Health Care in Focus

The pharmaceutical industry saw its global sales rise 9% to reach $491.8 billion in 2003, according to IMS Health's estimate, and by June 2004, estimated 12-month running sales had reached $496.6 billion. This steady growth in sales came despite an atmosphere of cost containment, poor research and development productivity, and the loss of exclusivity for some major products.

Pharmaceutical stocks had been seen as a safe haven, but now, reflecting on 2004, some investors may be losing their nerve. Even before the U.S. presidential election, analysts predicted that drug prices in the world's largest single market would be under pressure--perhaps less so under a George W. Bush Administration than one led by John Kerry, but under pressure nonetheless. Then, in the fall, a series of events occurred that marred the reputation of both drug manufacturers and the regulatory agencies that control their activities.

First, after criticism from some U.S. politicians, the Food & Drug Administration ordered that "black box" warnings--the strongest available--be placed on the labels of all antidepressants, due to the increased risk of suicidal behavior in younger patients. The U.K. then suspended Chiron's manufacturing license at its plant near Liverpool, England, citing quality-control problems; the main product, influenza vaccine Fluvirin, was contaminated with bacteria.

Unfortunately, a number of companies have pulled out of the U.S. traditional flu vaccine market in recent years, citing low profits and wasted product. Chiron and Sanofi-Aventis are the only two licensed producers; the U.S. thus found itself missing half its injectable flu vaccine supply. MedImmune sells an inhaled, live flu vaccine, FluMist, but this cannot be used by many patients, and the drug's planned 2004 production run was only modest.

Last but not least, the industry was left stunned by the voluntary withdrawal of Merck & Co.'s COX-2 inhibitor Vioxx (rofecoxib), even though the painkiller had long been the subject of speculation that it was linked to an increased risk of cardiovascular events such as heart attack and stroke. Merck had repeatedly said Vioxx was safe, but more negative data appeared over the summer. On Sept. 30, the firm announced that a colorectal cancer prevention trial had shown an increased risk of cardiovascular problems in patients who took the drug for longer than 18 months. Merck decided to withdraw its $2.5 billion-per-year product worldwide, and regulators are now investigating the whole class of COX-2 inhibitors.

So 2004 may turn out to be an annus horribilis for the pharmaceutical industry, but it is beginning to change and adapt to the new operating environment. A number of manufacturers are moving away from the blockbuster model to smaller niche markets, where the profits can still be substantial, as can be seen from the cancer therapies Gleevec (imatinib) and Avastin (bevacizumab). Some traditional manufacturers are building up their presence in the generic market while generic drugmakers move up the value chain into the development of innovative products. Conglomerates are shedding divisions to focus on health care, and new global markets such as China and India are opening up.

And in the U.S., while price controls are still a possibility, the Medicare prescription drug benefit in 2006 could bring millions of dollars in extra sales, as elderly patients will be more able to afford to take all the drugs they are prescribed. Indeed, aging baby boomers worldwide will continue to fuel growth due to the simple fact that older patients use more medicines.

REGIONAL SALES. North America continues to be the dominant market for pharmaceuticals, representing almost half of global sales in 2003. Europe is beginning to make a larger contribution, however, as pharmaceutical manufacturers see low growth rates in Japan, the second-largest single-country market. Nevertheless, Japan is still a major focus for multinational drug firms because of its size, low generic penetration, and high spending on health care. Latin America was the only region that reported a slight drop in sales in 2003, reflecting troubled economies in some of the larger markets.

One of the fastest growing markets is China. Although it now accounts for only 1.3% of global sales, the country is seen as a huge potential market by the multinationals, a number of which already have joint ventures with local manufacturers. Some are now beginning to expand their presence in China, and, although the decision by Chinese patent authorities to revoke a patent protecting Pfizer's Viagra (sildenafil) is a concern, if China can increase its intellectual property protection, the sales potential there is considerable.

Industry experts believe China will be at least the fifth largest individual pharmaceutical market by 2010. India, currently the 14th largest market, is due to adopt the World Trade Organization's product patent rights on Jan. 1, 2005, and is therefore becoming a market of much more interest to the multinationals, as are other countries such as Russia, Mexico, and Brazil.

THERAPY CLASSES. The main development in sales by therapy class during 2003 was cholesterol and triglyceride reducers replacing antiulcerants as the leading group. This was largely due to the loss of U.S. exclusivity for AstraZeneca's Prilosec (omeprazole) in December 2002, but it also reflected the continuing rise of cholesterol drugs, dominated by statins--and in particular Pfizer's Lipitor (atorvastatin).

The top 10 therapy classes accounted for 30% of the total world market in the 12 months ending June 2004, with five of the leading 10 growing by more than 10% each. Over the first six months of 2004, the antipsychotics, led by Eli Lilly & Co.'s Zyprexa (olanzapine), overtook the nonsteroidal antirheumatics to take fourth place; following the withdrawal of Vioxx, the nonsteroidal antirheumatics could slip further if physicians go back to generic nonsteroidal anti-inflammatory drugs. ACE inhibitors were knocked out of 2003's top 10 by the strong growth of the anticonvulsants and also by the full impact of patent expirations for several of the antihypertensives.

Outside the top 10, some of the fast-growing classes include specific antirheumatic agents, such as Amgen and Wyeth's TNF-inhibitor Enbrel (etanercept), which are biological response modifiers that target overexpressed mediators of inflammation. This class saw 65% growth in fixed-rate terms, which excludes the effects of currency fluctuations. Abbott Laboratories and Cambridge Antibody Technology's tumor necrosis factor inhibitor Humira (adalimumab), launched only in early 2003, has seen a healthy uptake as well. Thanks to two novel products, the class of "all other central nervous system (CNS) drugs" saw 49% growth over the 12 months ending June 2004. This group is led by Lilly's new, nonstimulant therapy for attention-deficit hyperactivity disorder (ADHD), Strattera (atomoxetine), followed by Cephalon's narcolepsy drug, Provigil (modafinil). Overall, however, stronger growth is expected in the oncology and cardiovascular areas, with fewer blockbusters arising from CNS disorders.

PRODUCTS. Pfizer's Lipitor was the world's number one drug again in 2003, and it became the first drug to have annual sales exceed $10 billion. Combined, the top 10 products had global sales in excess of $50 billion. Only one, Merck's statin Zocor (simvastatin), recorded a fall in sales. This is still the world's number two drug, but has lost exclusivity in many major markets. A notable success is AstraZeneca's proton pump inhibitor (PPI) Nexium (esomeprazole), which saw 37% growth in the 12 months ending June 2004. It is a single-isomer version of the company's older drug Prilosec and was introduced just in time to protect AstraZeneca from the worst effects of generic competition.

Among the top 50 products of 2003, the fastest growing was Amgen's second-generation erythropoietin Aranesp (darbepoetin), which saw sales increase 280%. All of the top 50 drugs for the year had sales in excess of $1 billion--23 exceeded $2 billion--with other strong increases seen from Enbrel; Johnson & Johnson, Schering-Plough, and Tanabe Seiyaku's Crohn's disease and rheumatoid arthritis therapy Remicade (infliximab); and Wyeth's PPI Protonix (pantoprazole), licensed from Altana Pharma. Seven of the top 50 were biotechnology products, with combined sales of $15.1 billion.

So that was the state of the market in mid-2004, but what have been the key issues for the industry over the past year?

PRICING PRESSURES. One issue giving many pharmaceutical executives headaches is a growing global trend of cost containment. Faced with a huge aging population, Japan has taken measures to restrain drug prices, and pharmaceuticals now only represent 20% of the country's total health care spending, down from almost 30% in the early 1990s. A key factor in this reform has been biennial price cuts, with another round imposed in 2004, and IMS predicts no more than 3% average annual growth for the pharmaceutical market in Japan through 2008.

In Europe, meanwhile, parallel trade--the practice of purchasing goods in cheaper markets and selling them in countries with higher prices--is a pressing issue. European Commission laws mandate free movement of goods from one European Union state to another, which encourages parallel trading. The expansion of the EU, formally accomplished this May, to include 10 Central and Eastern European states--many with flourishing generic industries--will not dampen parallel traders who take advantage of the higher drug prices in, for example, the U.K., Germany, and Scandinavia.

IMS consultants believe parallel trading affects approximately 5% of the total European market and costs original producers $1 billion to $1.5 billion each year. In October, however, GlaxoSmithKline won a preliminary victory at the European Court of Justice, which said the company should be allowed to restrict some supplies of pharmaceuticals to Greece, a low-priced market. The Advocate General stated that the variety of drug prices across Europe meant that standard competition rules did not apply, so long as each individual country's needs were met.

The cost of drugs has been a concern for many countries. A number of European governments have strengthened cost-containment schemes, among them Germany, the EU's largest single drug market. At the beginning of 2004, Germany's government imposed a 16% compulsory manufacturer discount for statutory health insurance providers, up from 6% in 2003. The move applies to all drugs not included in the country's reference price system.

The industry said it stood to lose approximately $1.5 billion from the measure, and a number of companies warned that the move would threaten investment in Germany. Pfizer said it would relocate its R&D to the U.K., and Merck canceled plans for an R&D center in Munich. Even the well-established German generics industry had to accept price cuts because another measure set the reference price of drugs with the same active ingredients at the lowest third of the price range.

Moreover, in 2005, a new scheme will come into effect that is designed to save the German government $1 billion per year. Under the new plan, public insurers would pay no more for patent-protected drugs if they were only as effective as generic alternatives. Drug classes affected include the PPIs, triptans for migraine, angiotensin II antagonists for hypertension, and the statins. As simvastatin is available as a generic, this could impact sales of other cholesterol-lowering drugs: Pfizer said it would not reduce the price of Lipitor, while AstraZeneca may not launch Crestor (rosuvastatin), licensed from Shionogi & Co., in Germany. The government, however, has said it will review the 16% statutory discount.?

In the U.K., manufacturers braced themselves for details of price cuts under the Pharmaceutical Price Regulation Scheme. Renegotiated every five years, this program limits prices charged to the country's National Health Service (NHS). Two previous cuts in 1994 and 1999 were 4.5% and 2.5%, respectively, but in November, a 7% discount was announced in a move that will save NHS $3.3 billion. The Association of the British Pharmaceutical Industry, representing manufacturers, had argued that significant cuts would be unjustified, as U.K. drug prices had fallen 15% in real terms over the past decade and pharmaceuticals had remained a steady 11% of total health care spending.

Overall, IMS predicts that such schemes and special taxes will cost the European pharmaceutical industry up to $4 billion in 2004, and that average annual growth there will be 6 to 8% between 2003 and 2008. The pressures in Europe have prompted many companies, including Novartis, to shift R&D investment to the U.S.: The European Federation of Pharmaceutical Industries & Associations calculates that R&D spending in the EU by Europe-based drugmakers dropped 26% in the 1990s, with the U.S. being the main beneficiary.

Still the most worrying threat is cost controls in the U.S., the largest single market for pharmaceuticals by a significant degree. Drug prices in the U.S. are both a political and an emotional issue. A report from Boston University's School of Public Health in October, based on pricing data gathered by the Canadian government, suggested there was an 81% average premium for branded prescription drugs in the U.S. over Canada and the major EU markets--up from 60% in 2000. The U.S. is the only leading market not to have general government price controls on drugs, and while prices have gone down in the EU and Japan, they have risen in the U.S.

Moreover, in 2003, 45 million Americans, or 15.6% of the population, had no health insurance--up 2.3% from the previous year. The U.S. market will see a huge change in 2006, when Medicare starts covering prescription drugs. Many seniors and other poorer, uninsured groups have had to limit their medications on financial grounds, so the prescription drug benefit could bring the industry significant extra revenues. Medicare and Medicaid recipients represent 26% of the U.S. population but almost half of these programs' total spending on prescription medicines. But the prescription drug benefit is expected to cost the U.S. government a staggering $534 billion by 2014.

The most public manifestation of a U.S. health care crisis is drug reimportation from Canada, often with encouragement from city and state leaders attempting to control spending. A bill that would lift the current federal reimportation ban was passed by the House of Representatives but has not yet been brought to a vote in the Senate. IMS estimates that Canadian imports were worth $1.1 billion in 2003--up 134% over 2002; however, this represented only 0.5% of total U.S. drug sales. Nevertheless, alarmed manufacturers began limiting supplies to Canadian wholesalers.

Canada shouldn't be forgotten in this debate: While its wholesalers and pharmacies are worried about reduced supplies, the government is tackling spiraling drug costs as well. Canada actually spends more of its total health care budget on pharmaceuticals than the U.S. (16.2% versus 12.4%), with around half the costs covered by public plans. Despite the problems in the U.S. and Canada, however, IMS still predicts average annual growth of 10 to 13% in North America through 2008.

Although sales may continue to rise, pharmaceutical executives have repeatedly stated that by denting profits, drug reimportation could harm R&D innovation and thus the flow of new medicines. A spokesman from Pharmaceutical Research & Manufacturers of America (PhRMA) noted that the U.S. creates 60 to 70% of the world's new drugs. Some drug industry pundits have accused Canada and Europe of protecting their generic industries and are calling for the U.S. government to act against such practices, while FDA has said reimportation could result in unsafe or counterfeit products.

Despite these concerns, a September survey by the market research firm NOP World Health found that more than 80% of Americans believe they should be able to purchase drugs from outside the U.S. The industry has fought back with drug discount cards, which shifted to a formal Medicare card scheme on June 1. There have been complaints that the scheme is complicated and confusing and that the benefits are lessened by overall price increases. But the cards may help manufacturers by encouraging new users of their products and inspiring a more positive sentiment toward the industry.

GENERICS AND INTELLECTUAL PROPERTY. In an era of cost containment, generics are riding high. A number of pharmacy benefit managers (PBMs) have introduced programs to promote the use of generics, while others require prior authorization for the dispensing of "premium" drugs or take a stepped approach where the cheapest drugs are tried first. Measures like these mean brand manufacturers must work hard to demonstrate the value and cost-effectiveness of their products.

In 2003, IMS's data suggested that sales of generic drugs increased by 24% in dollar terms, versus 8% growth for brands. In several major markets, including the U.S., Canada, Germany, and the U.K., generics account for at least 30% of drugs dispensed by volume. However, generics are lower margin products, and in 2003 they accounted for less than 10% of global sales dollars. What has changed in recent years is the speed with which brands lose sales--up to 90% within weeks if more than one generic competitor is launched initially.

The early 21st century has seen a paradigm shift in the landscape for generics. Blockbusters have gotten bigger--but the higher the sales, the harder the fall. An uncomfortable example has been seen in Germany, where generic simvastatin has cannibalized sales of both Zocor and other statins--a phenomenon not seen before, and thankfully for the original producers, one not yet replicated in many other markets. In the U.K., Merck's consumer health joint venture with J&J pursued the over-the-counter sale of Zocor, and it was launched in July 2004, becoming the first OTC statin in the world.

Some observers believe the generic bubble will burst, or at least shrink, post-2006 when a number of blockbusters are due to lose exclusivity. This is one factor driving generic manufacturers to shift into R&D. In terms of company strategies, though, anything appears to be up for grabs: While the likes of Teva Pharmaceutical Industries, Ranbaxy Laboratories, and Apotex are moving more into R&D, traditional brand companies, particularly Novartis, are growing their generic businesses, stating that this reflects the changing reality of the marketplace.

Moreover, authorized generic deals are becoming popular to help cushion the blow of copycat introductions. These deals involve a licensing agreement between the brand drugmaker and a generic manufacturer, the latter being granted a period of generic exclusivity before the product goes off patent or during another manufacturer's 180-day generic exclusivity period. In some instances, the brand manufacturers begin selling generic versions of their own products, as Pfizer has done with Neurontin (gabapentin) and Forest Laboratories with Celexa (citalopram), sold in the U.S. under license from Lundbeck.

In the meantime, there are still a number of enticing targets--including Lipitor, which Indian generic specialist Ranbaxy has challenged with an FDA filing that is the subject of litigation with Pfizer. And during mid-2004, Lilly's share price was dampened by concerns over generic challenges to its top product, the antipsychotic Zyprexa. Ivax, Dr. Reddy's, and Teva went to court against Lilly in early 2004, and a judge's verdict is still pending.

Even more tempting prospects may emerge as major biopharmaceuticals begin to lose patent protection. The potential launch of "biogenerics"--unbranded versions of the first biotech products, specifically simpler protein-based drugs such as erythropoietin and interferons--is presenting a whole new problem for biotech companies. These are some of the most lucrative drugs in the world, and so far they have not been open to generic competition. One reason, and a major lobbying point for the biotech companies, is that the manufacturing process can affect the finished drugs. The brand manufacturers believe, therefore, that any biogeneric would need to undergo full clinical testing before being approved, whereas generic drugmakers argue that a protein is a protein, regardless of its method of production. Due to the investment needed in their production and clinical trial requirements, biogenerics may not offer as much of a discount as small-molecule generics.

Perhaps more relevant, regulatory agencies have not been able to decide on the approval process for biogenerics. Although, in October, Australia cleared Omnitrope, a human growth hormone product from Novartis' generic business Sandoz, FDA and European Medicines Agency (EMEA) have not yet given final clearance. And whereas FDA is still considering the broader issues, EMEA is accepting applications for biogenerics, and EC legislation covering their approval is due to come into effect in late 2005. Meanwhile, Teva, Sandoz, and others are ready to launch biological copy products.

CONSOLIDATION. Pricing and other competitive pressures are among the factors that continue to drive industry consolidation. However, since Pfizer's merger with Pharmacia in April 2003, the rate of mergers and acquisitions (M&A) has slowed. For the top 10 companies, "megamergers" have produced mixed results in terms of market share growth, and many executives now accept that mergers can actually have a negative impact on R&D productivity--previously cited as one of the main drivers of M&A.

The top 10 companies accounted for half of all worldwide sales in 2003. Their relative contribution to overall industry growth, however, has declined to 41% in 2003 from 53% in 2001. In terms of growth, six of the top 10 companies in 2003 grew at or below the overall pharmaceutical market rate of 9% in local currency terms. By far the strongest growth came from generics and biotechnology, led by Schwarz Pharma, which had won 180 days of generic exclusivity for omeprazole in the U.S. In total, six of the top 10 fastest growing companies in 2003 were generic producers, underscoring the integral role of this sector in driving expansion of the overall health care market.

When comparing 2003 market shares with pro forma projections based on 1998 sales, GlaxoSmithKline, Sanofi-Aventis, AstraZeneca, Bristol-Myers Squibb, and Abbott all had lower actual market shares in 2003 than the sum of their components had in 1998. J&J, Merck, and Roche, which didn't participate in megamergers, and Novartis, which was formed in 1996, all had higher market shares in 2003. This is not to say that all mergers have a negative impact: Pfizer, for example, has bought its way to the top, up from fourth in 1998, the last year it launched a significant new drug from its own laboratories. And there are other factors behind the shifting market shares, notably major patent expirations.

But there are signs that companies want to avoid the disruption and distraction caused by large mergers. M&A may increase market share and critical mass but might also actually make it harder to get new drugs to market, and the bigger the company, the bigger the need in terms of numbers of new products and their sales potential. What is seen as a successful strategy is making smaller, targeted acquisitions to gain access to a specific product or technology. This approach has been pursued by J&J with its acquisitions of Centocor, Alza Corp., and Scios; in Merck's purchases of Banyu Pharmaceuticals and SIBIA Neurosciences; and by Pfizer, which bought Esperion Therapeutics.

Despite the slump in its share price after withdrawing Vioxx, Merck has reiterated that it has no plans to merge, even though there has been speculation about a link-up with Schering-Plough, its partner for the cholesterol-lowering drug Vytorin (ezetimibe/simvastatin). And Roche has repeatedly rejected overtures from Novartis, which has built up a stake of approximately 30% in Roche. A surprise deal that did go through in 2004 was UCB's merger with Celltech Group, the U.K.'s largest biotechnology firm. Belgian UCB is best known as the developer of the antihistamine Zyrtec (cetirizine), marketed in the U.S. by Pfizer. Like many European conglomerates, UCB is seeking to build up its health care operations. Likewise, a number of German companies have reorganized, such as Bayer, which is spinning off its chemicals unit and agreed to buy Roche's consumer health unit in July.

The biggest M&A announcement in the industry came in January when Sanofi-Synthélabo of France revealed an audacious bid for Franco-German Aventis. Although having twice the sales and market capitalization of Sanofi, Aventis was vulnerable in part due to a poor pipeline and looming generic competition for key products. It rejected the deal initially, and Novartis prepared to step in as a "white knight." But ultimately, French government "encouragement" led to the birth of Sanofi-Aventis on Aug. 20, with full consolidation to take place in early 2005.

Another major company will arrive in the shape of Astellas Pharma in April 2005. Formed by the merger of Yamanouchi Pharmaceutical and Fujisawa Pharmaceutical, it will be ranked 18th globally based on pro forma 2003 sales. Consolidation typically has been less prevalent in Japan, but the formation of Mitsubishi Pharma, incorporating Yoshitomi Pharmaceutical Industries and Tokyo Tanabe, and Astellas demonstrates the operating pressures on domestic manufacturers there. Others, like Banyu and Chugai Pharmaceutical, have been bought out or merged with the multinationals Merck and Roche, respectively.

One sector where M&A activity is expected to increase is generics. Currently in the headlines is Mylan Laboratories, one of the largest U.S.-based generic drugmakers, which in July announced a $4 billion deal to acquire King Pharmaceuticals. Mylan was seeking to diversify away from generics into higher margin brands, and particularly to prepare for launching its branded antihypertensive nebivolol. Whether the transaction will be completed is uncertain; Mylan has faced considerable pressure from investors who believe it is paying too high a price for King.

REGULATORY ISSUES. Not just manufacturers have been facing a high level of scrutiny: Regulatory agencies are also under fire. Like its peers in other countries, FDA has had to balance a host of issues such as complaints from the innovative R&D companies that new products are taking too long to be reviewed; objections from generic manufacturers over approvals for their products; and criticism from consumer groups and politicians who claim that the agency is too close to the industry, allowing dangerous medicines onto the market or failing to remove those drugs with questions about their safety.

So how does FDA keep everyone happy? There are signs that the agency is becoming harsher in its evaluation of new drugs, particularly those for chronic conditions that need to be taken long-term. AstraZeneca, for example, felt the impact of this when FDA rejected Exanta (ximelagatran), the first alternative to warfarin for decades, in October, even though it was launched in Germany in June for preventing venous thromboembolic events after orthopedic surgery.

With scrutiny heating up for other COX-2 inhibitors, Novartis has delayed U.S. filing for its candidate Prexige (lumiracoxib) to 2007--not 2006 as originally planned--to allow for further safety studies: Prexige has been approved in the U.K., but in November, Novartis temporarily withdrew its wider EU application to allow submission of further clinical data. AstraZeneca made a similar announcement in October for Galida (tesaglitazar), its peroxisome proliferator-activated receptor (PPAR) agonist for diabetes. In July, FDA imposed restrictions on all PPAR agonists because of safety concerns arising from animal tests. And, due to Exubera's novelty, Pfizer, Sanofi-Aventis, and Nektar Therapeutics have delayed FDA submission of the inhaled insulin product by at least two years in an attempt to gather comprehensive safety data; an FDA filing is now scheduled for early 2005.

Certainly, new chemical entities (NCEs) appear to be taking longer to reach the market. In 2003, the average time to market (from first patent application through launch) was 13 years and three months--five months longer than in 2002. Steven K. Galson, acting director of FDA's Center for Drug Evaluation & Research, admitted at IMS's DCAT PharmaChemical Horizons seminar in March that few NCEs are approved in their first review cycle, increasing the cost and length of the approval process. FDA has taken steps to address this problem, reorganizing the way it appraises biotechnology products and restructuring its review divisions.

In July, the agency unveiled plans that would see a "complete response letter" replace "approvable" or "nonapprovable" letters for drugs not initially approved. FDA said the new letter would aim to provide clearer explanations of the problems with an application, but some observers are concerned that the actual status of a drug may be obscured if the recipient companies do not disclose the letter's contents. Another idea is "proof of concept" trials that would provide an early indication of a drug's potential for success.

One positive move has been the "rolling reviews" of fast-track drugs--those for significant unmet medical needs--whereby companies can gradually submit their applications and usually get feedback within six months. Galson was also pleased with the pilot End of Phase IIa scheme, which is trying to improve the design and outcome of subsequent Phase IIb studies, with the aim of increasing the success rate at the final Phase III stage.

FDA could take further steps, but in light of President Bush's reelection, these are unlikely to occur in the near future. Many Democrats favor comparative effectiveness trials, where new drugs must be tested head-to-head against current products rather than a placebo; such tests are often run, but are not compulsory. Even more drastic, in U.S. terms, would be stronger links between FDA and Centers for Medicare & Medicaid Services, whereby the cost-effectiveness of drugs for Medicare would be examined. A number of countries--for example, the U.K. through its National Institute for Clinical Excellence--have implemented such schemes.

Since the controversy over an increased risk of suicide with some antidepressants in younger patients, pediatric clinical studies have been in the spotlight. FDA has already implemented a pediatric exclusivity program, where drugmakers are granted six months of extra marketing exclusivity in exchange for conducting trials in children. The scheme has led to more than 100 products undergoing such tests. The EC has adopted a proposal for a regulation on medicines for children that aims to ensure the authorization of medicines specifically developed to meet children's therapeutic needs; this plan also offers a six-month exclusivity extension, among other incentives.

In response to the side-effect problems of a number of products, and criticism from Congress over its handling of the issue, FDA announced in November that it would commission a major review of drug safety activities by the Institute of Medicine; IOM will also look into broader issues, such as FDA's funding and its links with the pharmaceutical industry. Other safety-related initiatives will include a series of public meetings, new guidelines for drug manufacturers, the implementation of an arbitration procedure to deal with disagreements between FDA staff, and the appointment of a new director for FDA's Office of Drug Safety--a position that has been vacant since October 2003.

Finally, in 2004 FDA announced changes to the regulatory process for manufacturing. Under the new guidelines, drugmakers will no longer need to seek approval for every change made to their production processes. The agency believes this move should reduce supply disruptions and allow new drugs to reach the market more quickly, but critics say it would effectively reduce regulation. Manufacturers, however, will still need to demonstrate that they have developed adequate tests and procedures.

RESEARCH & DEVELOPMENT. Getting products past the regulators has been only part of the problem, as there were only modest signs of an improvement in R&D productivity in late 2004. According to IMS, in 2003, just 30 NCEs were launched worldwide--the lowest number for more than 20 years. Through August 2004, there were 14 NCEs launched, suggesting that the 2004 total is unlikely to be much higher. There are, however, indications that the number of active projects in development has increased during 2004, particularly at the preclinical level. Nevertheless, at present only 10% of Phase I products reach the market, and only 30% of those become profitable. Moreover, of the New Drug Applications approved by FDA in 2002, only 22% were for NCEs, with the majority being new formulations or line extensions of existing products.

While "me-too" drugs may be in the majority, there have been some notable developments, including Lilly's Strattera, the first nonscheduled therapy for ADHD, and Spiriva (tiotropium bromide) from Boehringer Ingelheim Pharmaceuticals and Pfizer, for chronic obstructive pulmonary disease (COPD). Highly anticipated pipeline products include Tarceva (erlotinib), the recently approved anticancer drug from Genentech, Roche, and OSI Pharmaceuticals; Altana and Pfizer's asthma and COPD therapy Daxas (roflumilast); and particularly Sanofi-Aventis' cannabinoid 1 modulator Acomplia (rimonabant). Being developed for obesity--the holy grail of the drug industry--and smoking cessation, Acomplia may also have positive effects on metabolic syndrome independent of the weight loss associated with its use, as data released in August suggest; Sanofi-Aventis anticipates filing for approval in early 2005.

Eight of the 30 NCEs launched in 2003 were biotechnology-derived products, up from just four in 2002, and biotechnology is making an increasing contribution to the industry in terms of both R&D and sales. The worldwide biotech market was worth $37 billion in 2003, and, as of mid-2004, biotech projects accounted for 27% of the drug industry's total R&D pipeline. Most big pharmaceutical firms have incorporated biotechnology into their R&D capabilities, with GlaxoSmithKline, Roche, and Sanofi-Aventis being particularly active.

Alongside acquisitions of small biotech firms, most pharmaceutical companies have an active matrix of licensing deals. The importance of licensing has grown as R&D productivity at large corporations has declined. A decade ago, small companies might have had difficulty engaging larger partners for their drugs, and even if successful, might have seen the products languish on the bench as the partners focused more on in-house projects. Now, promising drugs are scarce, and biotech companies are signing lucrative deals, often with copromotion components. In 2003, the average up-front payment for rights to a U.S. Phase III product was $110 million.

In 2001, in-licensed products accounted for 16 to 20% of the top 20 companies' revenue: By 2007, this figure is expected to reach 40%. A late but keen entrant into the licensing game is Merck, spurred by a series of setbacks in its own pipeline. In 2003, Merck signed 47 R&D collaborations, compared with 10 in 1999. GlaxoSmithKline, meanwhile, believes outsourcing drug discovery alliances will soon provide as many projects as its in-house teams.

Some observers have gone so far as to suggest that the industry is effectively dividing into two, with small R&D boutiques providing candidates for large companies that focus on sales and marketing. A complete split is still some way off, however, since it takes up to $1.5 billion to develop a drug and there are benefits of scale in screening candidates and running large trials. But many analysts now believe that the optimal number of scientists for a successful R&D outfit is 300–800, with any more being unmanageable.

GlaxoSmithKline, for example, has arranged its research teams into therapy- area-based Centers of Excellence for Drug Discovery to promote an independent, entrepreneurial spirit. Lilly also works by therapy area rather than function and has linked its biology and discovery units, allowing hypotheses to be tested quickly and thereby reducing its pipeline attrition rate. It also employs more physicians than many of its peers and quickly integrated its biotech capabilities with its small-molecule discovery efforts.

A positive development for pharmaceutical R&D during 2003 and 2004 has been the lessening of the genomics "bottleneck." In the 1990s, both big pharma and biotech firms invested millions of dollars in genomic technologies, resulting in many new drug targets. Up until the end of the 20th century, the entire pharmacopeia was based on approximately 500 targets: Human Genome Project data suggest there could be many more than 10,000. The industry as a whole, however, was overwhelmed by the sheer number of targets, with downstream technologies and resources not being sufficient to keep up. This situation has eased, and in mid-2004, Amgen began its most expensive Phase III program ever for osteoporosis candidate AMG 162. The monoclonal antibody became one of the first genomics-derived products to enter late-stage trials, and analysts predict blockbuster status.

Pharmacogenomics and personalized medicines are still hot topics, and the industry may be driven more toward embracing the idea of predicting drug response and effectiveness in individuals by events such as the withdrawal of Vioxx. PBMs are already reported to be collaborating on an adverse drug reaction (ADR) database, which could ultimately be used to push for a wider adoption of pharmacogenomics; there are 2 million to 2.5 million ADRs in the U.S. each year, including 60,000 to 150,000 fatalities. Moreover, many therapies only work in 40 to 60% of cases.

A sign that the industry was moving toward applying pharmacogenomics came in October, when more than 20 companies, academic centers, and government agencies, including Abbott, AstraZeneca, Pfizer, and Roche, formed the Personalized Medicine Coalition. The nonprofit coalition was created to foster understanding and adoption of personalized medicine. Targeted cancer therapies already have made significant progress, with the launch of products such as Herceptin (trastuzumab), Gleevec, Avastin, Erbitux (cetuximab), and Iressa (gefitinib), which fight the disease while causing fewer systemic side effects or have high success rates in limited patient populations.

While the markets for pharmacogenomic products will be smaller than traditional blockbusters, they could still be substantial. For example, Genentech's total sales of Herceptin since its launch in late 1998 have exceeded $800 million, despite the product only being appropriate for use in 25 to 30% of women with breast cancer. By having strong safety and efficacy claims, companies may be able to maintain premium prices. Moreover, the development of genomic products, thanks to smaller trials and lower attrition rates, will be cheaper and liability cases should be significantly reduced, while direct-to-consumer advertising could become more or less redundant and sales forces could shrink.

Beyond pharmacogenomics, a number of technologies could be adapted or better utilized by the industry. Speaking at the Economist Conferences' 10th Annual Pharmaceutical Conference in February, GlaxoSmithKline's former CEO Sir Richard Sykes identified six areas that will be enablers of new drug discovery and development. They include structural biology, for the rational design of medicine; genetics, genomics, and proteomics, for better targeted medicines; metabonomics, for the prediction of efficacy and toxicity; imaging, for kinetics and toxicology prediction; bioinformatics, for new target identification; and nanotechnology, for drug delivery and targeting.

Companies also may need to better manage their processes and products. As the flow of NCEs has declined in recent years, the importance of life-cycle management has risen. This can take a number of forms, including creating new formulations, such as once-daily or rapid-melt tablets; finding new disease indications; highlighting safety and efficacy, perhaps through head-to-head trials; developing a franchise in a particular therapy area; and making prescription to over-the-counter switches.

The industry still has some way to go in terms of maximizing the life-cycle potential of its products. Many companies lose revenue by rolling out their products slowly across different countries, while others appear to tackle life-cycle planning very late in the game, acting only when a patent expiration nears. The strategy of offering slightly modified products has become popular, such as Clarinex for Claritin, Lexapro for Celexa, and Nexium for Prilosec. But while many have been strong sellers, this tactic is risky because insurers are not always willing to cover what they view as a premium product if effective generic alternatives are available.

IMS's data suggest that one of the most successful strategies is the development of combination products, where two active ingredients are delivered together. Examples include GlaxoSmithKline's Advair (fluticasone/salmeterol) for asthma; Vytorin, which has extended the life of Merck's Zocor by combining it with Schering-Plough's cholesterol absorption inhibitor Zetia; Caduet, combining Pfizer's two cardiovascular blockbusters Lipitor and Norvasc (amlodipine); and Symbyax, for depression associated with bipolar disorder, featuring Lilly's Zyprexa and Prozac (fluoxetine). Both physicians and patients often favor combination products for their improved cost and convenience.

OUTLOOK. The pharmaceutical industry has come under criticism for the development of "me-too" drugs instead of breakthrough therapies, for suppressing or selectively releasing trial results, and for direct-to-consumer advertising that prompts patients to demand particular drugs regardless of the therapeutic benefit. While both regulators and companies must carry some responsibility for these failings, the criticisms are arguably overstated. Pharmaceuticals and vaccines have helped prolong lives, prevent diseases, and increase quality of life for millions of people around the world. According to PhRMA, every dollar spent on pharmaceuticals can save $6.00 in hospital costs--in other words, drugs offer value for money.

Many factors could help the industry win back public confidence. Companies need to act quickly and transparently if drugs appear ineffective or dangerous. Focusing on unmet medical needs should be a priority, particularly in the areas of cancer and anti-infectives. Most researchers state that "low-hanging fruit" diseases, such as hypertension, have been sufficiently addressed, and that R&D should focus on disorders with multiple causes and triggers. Many of these--such as cancer, Alzheimer's disease, obesity, diabetes, and cardiovascular disorders--will affect the aging Western population. And big pharmaceutical companies are conducting what could be described as nonprofit research, such as GlaxoSmithKline's collaborative development of a malaria vaccine.

In the U.S., moreover, the biopharmaceutical industry is a significant employer, providing jobs for 413,000 in 2004. According to a study from the Milken Institute in October, supported in part by PhRMA, the biopharmaceutical industry will add 122,000 jobs and $60 billion in real output to the U.S. economy over the next 10 years; it was directly responsible for $63.9 billion of real output in 2003.

Biopharmaceutical stocks are therefore likely to remain an attractive investment opportunity. But whether it's found in small biotech companies or large pharma R&D operations, shareholders may begin looking for a recipe for success that favors "small is beautiful." That is, one that avoids distracting megamergers, includes plenty of alliances and collaborations, accepts high R&D spending, and perhaps results in smaller products that represent true medical breakthroughs.

This transformation is not going to happen overnight, and in the meantime there are no signs that the blockbuster drug is dead: In 2003, there were 67 products with sales in excess of $1 billion, and IMS predicts this number will reach 105 by 2007. Biotech drugs, generics, and combination/life-cycle management products are all set to add to the mix, and according to IMS forecasts, the global drug industry will see an annual growth rate of 8 to 11% through 2008.

Selena Class is deputy executive editor of IMS Company Profiles, a publication from IMS Health. A leading market research and consulting firm, IMS provides global information solutions and insights to the pharmaceutical and health care industries. All data in the article are sourced from IMS, unless stated otherwise. For further information about IMS, visit http://www.imshealth.com.