By Dan Schell, Editorial Director, Life Science Leader
As we enter only the second month of 2010, many pharmaceutical executives are already looking ahead to — and many are likely dreading — 2011. That’s when some of the most profitable blockbuster drugs (e.g. Lipitor, Plavix, Seroquel, Zyprexa) will come off patent. Of course, dealing with drug patent expirations and the resulting increase of generics in the marketplace is nothing new to pharma executives.
But in recent years this issue has been building, and undoubtedly 2011 will be one of the worst years ever regarding profits lost to generics. In fact, according to pharma and biotech analysis firm EvaluatePharma, during 2010 and 2011 generics will take a 13% chunk out of global pharmaceutical sales.
This is just one of the many issues creating heartburn for pharmaceutical executives worldwide, and it’s also one of the catalysts for widespread industry change. Everything from previously unheard of partnerships to a focus on branded generics are now being considered. For example, in June 2009 GSK and Dr. Reddy’s announced an agreement where Dr. Reddy’s will manufacture branded pharmaceuticals for GSK in fast-growing therapeutic segments such as cardiovascular, diabetes, oncology, gastroenterology, and pain management. The products will then be licensed by GSK and supplied to various countries in Africa, the Middle East, Asia Pacific, and Latin America. In certain markets, products will be comarketed by GSK and Dr. Reddy’s. Other similar deals completed in 2009 include Pfizer and Aurobindo Pharma Ltd.; sanofi-aventis and Sentiva; and Watson Pharmaceuticals and Arrow Group.
Generic companies are also merging and acquiring. For instance, Teva purchased Barr in 2008, and a few prominent generic players are rumored to be interested in purchasing German generics company Ratiopharm (a final deal could be completed this quarter).
M&As will likely continue, considering, according to pharmaceutical market intelligence firm IMS Health, the generic industry is growing at more than 7.8%, a pace that is faster than the world pharmaceutical market. And mergers can often help a company compete effectively due to the generics industry having slim margins on products that need to be created in great volumes as inexpensively as possible. M&As also can provide a more global presence, thereby giving access to emerging pharmaceutical markets and a diversified portfolio.
“Generic encroachment and imminent patent expiry are accelerating the rate of consolidation among large pharma companies, together with a strategic shift of focus to revolutionary development rather than on incremental improvements,” comments Alex Yule, a pharmaceutical industry consultant. “This could see the majors walking away from areas where the time and cost to demonstrate revolutionary benefit is prohibitive [e.g. cardiovascular disease, diabetes, other chronic diseases]. It could be possibly good news for cancer patients and others with true unmet needs, but maybe not so good for the mass of individuals who, while pleased that the cost of meds is lower, are going to have to make do with the limited efficacy of most chronic disease medication. In parallel, major pharma companies are focusing on the developing nations, where strong branding can build and protect market share, and of course how they can leverage cash and logistical expertise to become generic players themselves.”
Revamping The Traditional Business Model
Besides delving into generics, the pharma industry is also changing by abandoning its vertically integrated business model, now relying more on outsourcing or partnering for R&D (thereby sharing the risk) while still focusing on sales and marketing. In addition, there has been a lot of emphasis on streamlining existing processes and operations, sometimes through new technologies or even layoffs. But this also includes retooling processing and manufacturing equipment, employing lean and six sigma strategies, and determining a compound’s efficacy earlier in the clinical development process. The latter is seen as one of the most important changes a company can make.
“As a matter of course, pharma will need to reduce development costs and enhance success rates,” says Ron Norton, founder of Global Clinical Research Solutions. “Currently about 30% of failures are due to toxicity and 30% to lack of efficacy. Molecules are brought to Phase 3 that should have failed earlier in the development process. As one strategy, pharma will need to embrace and develop modeling techniques throughout the clinical development systems to decrease the incidence of late-stage failure, avoid the tendency to rush through Phase 1 as quickly as possible, design solid proof of concept studies, and ensure the drug candidate’s dosing regimen is well understood. Ultimately pharma will have to rely on innovation and development of enhanced application tools in drug development and abandon so much focus on delaying generic intrusion or ‘me-too’ drug development in order to stem the decline in drug approval rates.”
Innovation And Biologics
Many pharma industry experts posit that innovation in this industry is slowing and conversely, is also the key to future success. After all, it’s no secret that pharma companies just aren’t producing new drugs fast enough to replace the profits from blockbusters.
Many people cite follow-on biologics (i.e. biosimilars) as a huge growth area for innovation. According to Datamonitor, the biosimilars market will grow to more than $2 billion across France, Germany, Italy, Japan, Spain, the United Kingdom, and the United States by 2014 following key patent expires for epoetin alpha, filgrastim, interferon beta 1a, interferon alpha, human growth hormone (hGH), and insulin-glargine. Other data suggest that making a biosimilar costs 1/10 the investment it takes to develop a new biotech drug, and the rate of success in development is 10 times higher.
Obviously, regulations surrounding follow-on biologics are being closely watched in the United States. In addition to the Generic Pharmaceutical Association (GPhA) stressing the need for “increased investment in the FDA’s Office of Generic Drugs (OGD) to ensure the timely review and approval of new generic pharmaceuticals,” it also says a “science-based biogeneric approval pathway needs to be established that promotes innovation while providing patients access to more affordable versions of lifesaving biologic medicines.”
Michael Clark, an attorney with Hamel Bowers & Clark LLP who is an expert in pharmaceutical law, adds, “The hope is for more tailored, individualized treatment regimens with bioengineered medicines. Certainly there have been some notable successes, such as Herceptin for treating breast cancer patients having a certain gene. But, of course, the complicated production and increased costs associated with larger molecule drugs are but a few of many practical problems that appear difficult to address when looking forward to opening up the market to biogenerics. It seems that the short-term gains will be realized by those companies that can develop new, useful products, but without some needed changes to the current laws these products may not have widespread public benefits in the near future.”