Blog | March 9, 2018

The R&D Leadership Summit 2018 — One Hot Ticket

Source: Life Science Leader
Rob Wright author page

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

The R&D Leadership Summit 2018 — One Hot Ticket

This past February I had the good fortune to attend the 8th Annual R&D Leadership Summit (RDL) in Miami, FL. I say “good fortune,” because this Conference Forum event is not typically open to the media. Fortunately, however, Life Science Leader has been invited by The Conference Forum’s executive director, Valerie Bowling, every year since inception. We are grateful for the decision to include Life Science Leader, as this has become one of my all-time favorite events to attend.

There are number of attributes that make RDL interesting and different. For starters, the summit employs the Chatham House Rule, meaning participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed without the speaker’s written permission. The aim is to provide anonymity to speakers to encourage openness and sharing of information, which in my experience, this directive most certainly does.

Another intriguing component of RDL is the caliber of attendees and speaking faculty. Looking around the room this year I recognized at least half a dozen executives who have previously appeared on the cover of Life Science Leader magazine, with another half dozen or so having participated in secondary features, departmental articles, or contributed articles. In addition, there were roughly a half dozen thought leaders who currently serve on Life Science Leader’s editorial advisory board.

Something else that makes the summit different from many of the other events I attend is that RDL has only one sponsor, PRA Health Sciences. As a result, you won’t find vendor booths outside the venue, and you won’t find yourself listening to sales pitches disguised as educational sessions anywhere in the program. Don’t get me wrong. When I attend industry events (e.g., BIO), I always make a point of walking the show floor. For if you want to learn about a company’s latest technology or service, this is often the best place to do so. But most people abhor attending an “educational session” where a panel participant seems incapable of giving a talk or sharing insight that doesn’t include some sort of marketing message.

So what are some of the things I can share from this year’s R&D Leadership Summit?

Growth: Where Will It Come From?

The theme for RDL this year was “Growth: Where Will It Come From?” It was during an economic overview where I have to admit to first hearing the term “Goldilocks economy” (i.e., not too hot or cold, but sustains economic growth, allowing for a market-friendly monetary policy). This is what we are currently in, and apparently it is a highly unusual situation. For example, in the past if the North American economy was growing, Europe or Asia might not be. However, what we are presently seeing is synchronized growth of major economies, including emerging markets, with overall global growth averaging around 3 percent. In addition, we are seeing low interest rates and low rates of inflation, two things that generally don’t go together. Other interesting macro factors to pay attention to are unemployment rates, which in the U.S. are nearing 4 percent (even lower in certain geographic areas). The dividend yield on stocks has been pretty good, with those in biopharma averaging returns around 3 percent. This demonstrates strength of the sector’s ability to pay back investors. A recent Barron’s article highlighted 14 U.S. dividend stocks to pay attention to in 2018, five having ties to healthcare (i.e., AbbVie, Bristol-Myers Squibb, J&J, Merck, and P&G). Finally, the yield on the 10-year treasury is less than 3 percent, a zone where people and investors remain less fearful, and stocks tend to retain strength.

The trend of economic nationalism continues to rise. While many attribute this to being something driven by President Donald Trump, the reality is this is not just a U.S. phenomenon. Remember, the referendum for the UK to withdraw from the EU (i.e., Brexit) took place five months prior to the U.S. presidential election. Economic nationalism isn’t typically good for global industries such as biopharma, which thrives on not just developing innovative treatments, but being able to deliver those innovations to patients in need around the world. Biopharmaceutical industry leaders need to understand how economic nationalism could negatively impact their current business models, beyond just drug pricing. Because though the focus on “high-priced drugs” may seem a U.S.-centric issue, access to new innovative therapeutics is not.

According to one RDL presenter, up until 2014, the energy sector was considered the darling of investors. However, this individual believes healthcare has supplanted energy as the growth sector to now be in, as it is growing 20 to 30 percent faster than most other industries. The three big drivers of healthcare growth are:

  1. Bubbling Science. We are experiencing exponential growth in our knowledge and understanding of human health, as well as the development of new tools and modalities. It is estimated that accumulation of knowledge in the last two years alone is greater than the previous history of mankind. Healthcare’s growth has been amplified by the explosion of insights being gained in the fields of data sciences, machine learning, and AI.
  2. Demographics. In three years Baby Boomers will begin passing the age of 75, and doing so in large numbers. The “old” demographic (i.e., Baby Boomers), and the “old-old” demographic (i.e., The Silent Generation) combine to make up the fastest growing demographic in the current U.S. population. The healthcare needs of this population are 10 to 15 times higher than those below the age of 65. As such, we can expect the demand for healthcare to grow significantly in the U.S. But there is graying of other major global economies (e.g., China, Japan), so the rising demand for healthcare and eldercare will be global in scope.
  3. Mindset change. The aging of populations has driven an increased focus on wellness, with the Internet service as a knowledge resource. Older people today seem less accepting of the notion that “being old” is synonymous with poor health and low quality of life. In addition, the world is experiencing an unprecedented expansion of the global middles class. Greater numbers of people with increased purchasing power in emerging and developing markets are no longer accepting of second-class care. While a 2012 McKinsey report projects spending in China’s healthcare sector to surpass $1 trillion by 2020, another article comparing U.S. healthcare with China’s provides even greater insight. Entrepreneurs who develop solutions to some of this country’s current healthcare problems (e.g., healthcare scalping: the practice of people standing in line to get physician appointment tickets, and then selling those tickets at exorbitant prices to desperate patients) should be richly rewarded.

Other areas driving growth in healthcare/biopharma include tax reform and repatriation of funds (assuming some of those funds are invested in R&D and infrastructure and not merely stock buybacks and dividend payouts) and continued modernization of the FDA. But there are also a number of challenges we can’t lose sight of.

Challenges That Could Impede Heathcare’s Growth

When I first entered into pharmaceutical sales back in 1994, nearly every company was in the process of increasing the size of its primary care field force. One of the driver’s behind the move was companies desiring significant share of voice and high reach and frequency with the most important doctor, which back then was clearly the primary care physician (PCP). In the burgeoning days of HMOs, most insurance companies required patients to have a referral (for services to be covered) before seeking treatment by a specialist. As such, PCPs were the gatekeepers to patient access for nearly every specialty. But many PCPs would initiate treatment along with the referral. This is why in the days of me-too drug development, every company with a potential blockbuster-branded prescription product (e.g., antidepressants, pain relievers) had sales reps calling on and giving out samples (or vouchers for a free sample) to PCPs. While referrals and PCPs still play an important role, as biopharmaceutical companies have shifted their R&D focus to ever more specialized drug development, PCPs, as well as innovations for primary care, seem to have fallen out of fashion. A number of companies have (almost proudly so) announced their decision to move away from primary care. One speaker at RDL 2018 believes the abandonment of the PCP, or the walking away from developing innovative treatments for primary care, to not be a best business practice, especially if taking a long-term view. Because, although we see the rising importance of specialty drugs, which are expected to compose approximately 45 percent of branded biopharmaceutical sales by 2020, these same products will eventually face a patent cliff of their own. And while biosimilars may provide a new revenue stream for some branded biopharmaceutical companies, as we move away from treatments and toward cures, biopharma will increasingly be impacted by the law of diminishing returns.

Another challenge for the biopharmaceutical industry is the internal rate of return for investors (IRR). In 2017, Deloitte published a report noting that R&D returns for the top 12 biopharmas have declined to 3.2 percent, which is down from 10.1 percent in 2010. Meanwhile the cost of capital is around 8 percent. So while we realize R&D to be a critical driver behind healthcare’s future growth, there is a desperate need for biopharma to sharpen its R&D saw to increase productivity while reducing costs. Developing drugs that cost nearly $2 billion to develop for highly specialized segments, yet deliver half the revenues when compared to their predecessors, is not a sustainable business model.  

Biopharma continues to have very high R&D failure rates, especially in the CNS area . Many within biopharma were very optimistic about beta-amyloid and the amyloid hypothesis with regard to developing therapeutics for the treatment of Alzheimer’s disease. And yet the majority (99.6 percent) of drugs that have been attempted to be developed for Alzheimer’s have failed. Meanwhile, it is estimated that the global cost of treating dementia will surpass $1 trillion before the end of this year. A more coordinated effort is needed, and it should involve greater resources being applied, beginning with the NIH. Presently, the NIH invests about $32.2 billion in medical research, yet spends less than a billion/year in the area of Alzheimer’s/dementia. Societies need to up the spending to better understand the basic science of the CNS if we hope to improve CNS drug development outcomes.

Societal blowback on “high-priced drugs” continues to hamper the biopharmaceutical industry’s innovation efforts. While some companies have launched novel drug pricing models for highly innovative treatments (e.g., Novartis’ money back guarantee if the drug doesn’t work), as drug prices reach stratospheric heights (e.g., Spark Therapeutics Luxturna priced at $850,000), this fact will continue to not only challenge biopharma, but insurance companies and healthcare consumers as well. No matter how responsibly priced a therapeutic might be, and no matter how much value it might deliver, when it costs three to four times the price of the average American’s biggest lifetime purchase (their home), it is difficult to wrap one’s head around it. Think about this, the median household income in the United States is $56,516 (pre-taxes), and yet a $500 surprise expense would put most American’s into debt. Considering that the average price of a branded pharmaceutical to be roughly $280, it only takes a couple trips to the pharmacy during a bad flu season for the average American to become anti-drug company.

A key point made by a speaker during RDL 2018 was that though the biopharmaceutical industry is considered to be one of the most innovative, when it comes to implementation of new technologies, it remains one of the biggest laggards. Perhaps the solution to reducing drug prices resides in novel government incentive programs that encourage biopharma to implement new technologies that can dramatically reduce costs throughout the drug discovery, development, and manufacturing processes? Then again, why wait for a government program? Perhaps it is time for biopharma and healthcare to disrupt itself. For as recently evidenced by the announcement of Amazon, Berkshire Hathaway, and J.P. Morgan teaming up to disrupt healthcare, maintaining the status quo no longer seems viable, and outsiders seem anxious to disrupt our business for us.