Issue Date: December 7, 2009
As they pop the champagne corks and sing “Auld Lang Syne” on New Year’s Eve, pharmaceutical industry executives will likely be glad to put 2009 behind them.
Throughout the year, drug companies were buffeted by the all-too-familiar problems of patent expirations for superstar products, rising generic competition, and pipelines that can’t churn out as many big-ticket products as they did in the past.
On top of that, pharmaceutical firms faced the possibility of U.S. health care reform legislation, which, if adopted by the Obama Administration in the coming months, could depress future drug pricing. The lingering global recession, although it ultimately pinched drug companies less than those in many other businesses, further boosted industry anxiety levels.
However, 2009 did have its bright spots. Many companies benefited from selling dramatically increased quantities of vaccines and antivirals to stem the global outbreak of the H1N1 virus, or swine flu. And growth rates for branded pharmaceutical products—although still nowhere near what they were in the industry’s blockbuster-fueled heyday—actually recovered slightly from 2008.
When 2009 comes to a close, global pharmaceutical sales are expected to have grown 5.5–6.5%, to between $775 billion and $785 billion, up from 5.3% growth in 2008, according to Michael Kleinrock, director of thought leadership at IMS Health, a provider of market information and consulting services for the health care industry. For the U.S. pharmaceutical market, by far the world’s largest, 2009 brought a marked improvement. IMS Health expects 4.5–5.5% growth, to about $300 billion, up from just 1.5% growth in 2008.
The improvement over 2008 is due in part to the weakening of the pharmaceutical supply chain in the final quarter of last year, when the recession was at its darkest moment, the holidays dampened drug sales, and pharmacy inventories remained low. Kleinrock reports particularly high sales growth in the first quarter of 2009 as pharmacy chains rebounded. This year’s growth also reflects pharmaceutical companies’ success in “maintaining their pricing practices and competing on the basis of clinical evidence and value” even as insurance companies and other payers “seek to limit price increases and boost the use of lower-cost generics,” he says.
To stand up to payers and myriad other challenges, drug companies continued efforts they started in 2008 to overhaul their business models. They are still cutting costs, slashing jobs, and refocusing business units in an attempt to be leaner and more customer-focused. Many drug companies are also setting up creative licensing deals, partnerships, and acquisitions—three megamergers closed this year—all aimed at improving operating efficiencies and beefing up less-than-robust new product pipelines.
At the same time, firms are devising ways “to broaden access to their medicines in both mature and emerging markets,” according to Carolyn Buck-Luce, head of the global pharmaceutical practice at Ernst & Young, which provides tax, accounting, transaction, and other business services.
“The business environment is driving the greatest era of change the biopharmaceutical industry has ever experienced,” says Tony Zook, chief executive officer of AstraZeneca in North America and executive vice president of AstraZeneca global marketing. “The companies that execute well while transforming themselves to compete effectively in this environment will emerge on top.”
As part of its strategy, AstraZeneca continues to take “a number of steps to strengthen our pipeline and broaden our scientific base,” Zook says. “We have doubled the number of projects in every clinical phase of the portfolio, taken two years out of the development process, become focused on fewer disease areas, diversified into biologics, and stepped up our business development efforts.” For example, in September, AstraZeneca set up an exclusive worldwide license agreement with Nektar Therapeutics involving NKTR-118, a late-stage investigational drug being evaluated for the treatment of opioid-induced constipation, and NKTR-119, an early-stage drug intended to deliver pain medications without constipation side effects. Both programs use Nektar technology for conjugating polymers to small molecules.
Diversifying R&D efforts is not the only way for companies to adapt to evolving market pressures. “Different strategies will be appropriate for different companies,” Buck-Luce says. “Each company has to decide how to best align their assets to create the most value.”
Some companies have adopted strategies that require them to focus on their core pharmaceutical activities, and others are diversifying into businesses such as generics or consumer health products to reduce dependence on branded drugs. Still other firms are making business changes aimed at serving customers in emerging and low-income markets and at the payers and governments that are making more health care decisions for patients, Buck-Luce says.
Sanofi-Aventis, for example, is diversifying its business to offer health care solutions that match increasingly broad customer needs, according to Greg Irace, CEO of Sanofi-Aventis U.S. “A health care solution, for example, may not always be a traditional medicine, and therefore, we’re looking into areas that may ultimately include things like medical devices or services,” he says.
Already, Sanofi is quite diversified globally. In addition to its Merial animal health business, it has a footprint in emerging markets, a robust presence in over-the-counter products and generics, an expanding biotechnology base, and a major vaccines presence, according to Irace.
With a renewed focus on “delivering products and services that people truly need, we have examined our R&D portfolio to determine which projects have promising, long-term therapeutic and commercial potential, and we have eliminated a good percentage that do not,” Irace says. At the same time, Sanofi is making acquisitions in areas such as oncology and diabetes. This year, for example, it bought South San Francisco-based BiPar Sciences, which is developing BSI-201, an inhibitor of poly(ADP-ribose) polymerase-1 with potential to target triple-negative breast cancer, a particularly aggressive disease.
Making acquisitions that build on core drug businesses may be critical to the profitability of big pharmaceutical companies, even those seeking to create more diverse business portfolios, according to a new Datamonitor report, “Mapping the Healthcare Landscape: Bringing Pharmaceuticals into Focus.”
Although almost half of all drug company acquisitions since 2000 have been in nonpharmaceutical sectors, these moves may not be reaping the desired rewards, according to Datamonitor pharmaceutical strategy analyst Pam Narang. In general, companies that have diversified heavily into over-the-counter drugs, medical devices, diagnostics, animal health, retail pharmacy, and health insurance are less profitable than those companies for which pharmaceuticals generate a high percentage of their sales, she says.
As a result, drug companies may be better off merging with and acquiring other pharma companies and biotechs, Narang says. Such transactions “provide the most potent means of driving up operating margins, as they result in cost savings that come from sales force reductions and corporate rationalization,” she says.
This year’s three big deals all are of the type that Datamonitor advocates. Roche’s $46.8 billion purchase of the part of Genentech it didn’t already own was squarely aimed at boosting pharma presence. Through the deal, Roche now has full access to Genentech’s science-driven culture and a pipeline of potential drugs; it also gains successful products such as Genentech’s cancer drug Avastin.
Pfizer, meanwhile, expects to gain synergies of $4 billion by the end of 2012 following its $68 billion acquisition of Wyeth. It plans to achieve those savings at least in part by shuttering six of its 20 research sites and cutting 15% of the combined workforce of roughly 128,000 people.
In addition to cutting costs, mergers between big drug companies create expanded product portfolios and R&D pipelines that will help firms “survive the patent cliff,” Buck-Luce says.
Merck & Co.’s $41 billion purchase of Schering-Plough promises such rewards, in part because the combined company now has a pipeline of more than 15 late-stage candidates spanning several therapeutic categories. “The acquisition was an acknowledgment by Merck that it needed to strengthen its position in ethical pharmaceutical products, but, contrary to its previous preferences, it couldn’t develop them all itself,” Buck-Luce says.
Despite the benefits of these deals, fewer mergers and acquisitions took place in 2009 than were expected, especially in the biotech arena, according to Glen Giovannetti, Ernst & Young’s global biotechnology leader. Throughout the year, big drug companies were poised to take advantage of biotech-buying opportunities set up by the upheaval of capital markets, he says. However, some drug companies have been surprisingly conservative in making acquisition moves, a stance he attributes to their desire to take on only those firms that would be a good strategic fit. Other drug companies, he says, have postponed acquisition moves to give them time to fully digest companies they recently swallowed up.
Although companies have been more prudent in making purchases this year, they have been eager to set up creative alliances and partnerships, especially with biotechnology firms, Giovannetti says.
“We are seeing an increase in option deals, under which a pharma company pays a biotechnology company not for a license to the technology but for an option to license it later at a set price after proof of concept,” Giovannetti says.
In these cases, “the pharma company may be very interested in the technology but may be unwilling to assume a high level of risk associated with a technology in an early stage of development,” he explains. “Because drug companies are typically putting up less cash up front in these option deals, they are also able to spread their bets around a little bit and get a few more shots on goal despite increasing constraints on overall R&D spending.”
This year, for example, GlaxoSmithKline set up two deals that could each involve more than $1 billion in milestone and option payments. Under these deals, Concert Pharmaceuticals will develop deuterium-containing medicines and Chroma Therapeutics will develop macrophage-targeted compounds that may find application in treatments for inflammatory disease.
In other moves, the Novartis Option Fund, an investment arm of Novartis, struck three option deals, each involving up-front and milestone payments valued at around $200 million. A year ago, it bought an option to license drug candidates from Ascent Therapeutics, which is focused on small lipopeptides targeting G-protein-coupled receptors. Early this year, it set up a licensing and option deal with Forma Therapeutics involving protein-protein interaction targets in the field of oncology. And this fall, it formed a deal with Heptares Therapeutics under which Heptares will generate novel drug leads against an unspecified G-protein-coupled receptor target.
Through licensing deals or other avenues, companies are eager to develop products in high growth markets such as biologic drugs. The biologics market grew by 7.5% to reach $120 billion globally in the 12 months through June, according to IMS Health’s Kleinrock. IMS Health defines the category to include single identified components and whole cells; products can be chemically synthesized or produced through recombinant DNA technology.
Leading products include Enbrel, marketed by Amgen and Wyeth (now Pfizer) for rheumatoid arthritis and psoriasis; Centocor Ortho Biotech’s Remicade for inflammatory disorders involving the immune system; and Roche’s Avastin for treating various cancers. The segment also includes products such as Sanofi-Aventis’ Lovenox, an anticoagulant that helps reduce the risk of deep-vein thrombosis; Teva Pharmaceutical’s Copaxone multiple sclerosis treatment; and Prevnar, a pneumococcal disease vaccine marketed by Wyeth/Pfizer.
Many drug companies are also clamoring for a piece of the fast-growing market for specialist-driven products—those prescribed predominantly by medical specialists. In the 12 months through June, for example, the specialist-driven segment grew 7.3% to $289 billion, according to Kleinrock. In contrast, products generally prescribed by primary care physicians grew only 4.1% to $421 billion, hindered by fewer significant product launches and the loss of patent exclusivity for drugs such as Johnson & Johnson’s schizophrenia treatment Risperdal and Merck’s osteoporosis drug Fosamax, he says.
Within the specialist-driven segment, oncology is one of the higher performing classes. In the 12 months through June, oncology drug sales grew 10.5% to reach $50 billion globally. The class of drugs to treat autoimmune diseases also performed well; it grew by 17.8% to reach $16 billion. In addition, diabetes treatments grew 12.5% to $28 billion.
Companies also benefited from Food & Drug Administration approvals for key drugs this year, Kleinrock says. As of the end of October, FDA had approved 18 new molecular entities and six biologics license applications for a total of 24 new drugs, according to the agency. In 2008, the agency approved 24 new drugs, up from only 18 in 2007.
This year, FDA also focused on vaccines for use against the H1N1 virus. In the fall, after the agency approved vaccines made by firms such as Novartis, Sanofi-Pasteur, and AstraZeneca’s MedImmune arm, the companies began working to accelerate production to meet skyrocketing demand.
Sanofi-Pasteur, Sanofi-Aventis’ vaccines unit, has been “working literally around the clock to deliver on our commitment to provide a vaccine for H1N1, while maintaining seasonal flu vaccine output,” Irace says. “As the largest producer of influenza vaccine, we committed 75 million doses of H1N1 vaccine by the end of the year in the U.S. alone, and we are set to deliver on that commitment.” Sanofi-Aventis expects its global H1N1 vaccines sales to reach $600 million for the year.
GlaxoSmithKline is also benefiting from the swine flu outbreak. In addition to supplying an H1N1 vaccine to governments and health authorities around the world, the company makes Relenza, an inhaled antiviral used to treat those infected with swine flu. Sales of that product rose to $715 million in the first nine months of 2009, compared with just $86 million in the same period in 2008.
Roche has been reaping big returns for the antiviral Tamiflu. Sales jumped to almost $2 billion in the first nine months of this year, representing a whopping 362% increase over the same period last year.
As part of their quest for growth, big drug companies are expanding their reach to include the emerging markets of the world. “Within these areas, they recognize that there is an expanding middle class that both can afford and needs Western drugs and an even greater population that will soon begin to access at least essential medicines through new government programs,” Ernst & Young’s Buck-Luce says.
Taken together, the emerging markets of the world sustained strong growth in 2009 despite the recession, IMS Health says. The seven big emerging market countries—China, Brazil, Russia, Mexico, India, Turkey, and South Korea—grew 15.7% in the 12 months to June. Moreover, in aggregate they are expected to grow by 11–13% in 2010 and 13–16% annually over the next five years, according to IMS Health.
In one of this year’s many moves to tap this growth, GSK set up a partnership with India’s Dr. Reddy’s Laboratories to develop and sell drugs across emerging markets such as Africa, the Middle East, Latin America, and Asia-Pacific. The deal doesn’t include India.
Companies are also keen on expanding into the Chinese pharmaceutical market, which grew 24.7% in the 12 months through June, according to IMS Health. Even more alluring is the fact that China’s economy is expected to grow by more than 20% annually through 2013, fueled in part by government programs aimed at providing basic health care to every person in the country by 2020.
Not surprisingly, many big drug firms have made R&D investments in China. Just last month, Novartis announced plans to spend $1 billion over the next five years to boost its R&D effort in China, including a significant expansion of the Novartis Institute for BioMedical Research in Shanghai. In addition, Novartis agreed to spend $125 million to acquire an 85% stake in the Chinese vaccines company Zhejiang Tianyuan Bio-Pharmaceutical.
As companies expand into Asia, they are leveraging Singapore as a strategic site for drug discovery and development, regional clinical research, and biopharmaceutical manufacturing, according to Keat Chuan Yeoh, executive director for biomedical sciences at the Singapore Economic Development Board. In June, GSK opened a $411 million plant in Singapore that will manufacture pneumococcal vaccines for global markets. In another move over the summer, Roche exercised an option to buy Lonza’s cell culture biologic manufacturing facility in Singapore for $290 million plus milestone payments of $70 million. The plant will be used to produce bevacizumab, the active ingredient in the cancer drug Avastin.
Fueled in part by demand in emerging markets, global pharmaceutical sales are expected to grow 4–7% per year through 2013 to total more than $975 billion, according to Kleinrock. Events in 2010—including the magnitude of the H1N1 pandemic and the degree of global economic recovery—could have a long-term effect on the global market for drugs, Kleinrock cautions. Another wildcard is U.S. health care reform legislation, which, if adopted, “could make a big impact on the market beginning in 2010,” he says.
“U.S. health care reform legislation has the potential to be a double-edged sword,” Buck-Luce says. Although the legislation will provide health insurance to more people, creating growth opportunities for drug companies, some of the insurance may be provided through the government, which will likely seek lower prices for existing drugs and accelerate the shift to generic alternatives, she says. “There undoubtedly will be a trade-off between volume and price, which will challenge the industry to continue to find ways to manage its profitability,” she says.
Drug companies support health care reform that would allow all Americans access to high-quality and affordable health care, according to Ken Johnson, senior vice president of Pharmaceutical Research & Manufacturers of America, the U.S. industry’s main trade association. However, “pharmaceutical companies continue to believe that if we are going to cure cancer in our lifetime—as President Obama has challenged us to do—any health care reform package must support medical progress and innovation in America,” he says. “Among other things, we believe that final health care reform legislation should provide for a fair period of data protection for innovative biologic medicines that hold the promise to revolutionize health care.”
Like many companies in the drug industry, AstraZeneca “supports health care reform that promotes market competition, ensures patient safety is maintained or enhanced, expands coverage for the uninsured, fosters innovation, and protects intellectual property,” Zook says.
Regardless of what form the final bill takes, it will undoubtedly have a big impact on the industry, “which has a very complex ecosystem with interdependencies between payers, providers, doctors, hospitals, patients, the government, and the drugmakers themselves,” Buck-Luce says. “Any time incentives within an ecosystem change, all the players have to change what they do, how they do it, and how they interact with each other. And health care reform is going to change all the incentives.”
Government-led health care reform is just one of the many hurdles the pharmaceutical industry will face in 2010 and beyond, Kleinrock says. However, he is confident that companies will find a way to persevere. “The drive by pharmaceutical manufacturers to adapt to the longer-term marketplace trends and evolving patient needs will continue undiminished,” he says.
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