Issue Date: February 9, 2009
Breaking The Cycle
THE PHARMACEUTICAL industry has taken great pains to portray itself as an enterprise in transformation. With an influx of new managers in corner offices and laboratories, big drug companies say they are taking fundamentally new approaches to R&D, manufacturing, partnerships, and acquisitions, all aimed at revving up the industry's speed, agility, and efficiency. Companies say they are restructuring themselves to thrive in a world with fewer blockbuster drugs.
The recent news that Pfizer is buying Wyeth for an incredible $68 billion might seem to undermine the sincerity of such claims. Although casual news followers may be drawn to the story of a multi-billion-dollar business deal that is not a government bailout, readers familiar with the drug industry are likely invoking Yogi Berra: Déjà; vu all over again—another big acquisition that won't solve the real underlying problems.
Yet the deal is happening in an industry that has quietly transformed itself in recent years. Behind-the-scenes efforts at Pfizer and at competitors such as Merck & Co. and AstraZeneca are changing the way these companies discover drugs and bring them to the market. Although it remains to be seen whether a combination of big deals and smaller internal steps will fix the industry's woes, the strategy will be worth watching.
Pfizer's approach to business over the past decade certainly epitomized the growth-through-acquisition strategy that was a hallmark of the blockbuster drug era in the 1990s. The purchases of Warner-Lambert and Pharmacia, in 2000 and 2003 respectively, made Pfizer the largest drug company in the world but also kicked off rounds of painful restructuring and downsizing that arguably continue today.
Pfizer Chief Executive Officer Jeffrey Kindler assured analysts less than a year ago that the company wanted to avoid the upheaval of any more big acquisitions—that it was instead committed to innovative small deals primarily aimed at biotech drugs that are created in live cells rather than synthesized in chemical plants. But it now appears that the pressures to pursue an old-style deal were insurmountable.
Such pressures are shared by all large drug companies. In just two years, Pfizer faces the loss of exclusivity for its cholesterol drug Lipitor, the world's top-selling pharmaceutical, and by 2014, the same will be true for a total of 14 of its drugs. Many industry watchers describe the upcoming cluster of patent expiration dates as a kind of cliff that companies are scrambling to avoid through new science and new drug candidates, an increasing number of which are biologics.
John Goddard, senior vice president for strategic planning and business development at AstraZeneca, suggests a better metaphor might be a waterfall that looms in front of a ship. "We are like supertankers," he says. "It takes a long time to change course, even if we see a problem coming."
Still, like his counterparts at other big drug firms, Goddard says AstraZeneca's turn is under way—it just might be hard to notice. "We are doing a number of things that by pharmaceutical industry standards seem like moving quickly," Goddard says. "But by other industries' standards, we are moving quite slowly."
Observers agree that drugmakers need to address change on many fronts. "The industry is responding to the pressures it faces," says Martha Freitag, an analyst with Argus Research. "The question is whether or not it is changing fast enough."
Patent expirations are a focal point, Freitag says. "There is not enough developed product out there to support big staffs, so as products go off patent, companies will have to shrink," she says. "On the other hand, there are biotech candidates at early stages in the pipeline that will take a lot of money to develop. The drug companies are in the process of finding a way to redeploy their cash assets toward accelerating product development."
THIS SHIFT is apparent in a recent survey of 45 CEOs and senior managers at the top 15 drug companies by consulting firm Ernst & Young. Two-thirds of respondents ranked reinvigorating R&D as the most important strategic initiative under way at their firms.
"Companies are placing less emphasis on short-term cost-cutting campaigns that often ignore or imperil long-term growth plans," says Mark B. Hassenplug, pharmaceutical market leader at Ernst & Young. "Only 40% say that optimizing costs is the most important initiative, compared to a similar study done in 2007, in which 92% ranked it highest. The focus on R&D and reinvigorating the pipeline is where the attention is."
In a distinct break from how large, fully integrated drug companies have been managed for 50 years, Hassenplug says, new research capabilities are likely to be attained through establishment of R&D networks—small research operations either acquired or spun off from central research—that are run autonomously but contribute to a coordinated corporate research pool.
"We will probably see more virtually integrated pharmaceutical companies emerging," Hassenplug says. Yet such an approach doesn't necessarily preclude large acquisitions. "I'm not sure it is contradictory to build grassroots biotech capabilities and at the same time consider big purchases in biotech," he says.
Gregory K. Bell, head of the life sciences practice at the consulting firm CRA International, suggests that change in the drug industry goes well beyond standard business process redesign. "Reengineering was about getting costs out of the system," he says. "The pharmaceutical industry is struggling with the decline of the blockbuster business model. It needs to come up with a strategy to address circumstances where we don't have as many blockbusters."
Diversifying research is a key, according to Bell. "The change in R&D in pharmaceuticals is a lot more revolutionary than evolutionary," he says. "There may be a lot of economies of scale to operating a big lab and benefiting from spillovers in research, but it is a heck of a lot better to have your fingers in a whole bunch of different R&D pies."
Drug firms need to be nimble enough to recognize new opportunities and technologies, take positions through acquisition and partnership, and then, Bell says, "do what big pharma companies do very, very well—get products approved and create a compelling sales proposition to managed-care physicians and patients in the U.S. and globally."
Pfizer, in the three years leading up to the Wyeth announcement, has been the poster child for Bell's view of change in the industry. Kindler, a lawyer, came to the company from McDonald's in 2006 and soon embarked on a round of reorganization and staff reductions, including the closure of major research centers in Ann Arbor and Kalamazoo, Mich.
John LaMattina stepped down as president of Pfizer Global Research & Development and was replaced by Martin Mackay, who launched a unilateral R&D review. The result was the elimination of more than 30 drug development programs. Pfizer also started a biotech research wing, the Biotherapeutics & Bioinnovation Center, headed by California biotech entrepreneur Corey Goodman (C&EN, Sept. 1, 2008, page 27).
THE PROSPECT of acquiring Wyeth does not mean the company will backpedal on these changes, Pfizer insists. Indeed, Kindler suggested in a press conference announcing the deal that changes implemented in the past three years actually will ease the assimilation of Wyeth compared with Warner-Lambert and Pharmacia.
At the same time, the acquisition hugely jump-starts Pfizer's efforts in biotherapeutics. Wyeth, after all, recognized early the value of adding biopharmaceuticals to a stable of small-molecule drugs. It purchased 60% of industry pioneer Genetics Institute in 1991 and the rest of it in 1996.
In 2001, Wyeth consolidated its biotechnology activities by launching Wyeth BioPharma. It has since invested $3 billion in the business, including construction of one of the world's largest biopharmaceutical campuses, at Grange Castle Business Park, near Dublin. Wyeth, in partnership with Amgen, now markets the number one selling biologic drug, Enbrel, for several indications including rheumatoid arthritis and psoriasis, as well as Prevnar, a leading pediatric vaccine to protect against meningitis and other diseases caused by pneumococcal bacteria.
According to Robert Repella, general manager of Wyeth BioPharma, those early decisions put the company ahead of the biotech curve and helped turn Wyeth into the world's fourth largest biotech firm—a status Pfizer coveted.
But the market remains competitive. "We have to make sure that we continually scour the landscape for new technologies," Repella says. "We need to have the right collaborations in place to access the scientific approaches that we think have future value." The company recently extended its 2005 development and commercialization deal with Trubion Pharmaceuticals, a biopharmaceutical firm specializing in therapies for autoimmune and inflammatory diseases and cancer. It also has partnerships with Amgen, Medtronic, Genentech, and Elan.
Repella points to the importance of translational research and biomarker-based personalized medicine to both the science of drug development and to the marketplace. "If we understand the basic science to say that a patient with this particular genomic makeup or these particular biomarkers will be more likely to respond to a drug, we can do a better job of demonstrating value," he says. "We can go to payers and say, 'This is the profile of a patient who will do well with this new novel medicine.' "
Mary Collins, Wyeth BioPharma's vice president of inflammation discovery research, and Saeed Fatenejad, vice president of inflammation clinical research, attest to advances through translational methodologies. Fatenejad notes, for example, that the introduction of biomarkers has enabled researchers to gauge not only the safety but also the efficacy of a compound in early development, allowing simultaneous execution of Phase II and Phase III clinical trials. Collins says the feedback from the clinic has, in turn, been a boon to discovery science.
"What is very important to us is to understand the mechanism that drives pathology in human disease," Collins explains. "Getting information from the clinical division informs our choices."
Wyeth isn't the only company emphasizing internal feedback loops to improve drug development success rates. In addition to more conventional restructuring measures such as plant closures and layoffs, Merck & Co. is tightening the connection between process and medicinal chemistry. The goal, according to Rich Tillyer, head of preclinical development, is facilitating scalable process design, managing attrition, and moving toward a more targeted approach to drug development.
Tillyer, who previously led Merck's process chemistry group, says discovery chemists have increased efficiency in drug development by navigating around perennial roadblocks. For example, Merck process chemists have come up with asymmetric hydrogenation techniques that allow drug development teams to more easily access chiral compounds. He credits coordination between process and medicinal chemists for a highly efficient catalytic process used to manufacture Januvia, Merck's type 2 diabetes drug, in which two traditional reaction steps have been eliminated.
AT MERCK, Tillyer says, chemists now have the tools at their disposal to find the right synthetic route rather than throw in the towel when the science gets tough. "It is more of an 'A versus B' than a 'yes versus no' approach," he says. "If we get to a situation where we have a problem in a particular synthesis, we try to enable the program by applying novel techniques—things like spray drying, hot-melt extrusion, and nanodispersion. We are heavily deploying these in small-scale and in late stages of discovery. A few years ago, we were not."
Tillyer says this approach does not preclude an aggressive attrition program. "The most strident cost in the industry is still the cost of failure," he says. "The idea is to fail early and fail cheap, and we certainly have that mentality. We are trying to be sensible and thoughtful in how we apply our resources to answer the key questions that need to be answered early on."
Tillyer sees the changes in R&D at Merck as keeping with an industrywide trend toward translational medicine that connects the lab bench to the clinic bedside. "It's very compelling," he says. "What is new in all of this for Merck is the early collaboration between the clinician, who is designing the proof of concept, and the basic research scientist, who is actually designing the molecule."
At AstraZeneca, Chris Reilly, vice president of strategic performance for discovery, compares efforts to establish better lines of communication between discovery and development to the "culture change" that swept through other industries, such as auto manufacturing, in the 1990s. But in addition to the pressure of profit margins that all industries face, change for drugmakers is driven by industry-specific pressures of looming patent expirations, the need to accelerate drug development, and jockeying for position in biotechnology.
AstraZeneca has even applied Lean Sigma, a variant of the industrial quality regime Six Sigma, to the laboratory. Reilly says it works there. "It's a good logical tool for assessing what you do and how you do it," he says, noting that it stresses the use of partnerships to manage costs and expand capabilities. "Once people start using it, they like it. It fits well with the scientific mindset."
According to Reilly, by "creating a culture of partnership across boundaries," the company has tripled its output of drug candidates over the past five years and reduced the cost per candidate by 40%. "From the lead ID phase in discovery, we work closely with development teams who ultimately take that molecule to clinical development, working with their commercial colleagues," he says. "Even very early in the discovery process, we look at the intended use and final destination for a compound. We consider which patients it will be used in."
Despite advances such as these, Reilly's colleague Goddard is not sure the drug industry is fundamentally remaking itself. "It's the $64 million question," he says. Efficiency improvements do not constitute transformation. The critical issue, he says, is differentiation between the major players, "and what differentiates us is our biologics investments."
ASTRAZENECA has built an antibody therapies business on its acquisition of Cambridge Antibody Technologies in 2006 and MedImmune in 2007. The company announced its intention to make biologics 25% of its product portfolio. That goal will be reached in large part through partnerships, Goddard says.
"A defining feature of big pharma is that portfolios are high risk," Goddard observes. "There is a lot of industrial logic to the idea of sharing some of those risks, partly from the pure financial benefit. It is also better to have part of six things rather than all of three; it gives you a much better risk portfolio."
Then there is the benefit of leveraging partners' special expertise. Goddard sees this in AstraZeneca's partnership with Bristol-Myers Squibb to develop diabetes treatments. "Initially, the idea was to share risk with them, but we also have the benefit of the two clinical development teams working together," he says. "Two and two can make five."
And growth may derive from further acquisition, Goddard says. "We have the alternatives of growing capital over time organically or by acquiring smaller pieces and putting them together to make a bigger biologics unit," he says. But there are also advantages to making more sizable acquisitions. "MedImmune brought us current sales, as well as development, clinical, and regulatory expertise and the very important manufacturing expertise," he says. "The choice we made was to go all in one big play."
Although drug company executives often like to portray their strategies as completely new, industry watchers see a more gradual evolution. W. Blaine Knight, vice president of drug discovery at Southern Research Institute and a former vice president of discovery research at GlaxoSmithKline, sees the changes under way today as the tail end of a train of major innovations that date back 10 years.
"The early 2000s saw the industry trying to respond to a wealth of potential molecular targets by increasing efficiency through high-throughput screening and high-throughput chemistry," Knight says. Those moves were a form of reengineering in that their aim was to enable researchers to do more with less. "Efficiency increases have been successful, but not enough to sustain businesses moving forward. Now, companies are looking for a more flexible business model," he says.
GSK and Pfizer were among the firms that divided big research organizations into small units focused on therapeutic areas. GSK called its units Centers of Excellence in Drug Discovery, or CEDDs. The new centers began focusing on bringing in science from outside, Knight says, noting that GSK's most recently formed CEDD was established to manage partnerships.
"The changes going on are not necessarily transformational," Knight points out. "But they are large step changes. Companies are looking at collaborative outsourcing activities they never considered before." He notes that the multicenter not-for-profit Southern Research Institute, which includes a focus on drug research, is a beneficiary of the heightened R&D outsourcing.
FEW PEOPLE expect that big pharma will look much different in the near future than it does now. The biggest may get even bigger, and there may yet be a blockbuster or two in drug company pipelines. But the incremental changes in how the industry researches and develops drugs will occur slowly.
"Are the big companies going to be able to break the cycle?" asks Freitag of Argus Research. She notes that investment bankers are hungry right now, which will only heighten the pressure for deals on the part of major drug companies with the cash to go forward. "But the history of the megadeal has not been a good one," she says.
The first such deal since the economic meltdown will have to navigate new financial hurdles. But AstraZeneca's Goddard notes that such pressures are not likely to have a deleterious effect on big drug companies' day-to-day business. "Our cash flow in the short term is quite robust. It's not like we'll suddenly lose 20% of our business, as have retailing and car manufacturing," he says.
Goddard and others executives believe the industry still has time to boost productivity in the laboratory and reach the market with significant new products before the patent cliff—or waterfall—takes its toll. "Part of the supertanker nature of the business," Goddard says, "is that people don't stop taking pills."
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