 billion and the sales reported in India was around Rs. 77 Crore (around US $17 million) in just over two years with around 2.4% market share in the large and fragmented Oral Ant-Diabetic segment (IMS, MAT March 2010). This could happen, in my view, not only due to a brilliant business strategy executed with military precision but also because of a differential pricing strategy adopted by the company for this particular product in India.

In recent times, it has not been difficult to record a turnover of around US $ 20 – 25 million by a large pharmaceutical brand either in India or China.

Conclusion:

If this does not happen, due to one reason or the other, it would arguably be quite challenging for the global innovators to be able to keep engaged in the high-cost and high-risk R&D initiatives, by driving their business growth mainly with generic and branded generic medicines in the fast growing emerging markets of the world.

Thus the name of the game for the global innovator companies will be to Explore the Emerging Markets with the ‘Wings of Courage’.

By: Tapan J Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

The traditional ‘Business Models’ of R&D focused Global Pharmaceutical majors are undergoing a metamorphosis

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Mounting pressure on the P&L account, as the products go off patent:

Patented new products are the prime growth driver of the research based pharmaceutical companies of the world. Since last few years, because of various reasons, the number of launch of such products has been greatly reduced. To add fuel to the fire, 2010-12 will witness patent expiries of many blockbuster drugs, depleting the growth potential of the most of the research based pharmaceutical companies.

The existing model of growth engine needs a relook:

The blockbuster model of growth engine of the innovator companies effectively relies on a limited number of ‘winning horses’ to achieve the business goal and meeting the Wall Street expectations. In 2007, depleting pipeline of the blockbuster drugs hit a new low in the developed markets of the world. It is estimated that around U.S. $ 140 billion of annual turnover from blockbuster drugs will get almost shaves off due to patent expiry by the year 2016. IMS reports that in 2010 more than U.S. $ 30 billion will be adversely impacted because of patent expiry. Another set of blockbuster drugs with similar value turnover will go off patent the year after i.e. 2011. It will not be out of context to mention, that last year around U.S. $ 27 billion worth of patented drugs had gone off-patent.

Decline in R&D productivity is not related to investments:

The decline in R&D productivity has not been due to lack of investments. It has been reported that between 1993-2004, R&D expenditure by the pharmaceutical industry rose from U.S.$ 16 billion to around U.S.$ 40 billion. However, during the same period the number of applications for New Chemical Entities (NCEs) filed annually to the U.S. FDA grew by just 7%.

Total global expenditure for pharmaceutical R&D was reported to have reached U.S. $ 70 billion in 2007 and is expected to be around U.S. 90 billion in year 2010. 75% of this expenditure was incurred by the U.S alone. It is interesting to note that only 22 NMEs received marketing approval by the US FDA during this period against 53 in 1996, when R&D expenditure was almost less than half of what was incurred in 2007 towards R&D.

Be that as it may, the pressure on the P&L (Profit and Loss) accounts of these companies is indeed mounting.

The silver linings:

However, there seem to be following two silver linings in the present scenario, as reported by IMS:

1. Number of Phase I and Phase II drugs in the pipeline is increasing.

2. R&D applications for clinical trials in the U.S. rose by 11.6% to a record high of 662 last year.

Significant growth of generic pharmaceuticals is expected in near future, far surpassing the patented products growth:

Patent expiry of so many blockbusters during this period will fuel the growth of generic pharmaceutical business, especially in the large developed markets of the world. The market exclusivity for 180 days being given to the first applicant with a paragraph 4 certification in the U.S. is, indeed, a very strong incentive, especially for the generic companies of India.

Healthcare reform of March/April 2010 in the USA is expected to give a further boost to this trend.

Pressure on traditional Marketing strategies:
The marketing expenditure for pharmaceutical of the global pharmaceutical companies as reported by Scrip is U.S. $ 57.5 billion. However, an industry association reported that research based pharmaceutical companies in the U.S. spent $ 29.4 billion on R&D and $ 27.7 billion on promotional activities.

New Product Differentiation could be a big issue:

Products in R&D pipeline could face problems of ‘differentiation’ in terms of value offering to the patients, once they are launched. This issue is expected to surface especially with products in the oncology disease area. IMS Health reports that about 55 oncology projects are now in Phase III and 8 in the pre-registration stage. Thus about 50 new oncology products are expected to hit the market by end 2010. Many experts anticipate that there may not be significant brand differentiation between the brands of the ‘same basket’, leading to cut-throat competition and further pressure on expenditure towards marketing of brands.

The changing business strategy of global pharmaceutical companies during this trying time:

In this trying time, the global pharmaceutical companies are resorting to an interesting strategy, combing both old and the new ones. I shall touch upon the following seven strategies:

1. Mergers and Acquisitions (M&A):
Mega M&A strategies are still being actively followed by some large Pharmaceutical companies mainly to enrich R&D pipeline and achieve both revenue and cost synergies.
However, some of these large global companies have started realizing that ‘powerhouses’ created through past mega mergers and acquisitions have now become too large to manage effectively for various reasons. Mismatch between two different organization cultures also throws a great challenge to obtain desired output, many a times. Moreover, the merged R&D set up could become too large to manage, impacting the R&D productivity very adversely.

2. Extension of the Product Life Cycle and Effective Product Life Cycle Management:
Many global pharmaceutical companies are now engaged in ‘product life cycle management’ of their existing products by extending the ‘product life cycle’, effectively. In that process they are trying to maximize the brand value of these products in the international markets. For example, AstraZeneca has developed once daily treatment with their anti-psychotic drug Seroquel XR. This extended-release formulation of the same drug will help patients avoid 5 to 7-day titration required with the immediate-release version.
Towards similar initiative, Pfizer has also recently set up a dedicated “Established Product Business Unit” within worldwide pharmaceutical operations, to hasten business growth in the international markets.

3. OTC Switch:
Prescription to ‘Over the Counter’ (OTC) switch is another business strategy that many innovator companies are now imbibing, at a much larger scale.

This strategy is helping many global pharmaceutical companies, especially in the Europe and the U.S to expand the indication of the drugs and thereby widening the patients base.

Recent prescription to OTC switches will include products like, Losec (AstraZeneca), Xenical (Roche), Zocor (Merck), etc.

4. Emerging of Preventive Therapy, like Vaccines:
Many large global companies, like GSK, Sanofi Aventis and Merck are getting attracted by the emerging opportunities in the fast developing vaccines market. This trend has been triggered primarily by heightened awareness and greater focus on preventive medicines almost all over the world. It is estimated that in 2011, the vaccines market will grow from U.S.$ 13 billion to U.S.$ 30 billion registering a growth of 18% each year during this period. PricewaterhouseCoopers (PwC) estimates vaccine market to be U.S. $ 42 billion by year 2015 based on data of 245 pure vaccines and 11 combination vaccines currently under clinical development. It is interesting to note that 90 of these are therapeutic vaccines for cancer.

5. Entry into highly contentious market of Biosimilar drugs:
The Generic Pharmaceutical Association (GPhA) has estimated that it is possible to save US$ 10 billion – 108 billion over a period of 10 years with biosimilars in the top 12 categories of biological drugs. Some of these biological are already off patent and for others the patents will expire shortly.
Only a few biosimilar drugs have reached the global markets as on date because of their regulatory restrictions in most of the developed markets of the world. Even those biosimilar drugs, which have since been launched in Europe like, human growth hormone (HGH) Somatropin and Epoetin alfa for anemia, are yet to make a mark in the market place.

IMS Health reports that Omnitrope (somatropin) of Sandoz, the first biosimilar drug launched in the developed world, has registered less than 1% of the U.S. $ 831 million HGH market in Europe. Moreover, the launch of 3 more biosimilar versions of epoetin alfa in 2007, made almost negligible impact in the market. Such a low acceptance of biosimilars in the western world, so far, could well be due to lingering safety concern of the medical profession with such types of drugs.

Currently, Japan and USA are working on formal guidelines for biosimilar drugs, whereas Health Canada has already issued draft regulatory guidelines for their approval in Canada.

In April 2010, Reliance Life Science has already announced its intent to enter into the Biosimilar market of the EU in not too distant future.

6. Entry into Generic Markets:

Some large global pharmaceutical companies have already made a firm commitment to the generics market. Novartis paved the way for other innovator companies to follow this uncharted frontier, as a global business strategy. Last year the generic business of Novartis (under Sandoz) recorded 19% of their overall net sales, with turnover from generics registering U.S$ 7.2 billion growing at 20%.

Keen business interest of Sanofi Aventis to acquire Zentiva, the generic pharmaceutical company of Czechoslovakia; it’s very recent acquisition of the generic pharmaceutical company Laboratorios Kendrick of Mexico and Shantha Biotech in India and acquisition of Ranbaxy Laboratories of India by Daiichi Sankyo, will vindicate this point.

Pfizer has also maintained its generics presence with Greenstone in the U.S. and is using the company to launch generic versions of its own off patent products such as Diflucan (fluconazole) and Neurontin (gabapentin).

7. Collaboration with the Indian Companies:

Another emerging trend is the collaboration of MNCs with the Indian pharmaceutical companies to market generics in the global market, like, Pfizer with Aurobindo and Claris, GSK with Dr. Reddy’s Laboratories (DRL), Astra Zeneca with Torrent. I guess that similar trend will continue, in future, as well.

Conclusion:
Another ‘new pharmaceutical sales and marketing model’ is gradually emerging in the global markets. This model emphasizes partnership by bundling medicines with services. The key success factor, in this model, will depend on which company will offer better value with an integrated mix of medicines with services. PwC indicates that in this ‘new pharmaceutical marketing model’, besides required medicines, the expertise of a company to effectively deliver some key services like, patient monitoring and disease management could well be the cutting edge for future success.

By Tapan Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Will Global Pharma Majors be successful in their foray into highly competitive generics pharma business offering no (patent) protection of any kind?

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As reported by IMS Health, emerging markets will register a growth rate of 14% to 17% by 2014, when the developed markets will be growing by 3% to 6% during the same period. It is forecasted that the global pharmaceutical industry will record a turnover of US$1.1 trillion by this period.

Mega consolidation process in India begins in 2009:

Fuelled by the above trend, the year 2009 witnessed the second biggest merger, so far, in the branded generics market of India when the third largest drug maker of Japan, Daiichi Sankyo acquired 63.9 percent stake of Ranbaxy Laboratories of India for US $4.2 billion.

This was widely believed to be a win-win deal for both Ranbaxy and Daiichi Sankyo, when Daiichi Sankyo will leverage the cost arbitrage of Ranbaxy effectively while Ranbaxy will benefit from the innovative product range of Daiichi Sankyo. This deal also establishes Daiichi Sankyo as one of the leading pharmaceutical generic manufacturers of the world, making the merged company a force to reckon with, in the space of both innovative and generic pharmaceuticals business.

Another mega acquisition soon followed:

Daiichi Sankyo – Ranbaxy deal was followed in the very next year by Abbott’s acquisition of the branded generic business of Piramal Healthcare in India. This deal, once again, vindicated the attractiveness of the large domestic Indian Pharma players to the global pharma majors.

In May 2010, the Pharma major in the US Abbott catapulted itself to number one position in the Indian Pharmaceutical Market (IPM) by acquiring the branded generics business of Piramal Healthcare with whopping US$3.72 billion. Abbott acquired Piramal Healthcare at around 9 times of its sales multiple against around 4 times of the same paid by Daiichi Sankyo.

Was the valuation right for the acquired companies?

Abbott had valued Piramal’s formulations business at about eight times sales, which is almost twice that of what Japan’s Daiichi Sankyo paid for its US$4.6 billion purchase of a controlling stake in India’s Ranbaxy Laboratories in June 2008.

According to Michael Warmuth, senior vice-president, established products of Abbott, the acquired business will report to him and will be run as a standalone business unit after conclusion of the merger process. Warmuth expects that the sales turnover of Abbott in India, after this acquisition, will grow from its current around US$ 480 million to US$2.5 billion in the next decade.

On the valuation, Warmuth of Abbott has reportedly commented “If you want the best companies you will pay a premium; however, we feel it was the right price.” This is not surprising at all, as we all remember Daiichi Sankyo commented that the valuation was right even for Ranbaxy, even when they wrote off US$3.5 billion on its acquisition.

For Abbott, is it a step towards Global Generics Markets?

It is believed that the Piramal acquisition is intended towards achieving a quantum growth of Abbott’s business in the IPM. However, it is equally important to note the widely reported quite interesting statement of Michael Warmuth’s, when he said, “we have no plans immediately to export Piramal products [to third-country markets] but we will evaluate that. You won’t be at all surprised that if we evaluate that.”

The Key driver for acquisition of large Indian companies:

Such strategies highlight the intent of the global players to quickly grab sizeable share of the highly fragmented IPM – the second fastest growing and one of the most important emerging markets of the world.

If there is one most important key driver for such consolidation process in India, I reckon it will undoubtedly be the strategic intent of the global pharmaceutical companies to dig their feet deep into the fast growing Indian branded generic market, contributing over 98% of the IPM. The same process is being witnessed in other fast growing emerging pharmaceutical markets, as well, the growth of which is basically driven by the branded generic business.

Important characteristics to target the branded generic companies in India:

To a global acquirer the following seem to be important requirements while shortlisting its target companies:

• Current sales and profit volume of the domestic branded generic business
• Level of market penetration and the rate of growth of this business
• Strength, spread and depth of the product portfolio
• Quality of the sales and marketing teams
• Valuation of the business

What is happening in other emerging markets? Some examples:

The most recent example of such consolidation process in other emerging markets happened on June 10, 2010, when GlaxoSmithKline (GSK) announced that it has acquired ‘Phoenix’, a leading Argentine pharmaceutical company focused on the development, manufacturing, marketing and sale of branded generic products, for a cash consideration of around US $253 million. With this acquisition, GSK gains full ownership of ‘Phoenix’ to accelerate its business growth in Argentina and the Latin American region.

Similarly another global pharma major, Sanofi-aventis is now seriously trying to position itself as a major player in the generics business, as well, with the acquisition of Zentiva, an important player in the European generics market. Zentiva, is also a leading generic player in the Czech, Turkish, Romanian, Polish, Slovak and Russian markets, besides the Central and Eastern European region. In addition to Zentiva, in the same year 2009, Sanofi-aventis also acquired other two important generic players, Medley in Brazil and Kendrick in Mexico.

With this Sanofi-aventis announced, “Building a larger business in generic medicines is an important part of our growth strategy. Focusing on the needs of patients, Sanofi-aventis has conducted a regional approach in order to enlarge its business volumes and market share, offering more affordable high-quality products to more patients”.

Faster speed of such consolidation process could slow down the speed of evolution of the ‘generics pharmaceutical industry’ in India:

As the valuation of the large Indian companies will start attracting more and more global pharmaceutical majors, the revolutionary speed of evolution of the ‘generics pharmaceutical industry’ in India could slow down. The global companies will then acquire a cutting edge on both sides of the pharmaceutical business, discovering and developing innovative patented medicines while maintaining a dominant presence in the fast growing emerging branded generics market of the world.

Recent examples of Indian companies acquired by global companies:

1. Ranbaxy – Daiichi Sankyo
2. Dabur Pharma – Fresenius
3. Matrix – Myalan
4. Sanofi Pasteur – Shanta Biotech
5. Orchid – Hospira
6. Abbott – Piramal Healthcare

Indian Pharmaceutical companies are also in a shopping spree:

It has been reported that by 2009, around 32 across the border acquisitions for around US $2 billion have been completed by the Indian pharmaceutical and biotech players. Recently post Abbott deal, Piramals have expressed their intent to strengthen the CRAMS business to make good the drop in turnover for their domestic branded generics business, through global M&A initiatives.

Some of the major overseas acquisitions by the Indian Pharmaceutical and Biotech companies:

1. Biocon – Axicorp (Germany)
2. DRL – Trigenesis Therapeutics (USA)
3. Wockhardt – Esparma (Germany), C.P. Pharmaceuticals (UK), Negma (France), Morton Grove (USA)
4. Zydus Cadilla – Alpharma (France)
5. Ranbaxy – RPG Aventis (France)
6. Nicholas Piramal – Biosyntech (Canada) , Minrad Pharmaceuticals (USA)

What is happening in other industries?

In spite of the global financial meltdown in 2009, the future of M&A deals in India looks promising across the industry. Some of the major offshore acquisitions by the Indian companies are as follows:

 

Mega acquisition of foreign companies by Indian companies:

• Tata Steel acquired 100% stake in Corus Group on January 30, 2007 with US$12.2 billion.
• India Aluminum and Hindalco Industries purchased Canada-based Novelis Inc in February 2007 for
US $6-billion.
• The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009 for US $2.8 billion.
• Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008. The deal
amounted to $2.3 billion.
• Acquisition Asarco LLC by Sterlite Industries Ltd’s for $1.8 billion in 2009
• In May 2007, Suzlon Energy acquired Germany’s- wind turbine producer Repower for US$1.7 billion.

Mega acquisition of Indian companies by foreign companies:

• Vodafone acquired administering interest of 67% owned by Hutch-Essar, on February 11, 2007 for US
$11.1 billion.
• The Japan based telecom firm NTT DoCoMo acquired 26% stake in Tata Teleservices for USD 2.7
billion, in November 2008.

An alarm bell in the Indian Market for a different reason:

It has been reported that being alarmed by these developments, Indian Pharmaceutical Alliance (IPA) has written a letter to the Department of Pharmaceuticals, highlighting, “Lack of available funding is the main reason for the recent spurt in the sale of stakes in domestic companies”.

The letter urged the Government to adequately fund the research and development initiatives of the Indian Pharmaceutical Companies to ensure a safeguard against further acquisition of large Indian generic players by the global pharmaceutical majors. To a great extent, I believe, this is true, as the domestic Indian companies do not have adequate capital to fund the capital intensive R&D initiatives.

Will such consolidation process now gain momentum in India?

In my view, it will take some more time for acquisitions of large domestic Indian pharmaceutical companies by the Global Pharma majors to gain momentum in the country. In the near future, we shall rather witness more strategic collaborations between Indian and Global pharmaceutical companies, especially in the generic space.

The number of high profile M&As of Indian pharma companies will significantly increase, as I mentioned earlier, when the valuation of the domestic companies appears quite attractive to the global pharma majors. This could happen, as the local players face more cut-throat competition both in Indian and international markets, squeezing their profit margin.

It will not be a cake walk…not just yet:

Be that as it may, establishing dominance in the highly fragmented and fiercely competitive IPM will not be a ‘cakewalk’ for any company, not even for the global pharmaceutical majors. Many Indian branded generic players are good marketers too. Companies like, Cipla, Sun Pharma, Alkem, Mankind, Dr.Reddy’s Laboratotries (DRL) have proven it over a period of so many years.

We witnessed that acquisition of Ranbaxy by Daiichi Sankyo did not change anything in the competition front. Currently the market share of Abbott, including Solvay and Piramal Healthcare, comes to just 6.4% followed by Cipla at 5.5% (Source: AIOCD). This situation is in no way signifies domination by Abbott in the IPM, even post M&A.

Thus the pharmaceutical market of India will continue to remain fragmented with cut-throat competition from the existing and also the newer tough minded, innovative and determined domestic branded generic players having both cost arbitrage and the spirit of competitiveness.

Simultaneously, some of the domestic pharmaceutical companies are in the process of creating a sizeable Contract Research and Manufacturing Services (CRAMS) sector to service the global pharmaceutical market.

Conclusion:

In my view, it does not make long term business sense to pay such unusually high prices for the generics business of any company. We have with us examples from India of some these acquisitions not working as the regulatory requirements for the low cost generics drugs were changed in those countries.

Most glaring example is the acquisition of the German generic company Betapharm by DRL for US$ 570 million in 2006. It was reported that like Piramals, a significant part of the valuation of Betapharm was for its trained sales team. However, being caught in a regulatory quagmire, the ultimate outcome of this deal turned sour for DRL.

Could similar situation arise in India? Who knows? What happens to such expensive acquisitions, if for example, prescriptions by generic names are made mandatory by the Government within the country?

By Tapan Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Emerging markets and a robust oncology portfolio expected to be the future growth engine of the global pharmaceutical industry… but not without associated pricing pressures.

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When the growth rate of the developed markets of the global pharmaceutical industry started slowing down along with the declining R&D productivity, the emerging markets were identified as the new ‘El-Dorado’ by the global players. At the same time, new launch of anti-cancer drugs, more in number, started giving additional thrust to the growth engine of the industry, at least in the developed markets and for the ‘creamy layers’ of the emerging markets of the world. As cancer is being considered as one of the terminal illnesses, the cancer patients from all over the world, would like to have their anti-cancer medications, at any cost, even if it means just marginal prolongation of life with a huge debt burden.According to a recent study done by the Cancer Research, UK, despite significant decline in the overall global pharmaceutical R&D productivity over a period of time, in a relative yardstick, newer anti-cancer drugs have started coming up to the global market with a much greater frequency than ever before. ‘Pharmacy Europe’reports that 18 percent, against a previous estimate of 5 percent of 974 anti-cancer drugs will see the light of the day in the global market place, passing through stringent regulatory requirements. This is happening mainly because of sharper understanding of the basic biology of the disease by the research scientists.Another study reports that between 1995 and 2007 such knowledge has helped the scientists to molecularly target ‘kinase inhibitors’, which are much less toxic and offers much better side effect profile. Well known anti-cancer drug Herceptin of Roche is one of the many outcomes of molecularly targeted research.

Price of Anti-cancer drugs:

Although in the battle against the much dreaded disease cancer, the newer drugs which are now coming to the market, are quite expensive. Even in the developed markets the healthcare providers are feeling the heat of the cost pressure of such medications, which would in turn impact the treatment decisions. Probably because of this reason, to help the oncologists to appropriately discuss the treatment cost of anti-cancer drugs with the patients, the American Society of Clinical Oncology recently has formed a task force for the same.

The issue is now being fiercely debated even in the developed markets of the world:

In the developed markets of the world, for expensive cancer medications, the patients are required to bear the high cost of co-payment, which may run equivalent to thousands of U.S dollars. Many patients are finding it difficult to arrange for such high co-payments.

Thus, it has been reported that even the National Institute of Health and Clinical Excellence (NICE), UK considers some anti-cancer drugs not cost-effective enough for inclusion in the NHS formulary, sparking another set of raging debate.

‘The New England Journal of Medicine’ in one of its recent articles with detail analysis, expressed its concern over sharp increase in the price of anti-cancer medications, specifically.

Is the global pharmaceutical industry in a ‘gold rush’ to get into the oncology business?

Recently ‘The New York Times’ reported some interesting details. One such was on the global sales of anti-cancer drugs. The paper reports that in 1998 only 12 anti-cancer drugs featured within the top 200 drugs, ranked in terms of global value turnover of each. In that year Taxol was the only anti-cancer drug to achieve the blockbuster status with a value turnover of U.S$ 1 billion.

However, in 2008, within top 200 top selling drugs, 23 were for cancer with three in the top ten, clocking a global turnover of over U.S$ 1 billion each. 20 out of 126 drugs recording a sales turnover over U.S$ billion each, were for cancer, impressive commercial growth story of which is far from over now.

How to address this issue?

Experts are now deliberating upon to explore the possibility of creating a ‘comparative effectiveness center’ for anti-cancer drugs. This center will be entrusted with the responsibility to find out the most cost effective and best suited anti-cancer drugs that will be suitable for a particular patient, eliminating the possibility of wasteful expenses, if any, with the new drugs, just because of their newness and some additional features, which may not be relevant to a particular patient. If several drugs are found to be working equally well on a patient, most cost effective medication will be recommended to the particular individual.

Some new anti-cancer medications are of ‘me-too’ type:

‘The Journal of National Cancer Institute’ reports that some high price anti-cancer drugs are almost of ‘me too’ type, which can at best prolong the life of a patient by a few months or even weeks. To give an example the journal indicated, ‘Erbitux for instance, prolongs survival in lung cancer patients by 1.2 months… at a cost of U.S$ 80, 000 for an 18 – week course of treatment.’

However, the manufacturer of the drug later told ‘The Wall Street Journal’ (WSJ), ‘U.S.$ 80,000 is like a sticker price, but the street price is closer to U.S$ 10,000 per month” i.e around U.S$ 45,000 for 18 week course of treatment.

Conclusion:

Even in the developed countries, the heated debate on expensive new drugs, especially, in the oncology segment is brewing up and may assume a significant proportion in not too distant future. India being one of the promising emerging markets for the global pharmaceutical industry, willy nilly will get caught in this debate, possibly with a force multiplier effect, sooner than later.

By Tapan Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Global Pharmaceutical Industry: Capturing the micro-trends, having potential to become future mega-trends.

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The situation:Almost the entire developed world is reeling under recession… Slowed down business growth… Gradual drying up of research pipeline… Skyrocketing R&D cost… Pressure on product price …Market capitalization going south… Cut throat market competition… Depressed business sentiments…Past M&As are no longer yielding desired results… Global pharmaceutical companies are to lose nearly US$100 billionin sales as many blockbuster drugs are set to go off-patent over the next five years. Sounds quite like a dooms day! No, in my view, the industry including in India, is going through a transformation process. Is any trend emerging through this process? Yes, of course. Let us now try to capture these micro-trends, which have a potential to become tomorrow’s mega-trends.The response:

Before we delve into that, let us see how the global pharmaceutical industry has been responding to such a situation during this trying time. A strong instinct of survival, in such a situation, will undoubtedly prevail. This instinct is driving some of the large companies, with reasonably deep pocket, towards consolidation. This is happening through mergers, acquisitions and even through hostile takeovers.

Globally, from 2008 to date about 58 mergers and acquisitions have taken place, mega, big or small. Amid the biggest financial crisis since the Great Depression, Pfizer Inc., Merck & Co. and Roche Holding AG could raise a mindboggling amount of US $155 billion to expand and survive in their business.

This month Merck & Co acquired Schering Plough for US$41.1 billion in a cash-and-stock deal that will create the second largest pharmaceutical company in the USA. Richard Clarke, Chairman and CEO of Merck said that the merged company would benefit from the rich R&D pipeline, a significantly broader product portfolio and a wider presence in the global markets.

Besides enriching R&D pipeline and achieving substantial revenue synergy, the merged entity is expected to achieve significant cost synergy of about US$ 3.5 billion by 2011. This deal comes just six weeks after Pfizer Inc swallowed up Wyeth for a record US$68 billion. This move of Pfizer’s is not only expected to enlarge its product portfolio, but also to significantly reduce its dependence on Lipitor, which goes off-patent in 2011.

Just after these, Roche clinched a deal to acquire 44% of Genentech Inc with US$ 46 billion. In 2008 almost 75% of Pharmaceuticals sales of Roche were contributed by the products brought in from Genentech stable. This signifies the importance of acquisition of Genentech by Roche.

Will the M&A strategy be viable in the longer term?

All these companies are basically looking for various avenues to tide over the impending crisis, especially in their R&D pipeline by acquiring other suitable companies. However, looking at the past records, it appears that many of these mega mergers may not fetch a sustainable longer term gain. Insatiable desire to merge or acquire another company for various reasons, keep coming back to these companies after a little while, once again. Pfizer, GlaxoSmithKline (GSK), Sanofi Aventis etc will stand as good examples. Some believe that merging just for the sake of width and depth of the R&D pipeline could have its underlying risks, as business compulsion of two different research cultures to come together may cause a serious adverse impact on ‘the climate of innovation’. Such a congenial environment very often plays a critical role in the process of discovery of breakthrough drugs. Probably because of this reason many questioned whether Genentech’s productive R&D culture can flourish under Roche’s full control.

Let me now deliberate on emerging micro-trends in the global pharmaceutical industry. All these micro-trends, in my view, are having potential to get transformed into mega-trends in not too distant future.

Micro-trend 1: Reorganization of large R&D set-ups into smaller units to foster innovation.

Despite creating large R&D set-up through mega mergers, we have also witnessed that some pharmaceutical majors like, GSK, are reorganizing the large R&D set-ups into smaller units to foster innovation, under the leadership of Andrew Witty, the current CEO. This strategy is expected to reap rich harvest.

Micro-trend 2: From concentrating exclusively on innovative medicines to expansion into low risk generic medicines.

Not so long ago Global R&D companies focused only the business of innovative prescription medicines. Low margin generic business was not their cup of tea. Today the scenario has made a 180 degree shift. Low risk, low cost and high volume turnover of generic business is now attracting many R&D based companies.

We are now witnessing another model of mergers and acquisitions, which was pioneered by Novartis some time back. An increasing number of companies are planning to spread their business in less risky generics pharmaceutical businesses. This business model will not require going through lengthy R&D and ever increasing stringent regulatory approval process for their entire product portfolio, in the developed markets of the world. Following this business model Daiichi Sankyo acquired Ranbaxy, in India. Sanofi-Aventis is in the process of acquiring the generic company of Eastern Europe, Zentiva. GSK acquired Pakistan operations of Bristol Myers Squibb, other generic business in South Africa and Egypt and mature products business of UCB in some selected markets of the world. Pfizer has also recently made somewhat similar move in India by entering into a strategic alliance with Aurobindo drugs for sourcing generic formulations for their global markets.

Micro-trend 3: From only prescription medicine business to businesses like, OTC, Nutrition, Diagnostics, Animal Health products, to reduce the business risk.

Some research based companies are now trying to somewhat insulate themselves from high risk R&D business by focusing on, besides generics, other low risk areas like, over the counter medicines (OTC), nutrition products, diagnostics, animal health businesses etc. Companies like, GSK, Pfizer, Roche will be good examples for such strategy.

Micro-trend 4: From sharp business focus mainly on top 10 markets of the world to extension of focus on key emerging markets of the world.

Not so long ago, large multinational companies (MNCs) used to have major focus on top 10 markets of the world. Now a days many of these companies are extending their business focus on emerging markets, like, India, Brazil, China, Russia, Turkey, Mexico etc, which are riding high on a very strong growth curve, unlike USA, Europe or Japan.

In these markets to gain a critical mass, the MNCs will need to enter the generic business and the best way to do it is by acquiring a good generic company. For this reason, in India we may soon start witnessing MNCs acquiring large to mid-size domestic Indian pharmaceutical companies. Daiichi Sankyo has just shown the way by acquiring Ranbaxy in India. This process has not started in full swing, as yet, probably because of expected very high valuation for their respective companies, by the Indian promoters following Ranbaxy deal.

Micro-trend 5: Gradual shift in R&D focus from infectious to chronic to preventive (vaccines) to personalized medicines.

Global pharmaceutical industry got a head start with the innovative drugs to treat infectious diseases. It gained growth momentum by changing its R&D focus on non-infectious chronic disease areas. We now observe a micro-trend to move towards preventive therapy like vaccines even for cervical cancer. With the emergence of stem cell research in the USA and with the rapid progress of RNAi technology, very soon we may enter into the area of personalized medicines, as well. Thus, in my view preventive and personalized medicines will be the high growth pharmaceutical business of future. At that time, the pharmaceutical business model will change significantly though, to adapt to the changing business environment.

Is the era of Blockbuster drugs over?

Let me now reiterate that contrary to the belief of many, future R&D pipelines of the global pharmaceutical companies are not too dry, either. I am not in agreement with many pontificating that the future of blockbuster drugs is over. Published reports indicate that 581 primary-care driven NCEs covering disease areas like, Central Nervous System (CNS), Cardiovascular, Vaccines, Respiratory, Anti-infective etc, are currently in Phase I and Phase II stages. Similarly 637 specialist-care driven NCEs covering disease areas like, Oncologics, Autoimmune agents, HIV, Immunostimulants, Alzheimer, Immunosuppressive etc, are also in phase II and Phase III clinical trial stages. Altogether 1218 NCEs are currently in Phase II and Phase III stages of clinical trial.

Indian Pharmaceutical Companies – are they in a dilemma?

In sharp contrast to prevailing scenario in the global pharmaceutical industry, in India, after a paradigm shift to a new IPR regime, the domestic pharmaceutical industry seems to be in a great dilemma, to some extent they seem to be in a state of identity crisis. Many domestic companies seem to be getting too overawed by the change in their ‘reverse engineering’ business model, as a fuel for growth.

At this stage, it is very important for all these companies to appropriately change their business model based on their competitive strength and quickly adapt to the new paradigm. Instead of considering the research based global companies as competitors, they should look at them as potential collaborators for various outsourcing opportunities; starting from contract research, contract manufacturing to contract marketing, as well. Why not?

Need to move from fragmentation to consolidation for leveraging the business growth:
Indian pharmaceutical industry is now highly fragmented. This is the high time to move away from fragmentation to consolidation, which will help the domestic pharmaceutical industry to attain adequate scale to invest significantly in their well considered business model to fuel the growth engine.

India is making progress in pharmaceutical R&D:

In India some domestic pharmaceutical companies have made significant progress towards R&D output. Published information indicates that Biocon, Piramal Healthcare, Glenmark, Ranbaxy and Suven Life Sciences have between them 45 NCEs. Most of these fall under oncology, infectious, metabolic and respiratory disease areas. Out of these 19 NCEs are in pre-clinical and the balance are in Phase I& Phase II clinical trial stages.

To sum-up, I witness the following micro-trends globally, which we should keep tracking with interest:

 Reorganization of large R&D set-ups into smaller units to foster innovation.

 From concentrating exclusively on innovative medicines to expansion into low risk generic
medicines.

 From only prescription medicine business to businesses like, OTC, Nutrition, Diagnostics, Animal
Health products, to dilute the business risk.

 From sharp business focus mainly on top 10 markets of the world to extension of focus on key
emerging markets of the world.

 Gradual shift in R&D focus from infectious to chronic to preventive (vaccines) to personalized
medicines.

WILL THE BALL GAME BE QUITE DIFFERENT TOMORROW?

By Tapan Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.