Issue Date: December 5, 2011
Before The Storm
The year in pharmaceuticals closes with a milestone event: Pfizer’s Lipitor, the most profitable drug of all time, went off patent last month, delivering the biggest thunderbolt in the storm of patent expirations. The number of drugs losing patent protection will reach a record high in 2012, marking the appearance of the long-anticipated patent cliff.
But after struggling in recent years to reignite lagging product development pipelines, major pharmaceutical companies will ride over the cliff empowered by a rash of newly approved products. Drug approvals by the Food & Drug Administration spiked in 2011, even as companies were cutting research and development costs through efficiency drives, lab closures, and big budget cuts.
Meanwhile, marketing departments, anticipating changes in health care regulation and a shift to patient-managed care, reoriented themselves from satisfying doctors and hospitals to meeting the requirements of insurance payers. All in all in 2011, the goal of both the R&D and business sides of pharmaceutical companies veered from the billion-dollar drug to the drug that exceeds the current standard of care.
This year was typical in many ways, with its share of mergers, acquisitions, divestitures, and failures in the lab. But it also brought into sharp focus an industry in the midst of fundamental transformation.
The J.P. Morgan Healthcare Conference, held each January, offers a convenient door to the year ahead in pharmaceuticals. Presentations in 2010 centered on efficiency moves: the paring back of pipelines and cuts in R&D spending. This year, chief executive officers spoke of the forthcoming fruit of these efforts. Bristol-Myers Squibb (BMS), Merck & Co., and Pfizer were among the companies showcasing candidates poised for approval, and each had products among the 35 FDA okayed during the fiscal year that ended on Sept. 30.
New drug approvals were the most welcome news of 2011; the number of drugs approved this year was exceeded in the past decade only in 2009, when FDA approved 37 drugs. In 2011, FDA cleared seven new cancer treatments, two of which qualified as “personalized medicines,” or drugs accompanied by diagnostic tests to identify patients who will benefit the most from them. FDA also approved 10 drugs for rare or “orphan” diseases.
It has been another disappointing year for sales, however. Drug sales in the U.S. will reach $320 billion to $330 billion in 2011, a growth rate of less than 4%, according to IMS Health. The pharmaceutical intelligence firm expects $940 billion to $950 billion in global sales, representing 4–5% growth. A year ago it estimated 5–7% growth for 2011. IMS predicts 3–5% growth in global sales in 2012.
“The most important thing about 2011 is how challenging a year it has been, even though it was supposed to be a kind of lull in the storm,” says Michael Kleinrock, research director for the IMS Institute for Healthcare Informatics. “What we have begun to see is the growing impact of increased Medicaid rebates and the expanding number of entities able to provide lower-cost medications impacting big pharma margins.”
At the same time, stalwart products failed to deliver. “Sales volume has underwhelmed as a lot of payers and doctors look to upcoming expiries and shift patients to lower-cost therapies,” Kleinrock says. Sales of Lipitor, a bellwether drug, declined nearly 8% between June 2010 and June 2011. Kleinrock says, however, that Pfizer has managed to recoup some of its loses since then, via contracts with pharmaceutical benefits managers and discounts.
The industry’s success in getting drugs approved in 2011 was unexpected, Kleinrock says, given the number of compounds that have stumbled in the homestretch in recent years.
The upturn is, to some extent, attributable to changes in the approval process. FDA credits its expedited review process—including streamlined clinical trials featuring smaller, shorter, and fewer trials where appropriate—for the rise in approvals. Nearly half of the drugs approved during the fiscal year were on a priority review track. The payoff may also be partly due to steady progress in drug company pipelines, Kleinrock adds.
The products approved this year address a wide range of therapeutic areas. But Kleinrock questions whether they will gain anything like blockbuster status—that is, realizing at least $1 billion in annual sales—in a health care market that is veering away from granting automatic access and reimbursement for new drugs.
“There are more and more products coming on the market with randomized clinical trials and no real-world evidence of value and clinical benefit,” he says. “This is why we see that a number of products in the last few years have slowly gained adoption rather than gaining rapid early adoption.”
The industry is aware of this and other problems, Kleinrock says. “Over the last three or four years, in the face of the looming [patent expiry] storm, companies have reorganized themselves, making cuts in sales forces and R&D, restructuring business units, and derisking portfolios,” he says. “What many moves suggest is that management teams at these companies are thinking about the world in a very sensible way, trying to understand what is possible for their business, and aligning themselves to be successful in the future.”
Companies are trying to cater to today’s highly critical health care payers, says Carolyn Buck Luce, global pharmaceutical sector leader at consulting firm Ernst & Young. “R&D is no longer just about choosing a set of development targets that could work,” she says. “More and more it is the issue of whether anyone will pay for the therapy. Will it work better than the standard of care? Research agendas are driven not on the full field of leads and targets. The commercial implication of what will be reimbursed is increasingly influencing the R&D decisions companies are making.”
Beyond rethinking research, drug companies are linking with health care and technology firms to promote personalized medicine, improve the quality of care, and reduce costs, Buck Luce notes. An example is Pfizer’s five-year partnership with Humana, the largest health care company in the U.S., to improve health care delivery for senior citizens and other specialized patient groups. Johnson & Johnson’s recent investment in 23andMe, a provider of genomic screening, is another example, she says.
The development of emerging markets continued in 2011, Buck Luce says, and the industry broke new ground in biopharmaceuticals with forays into biosimilars, a field poised for growth as FDA clarifies a regulatory approval path for the complex molecules.
Art Karacsony, director of U.S. pharmaceutical and life sciences marketing at the consulting firm PricewaterhouseCoopers, says such changes are part of a necessary evolution for large drug companies. “This is part of the idea of the blockbuster drug not going away but becoming the specialty product blockbuster,” he says. Corporate research departments now have their sights set on drugs that will command premium prices on the basis of demonstrated value in an expanded context—one that includes services related to improving health care beyond the delivery of the drug itself.
“One of the most important” changes facing the drug industry “has been the increasing pressure from payers, governments, and society to deliver greater value,” Ian C. Read, CEO of Pfizer, wrote in his annual letter to shareholders in February. Pfizer, he said, is focusing R&D on bringing “differentiated medicines” to market.
Similarly, at Merck’s R&D day for analysts in November, CEO Kenneth C. Frazier noted a shift in Merck’s research targets from first-in-class medicines to best-in-class medicines, or “molecules that the market will differentiate favorably.”
Both firms are completing their second year of integrating major acquisitions. And both have made significant cuts in R&D. Pfizer announced in February it would close its Sandwich, England, research facility, which employs 2,400 people, and eliminate 25% of the 4,400 jobs at its Groton, Conn., labs. The company said it will end research in allergy and respiratory medicine, internal medicine, oligonucleotides, tissue repair, and antibacterials. Instead, it will focus on neuroscience, cardiovascular health, metabolic and endocrine disease, inflammation and immunology, oncology, and vaccines.
In August, Merck announced a second major headcount reduction since it acquired Schering-Plough in 2009. The company will have cut positions 30% by 2015, eliminating 30,000 jobs. It’s not clear how this downsizing impacts R&D specifically, but the fact that Merck has announced the shuttering of nine research facilities since the merger, leaving it with 15, indicates a substantial hit.
“The macroeconomic challenges of 2010 are continuing in 2011,” Frazier told investors early in the year, “and some will get even more difficult, including increased European austerity measures and higher-than-anticipated U.S. health care reform costs.”
More subtle restructuring also took place in 2011. For example, the former Schering-Plough headquarters in Kenilworth, N.J., although downsized with the elimination of 580 jobs, was converted into a biologics research hub into which Merck will move 350 employees. The company expanded its biologics work this year by forming a partnership with South Korea’s Hanwha Chemical through which the two firms will work on a generic version of Amgen’s rheumatoid arthritis drug, Enbrel.
Pfizer, meanwhile, continued to expand its academic partnerships. In January, the firm added seven New York City medical centers to its Centers for Therapeutic Innovation program, a network of academic and institutional research partners it launched last year with the University of California, San Francisco, as its first partner. The company added a third network in June, naming eight partners in the Boston area.
Links with academia are nothing new, IMS’s Kleinrock notes. “Almost all of drug R&D starts in academia with National Institutes of Health funding,” he says. But wherever compounds originate, the key to R&D success is getting drugs to fail sooner and at a lower cost. The increase in academic partnerships this year, he says, “doesn’t address the fact that 10 years ago we used to get 50 new drugs a year. Lately, we’ve been getting south of 30.”
Pfizer’s 2010 licensing drive, which included deals with Lpath to license a monoclonal antibody to treat ophthalmology disorders and with Phylogica to discover peptide-based vaccines, continued this year. Pfizer inked a pact in June with GlycoMimetics, which has an orphan drug candidate for vaso-occlusive crisis. Last month, Pfizer announced an agreement to acquire Excaliard Pharmaceuticals, a privately owned company focused on developing drugs to treat skin fibrosis.
And with the Lipitor countdown almost to zero, Pfizer scored an important FDA approval in September with lung cancer drug crizotinib, which will be marketed as Xalkori. Shortly after, Pfizer obtained promising data on the blood thinner apixaban, considered a potential blockbuster.
Merck scored five drug approvals in 2011, including Juvisync for type 2 diabetes and Victrelis for hepatitis C. It also expanded a partnership with Roche to jointly promote Victrelis in Europe, Asia, and Latin America, primarily by educating physicians and patients about managing the disease.
Roche, which went through a round of job cuts a year ago that eliminated 6,300 positions, has been relatively quiet in 2011. After scaling back RNA interference (RNAi) research, the company exited the field entirely in August, transferring assets to Arrowhead Research. Arrowhead paid nothing for the Roche assets but gave the firm a 10% ownership stake. Roche had spent roughly half a billion dollars to build its position in RNAi research, including $331 million in 2007 for access to Alnylam Pharmaceuticals’ technology and $125 million in 2008 to purchase Mirus Bio.
Roche, the third big pharma company to complete a large deal in 2009 with its acquisition of the part of Genentech it didn’t already own, also sold a peptides plant in Boulder, Colo. The buyer was International Chemical Investors Group, one of a handful of private firms that continues to snap up manufacturing assets that drug companies have been abandoning in recent years.
Several other deals were announced or completed in 2011, the largest and probably most contentious being Sanofi’s acquisition of Genzyme. The $20 billion deal finally wrapped in February after a strong fight by Genzyme, which claimed the initial bid of $18.5 billion undervalued the firm. With the acquisition, Sanofi joins Eli Lilly & Co., AstraZeneca, and Pfizer in beefing up its biologic drug portfolio via acquisition.
The Genzyme deal aside, most acquisitions in 2011 ranked as spot buys targeting drug candidates or technology platforms. BMS paid $325 million for small-molecule drugmaker Amira Pharmaceuticals to bolster its research in fibrotic diseases. Merck paid $430 million to acquire Inspire Pharmaceuticals and thus expand its eye care franchise. Novartis hopes to advance its oncology research with the $470 million acquisition of Genoptix.
Gilead Sciences placed a considerably higher spot bet in November, agreeing to pay $11 billion for Pharmasset, a small company in New Jersey with 82 employees and a uracil nucleotide analog in Phase III clinical trials as a treatment for hepatitis C.
As major drug companies continued their selective expansion of research ventures, they also reassessed diverse portfolios, which in many cases include small-molecule therapeutics, biologics, vaccines, generic drugs, consumer products, and animal health products. Many companies have been expanding their generics activities, partly in response to the number of branded products coming off patent and partly to advance in emerging markets dominated by local generics producers.
To that end, Abbott Laboratories greeted 2011 with a big new presence in generics, having purchased Piramal Healthcare’s generics operations in May of 2010. Around the same time, Abbott signed a deal with an Indian firm, Zydus Cadila, to sell 24 generic products in 15 emerging markets. In April of 2011, Merck announced a joint venture with another Indian firm, Sun Pharmaceutical Industries, to develop, manufacture, and commercialize new combinations of generic drugs for emerging markets.
Later this year, however, Abbott moved to separate its research-based drugs business from its medical devices, diagnostics, nutritional products, and generics operations. The latter four businesses, a group with annual sales of about $22 billion, will retain the Abbott name. The pharmaceutical firm, with sales of $18 billion, is yet to be named.
Other firms are split about what to do with diversified operations. Pfizer said this year that it is investigating options, including spin-offs, for its animal health and nutrition businesses. Merck, meanwhile, claims it is committed to animal health and consumer products.
As the year closes, the pharmaceutical industry finds itself, like other industries, assessing the impact of a prolonged economic downturn. But for drugmakers, who generally ride through business cycles relatively unscathed, economic concerns are mingling with industry-specific pressures, ranging from patent expiry to fundamental changes in how drugs are delivered and paid for.
“The clouds have cleared regarding our understanding of the impact of a long-term economic crisis,” IMS’s Kleinrock observes. Although the drug industry feared the worst when the recession arrived in late 2007, high levels of unemployment did not have an immediate effect on sales. “But in 2010 and 2011, we see that fewer patients are going to doctors, there are fewer new therapy starts, and there is a shift to generics where possible, even in advance of patent expiry,” he says.
Generics won’t likely lose ground even when the economy gets better, Kleinrock says, unless high-profile new drugs cause a lot of excitement. “When patients switch to generics because of cost, they don’t come back to the branded drug when they get their jobs back.” Continued economic pressure could lead patients to decide not to visit doctors or even not to take medications, he adds. In addition to affecting the industry, such frugality can have “long-term implications for people’s health,” he observes.
The options for patients as they become more involved in decisions about their own care will influence strategies in the drug industry going forward, according to Buck Luce at Ernst & Young. For major drugmakers, the challenge will be to take advantage of market data to shift effectively from the mass-market, blockbuster drug approach to more nimble and targeted forays in a world of increasingly personalized medicine.
Big pharma CEOs, describing the transformation that has taken place at their companies this year, acknowledge the pressure of change. “It’s a whole lot easier to restructure than to rebuild,” Sanofi CEO Christopher A. Viehbacher told analysts at the J.P. Morgan meeting in January. He and other CEOs claim that their new strategies are gaining traction; analysts agree that industry moves in 2011 have clarified a vision of a rebuilt pharmaceutical industry.
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