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Biologic Medicine: Ushers in a different ‘Mega Race’ for inorganic growth

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During the last several years the success of biologics compared to conventional small-molecule drugs to meet the unmet needs of patients, is gradually but surely changing the area of focus of pharmaceutical R&D altogether, making the biotech companies interesting targets for M&A. Over a period of so many years, the small-molecule blockbuster drugs business model made pharmaceuticals a high-margin industry. However, it now appears that the low hanging fruits to make blockbuster drugs have mostly been plucked.

These low hanging fruits involved therapy areas like, anti-ulcerants, anti-lipids, anti-diabetics, cardiovascular, anti-psychotic etc. and their many variants, which were relatively easy R&D targets to manage chronic ailments. Hereafter, the chances of successfully developing drugs for cure of these chronic ailments, with value addition, would indeed be a very tough call.

Deploying expensive resources towards finding a cure for so called ‘chronic diseases’ may also not promise a strong commercial incentive, as the treatment for ulcer, lipid disorders, diabetics, hypertension etc. are currently continues lifelong for a patient and a cure will limit the treatment to a short to medium term period.

Greater promise in biologics:

On the other hand, the bottom-line impact of a successful R&D outcome with safer and effective drugs 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, Alzheimer’s diseases etc., will be huge. It is believed that well targeted drugs of biologic origin could well be successful treatment for such intractable diseases.

The golden opportunity of meeting the unmet needs of the patients with effective biologics, especially in high-growth therapeutics, as mentioned above, has given the M&A activities in the pharma-biotech space an unprecedented thrust.

Biologic versus conventional drugs:

Biologics Conventional and NME drugs
Large molecules (>5000 molecular weight) Small molecules (~500 molecular weight)
Bio-technologically produced or isolated from living sources Chemically synthesized
Complex structure/mixtures (tertiary structure, glycosylated) Simple well-defined structure
High target specificity Less target specificity
Generally parenteral administration (e.g., intravenous) Oral administration possible (pills)

(Source: MoneyTreeTM Report. PWC, 2009)

According to IMS, Biologics contribute around 17% of global pharmaceutical sales and generated a revenue of US$120 billion MAT March 2009. As we see today, gradually more and more global pharmaceutical companies, who used to spend around 15% to 20% of their annual sales in R&D, are channelizing a large part of the same to effectively compete in a fast evolving market of biologics through mainly M&A route. This is also driven by their strategic intent to make good the loss in income from the blockbuster drugs going off patent and at the same time fast dwindling R&D pipeline.

A shift from small molecule based blockbuster model to a biologics-based blockbuster one:

Frost & Sullivan forecasts a shift from small molecules-based blockbuster model to a biologics-based blockbuster one for the global pharmaceutical majors, just as biologics like Enbrel ,Remicade, Avastin, Rituxan and Humira, as mentioned below, have already proved to be money spinners.

The top 10 global brands in 2009:

Rank Product Chemical/Biologic Global Sales US$ Mn
1 Lipitior Chemical 12,511
2 Plavix Chemical 9,492
3. Seretide/Advair Chemical 7,791
4. Enbrel Biologic 6,295
5. Diovan Chemical 6,013
6. Remicade Biologic 5,924
7. Avastin Biologic 5,744
8. Rituxan Biologic 5,620
9. Humira Biologic 5,559
10. Seroquel Chemical 5,121

(Source: EvaluatePharma)

Faster growth of biologics attracting attention of large pharma players:

Currently, faster growth of biologics as compared to conventional new chemical entities is driven by novel technologies and highly targeted approach, the final outcome of which is being more widely accepted by both physicians and patients. The large global pharmaceutical companies are realizing it pretty fast. The type and quality of their recent acquisitions, vindicate this point.

Mega race for biologics and vaccines:

Driven by the above factor, in 2009 Pfizer acquired Wyeth for US $68 billion, Roche acquired Genentech for US $ 47 billion and Merck acquired Schering-Plough for US $ 41 billion. Only the above three M&A are valued more than US $ 150 billion and that too at a time of global financial meltdown.

Acquisition of Wyeth enabled Pfizer to expand its product-mix with vaccines, animal health and consumer products businesses and at the same time leveraging from Wyeth’s biologics capability.

Similarly, Merck got tempted to acquire Schering-Plough mainly because of latter’s rich R&D pipeline with biologics.

Roche, which was basically a pharmaceutical company, post-acquisition of Genentech, became a major bio-pharmaceutical company with a great promise to deliver in the years ahead.

Other M&As, which would signify a shift toward the growing space for biologics are the acquisition of MedImmune by AstraZeneca and Insmed by Merck and the recent bid of Sanofi-Aventis for Genzyme.

Faster growth of biologics:

As mentioned above, despite patent cliff, biologics continue to contribute better than small molecules to overall growth of the R&D based global pharmaceutical industry.  Most of these biologics are sourced either through acquisition or  collaborative arrangements.

Currently cash strapped biotech companies with molecules ready for human clinical trials or with target molecules in the well sought after growth areas like, monoclonal antibodies, vaccines, cell or gene therapies, therapeutic protein hormones, cytokines and tissue growth factors, etc. are becoming attractive acquisition targets, mainly by large pure pharmaceutical companies with deep pockets.

Another M&A model:

Besides mega race for mega acquisitions, on the other hand, 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 diseases. In 2009 the same Gilead acquired CV Therapeutics for US $1.4billion to build a portfolio for cardiovascular drugs.

Smaller biotech companies, because of their current size do not get engaged in  very large deals, unlike the top pharma players, but make quick, decisive and usually successful deals.

Another commercial advantage for biologics – lesser generic competition :

After patent expiry of a New Chemical Entity (NCE), innovators’ brands become extremely vulnerable to cut throat generic competition with as much as 90% price erosion, as these small molecules are relatively easy to replicate by many generic manufacturers and the process of getting their regulatory approval is not as stringent as biosimilar drugs in most of the markets of the world.

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

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

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

Change of appetite:

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

Conclusion:

Although the large pharma majors are experimenting with pure biotech companies in terms of acquisitions and alliances, it will be interesting to see the long term ‘DNA Compatibility’ between these companies’ business models, organization and work/employee culture and market outlook to improve their overall global business performance, 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-aventis at a later date, helps synergizing the overall R&D productivity of the merged companies.

In this context, Frost & Sullivan had commented: “Widely differing cultures at Roche and Genentech could make retaining top scientists a huge challenge. Roche is Swiss and a stickler for precision and time, while Genentech has a more ‘Californian attitude’ and is laid back and efficient in its work”.

Though the long-term overall financial impact of the ‘mega race for mega deals’, as mentioned above, is less clear to me, acquisition of biotech companies, especially well thought through smaller ones, seems to be a pretty smart move towards inorganic growth by the global innovator companies.

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 concept of ‘Value Based Pricing (VBP)’ gaining ground to reduce cost of healthcare and improve access…but India is quite different

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So far as the pharmaceutical pricing and increasing access to healthcare are concerned, year 2010 perhaps will be remembered as one of the very significant years, at least, in the recent times. In this year with new healthcare reform, President Obama expanded access to Health Insurance to additional around 40 million Americans, the Government in Japan brought in, not much talked about, “premium for the development of new drugs and elimination of off-label drug use” and the Governments in UK and European Union, including the largest market in the EU – Germany, introduced stringent cost containment measures for pharmaceutical products.

Pharmaceutical pricing model is changing across the world:

Overall scenario for pharmaceutical pricing model has undergone significant changes across the world. The old concept of pharmaceutical price being treated as almost given and usually determined only by the market forces with very less regulatory scrutiny is gradually but surely giving away to a new regime.

It started, especially in the developed world, with the generation and submission of pharmacoeconomics data to the regulators for pharmaceutical pricing, by the pharmaceutical companies. However, shortcomings in that system gradually became subject of a raging debate. The newer concepts of Health Technology Assessment (HTA), Health Outcomes Analysis (HOA) and Value Based Pricing (VBP), have started gaining grounds.

Value Based Pricing (VBP):

Value based pricing is basically offering the best value for the money spent. It ‘is the costs and consequences of one treatment compared with the costs and consequences of alternative treatments’.
For pharmaceutical players, VBP perhaps would mean not charging more than the actual value of the product.

On the other hand, price being a function of value that a product would offer, it is also important for the regulators to understand what value in totality that the product would offer, not just for the patients’ treatment in particular, but for the civil society at large.

However, in India, the regulators are still far behind and groping in the dark to find out an appropriate solution to this critical issue. They seem to be quite contended with taking arbitrary, non-transparent populist decisions.

The concept is gaining ground:

The concept of ‘evidence-based medicine’ , as stated earlier, is gaining ground in the developed markets of the world, prompting the pharmaceutical companies generate requisite ‘health outcomes’ data using similar or equivalent products. Cost of incremental value that a product will deliver is of key significance. Some independent organizations like, the National Institute for Health and Clinical Excellence (NICE) in the UK have taken a leading role in this matter.

VBP could help in ‘freeing-up’ resources to go to front-line healthcare:

On November 11, 2010 ‘Pharma Times’ in a news item titled, “Government (UK) to consult on drug pricing in December’ reported the following:

“Consultation on the government’s plans to introduce value-based pricing (VBP) for medicines will begin next month, the Department of Health has announced.
The consultation will run until next March, the Department reveals in its newly-published business plan for 2011-15. The plan sets out the coalition government’s structural reform priorities for health care, which are to: – create a patient-led NHS; – promote better healthcare outcomes; – revolutionize NHS accountability; – promote public health; and -reform social care.
These reforms ‘will help to create a world-class NHS that saves thousands more lives every year by freeing up resources to go to the front line, giving professionals power and patients choice, and maintaining the principle that healthcare should be delivered to patients on the basis of need, not their ability to pay,’ says the Department”.

Global pharmaceutical companies using more ‘health outcome’ data to set pricing strategies:

Some global pharmaceutical majors have already taken pro-active measures on the subject. In early 2009, reported agreements between Sanofi-Aventis, Procter & Gamble and Health Alliance as well as Merck and Cigna vindicate this point. These agreements signify a major shift in the global pharmaceutical industry’s approach to gathering and using ‘health outcomes’ data

In the Sanofi-Aventis/Procter & Gamble-Health Alliance agreement, the concerned companies agreed to reimburse Health Insurance companies expenses incurred for patients suffering from non-spinal bone fracture while undergoing treatment with their drug Actonel.

In the Merck/Cigna agreement, Cigna will have the flexibility to price two diabetes drugs based on ‘health outcomes’ data.

‘Outcomes-based’ pricing strategies are expected to become the order of the day, in not too distant future, all over the world.

The ground realities in India are very different:

Medicines are very important and constitute a significant cost component of modern healthcare systems, across the world. In India, overall healthcare system is fundamentally different from many other countries, even China. In most of those countries around 80% of expenses towards healthcare including medicines are reimbursed either by the Governments or through Health Insurance or similar mechanisms. However, in India situation is just the reverse, about 80% of overall healthcare costs including medicines are private or out of pocket expenses incurred by the individuals/families.

Since 1970, the Government of India (GoI) has been adopting various regulatory measures like cost based price control and price monitoring to make medicines affordable to the common man. For those products, which are patented in India, it has now been reported that the Government is mulling the approach of price negotiation with the respective companies.

However, we should keep in mind that making drugs just affordable in India, where a large number of population does not have access to modern medicines for non-price related factors, is indeed not a core determinant of either healthcare value or proven health outcomes or both.

Till VBP is considered, cost-effective ‘health outcome’ based medical prescriptions should get priority:

Expenditure towards medicines can be considered as an investment made by the patients to improve their health and productivity at work. Maximizing benefits from such spending will require avoidance of those medicines, which will not be effective together with the use of lowest cost option with comparable ‘health outcomes’.

For this reason, many countries have started engaging the regulatory authorities to come out with head to head clinical comparison of similar or equivalent drugs keeping ultimate ‘health outcomes’ of patients in mind. A day may come in India, as well, when the regulatory authorities will concentrate on ‘outcomes-based’ pricing. However, in the Indian context, it appears, this will take some more time. Till then for ‘health outcome’ based medical prescriptions, working out ‘Standard Treatment Guidelines (STG)’ , especially for those diseases which are most prevalent in India, should assume high importance.

Standard Treatment Guidelines (STG):

STG is usually defined as a systematically developed statement designed to assist practitioners and patients in making decisions about appropriate cost-effective treatment for specific disease areas.

For each disease area, the treatment should include “the name, dosage form, strength, average dose (pediatric and adult), number of doses per day, and number of days of treatment.” STG also includes specific referral criteria from a lower to a higher level of the diagnostic and treatment requirements.

For an emerging economy, like India, formulation of STGs will ensure cost-effective healthcare benefits to a vast majority of population.

In India, STGs have already been developed for some diseases by the experts. These are based on review of current published scientific evidence towards acceptable way forward in diagnosis, management and prevention of various disease conditions. STGs, therefore, will provide:

- Standardized guidance to practitioners.
- Cost-effective ‘health outcomes’ based services.

GoI should encourage the medical professionals/institutions to lay more emphasis and refer to such ‘heath-outcomes’ based evidences, while prescribing medicines. This will ensure more cost effective ‘health outcomes’ for their patients.

Steps necessary for ‘Standard Treatment Guidelines (STG):

1. Get Standard Treatment Guidelines (STG) prepared for the diseases more prevalent in India, based on, among other data, ‘health outcomes’ studies.

2. Put the STG in place for all government establishments and private hospitals to start with.

3. Gradually extend STG in private medical practices.

4. Make implementation of STG a regulatory requirement.

Conclusions:

Till VBP concept is considered appropriate for India by the regulators, STG model for drug usage would help both the doctors and the patients equally to contain the cost of treatment in general and the total cost of medicines in particular. Encouraging implementation of STGs in India, as a first step towards VBP, especially for prescription medicines, the country will require, above all, a change in the overall mindset of all concerned. The use of an expensive drug with no significant improvement in ‘health outcome’ should be avoided by the prescribers at any cost, initially through self-regulation and if it does not work, stringent regulatory measures must be strictly enforced for the same… for patients’ sake.

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.