Issue Date: December 6, 2010
Battening The Hatches
The pharmaceutical industry, often compared to a giant cargo ship, does not change course quickly. Trends in research, manufacturing, and marketing play out over years, and drugmakers spend a great deal of time looking toward the distant horizon to calibrate their next moves. Thus, a review of any one year in the industry necessitates a glimpse at least one year into the future and one into the past.
The year now drawing to a close, however, delivered several useful focal points. For one thing, the so-called patent cliff is no longer on the distant horizon. The loss of patent protection next year for Pfizer’s cholesterol-lowering drug Lipitor—the most profitable drug in history, with sales set to top $13 billion this year—is the centerpiece of a raft of patent expiries that won’t be offset by new drugs in the pipeline anytime soon.
The year also featured the digestion of a wave of huge 2009 acquisitions: Pfizer of Wyeth, Merck & Co. of Schering-Plough, and Roche of the half of Genentech it didn’t already own. The deals brought big shifts in science, business, and overall strategy as the newly merged companies made decisions about how to discover and manufacture drugs and about which compounds to advance in their pipelines.
Trends toward developing biologics, outsourcing manufacturing, and partnering with universities and other drug companies advanced markedly in 2010 as well. Emerging markets asserted increasing strength, and several major drug companies moved forward with programs to address rare diseases. Others pursued nontraditional partnerships with telecommunications and even computer-gaming companies, reflecting a gradual shift toward preventive, patient-managed health care.
In its annual pharmaceutical forecast, the market research firm IMS Health reports an expected 4 to 5% growth in global drug sales this year to between $840 billion and $850 billion. Sales growth in 2011 should accelerate to between 5 and 7%, the firm predicts.
“While the overall market will appear to rebound somewhat in 2011, the underlying constraints to growth in developed markets are stronger than ever, including the impact of major patent expiries and payer mechanisms to limit drug spending,” says Murray Aitken, IMS’s senior vice president. Expanding emerging economies and the development of innovative therapies in areas of significant unmet need are also influencing the business, IMS reports.
Looking forward to 2011, the market research firm sees combined drug sales in 17 emerging countries growing 15 to 17%, to between $170 billion and $180 billion. Sales in China, notably, are expected to grow by 25 to 27%, to $50 billion. The research firm also sees the potential for five new blockbusters—drugs netting sales of more than $1 billion per year—in areas such as stroke prevention, melanoma, multiple sclerosis, breast cancer, and hepatitis C.
Patent expirations and the concurrent R&D efforts to offset them with new products were a central theme in 2010, says Michael Kleinrock, director of market insights at IMS. Patent cliffs, however, come in cycles. “The conversation about the cliff really belies the fact that every company has to balance its innovation with the life cycle of its portfolio,” he says. “Let’s recognize that there are a couple of peaks: ’06–’07 and ’11–’12.”
Although patent expirations and the resulting generic drug competition ebb and flow, Kleinrock says, “that doesn’t reduce the impetus and pressure on companies to ensure they get the benefit from the innovation they’ve invested in and ensure that their launch and marketing activities are as effective as they can be.” Given the coming upswing in patent expiries, companies large and small spent 2010 looking at new ways of organizing their commercial operations and bringing innovation into their businesses, he says.
Much of this work is happening in the aftermath of mergers and acquisitions, which also seem to occur in cycles. Deal-making is a means of acquiring needed assets or capabilities, Kleinrock says. “Some may be looking for a biotech platform or generics or a geographic strategy,” he adds.
According to Carolyn Buck Luce, global pharmaceutical sector leader at the consulting firm Ernst & Young, 2010 marked a transition in industry-wide business strategy. “This year, we saw the beginning of Pharma 3.0,” Buck Luce says, employing the numbering system that computer firms use to describe new versions of their software or operating systems.
Ernst & Young uses the term Pharma 1.0 to describe the “blockbuster business model” typical of the late 1990s and early 2000s, when many drug companies focused on top-line revenue from one or two products with massive sales. The loss of patent exclusivity on these blockbuster drugs prompted Pharma 2.0, marked by a diversification of product portfolios and geographic markets. Focus shifted to the bottom line as firms drew up plans for sweeping changes in research and business operations.
Drug companies continue efforts to put Pharma 2.0 into operation, Buck Luce says. In addition to refocusing pipelines and forming innovative research partnerships, firms are seeking to lower their manufacturing and marketing-cost bases, generally with plant closings and layoffs.
At the same time, companies are preparing for a next-generation drug enterprise geared toward delivering health outcomes, rather than mere products. In this emerging Pharma 3.0, Buck Luce anticipates “a shift from being product-centric to being customer-centric and payer-insightful.”
As an example, she points to a partnership announced this year by Bayer and Nintendo that attempts to influence health outcomes through greater patient involvement in managing disease. The two companies have developed a glucose-monitoring game for children with diabetes in which players gain points by keeping track of their blood sugar levels. “That is Bayer taking a product and wrapping it around a medical device and information, developing a brand around customer experience and improved outcomes for children with diabetes,” she says. “That is a 3.0 way of thinking.”
Another example is SMS For Life, an alliance among Novartis, Vodafone, and IBM to manage the medicine supply chain in 135 African villages in Tanzania with mobile phones and electronic mapping technology. The partners claim its distribution monitoring has improved access to malaria drugs.
Although 2010 did offer glimpses of the future, most of the year’s corporate actions were more prosaic product-line diversifications and drug development and downsizing moves. And although 2010 didn’t bring anything like the three big deals of 2009, corporate strategies were generally advanced through mergers and acquisitions.
The year began with the announcement of Novartis’ plan to purchase from Nestlé the 75% of eye care specialist Alcon it did not already own for nearly $50 billion. Daniel Vasella, then Novartis’ chief executive officer, said at the time that the deal would combine Alcon’s research and marketing activities, as well as devices such as its Infiniti ultrasound cataract removal system, with Novartis’ portfolio of eye care products.
Eric Le Berrigaud, a stock analyst with Raymond James, told C&EN during that period that the deal can be viewed as part of an overall restructuring of Novartis’ portfolio. “This is an expensive deal,” he said. “But Novartis is not only looking to offset patent expiry, it is looking to build a new Novartis for the next decade.”
That acquisition, still pending, has met with shareholder resistance, although some view Vasella’s ascendance to chairman of Alcon’s board as a sign it will move forward. Vasella stepped down as CEO of Novartis in February but remains on its board.
During the year, Novartis also closed research operations it acquired in 2008 from Protez Pharmaceuticals after a broad-spectrum antibiotic candidate ran into problems in Phase II trials. The company had paid $100 million for Protez and agreed to pay up to $300 million in milestone payments. Novartis also discontinued development of two drug candidates: Zalbin, a genetic fusion of human albumin and α-interferon for the treatment of hepatitis C, and Mycograb, a recombinant antibody to treat invasive Candida yeast infections.
Sanofi-Aventis is closing the year with a big deal pending: the heavily contested $18.5 billion bid for Genzyme, which would significantly increase Sanofi’s biopharmaceuticals portfolio. Sanofi also formed its first research partnership in India, licensing drug candidates for treating chronic pain from Glenmark Pharmaceuticals. The deal entailed an up-front fee and milestone payments that could total $325 million.
Meanwhile, Bristol-Myers Squibb announced it would acquire ZymoGenetics for $885 million. The acquisition is the latest in a series of purchases designed to bolster BMS’s portfolio of biopharmaceuticals. In a note to investors, Deutsche Bank stock analyst Barbara Ryan called the deal “another solid ‘string of pearls’ acquisition,” referring to BMS’s serial acquisition of small firms—including Adnexus, Kosan Biosciences, and Medarex—accompanied by licensing deals for specific compounds of interest.
Abbott Laboratories was involved in two notable deals in 2010. In February, it completed the $7.6 billion purchase of Solvay’s pharmaceutical business, which included a portfolio of branded generics and a presence in emerging markets. Then, in May, it announced an expansion in generics and a move into India with the $3.3 billion acquisition of Piramal Healthcare. The move makes Abbott the leader in the Indian pharmaceutical market, with a share of roughly 7%. It’s arguably a coveted position, given that the majority of future drug industry growth is expected to come from emerging markets.
Across the pharmaceutical industry it was an active year for restructuring R&D and manufacturing. In May, Pfizer revealed the closure of research sites in the U.S. and Europe that amounted to a 35% reduction in overall lab space. This news was followed by an announcement that the former head of research at Wyeth, Mikael Dolsten, would take the lead role in R&D at Pfizer. Former R&D chief Martin Mackay left to head R&D at AstraZeneca.
Pfizer then announced its plan to close eight manufacturing sites in Ireland, Puerto Rico, and the U.S. The firm also plans to scale back operations at six other plants in Europe, the U.S., and Puerto Rico. The closures will result in the elimination of 6,000 jobs by the end of 2015. The company recently said it expects to exceed its overall target of cutting 15% of its staff, or about 19,000 jobs, set after it acquired Wyeth.
AstraZeneca announced sizable job cuts: 8,000 across the firm by 2014. The new layoffs, about 12% of the British firm’s workforce, come on top of 15,000 job cuts previously announced, 12,600 of which had already been enacted during the past two years. Within R&D, the firm plans to cut as many as 3,500 positions to realize annual savings of $1 billion. And Merck announced that it would lay off 15% of its staff, nearly 16,000 employees, shuttering activity in 16 locations around the world. R&D and manufacturing were both hit hard.
The year also saw the sale of R&D operations by major drug companies to pharmaceutical services firms. Sanofi sold sites in Porcheville, France, and Alnwick, England, to Covance in a 10-year agreement worth up to $2.2 billion. Covance struck a similar deal with Eli Lilly & Co. in 2008. GlaxoSmithKline, meanwhile, sold R&D sites to the services firms Aptuit and Galapagos.
Although some of 2010’s downsizing can be attributed to postmerger integration, much of it had to do with the change in the way drugmakers conduct research and manufacturing. Next year will likely bring further reorganization as drug firms shift resources to priority projects and outsource more manufacturing and research operations.
Research partnerships with academic institutions and other drug companies advanced in 2010. For example, Johnson & Johnson, through its Ortho-McNeil-Janssen Pharmaceuticals subsidiary, signed a five-year oncology R&D pact with the David H. Koch Institute for Integrative Cancer Research at Massachusetts Institute of Technology.
And Pfizer signed a $22.5 million, five-year pact with Washington University in St. Louis to look for new indications for Pfizer compounds that are either in development or languishing on the shelf. Pfizer says the arrangement is the first in what the company envisions as a network of similar research collaborations. It subsequently announced an even more expansive deal with the University of California, San Francisco.
Amgen has also been a pacesetter in partnerships. The biopharmaceutical firm, which received a 2009 award from the drug industry news and data service Scrip Intelligence for having the most innovative pipeline, has successfully leveraged partnerships in the lab, according to Joseph Miletich, senior vice president of research.
One showcase effort for the company is with Vanderbilt University’s Program in Drug Discovery. The partners screened publicly available compound libraries for allosteric compounds useful as neurology-related therapies. This year, Amgen formed a partnership with Array BioPharma to develop Array’s portfolio of glucokinase activators.
The push to fill new-drug pipelines anticipates the upswing in patent expirations in the months ahead, with the Lipitor expiration next year serving as a kind of centerpiece. Going into 2010, the industry faced the prospect of generic drug competition for Pfizer’s dementia drug Aricept, Merck’s hypertension drug Cozaar, and Sanofi’s breast cancer treatment Taxotere. On the horizon with Lipitor are Zyprexa from Lilly, Plavix from BMS and Sanofi, and Seroquel from AstraZeneca. Clearly, companies have reached the cliff.
The patent cliff was a major focus of drug company CEOs in recent third-quarter earnings reports and conference calls. Sales at six of the 10 big pharma companies tracked by C&EN were flat or down for the quarter (C&EN, Nov. 15, page 23).
Lilly CEO John C. Lechleiter acknowledged setbacks such as the failure in Phase III clinical trials of teplizumab, a diabetes treatment the company was developing with MacroGenics, and the halted clinical trials for two Alzheimer’s disease drugs. Lechleiter claimed, however, that the company is on track for growth, pointing to cost-cutting efforts and strong international sales. “Japan performed particularly well in the quarter, growing revenue by 27%, driven by recent product launches. Strong performance was also seen in key emerging-market countries,” he said. Sales were up 1.7% for the quarter and 6.2% for the first nine months, compared with 2009.
Pfizer CEO Jeffrey Kindler claimed his company is on track with its postmerger integration program. “It’s been just over a year since the closing of the Wyeth acquisition,” he said. “I am particularly pleased with the speed of the integration, the cost synergies achieved to date, as well as our solid financial performance this quarter and year to date in this difficult economic environment.”
At GSK, CEO Andrew Witty said investment in growth markets, vaccines, and consumer health care products offset the generic drug competition for its herpes treatment Valtrex and Food & Drug Administration restrictions on the use of Avandia, the company’s beleaguered treatment for type 2 diabetes. He also pointed to the latest round of reorganization in research, including the launch of small R&D units, as a foundation for growth.
Steve Arlington, head of the pharmaceutical and life sciences team at consulting firm PricewaterhouseCoopers, says GSK’s moves are an example of how major drug companies are stepping up to the task of “managing complexity” by segmenting business and research endeavors into small autonomous groups. “All of this has to be viewed in the context of one of the biggest changes in marketing,” he says, “and that is the enormous pressure on the industry to bring drugs to the marketplace that not only prove efficacious but that also have a health economic benefit.”
Industry watchers agree that new levels of business and research innovation will need to emerge as federal regulators show signs of getting tougher on drug companies. GSK’s recent agreement to plead guilty and pay $750 million to settle civil and criminal complaints that it knowingly marketed adulterated products made at a plant in Cidra, P.R., between 2001 and 2005 is, perhaps, the starkest example of the effect of FDA’s muscle flexing on the industry.
Given the tendency of big drug companies to try to acquire their way out of financial jams, it’s not surprising that 2010 is ending with a couple of deals pending—Sanofi’s push for Genzyme and Novartis’ ongoing bid for Alcon—and another one launched: In yet another move to boost revenues on the eve of Lipitor’s patent expiration, Pfizer announced the $3.6 billion acquisition of King Pharmaceuticals in October in hopes of bolstering its pain management and animal health businesses.
And although some industry watchers characterize such deals as examples of Pharma 1.0 behavior, financial analysts are not entirely displeased. According to Leerink Swann analyst Seamus Fernandez in a note to investors, the King acquisition is “a straightforward and well-conceived strategic move.”
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