By Cliff Mintz Ph.D.,
Although the much-anticipated economic recovery was less robust than expected, many large and midsize publicly traded pharmaceutical, biotechnology, and medical device companies reported record-breaking profits in 2010. Unlike the past two years, there were no major mergers or acquisitions in the life sciences sector in 2010. However, M&A activity and deal making was brisk between big pharma and midsize and smaller life sciences companies in emerging markets like China, India, and Brazil as industry players consolidated to cut costs, expand drug development pipelines, and lengthen geographic reach.
The private equity and venture capital markets rebounded in 2010, and many smaller, private biotechnology companies benefited from new rounds of much-needed funding. Despite record-breaking profits, big pharmaceutical companies continued to shed large numbers of employees in 2010 to combat declining R&D productivity, impending patent expiry for many blockbuster drugs, and unrelenting downward pricing pressures.
While 2010 could be considered a good year, 2011 is expected to be very challenging (because of patent expiry and impending generic competition) for many pharmaceutical and biotechnology companies. Because of this, Life Science Leader decided to assemble a panel of industry experts to offer their ideas and insights into what 2011 may hold for the life sciences industry. Members of the panel included:
- Steven Burrill, CEO of Burrill & Company, a leading private equity and investment firm in the life sciences industry
- Ranjith Gopinathan, industry analyst and team leader for Frost & Sullivan’s Life Sciences Healthcare practice
- Eric Langer, president and managing partner of BioPlan Associates, Inc., a biotechnology and life sciences market research company
- Mark Senak, senior VP at Fleishman Hillard, a public relations and communication firm, and author of the Eye on FDA blog, which provides analysis and insights into regulatory activities at the FDA.
- had the opportunity to chat with the panel in late December 2010 about their predictions for the upcoming year.
Will Consolidation Continue To Take Place In The Life Sciences Sector?
Burrill: Yes, it always has and always will. Big pharma has no place to go for innovation except to acquire smaller companies who have already taken the risk on new drug development. Consolidation has accelerated in the last two years because the capital markets are tough, making M&A an attractive exit strategy for investors.
Gopinathan: Yes. Big pharma historically has been fighting — with little success — on various issues like patent expiry of blockbuster molecules, regulatory hurdles, generics competition, underutilization of resources, declining product pipelines due to a low R&D productivity, and so on. All these factors have undoubtedly led to lower valuations of their stock value. Consequently, this has created a climate for large-scale M&A. Biotech and pharmaceutical companies with strong drug development pipelines and low exposure to patent expiries are the most attractive M&A targets.
Langer: Yes. Established pharma and biotech companies have gone on a buying spree to improve their product pipelines and portfolios, with many companies experiencing or projecting loss of revenue as patents on many profitable products expire, and these products go the generic or biosimilar route. With low interest rates, companies of all sizes are experiencing fund-raising from VCs and stock sales. Corporate acquisitions make sense over the next few years as economic conditions continue to improve.
What Will 2011 Bring For CROs And Others That Support The Life Sciences Industry?
Burrill: 2011 will be a much better year for everyone. The capital markets invested more in life sciences companies in 2010 than in any other year, and more will be invested in outsourcing of drug development and manufacturing. CROs will have a big recovery year in 2011.
Gopinathan: The geographical shift of this industry toward the low- cost countries is bound to increase. Countries such as China and India are already witnessing a marked increase in CRO activities.
Langer: While the economic downturn has beat up biomanufacturers badly, their vendors and suppliers have continued to do relatively well, despite the recession. From our Annual Report and Survey of Biopharmaceutical Manufacturing, we find that supplier sales to this industry have declined from their 16% CAGR in 2007 to a more modest 13% growth in 2009. However, any industry segment with 10% annual growth in the current climate should consider itself fortunate. Those companies with technologies that offer cost savings, such as improved expression systems and purification equipment, can expect increased sales.
In terms of markets and revenue, bioprocessing equipment, reagent, and services vendors tend to be somewhat insulated from much of the ongoing economic difficulties. Private sector R&D has increased slightly or is remaining steady, and, at least for the moment, NIH and other federal life sciences R&D budgets have not been significantly hit with cutbacks. CMOs, technology sources/licensors, and vendors should expect the market to remain relatively unchanged and may even see an increase in revenue as many companies worldwide gear up for biosimilars and biogenerics.
What Are Some Of The Highly Anticipated Products That Will Launch In 2011?
Gopinathan: Very recently, Amgen’s Denosumab (trade name, XGEVA) received FDA approval to prevent fractures in patients with cancer that has metastasized into the bone. This drug may reach sales of $2.4 billion in 2015. Also, Denosumab was earlier approved in June, under the trade name Prolia, to treat postmenopausal women with osteoporosis at high risk for bone fractures.
Langer: This is a very long list. However, the most important ones in my opinion include: 1) Replagal (alpha-galactosidase) from Shire Pharma/TKT, which is expected to compete with a similar product from Genzyme; 2) Ipilimumab from Medarex and BMS, a CTLA-4 monoclonal antibody for several oncology indications including melanoma; 3) Benlysta from Human Genome Sciences and GSK, a B-cell-activating factor monoclonal antibody expected to be a blockbuster for treatment of systemic lupus erythematosus; 4) NuMax, a second-generation respiratory syncytial virus monoclonal antibody from MedImmune/AstraZeneca, which is expected to replace its first-generation blockbuster, Synagis; 5) TevaGrastim from Teva, a follow-on version of G-CSF that is expected to compete with similar products from Amgen.
Senak: While not a product, it is heartening to see that a second clinical trial involving embryonic stem cells has been authorized by the FDA and will go forward in 2011.
Which Relatively Unknown Companies Are The Ones To Watch In 2011?
Burrill: Targacept, a biopharmaceutical company that is developing drugs that target neuronal nicotinic receptors to treat neurological diseases like schizophrenia and Alzheimer’s disease, is one to watch. Another one is Pharmasset, which is a clinical stage company focusing on novel treatments for viral infections, primarily Hepatitis C.
Gopinathan: Currently, there are many small and medium, lesser-known biopharma companies with a lot of promise. For instance, Debiopharm, a Swiss-based biopharmaceutical group, has a business model of in-licensing new molecules from biotech companies, pharmaceutical, and start-up companies as well as academic institutions based worldwide. It then adds value through a creative development strategy. Toward the end of the development process, it out-licenses the developed and registered drugs to pharmaceutical firms for worldwide commercialization.
Langer: The question, in my mind, is not so much which unknown companies to watch, as which emerging technologies are going to radically change the way biopharmaceuticals are manufactured globally. Companies to watch include iBio, Fraunhofer, SemBiosys Genetics, and Medicago, which has developed a low-cost, cultivated, plant-based expression system to produce vaccines and a variety of therapeutic proteins. Other companies using single-cell algae expression systems to produce recombinant proteins are also ones to watch.
What Will Be The Next Big Leap In Technology Or Innovation In The Life Sciences Industry?
Burrill: I believe it will be consumer digital health and increased focus on improved diagnoses (molecular diagnostics tied to predictors). Also the cost of sequencing entire genomes continues to plummet, and it is likely that within the next year or so individuals’ genomes will be sequenced for $1,000 or less. And, the consequences of this will be extraordinary!
Gopinathan: There is a need for in-depth knowledge of the relationship between molecular intervention and disease pathophysiology. This would help in the development of a precise and sensitive set of biomarkers for determining disease subtypes, patient subpopulations, safety, and efficacy. Companies or business units focusing exclusively on biological pathways and proofs of mechanism would emerge in the future. Selling their knowledge or research to the pharmaceutical firms would be the business model.
Langer: Major advances in the near term are likely to involve bioprocessing, in particular, expression systems and related genetic engineering technologies and downstream purification. The next big leap in technology will possibly be an “enabling” leap, making manufacturing simpler, lower-cost, and with more contained quality. In particular, the use of plant cell culture rather than mammalian cells to produce biopharmaceuticals is a technology to watch. Its impact on global health could be enormous.
Senak: I am not sure it is “next,” but Craig Ventner’s work on the creation of artificial life (synthetic biology) is fascinating and looks extremely promising. Synthetic biology represents an opportunity for new sectors of the life sciences industry to grow.
Which Developing Markets Represent The Greatest Opportunities For Drug Makers?
Burrill: Spending on healthcare in the BRIC (Brazil, Russia, India, China) countries — plus Turkey and Indonesia — with their growing populations and increasingly wealthy middle class has a huge upside. Also, the generic markets in these countries represent attractive opportunities.
Gopinathan: The pharmaceutical market in China is projected to grow about 27% to reach a market size of approximately $50 billion, to become the world’s third-largest pharma market. Meanwhile, other emerging countries like Brazil, Turkey, Russia, India, and Mexico are expected to grow more than 15% during 2011.
Langer: While most companies are looking toward the rapidly growing opportunities in China, India, and Brazil, the Middle East offers some attractive midterm growth opportunities. Based on research from our recent “Quick Guide to Biotechnology in the Middle East,” the Middle East region, with its 280 million people, spends around USD $10.6 billion on pharmaceuticals.
As purchasing power in individual countries and government efforts to reform healthcare grow, companies are finding opportunities for products in almost every therapeutic area. The Middle East is experiencing a rising demand for healthcare, which is transforming this part of the world. Examples of growth include Oman’s construction of a USD $1 billion integrated healthcare city outside Muscat, The United Arab Emirate’s construction of an integrated healthcare city for USD $3.4 billion (ownership of three public hospitals has been privatized), and Bahrain’s construction of USD $1.6 billion health island, Dilmunia, which will feature a comprehensive health environment. Moreover, several major pharmaceutical and biotechnology companies are setting up operations in the Middle East. For example, Pfizer, Amgen, and Genzyme set up their regional headquarters at Dubai Biotechnology and Research Park (DuBiotech); AstraZeneca and Pfizer/Wyeth have regional headquarters at Dubai Health Care City, and Pfizer controls over 6% of Saudi Arabia’s pharmaceutical market, whereas GSK recently exceeded 10% of the market share of that market.
What Are Some Major Regulatory Challenges Facing The FDA In 2011?
Burrill: Innovation has exceeded the ability of the FDA to evaluate new drugs. The gap between innovation and regulatory approval of new medicines has widened. We are dealing with archaic definitions of disease and antiquated ways of testing drugs to determine if they are effective. I believed that P3 — personalized, predictive, preventative medicine — is the tack that the FDA should pursue.
Langer: The most critical challenge is the development of rational regulations for biosimilars. Congress passed a biosimilars law, but it is vague in many respects, leaving many major decisions to the FDA, which could take years to establish a predictable regulatory approval path.
Another major challenge is foreign manufacturing facilities. Many of these have never been inspected or are inspected infrequently, which may not ensure proper compliance with cGMP. This primarily affects drugs, but an ever-increasing number of biopharmaceuticals are being manufactured overseas.
The FDA has signaled it will more aggressively prosecute pharma executives whose companies have flagrantly violated regulatory statutes. However, despite some recent hefty fines, it seems those who are prone to acts such as encouraging off-label sales, insider stock trading, and misstating of earnings will continue to do so.
Senak: First, the authority of the agency is expanding and the demands being placed on it in this financially troubling time are also increasing. So, the first challenge is perhaps financial.
Second, the FDA is now regulating approximately 1/4 of the U.S. economy, and that diversity of jurisdiction means it has to do many things (and do them well) to be perceived as doing anything well.
Third, the legislative burden being placed on the FDA (e.g. developing a regulatory framework for biosimilars) is enormous, and the agency is being stretched beyond its limits to accomplish this task.
Fourth, the agency faces a continuing challenge to restore its image as a protector of public health — an image that has suffered many setbacks in recent years. Reestablishing credibility is a process that takes time and ongoing demonstrative efforts.
Finally, there is no reason to believe the FDA’s recent assertion that it will prosecute company executives for lapses in regulatory compliance will have any effect on the life sciences industry, unless one subscribes to the notion that this particular sector is pushing the regulatory envelope more aggressively than others. However, the agency has recently signaled that it intends to continue to vigorously enforce its regulations to protect the health of the American public.
Will Social Media Play A More Prominent Role In The Life Sciences Industry In 2011?
Gopinathan: With growing patient awareness, copayment models, and subsequent increases in the patient’s influence/voice regarding treatment decisions, social media is bound to play a more prominent role in the life sciences industry.
Langer: You know something is a trend when even inherently conservative and tight-budget government organizations such as the FDA get involved. The FDA recently implemented Twitter feeds for its MedWatch program to facilitate the public reporting of adverse events and drug/biologic safety hazards.
Social media, however, can become a nightmare for pharmaceutical marketing executives who must now consider how their actions, overt or inadvertent, may result in unapproved marketing activities, promotion of off-label indications, etc. Still to be addressed is if and how the FDA and other regulatory bodies will expect drug companies to manage their role in social marketing. Most pharma companies are currently engaged in the use of social media for marketing at some level. But, with health-related apps appearing virtually daily, can regulators keep up? The potential for abuse and harm in this largely unregulated field is enormous, and only now is being considered.
Senak: Social media will definitely play a more prominent role in the life sciences (and all other industries) in 2011, whether or not life sciences companies choose to participate. The FDA is taking social media seriously and has even embraced its use (the FDA now has eight Twitter feeds).
There are growing numbers of resources available to patients via social media. A good example is the Facebook affinity pages where people concerned with a disease can gather, talk, and exchange resources. Physicians are also increasingly gravitating to online communities like Sermo, and some are beginning to form their own communities around medical specialties.
What Effect, If Any, Will Healthcare Reform Have On The Life Sciences Industry In 2011?
Burrill: Uncertainty about healthcare reform in the life sciences industry will continue to reign in 2011. This is because of continuing turmoil both politically and economically. The delay in its implementation (because of complicated regulatory issues) will also contribute to the uncertainty of its future.
Langer: Healthcare reform will have little direct effect on the life sciences industry. If anything, healthcare reform offers life sciences companies assurances of continued, long-term growth in the U.S. market for improved healthcare innovations. There will be increasing emphasis on the cost-effectiveness of products and an increased reliance on the use of generic pharmaceuticals and biosimilars in the coming years.
Senak: The aspect of healthcare reform that I believe will have the greatest effect on the life sciences industry in 2011 is the creation of a regulatory pathway for biosimilars. While legislation was passed authorizing the FDA to create such a pathway, there are a huge number of outstanding issues that must be resolved before the regulatory framework can be finalized and implemented. In other words, while a regulatory framework for biosimilars was created, those companies seeking U.S. approval of biosimilars may have to wait quite some time before their applications are considered.
Is The United States Losing Its Competitiveness In Science And Engineering?
Burrill: Yes, we are falling behind in R&D spending relative to the rest of the world, particularly in emerging markets. Also, there has been a marked increase in the number of non-U.S. scientific publications and citations in the literature.
Gopinathan: No, I don’t think so. The United States will continue to attract scientific talent and retain its competitiveness in science and engineering.
Langer: Yes, more corporate technology, funding, and other resources are increasingly being shipped overseas. But, the United States will long remain a global leader in the life sciences industry, which has clearly become an international business. Five or ten years ago, only a few life sciences companies even had a China or India strategy. Today, most are actively investing in these regions and looking for partnerships in drug development, manufacturing, and outsourcing. Clearly, the ability of the United States to commercialize or manage the process of science is an area in which it maintains global dominance. And, despite gains made by other countries, I don’t see America’s dominance in the life sciences changing in the foreseeable future.
Senak: I don’t have a firm perspective on whether or not the United States is losing its competitiveness, nor is there any evidence to suggest that we are. However, as I alluded to in my earlier comment, the lifting of the ban on stem cell research suggests that we may be becoming more competitive in a new area for us.
What Are Some Major Challenges Pharma And Biotech Companies May Face In 2011?
Burrill: Major challenges will remain in drug development in terms of innovation and commercialization of new products. But, the most important challenges will continue to revolve around regulatory issues and reimbursement costs for medicines and treatments. While regulatory and reimbursement issues are changing and continually under attack in the United States, they are beginning to spill over into other markets, including emerging ones. This may represent a growing problem for many life sciences companies.
Gopinathan: Adequate funding for expanding business activities would continue to be a major challenge for the pharma and biotech companies.
Langer: A major challenge facing the industry is maintaining or finding new monies to maintain the current level of R&D in the life sciences. Because of the recession, federal funding for life sciences R&D has been slashed, wiping out gains that were made over the past decade. Unless the economy improves, there will likely be additional cuts to R&D spending. This may result in job losses for many Ph.D. life scientists and contribute to the ongoing glut of Ph.D.s on the job market.
Senak: One major challenge is navigating the transition from a blockbuster drug model to more targeted, personalized treatments. This likely requires changes to the current regulatory approval process. This became apparent in a recent conversation I had with Dr. David Kessler, a former FDA Commissioner. During our conversation, he noted that approval of personalized medicines will likely require a minimum of two approval processes, one for the approval of a treatment and a second for approval of the diagnostic or device that tells you whether or not the treatment was properly targeted. This begs the question: Is the FDA appropriately staffed and configured to ensure that the promise of personalized medicine will ever be realized? And, it is becoming increasingly apparent that developing personalized medicines will be and is extremely costly. That said, what will the business model be for marketing personalized medicines? Will personalized medicine ultimately be priced out of the reach of most Americans? These are important questions that life sciences companies need to address as we enter the era of personalized medicines.