Measured Metamorphosis

FOR MAJOR pharmaceutical companies, 2008 hasn't been a banner year. Generic competition brought on by patent expirations for key products and regulatory action that has slowed drug approvals are among the pressures that threaten continued profitability. Global financial conditions, which deteriorated throughout the year, created additional business challenges.

When 2008 comes to a close, global pharmaceutical sales are expected to have grown only 4.5 to 5.5%, to about $785 billion, down from 6.4% growth in 2007, according to Diana Conmy, corporate director of market insights at IMS Health, a provider of market information and consulting services for the health care industry. The U.S. pharmaceutical market, the world's largest, is forecast to grow only 1 to 2% in 2008 to about $290 billion, down from the 2 to 3% rate expected earlier this year, Conmy adds.

The moderation in growth is due in part to less than expected demand for recently introduced products, many of which are aimed at small therapeutic niches, she says. In addition, the unfavorable economic climate may have been dampening growth by holding down doctor visits and pharmaceutical sales.

To stand up to the many challenges they face, drug companies are continuing efforts begun last year to cut costs, refocus business units, and craft more acquisitions and alliances to beef up less than robust new product pipelines. They are pushing into higher growth markets, including those for biotechnology-derived drugs and for products that are mainly prescribed by specialists. Firms are also moving more decidedly into regions of the world where pharmaceutical demand is rising.

Companies realize that these moves alone are not enough; they will provide only temporary relief from the myriad pressures. As a result, drug firms are also stepping up efforts to "reinnovate and reinvent" themselves by adopting new business models, says Mark Hassenplug, global pharmaceutical markets leader at Ernst & Young, which provides tax, accounting, transaction, and other business services.

"LARGE PHARMA wants to move from being bureaucratic and lethargic to being leaner, more nimble, and more agile," Hassenplug says. "That journey is going to be different for every company. They will each have a different interpretation of that change, the future, and what areas they want to play in the future."

Eli Lilly & Co., for example, is changing its business model to allow it to operate within a network of partners rather than as a fully integrated pharmaceutical company, or FIPCO, according to Ernst & Young's "Beyond Borders: Global Biotechnology Report 2008," released in May. "The company is using alliances with firms in Asia and elsewhere to partner on activities across the value chain???from outsourcing key functions to teaming up to develop novel drugs," the report says.

The move to this model is being driven partly by "the complexity of disease states that we are trying to tackle," according to Dave DeMarco, global pharmaceutical account leader at Ernst & Young. "The science is progressing so fast, the FIPCO model just can't absorb it all." Companies need help to come up with faster solutions, realizing that they can no longer afford to wait 10 to 12 years to bring a drug to market, as was the case under the old model, he says.

Under the new model, companies are farming out more of their R&D work to contract research organizations, many of which are in developing countries where strong scientific talent is available at a lower wage than in more mature regions. Employing scientists around the world benefits some companies by allowing them to "follow the sun"—passing data and ideas across time zones and keeping R&D projects moving around the clock, Hassenplug says.

In addition to outsourcing R&D, companies are beginning to rely more on outside parties to take on other aspects of their business such as clinical trials, manufacturing, packaging, and administrative services, Hassenplug notes.

Some drug companies are trying to renew their focus on customers. For example, in October, Merck & Co. said it is creating a new business model that is "more customer-centric, as well as more agile."

The change comes at a steep cost, however. Like many firms that implement new business models, Merck will also cut jobs—about 7,200 across the company worldwide by the end of 2011; these are in addition to the 10,400 positions eliminated as part of a 2005 restructuring plan. The company will also shutter basic research sites in Tsukuba, Japan; Pomezia, Italy; and Seattle by the end of 2009.

Job cuts will also be a part of Novartis' move in the U.S. to implement its Customer Centric Initiative, which "will put the customer at the center of everything that we do," says Ludwig Hantson, head of Novartis' North American pharmaceutical business. From its U.S. base in East Hanover, N.J., the company will replace nationally managed sales forces with five new regional units that have cross-functional responsibility for the firm's portfolio of primary care products. As part of this new initiative, it will cut 550 U.S. sales jobs.

"We have been working to simplify our processes and decision-making by eliminating layers, concentrating on core activities, and systematically capturing growth opportunities," Hantson says. "By transitioning from a one-size-fits-all approach to a tailored approach, we are able to improve our performance, increase customer satisfaction, and better fit the needs of our key stakeholders, including payers, governments, and patients," he says. "Beyond changing our structure, we are changing our mind-set and our culture to one of customer focus, collaboration, and innovation."

Novartis has long been a standout among branded pharmaceutical companies in also running a generic drug business. Now, others are adopting a business model that involves diversifying into other businesses such as generics or consumer health products to reduce dependence on branded pharmaceuticals, DeMarco says.

IN JUNE, for example, the Japanese drugmaker Daiichi Sankyo said it would pay up to $4.6 billion to acquire a majority stake in Ranbaxy Laboratories, India's largest drug company and one of the top 10 generics companies in the world. By "providing an opportunity to access the growing market for generic products, the purchase of Ranbaxy will optimize our growth opportunities across the pharmaceutical value chain," says Joe Pieroni, chief executive officer of the U.S. arm of Daiichi Sankyo, in Parsippany, N.J.

At the same time, Daiichi Sankyo continues to invest heavily in R&D, hoping to fortify its pipeline of branded products. The company plows approximately 20% of its sales back into R&D, "which is among the highest percentages in the industry," Pieroni says. "We are focusing on developing innovative compounds across the cardiovascular therapeutic area, as well as investigating compounds in oncology, diabetes, and autoimmune diseases."

For others, reinvention involves diversifying R&D efforts. "We are learning to develop a range of new products that include more drugs with tried-and-tested scientific mechanisms, as well as riskier, untested ones," says Tony Zook, CEO of AstraZeneca North America. "Our R&D capability in biologics and vaccines now covers a broad range of approaches including antibodies, antibody derivatives, therapeutic proteins, peptides," and RNA interference (RNAi) technologies. Unlike Novartis and Daiichi Sankyo, however, AstraZeneca is eschewing lower margin generic and over-the-counter drug markets in favor of what it calls "innovative prescription medicines."

Drug companies are "restructuring their R&D units to be more innovative," according to Ernst & Young's "Beyond Borders" report. For example, in forming its Biotherapeutics & Bioinnovation Center, Pfizer "aims to preserve the cohesion and innovative spirit of the companies it acquires, rather than seeking to assimilate them into the larger Pfizer organization," the report says. Pfizer has put this strategy into play in recent acquisitions of smaller companies, including Serenex, Encysive Pharmaceuticals, CovX, and Coley Pharmaceutical.

Takeda Pharmaceutical has adopted a similar stance. When the Japanese firm acquired Cambridge, Mass.-based Millennium Pharmaceuticals in May, it offered incentives to executives and employees to retain them and maintain its innovative and entrepreneurial corporate culture. Takeda also preserved the company's identity by renaming it Millennium: The Takeda Oncology Co.

"In the past, companies were looking to acquire a pipeline. Now, they are looking to also acquire a culture," says Gautam Jaggi, a senior manager in Ernst & Young's biotechnology center. Given the acute pipeline challenges, he says, drug companies "are no longer going after quick fixes provided simply by acquiring a late-stage compound. They also want to reinvent themselves and function as much as possible like the smaller, more innovative, more independent companies they are buying."

IT'S NO SURPRISE that drug companies' primary acquisition targets are in the biotechnology realm, where demand growth is alluring. Sales of biotech drugs grew 9.9% to approximately $82 billion in the 12 months through June 2008, compared with only 5.2% growth in the drug industry as a whole, according to IMS Health's data for the markets it audits. Next year, biologics are forecast to grow at an 11 to 12% pace, according to the consulting firm.

The global biotechnology industry achieved record levels of financing and deal-making in 2007, according to Ernst & Young. "And while public markets have cooled and venture capitalists have become more selective, the deal-making environment has remained active in 2008," Jaggi says. In two high-profile moves, for example, Roche has been bidding for full control of Genentech, and Lilly agreed to buy ImClone Systems in October.

In the coming months, large pharmaceutical companies may be even better positioned to negotiate deals, reversing the trend that has lately advantaged biotech companies.

In recent years, biotechnology companies generally had gained more power at the bargaining table, Jaggi says, as demand for biotech's promising candidates has outstripped supply. "Most of the low-hanging biotech fruit had already been partnered away, creating a more competitive space that gave the biotech firms more leverage in deal negotiations," he says. As a result, "they were able to retain more rights and capture more of the share of the value going forward," he adds.

That pendulum may now be swinging back toward big pharma. Emerging biotech companies have taken a big hit from the recent upheavals of capital markets, and as a consequence, they have become more attractively priced, Jaggi observes. "At the same time, biotech firms are finding it more difficult to raise capital in the current market."

Meanwhile, big drug companies, which "have not been as badly burned by the financial crisis as companies in many other industries, still have very healthy reserves of cash" that will allow them to take advantage of biotech-buying opportunities, Ernst & Young's Hassenplug adds. If the crisis continues, "we may see a significant increase in merger and acquisition activity within the pharmaceutical industry," he predicts.

Even as the appetite for acquisition grows, drug companies will continue to rely on alliances and partnerships, which have been their lifelines to viable drug products in recent years. Alnylam Pharmaceuticals, a biotechnology company focused on RNAi technology, exemplifies this trend and has given it a twist.

Partnerships typically provide for exclusive license of a technology to a single company. But Alnylam has set up platform deals that allow multiple partners to pursue targets within specific therapeutic fields, according to Jason Rhodes, vice president for business development at the company.

This year alone, Alnylam formed a $1 billion alliance with Takeda in oncology and metabolic disease and agreed to collaborate with the Japanese company Kyowa Hakko Kogyo on an RNAi therapeutic for the treatment of respiratory synctial virus infection in Asia. In July, Alnylam and Novartis extended their RNAi collaboration for a fourth year.

And earlier in the year, Regulus Therapeutics, a year-old joint venture between Alnylam and Isis Pharmaceuticals, formed a $600 million alliance with GlaxoSmithKline to discover, develop, and market microRNA-targeted therapeutics. In addition, Alnylam continues in a $1 billion alliance it set up with Roche last year and in collaborations set up with Medtronic in 2005 and Biogen Idec in 2006.

"The diversity and extent of our partnerships really speaks to the tremendous need for innovation on the part of big pharma and the industry," Rhodes says. "Due to the ability of RNAi to meet that need, our dance card remains very full."

In addition to collaborating with other firms, drug companies are increasingly willing to forge R&D partnerships with academia to access innovative science and emerging technologies (C&EN, Nov. 10, page 13).

For example, in the past year or so, AstraZeneca created six discovery and development alliances with U.S. academic institutions "that complement our existing R&D capabilities across several disease areas, including Alzheimer's disease, chronic pain, metabolic disease, and psychiatric illnesses," AstraZeneca's Zook says.

WHETHER THROUGH partnerships or other avenues, drug companies are particularly eager to develop products mainly prescribed by specialists. In the 12 months through June 2008, for example, the specialist-driven segment grew almost 10% and contributed 72% of overall market growth in terms of dollars, according to IMS Health figures.

So far in 2008, companies have launched drugs within this category, including Tibotec Pharmaceuticals' Intelence for HIV infection; two products from UCB—Cimzia for Crohn's disease and Vimpat for epilepsy; and two drugs for thrombosis—Bayer and Johnson & Johnson's Xarelto and Boehringer Ingelheim's Pradaxa.

IMS Health forecasts that in 2009, products mainly prescribed by specialists will grow 8 to 9% to about $340 billion and contribute 67% of total market growth. "In contrast, products generally prescribed by primary care physicians are expected to grow 2 to 3%, due to the loss of patent exclusivity for several blockbusters and fewer significant product launches," IMS Health's Conmy says.

The specialist-driven products segment is contributing strongly to growth partly because of good performance from some drugs in key classes, Conmy says. These include antipsychotics such as Seroquel from AstraZeneca and Abilify from Otsuka Pharmaceutical and Bristol-Myers Squibb, as well as autoimmune drugs such as Enbrel from Wyeth Pharmaceuticals and Amgen, Centocor's Remicade, and Abbott Laboratories' Humira.

Many drug companies are also clamoring for a piece of the fast-growing oncology market. In the 12 months through June 2008, sales of oncology drugs grew 13.9% to reach $45.8 billion, according to IMS Health. In 2009, the consulting firm predicts, oncology products will achieve 15 to 16% growth.

Driving this growth are the targeted oncology therapies, sales of which grew 24.3% in the 12 months to June 2008, IMS Health reports. Leading products in the segment are Roche's Mabthera and Genentech's Herceptin and Avastin, Conmy says.

Recent launches, however, "are not contributing to growth in the same way as their predecessors because the patient populations in their approved indications are smaller, and uptake is necessarily slower," Conmy adds. Those include Pfizer's Sutent; Nexavar, which was jointly developed by Bayer and Onyx Pharmaceuticals; Wyeth's Torisel; BMS's Ixempra and Sprycel; and GSK's Tykerb.

Oncology drugs also belong to the rapidly growing market segment tied to the aging population, which includes the huge baby boomer generation of people who are now between the ages of 45 and 65. Eager to tap into this growth, Novartis has strengthened its portfolio of medicines for age-related conditions such as Alzheimer's disease, hypertension, and cancer, Hantson says. Most notably, it is betting on its Exelon patch for dementia and Alzheimer's and Parkinson's diseases, as well as Reclast, a once-yearly infusion for osteoporosis.

Novartis also has a strong cardiovascular portfolio, which includes Diovan, a medicine for high blood pressure, and the new hypertension medicines Tekturna and Exforge, which combines Diovan and Pfizer's high-blood-pressure medicine Norvasc.

In addition to developing therapies aimed at the aging population, companies are also working to satisfy growing demand for prevention and disease-management drugs in some of the more mature global markets, Conmy says. Within this category, cervical cancer vaccines, including Merck's Gardasil and GSK's Cervarix, have been a bright spot, she notes. The vaccines "have been pretty well adopted in some of the top five European countries and in the U.S.," Conmy says. Still, demand for these new products remains volatile as they establish a market presence.

Within the category of prevention and disease-management drugs, new diabetes treatments also have been performing well (C&EN, Oct. 20, page 34). "These drugs have been an area of focus for third-party payers in the U.S. and in some European countries," Conmy says. "They recognize that diabetes patients need to be treated holistically to prevent progression of the disease, which would create a greater cost burden later on."

As big drug companies seek new therapeutic niches, they also are intensifying their focus on emerging markets around the world, which are growing much faster than the large, mature U.S. market. "These countries are benefiting from greater government spending on health care and broader public and private health care funding," IMS Health says in its annual forecast, which it released in late October.

In China, for example, drug sales grew 28.4% to $16.8 billion for the 12 months through June 2008, compared with 16.7% during the same period a year ago. Combined with China's, the emerging markets of Brazil, Russia, India, Turkey, Mexico, and South Korea are forecast to grow 14 to 15% to about $110 billion in 2009, IMS Health says.

Although big drug companies have long dabbled in emerging markets, Ernst & Young's Hassenplug says a distinct shift occurred between 2007 and 2008: Many companies have stepped up their participation in these markets this year.

Daiichi Sankyo, for example, gains greater strength in emerging markets through the Ranbaxy deal, according to Pieroni. Through that relationship, Daiichi Sankyo's global presence has more than doubled to 56 countries. "We will continue in our tradition of developing proprietary drugs for established markets, and now with Ranbaxy's strength, provide lower-cost products for the emerging markets," he says.

AstraZeneca, which is already active in more than 100 countries, counts its geographic diversification as a "continuing source of strength," Zook says. The company's sales in emerging markets reached a new milestone earlier this year by exceeding $1 billion in both the second and third quarters, he says.

The numbers back the wisdom of such diversification. The global pharmaceutical market is expected to grow 4.5 to 5.5% next year to surpass $820 billion, reflecting double-digit growth in emerging countries, according to Murray Aitken, senior vice president for health care insight at IMS Health. The U.S. market, in contrast, will expand by only 1 or 2%, because of "the impact of continuing patent expirations, fewer new product launches, and a tighter economy," he says.

U.S. health care reform, if adopted by the Administration of President-Elect Barack Obama, could also affect the market beginning in 2009. Such measures are on the radar of many pharma players. For example, AstraZeneca will be reviewing proposals that come before Congress to see whether they promote competition that leads to improved health outcomes, ensure that patient safety is maintained or enhanced, expand coverage for the uninsured, and reward innovation by providing protection for intellectual property, Zook says.

Despite the many obstacles, drug companies "can still find avenues of growth by focusing on emerging markets, specialist-driven products, and biologics; by uncovering pockets of unmet need and underutilization in primary care markets; by demonstrating the superior value of their medicines; and by reinvigorating their established brands," IMS Health's Aitken says. "The growth is not where it used to be, and it may not be as easy to come by, but it is out there. The key to success in this new environment will be in adapting the pharmaceutical industry's commercial models to accommodate these new developments."