Jan 1, 1970 - Jan 1, 1970,

Dr. Bates’ Talkback: Pharma’s 2012 ‘to do’ list

Dr. Andree Bates suggests 8 things that should be on pharma’s 2012 agenda



We all know that we are a sector in crisis, and that the traditional blockbuster business model of the past is unsustainable now. The patent cliff is already here. In the next five years, 9 of the top 10 blockbusters will be off patent. If we extend our view to the top 20, the top 18 will go off patent. That equates to a loss of more than $100 billion.

Replacement products to take the strain are not coming through fast enough, if at all. When they do come through, they have shorter exclusivity periods, adding to increase pressure. Every drug we get to market costs around $1 billion and takes from 10-15 years, which puts large strains on earnings. (For more on R&D and the cost of development, see see Patent expiration: Innovate or die, New models for drug discovery and marketing and Understanding pharma’s drug development costs.)

Meanwhile, CEOs are under more pressure to deliver returns to shareholders, while healthcare reforms and governments are beginning to impose pay-for-performance as has already started in Europe. As a result, pharma has been on a pipeline-buying spree via acquisitions. The brands still around face tougher competition from other brands and generics, helped along by cost containment pressures of governments. Pay-for-performance is likely to increase. We are also likely to see the strictness of the regulatory pathway increased. (For more on generics, see Dr. Bates Talkback: How to mount an effective defense against generics, Branded generics: The emerging market opportunity and Pharma’s evolution: From blockbusters and biologics to branded generics, medical devices and functional foods.)

So, what should Big Pharma be doing?

1. Buy earnings via acquisitions

This habit is hard to break. Big Pharma have gained a lot over the years from merger and acquisitions. In fact, many of Pfizer’s blockbusters came from its acquisition of Pharmacia. Even in the past few years, we have seen a lot of merger and acquisitions activity: Pfizer and Wyeth, Pfizer and King Pharmaceuticals, Merck and Schering-Plough, Sanofi-Aventis and Genzyme, Abbott and Solvay. The difficulty is that while these do buy breathing room, they are not a permanent solution. Perhaps the focus may begin to change from mega-acquisitions of other large pharma into more targeted biotech or generic company acquisitions, as well as acquisitions of local companies in some of the markets we are aggressively expanding into.

2. Cut non-drivers of revenue

Often leading on from mergers and acquisitions is downsizing. The pharmaceutical industry has seen round after round of workforce layoffs. The most recent were Merck slashing 12,000 to 13,000 jobs, Pfizer cutting more than 50,000 jobs, Lilly more than 6,000, and Bristol-Myers Squibb more than 9,000. In fact, a report by the Institute for Policy Studies reports that 119,000 pharmaceutical jobs have been lost since 2008.

It is an easy way to save money but I question whether it is the best way. Shouldn’t the question really be, How can we grow profit in a downturn economy by making intelligent cost reductions to increase profitability? The challenge of where to cut expenditure is to carefully identify and examine all the non-drivers of revenue and reduce spend there. Cuts for the sake of profit cannot be made sensibly without really examining drivers. However, when a company has a thorough understanding of its customers and how they perceive value and use that knowledge to examine its cost structure, the resulting cuts are in alignment with revenue growth and profit.

3. Increase R&D efficiency

Getting rid of waste and increasing efficiency is the norm in tough times. Different companies have approached this in regard to R&D in different ways:

·      Smaller Working Groups. Novartis has responded to the challenge by creating smaller groups to commercialize drugs, to reduce red tape and silos, and to increase efficiency.

·      Outsourcing.Novartis also outsourced some of its R&D to a preferred strategic partner to reduce internal cost and risk.

·      Consolidation of spend. GlaxoSmithKline eliminated the use of numerous external research partners from around 130 to a total of 2.

4. Increase R&D innovation and productivity

The rate of NME innovation has been falling steadily since the 90s, so how can we enhance the productivity of R&D? It seems that top management needs to give clear direction on focus and encourage risks. There is a saying that you never got fired for passing on a drug but you can if you choose the wrong one to bring to market. This does not encourage risks. But a study by Bain showed that the big breakthroughs of the past were largely innovating rather than playing it safe.

That study suggested that management needs to understand the science more in order to direct focus, encourage more collaboration with academia, and develop a willingness to do research in a different way, including:

·      Focusing on specific patient populations and personalized medicine. This is the approach taken by Roche, which restructured and stopped focus on the short interfering RNA area and refocused largely on specific patient populations. (For more on R&D innovation, see Personalized medicine: A kick-start for innovation?)

·      Proof of Concept. Some companies, including both GSK and Lilly, have developed proof of concept units or partnerships. The aim of these is to get rid of poor performers earlier in the development cycle to decrease costly late-stage failures.

·      Early comparative effectiveness research. Bristol-Myers Squibb (BMS) conducts this type of research around the end of Phase II to understand the unmet medical need and where the patient and payer value lies. It typically doesn’t go into Phase III unless these studies show that it is valuable. (For more on comparative effectiveness research, see Health data and comparative effectiveness and Pharma marketing and comparative effectiveness research.)

·      Bounty Hunting. Lilly had an interesting process to tap into minds outside of company by putting their problems and challenges on the Web and offering ‘a bounty’ to whoever solves it.

·      Partnering with Venture Capital Firms. Many pharma now partner with venture capital firms to fund new drug development. The venture fund then gets first refusal to develop the best candidate compounds. Companies that have done this include Lilly, Abbott, J&J, Merck, Novartis, and Pfizer.

5. Expand aggressively into emerging markets

All the main big markets, (notably, the US and Japan) while still significant, are not seeing the double-digit growth seen in some of the emerging markets. Most companies have their Emerging Market Teams in situ for some time. The key countries focused on are China, Brazil, India, Russia, Mexico and Turkey. 

However, even though pharma has been in these markets for a long time, now they are really starting to focus on them aggressively. They are good target markets due to having a largely untreated population for diseases for which pharma has existing drugs. Currently, these markets are largely driven by generics and brand relationships and often branded generics. Companies tend to utilize a blend of approaches, which include selling a branded drug to the prosperous or insured population, offering generics to reach the broader population, collaborating to offer branded generics, and customizing to suit the market by developing local products to meet local needs.

However, emerging market strategies alone will not make up for the lost revenue in the big markets. Aggressively targeting these markets may not be plain sailing. Caution should be exercised around market access decisions, operating margins, competitive positioning, alternative medicines, and currency exchange issues. (For more on emerging markets, see eyeforpharma’s Special report: Pharma's emerging markets and download Pharma Emerging Markets Report 2011-12.)

6. Extract more value from the US and Japan

Although these markets are not seeing the growth of the emerging markets, they should not be defocused. Japan still has many of the drugs that have fallen off the patent cliff in other markets with many more years of patent life.  Although these markets have significant amounts of money spent in them, the focus of allocations is not always optimal. Eularis has conducted numerous analytics projects on drugs in these markets and always found areas where there is money spent in sales and marketing that is not having any impact. Reallocation of budget away from non-drivers and to drivers always results in more revenue and profit.

7. Diversify into new and revived product categories

Some pharma firms started life with other products, and that continues today. Several companies that did not have non-pharma products have started to move from prescription drugs to non-prescription healthcare products. Novartis moved into eye care with the acquisition of Alcon; GSK increased its dermatology business with the acquisition of Stiefel; and Sanofi-Aventis is venturing further into OTC with the acquisition of Chattem. 

The OTC segment in general is growing strongly, and many players are reaping rewards. Clinical nutraceuticals are also a target for big pharma. Generics is another category gaining renewed interest from the big players. The reasons for the diversification are that there is a more long-term income from these types of products, despite the lower margins and increased competition.

In addition to broader healthcare offerings, we are also seeing diversification of product portfolios by adding orphan drugs into the mix, as seen with GSK, Pfizer, and Sanofi-Aventis. There are advantages to going down this route, including additional revenue streams. On the negative side, we have lower margins, different skills sets needed, and different investment cycles. (For more on orphan drugs, see Forecasting for orphan drugs: The data challenge and Pharma innovation and rare disease research.)

8. Increase emphasis on biologics, including biobetters and biosimilars

Biologics have shorter development times and should be able to maintain market dominance even after expiration of patents. Biobetters (new and improved versions of the original drug) and biosimilars (or follow-on biologics) are in a similar position, with significant barriers to entry making them attractive with limited competition and less pricing pressures. Biosimilars are already seeing increased investment from Merck and Pfizer, although they have more hurdles since $53 billion in biologics become exposed to biosimilars in 2015 due to patent expiry. (For more on biologics, see Forecasting the future of biologics and Will biobetters beat biologics?)

The pharmaceutical industry is going through interesting times. We acknowledge the need to become leaner, maximize R&D and focus on where we can get the most growth. Pharmaceutical execs cannot afford to continue on a slow and conservative pathway but now need to embrace innovation in creating future value.

Dr. Andree K. Bates, a regular contributor to eyeforpharma, is CEO of Eularis, which applies analytics to determine the sales impact of marketing programs.

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Jan 1, 1970 - Jan 1, 1970,