The pharmaceutical industry must devote greater resources, investment and effort to address its anemic drug pipeline in the long term, rather than focusing on its bottom line in the near term.
At a glance
Is there any doubt that the leading drug companies are in desperate need of reinvention? Blockbuster drugs are coming off patent or being taken off the market for safety reasons and there are no replacement drugs on the horizon to make up the shortfall in profits. Furthermore, healthcare reform is likely to exacerbate the flaws in big pharma's traditional business model by imposing pay for performance, as is already the case in Europe. To state the obvious, over the past decade, the pharmaceutical industry has brought few drugs to market from its own development efforts. Commentators have stressed, and heads of big pharma have acknowledged, that the sector's R&D efforts need to be drastically changed. But alteration of the industry's culture and lumbering decision-making process will be slow and challenging and will require bold leadership.
Recognizing that the R&D engine cannot be repaired rapidly to fuel growth, big pharma has taken several steps in dealing with its diminished R&D productivity. First, it has looked to expand its markets geographically into developing countries; second, it has increased its emphasis on generic drugs and biosimilars; and finally, it has sought to diversify by migrating into new product categories.
Although the foregoing steps will lessen the projected shortfall in revenues associated with the expiration of patents in the coming years, the achievement of sustained growth in big pharma will of necessity depend to a large extent on another factor—its ability to increase the productivity of internal R&D efforts, while at the same time bolstering the pipeline with drugs acquired from the biotech sector. It is clear that from its internal productivity alone big pharma is unlikely to achieve the growth needed to fuel revenues. Successful implementation of this pipeline strategy will require the management at each company to optimize its current internal R&D efforts and its approach to acquiring drugs. In this article, I discuss some critical steps that could be implemented by pharmaceutical companies to better accomplish this strategy.
A sector in crisis
The traditional business model at big pharma relies on (i) identifying promising new blockbuster drugs; (ii) conducting large, expensive clinical trials; and (iii) if successful, promoting the drugs with extensive marketing and sales presence in developed countries. Clearly, the traditional model cannot be sustained in today's environment. Internally developed pipeline productivity at big pharma has decreased significantly, averaging only about one new molecular entity a year per company. But the cost of bringing a new drug to market has continued to rise and is now estimated to exceed $1 billion. Even though the industry cites scientific breakthroughs, the timeline for developing a drug and getting it to market has not declined and can take as long as 15 years.
A major reason that big pharma must limit the number of compounds it introduces into its pipeline is that spending on R&D places great pressure on earnings. The public equity markets relentlessly focus on short-term performance and unduly punish companies that do not meet quarterly revenue and earnings expectations. It has been reported that analyst expectations for the industry are so diminished that they are now hoping that the pharmaceutical industry as a whole will reach a compounded annual growth rate of 1% of revenues over the next five years.
The loss of patents on blockbusters by big pharma is a major concern. In the next five years, of the top 10 best-selling drugs in the world, 9 will go off patent, and of the top 20, 18 will lose patent protection. As a result, ~$100 billion of sales will be lost during this period. This number may be understated, given the recent safety issues associated with some blockbuster drugs, such as GlaxoSmithKline's (GSK; Brentford, UK) diabetes drug Avandia (rosiglitazone). To compensate for these losses, big pharma has resorted to buying revenues by means of acquisitions to replace declining sales. At the same time, sales of existing drugs are less likely to benefit from direct-to-consumer advertising. Indeed, direct-to-consumer advertising will continue to garner greater scrutiny from regulators and have less of a favorable impact on sales of new and existing products.
The pressure asserted by generics is causing an ever-steeper decline in returns on marketing and sales on drugs coming off patent than was the case in the past. It has not gone unnoticed by big pharma that generics sales have outpaced sales of the pharmaceutical industry over the past ten years. This has been driven by an increase of demand, the expiration of patents and cost constraints imposed by governments and third-party payers. The expectation is that this trend will continue into the future. With the patent cliff looming, generics will have many small-molecule blockbusters to target. Although one of the anticipated benefits of healthcare reform for big pharma will be expanded coverage, pay for performance will be an increasing issue. This legislation will put added pressure on product pricing from government and third-party payers. GSK recently has reported a drop in profits, which it attributed to US healthcare reform and European government 'austerity' measures that have had an impact on the drug industry1. Can big pharma expect its drugs to garner premium pricing without showing a benefit over cheaper alternative therapies? Pay for performance is already the case in Europe. For example, the UK's National Institute for Clinical Excellence (NICE; London) rebuffed an expansion of Roche's (Basel) Tarceva (erlotinib) for an additional indication, having determined that it was not a cost-effective use of resources2. As a precursor of where the United States is going, consider that Medicare officials are already considering whether the government program should cover Dendreon's (Seattle) new prostate cancer dendritic cell vaccine costing $93,000 per patient. Another indication of the changing US landscape is the recent pronouncements from the US Food and Drug Administration (FDA) and the Centers for Medicare and Medicaid Services (CMS); these agencies have issued a proposal to allow drug companies to voluntarily request that the FDA and CMS conduct parallel reviews for marketing approval. Although the rules are supposedly not intended to change the approval standards, but rather to benefit sponsors, critics have asserted that this will shift the agencies' focus from efficacy and safety to comparative effectiveness.
Technology will make regulators and third-party payers better equipped to measure what benefits patients are deriving from the drugs. The net effect is that governments and payers will continue to bear down on prices, access, utilization and prescribing patterns.
In addition, the pharmaceutical sector is going to be faced with a more stringent regulatory pathway for approval of new drugs, as well as closer government scrutiny of the continued marketing of existing drugs. There is little doubt that the regulators are going to focus increasingly on patient safety and benefits when bringing new drugs to market3. The recent restrictions placed on GSK's Avandia because of data indicating an association with heart toxicity points in this direction.
The manner in which big pharma is perceived in political circles will also have an impact on its future prospects. The US Congress portrays the industry as insensitive to consumer safety. Indeed, the Obama Administration publicly vilified big pharma as part of its health reform initiative (while simultaneously courting its participation in providing funds to close the so-called donut hole, a coverage gap in the 2003 Medicare Part D health plan for prescription drugs).
Regulatory halting of sales of therapeutics for safety reasons, poorly handled product recalls and the imposition of unprecedented criminal and civil fines (reaching $2.3 billion in Pfizer's case), coupled with calls for CEOs to serve jail time for illegal drug promotion, settlements relating to bilking healthcare programs by inflating drug prices and investigations of paying bribes to boost sales and the development and marketing of drugs have also added to the public's wariness of the sector. The net effect of a plummeting reputation—down in some surveys as low as the tobacco and oil industries—has been to hurt the industry across numerous constituencies that have a bearing on the prospects of its products, including governments, regulators and consumers. For these reasons, the importance of disassociation and delineation from big pharma has not been lost on the biotech industry.
How is big pharma responding?
Big pharma is increasingly coming to recognize the shortcomings of its traditional business model. Pharma has not been good at identifying early molecules likely to succeed; its discovery and research productivity is wanting; it lacks an innovative culture; and it has not effectively captured external breakthroughs. On top of this, it needs to reduce its cost structure to maintain earnings (only a short-term panacea). So how is big pharma management dealing with these structural shortcomings? It is taking the more expedient approach of solving the near-term revenue shortfall while failing to aggressively address the longer-term problem—its anemic drug pipeline. This myopic focus is translating into several business strategies.
Buy revenues. One old habit that the pharmaceutical industry is finding hard to abandon is the quick fix to diminishing revenues—buy earnings. But this is only postponing the problem. In 2009, Pfizer (New York) acquired Wyeth (Madison, NJ, USA) for $68 billion and in October it announced the purchase of King Pharmaceuticals (Bristol, TN, USA) for $3.6 billion. The King acquisition will add a mere $0.02 to Pfizer's earnings per share over the next two years and not much more in the years to come. Following this path, Merck (Whitehouse Station, NJ, USA) acquired Schering-Plough (Madison, NJ, USA), and now Sanofi-aventis (Paris) is seeking to acquire Genzyme (Cambridge, MA, USA). But the market and security analysts see these transactions for what they are. The Wyeth acquisition was viewed as merely giving Pfizer a year's worth of breathing room as investors were expected to have difficulty in comparing financial results to Pfizer's year-ago figures. Another take on this acquisition was that although Wyeth presented Pfizer with an attractive biologics platform and some complementary products and businesses, it is not enough to sustain long-term revenue growth. Longer-term growth was viewed as dependent on the success of Pfizer's future drug development efforts. Lilly has stated that it is going to take a different path to dealing with its pipeline issues by limiting itself to small acquisitions rather than large-scale combinations.
Expand outside the United States. The global pharmaceutical market outside the United States is projected to grow more dramatically than in the United States owing to the growth of a substantial middle class in emerging economies. The key countries are likely to be China and Brazil, followed by India and Russia. China, for example, is expected to become the third largest market in 2011—up from eighth in 2006 and having increased by 27% in 2009 alone.
As these markets will be driven by generics, margins are likely to be lower than in the United States but higher than may be expected—more likely closer to those prevailing in Europe, as sales there, given Europe's economic environment, are likely to continue to experience volume and pricing pressures.
Given the projected growth for pharmaceuticals outside the United States, the pharmaceutical industry is acquiring a presence in these markets. Some companies have already started to pursue these markets aggressively. For example, at a recent conference4, Hanspeter Spek, president of global operations at Sanofi-aventis, has indicated that his company ranks number one in emerging economies, which represent a key growth platform with fast-growing contributions coming from key markets, such as China and Brazil4. Sanofi has also acquired Zentiva in Hlohovec, Slovakia; Medley in Campinas, Brazil; and Kendrick in Ciudad de Mexico, Mexico. Similarly, Pfizer has participated in transactions with Indian (Aurobindo in Hyderabad, Claris Lifesciences in Ahmedabad, and Biocon in Bangalore) and Brazilian (Labóratorio Tueto Brasileiro in Anapolis) companies to gain access to these emerging markets, as well as to the local companies' branded and unbranded generics. Elsewhere, GSK is purchasing Nanjing MeiRui Pharma (Shanghai, China) and has partnered with Aspen Pharmacare (Durban, South Africa); and Abbott Pharmaceuticals (Deerfield, IL, USA) has purchased Solvay (Brussels) as both a geographic expansion into Europe and a foray into emerging markets. Merck recently announced it is looking to expand in India and other emerging markets through acquisitions and partnerships, seeking to become India's top or second largest pharmaceutical company by 2015.
Generics. Given the anticipated growth of generic sales, especially in the developing markets, pharmaceutical companies, such as Novartis (Basel) and Sanofi-aventis, have also placed an emphasis on building or purchasing generic operations. As mentioned above, Pfizer is partnering with Biocon of India, in part for its generics business. Similarly, Tokyo-based Daiichi Sankyo, the second-largest Japanese drug company, acquired the leading Indian company Ranbaxy (Gurgaon) to establish a global presence in the generics market.
Brand biologics. In the area of biologics, big pharma is recognizing the attractiveness of these franchises. Some of the allure relates to biologics having the potential for shorter development timelines than small molecules; what's more, brand biologics are likely to retain market dominance, even after expiration of their patents, due to high barriers to entry for competitors wishing to produce follow-on products or biosimilars. For Roche, biologics in 2009 are estimated to have accounted for 54% of its sales and are expected to rise to 59% by 2014. Indeed, the acquisition of biologic franchises and/or businesses has proven attractive across big pharma in recent years. Thus, for example, Sanofi-aventis is bidding over $18 billion to acquire Genzyme for its biological businesses, which even in niche diseases have been able to capture significant revenues and profits.
Orphan drugs. Indeed, big pharma is paying increased attention to the orphan drug market. These drugs, which target chronic, degenerative and other rare life-threatening diseases, have been shown by Genzyme and other biotech companies as having the potential to be highly profitable. The cost of treatments can run as much as $500,000 per patient per year. Compared with drugs for other indications, the development costs and regulatory hurdles for orphan drugs tend to be lower, whereas the margins are higher and the markets continue to expand. As a whole, markets for orphan diseases are expected to reach nearly $82 billion in 2011, up from about $59 billion in 2006. No wonder then that several pharmaceutical companies have entered this market, and some, like Pfizer, have even created specific business units focused exclusively on orphan diseases to help make up for the impending loss of revenues associated with their other drugs facing patent expiry5.
Entering these markets will not be without major challenges, however. Most pharmaceutical companies are novices in the orphan drug field and will have to build drug development expertise for these indications and marketing infrastructure for niche populations. Given the plummeting reputation of big pharma as a whole, a major issue will be how to manage the image fallout from the high prices that will need to be charged to make such drugs commercially attractive.
Biosimilars. Another area that is witnessing intense investment from large pharmaceutical companies is biosimilars or follow-on biologics. Merck has announced it will invest over $1.5 billion in biosimilars by 2015; and Pfizer's partnership with Biocon gives Pfizer access to Biocon's biosimilar versions of insulin.
The pharmaceutical industry (and to an extent some biotech companies) recognizes an opportunity in follow-on biologics because the development risk and costs associated in manufacturing such products are likely to be significant barriers to entry. Such limited competition should make the market more attractive as it is not going to result in extensive pricing pressures as is the case in the generics market. Generics giant Teva Pharmaceuticals (Tel Aviv, Israel) has projected that ~$53 billion in branded biologics revenues will be exposed to biosimilars competition by 2015 based on patent expirations alone.
In Europe, where the market is still in its early stage, biosimilar products need to overcome concerns about comparative efficacy and safety. Another reason cited for the limited uptake relates to the national rules that prevent automatic substitution. In the United States, despite its description in the recent health reform legislation, there is still no regulatory pathway for the approval of biosimilars.
The challenge of demonstrating comparability, high development costs, coupled with a difficult market environment may cause companies, in the right circumstances, to seek to develop improved versions of the original drugs—so-called biobetters—rather than go down the path of developing biosimilars. And even though the net effect of an increasing number of biosimilars and biobetters will, like other drugs, create competition in terms of safety, efficacy and pricing, the pharma industry anticipates that governments and third-party payers will implement policies to foster the use of biosimilars in an effort to restrain costs associated with the reimbursement of expensive biologics6.
Product diversification. Another strategy increasingly embraced by big pharma is to migrate into nonprescription health products for humans as well as animals and even reagent and supply service companies. Thus, Novartis recently moved into eye care products through its acquisition of Alcon (Hünenberg, Switzerland); GSK has augmented its business in consumer healthcare by acquiring Stiefel (Coral Gables, FL, USA) for its dermatology products; and Sanofi-aventis has acquired Chattem, an over-the-counter company based in Chattanooga, Tennessee. In animal health, Sanofi-aventis and Merck have expanded investment in Merial (Duluth, GA, USA), their animal health joint venture. And in the past year, Merck opted to buy Millipore (Billerica, MA, USA) for its US laboratory supply manufacturing operations.
The nutraceuticals sector—a market that the major food companies already target—is also garnering increasing attention from big pharma. These clinical nutritional products are developed to target specific diseases, ranging anywhere from diabetes to Alzheimer's disease, and their success is more dependent on physician recommendations than on shelf-space competition in supermarkets.
All the above businesses, compared with proprietary drugs, provide more stable long-term income flows. At the same time, however, such markets can be smaller, carry lower margins and face greater competition. Furthermore, it remains unclear whether big pharma has the requisite expertise to successfully exploit the benefits associated with these markets.
All these strategies attempt to address the projected shortfall in revenues through diversification across products and geography. Even so, they continue to ignore the critical problem—big pharma's drug pipeline, which remains anemic despite the commitment of vast resources to R&D.
The real problem
Decision making at large pharmaceutical companies is notorious for stymieing innovation, risk taking and long-term business development efforts. Although big pharma acknowledges the detrimental impact of its bureaucratic ways, it has not proven successful in becoming nimble like companies in the nascent biotech sector.
Examples of R&D inefficiency in the pharmaceutical industry are legion. As John Lechleiter, the CEO of Eli Lilly (Indianapolis), put it, companies are “taking too long, spending too much and producing far too little. Re-powering pharmaceutical innovation is an urgent need”7. Others have echoed his lament. Jeffrey Kindler, who recently announced he was stepping down as CEO of Pfizer, has gone on the record to acknowledge the detrimental impact of having 14 management layers between him and the bench scientists. His answer to this problem was to build the company's pipeline using a diversity of approaches that recognizes the increased need for flexibility in R&D spending and the dangers of sticking to the traditional industry research spending formula.
Another response to this earnings crisis has been to slaughter the R&D sacred cow. The approach here is to prune and streamline R&D so that the pipeline continues to advance while earnings are enhanced. In the past, marketing, sales and other costs were trimmed when big pharma encountered earnings pressure. This is no longer the case, with massive cuts in R&D personnel across the industry. According to recruitment specialists Challenger, Gray & Christmas (Chicago, IL, USA), the number of pharmaceutical industry jobs eliminated in the first ten months of 2010 was 45,263 (in 2009, it was 58,696 jobs). Since its merger with Wyeth, Pfizer has only four major R&D sites—down from 20 sites around the globe at the time of the acquisition in 2009—with most researchers in each laboratory focused on the same disease.
Another approach to R&D restructuring has been to 'spin out' scientists, products and patents. This can take several forms: creating entirely separate startup companies (e.g., GSK's Convergence Pharmaceuticals of Cambridge, UK) while retaining minority equity, with the potential for a return on investment if development of the spun-out programs progresses; out-licensing internally developed drugs to venture capital firms; divesting clinical services to contract research firms (e.g., Sanofi-aventis's deal with Covance of Princeton, New Jersey); or combining development and commercial efforts (e.g., GSK and Pfizer aggregating their HIV ventures to synergize their reach or Sanofi and Merck forming a joint venture for animal medicines). But rather than promoting a more efficient paradigm for furthering drug development, all of these measures are designed to reduce internal R&D costs, thereby increasing earnings in the short term.
The simple fact is that relying on acquiring drug candidates is also not likely to solve the problem. Given the absence of an initial public offering market and the decrease in capital available from other sources, one would assume that there would be a wealth of products in biotech companies desperate to collaborate with big pharma. However, big pharma deems only a limited number of products in the biotech sector as attractive opportunities (Fig. 1), suggesting that the number of transactions for coveted late-stage compounds is likely to be constrained. A recent study8 by consultants Bain & Company (Boston) states that of 6,000 biotech projects available for late-stage licensing in 2009, only ~200 were likely to be attractive to large pharmaceutical companies and of these, fewer than 100 were potentially top-selling candidates. Taken together, they would account for only $30 billion in potential revenue—tens of billions below the shortfall in earnings due to patent expirations that pharma is facing. Why then are so many biotech development programs unattractive to pharma?
Clearly, big pharma still finds late-stage, phase 3, potential blockbuster compounds most alluring, and in the current environment it is also enamored with drugs that target smaller patient populations that fit its therapeutic areas and have high commercial potential. However, these drugs have to be able to deliver true advancements in meeting patient needs (to have a better chance in passing regulatory muster and to increase payer adoption).
Another factor limiting the pool is a mismatch of the drugs that the biotech industry is developing and the ones that big pharma finds attractive. Programs in the biotech sector can become highly misaligned with those in big pharma when the latter suddenly changes its product strategy, for example, when a particular type of therapeutic modality comes into vogue. For example, big pharma has been acquiring many of the first-generation biotech antibody pioneers while many other companies that have small-molecule programs have been left on the sidelines. Thus, those biotech companies that have been focusing on small molecules over the many years of the development cycle (which themselves were previously in vogue) have in recent years found their drugs less attractive to big pharma, whose managements have been scrambling to expand internal biologics expertise. Overall, in recent years, the number of biotech companies acquired by big pharma has also been dwindling (Fig. 2).
How quickly big pharma can disrupt an entire segment of the biotech industry is illustrated by Roche's recent decision to discontinue its research into RNA interference (RNAi) in a cost-cutting restructuring9. It had embarked into RNAi only three years ago after having invested $500 million in this area. This abrupt abandonment of the research and partnering efforts has the potential of sending the message to the industry and marketplace that RNAi technology is not worth pursuing, leaving the biotech companies with which they partnered and others pursuing RNAi to defend their continued development of the technology and scrambling to attract other partners for their programs.
Another issue is that big pharma lacks all the tools to separate the winners from the losers early on, and compensates by creating a high hurdle for licensing (as seen in the stagnant growth of licensing deals; Fig. 3). Add to this the need for truly innovative products to obtain reimbursement from third-party payers, and one can see why so many drugs now in the biotech pipeline fail to meet the grade. In sum, drugs that offer considerable advances in treating patients will be the ones that will receive market receptivity and, in turn, attract the attention of big pharma.
What big pharma should be doing
So what can big pharma do to enhance R&D success? The potential steps that seem sensible fall into two broad categories: (i) retooling internal R&D activities and (ii) exploiting business development.
Retooling internal R&D activities. There is an old adage that no one gets fired from big pharma for passing on a compound but might for bringing in one that fails. Therefore, there needs to be clear direction from top management that encourages and rewards risk taking. This will require a cultural change in the organization, which may take years to effect. The Bain Study8, which interviewed leading global innovators who were responsible for some of the major breakthroughs in medicine, voiced the view that “broken innovation culture” lies at the core of big pharma's problems. This is manifested in a lack of dedication at the level of management to understand the science sufficiently, a reluctance to reach out to academia, high turnover in the R&D executive suites and a lack of willingness to undertake R&D in a different manner. Big pharma executives need to recognize that truly creative steps in product generation are not scalable like other manufacturing processes. Moving drugs from one phase to the next is not as important as getting the development program correct in the first place; and basing incentives on measurements related to other areas of the business, such as speed of throughput, applies pressures to mere numerical outcomes. Progress should be measured against the development plans thoughtfully devised8.
Furthermore, there is no one-size-fits-all and each big pharma organization will need to determine which models can be implemented to enhance its own R&D productivity rather than merely replicating what others are doing.
It goes without saying that big pharma must determine the class of drugs and therapeutic areas it wants to exploit. This is not a static situation and pharma management needs to anticipate where the best prospects will reside. For example, in October 2010, Roche announced that it is planning to expand its business beyond its historic focus on oncology drugs if results from experimental treatments for a broader range of diseases prove favorable. Also, Sanofi-aventis, by its proposed acquisition of Genzyme, is making a major effort in biologics, albeit through an acquisition.
The first step that big pharma should consider in fostering a cultural change to enhance innovation is to adopt a more entrepreneurial environment for the way its R&D is conducted that aims to emulate the incentive-based culture of smaller biotech companies. For example, GSK has mimicked the biotech model and divided its research groups into smaller and supposedly more nimble segments. It is yet to be seen whether this reorganization proves as effective as biotech ventures in spurring innovation; indeed, success will likely require granting management of the different centers greater autonomy; aligning each center's research goals with incentives; finding the right talent; and minimizing the inherent bureaucracy and management silos imbedded within the large parent corporation.
Other companies have resorted to different structural reorganizations to accelerate the movement of products through the pipeline. For example, Eli Lilly (Indianapolis) created 'Chorus', an independent division designed to get compounds to proof of concept more quickly and cheaply than its regular development organization (http://www.choruspharma.com/about-us.shtml). Given the imminence of the patent cliff and the ever-present earnings pressure, it would behoove pharmaceutical management to look to these and other innovative mechanisms of getting compounds to human testing faster and accelerating 'go, no-go' decisions. What has been successful for one company, however, may not resonate with another. Trial and error will of necessity be the result. But clearly going down the traditional development path is not an option.
Yet, big pharma also needs to recognize that the improvement in how internal R&D operates will not, in and of itself, solve the immediate pipeline shortage. Big pharma will need to shift significant resources from internal development to a whole host of external resources.
Exploiting business development. In addition to addressing internal R&D shortcomings, big pharma needs to find ways to exploit external partners to enhance R&D success. Even Merck, famous for its go-it-alone attitude, has acknowledged the need to access expertise in academia and other companies. Several approaches can be adopted to further this end.
Historically, business development activities in the pharmaceutical industry have been constrained for several reasons. There has been reticence to partner outside core competencies. Also, there has been a bias to focus resources on the internally developed pipeline. Just as importantly, earnings considerations (rather than cash constraints) have diminished efforts to in-license promising drugs. The net effect has been to constrain external programs.
To exploit external resources more effectively, big pharma should consider combining the best of biotech with its own considerable attributes. Biotech companies bring intensity, entrepreneurialism and an agility to drug development. Conversely, large companies offer a global reach for commercial products, much needed cash and expertise across scientific, medical and regulatory disciplines, as well as the ability to run large clinical trials worldwide. How can management in pharmaceutical companies capitalize on these attributes to promote R&D efficiency?
Given the inherent risks and costs associated with drug development, the pharmaceutical industry has for some time been divesting itself from early-stage drug discovery activities and focusing instead on the later stages where the likelihood of success is much greater. This has created a gap in the process of translating basic research into potential drug candidates. Declining productivity combined with increasing costs within the pharmaceutical sector can serve as the basis of a new collaborative model whereby big pharma steps in and aligns itself with those aspects of drug discovery and development research at which academia excels, with those aspects big pharma does best, and also implementing those aspects that can best be handled collaboratively. In such a model, the collaborators would need to initially determine their respective goals and responsibilities. For example, an academic laboratory that has particular expertise around new biology that has resulted in a high-profile publication could set out to develop functional assays for a particular target in that pathway that would take the project to the stage where it becomes sufficiently validated for big pharma to step in; in turn, the pharma partner could provide much needed funding, development expertise and project management. Fundamental to this approach is a genuinely collaborative environment where academic contributions to translational research are rewarded with appropriately structured funding, intellectual property (IP) ownership and a share in future royalties. The collaboration between academic nonprofits engaging directly with big pharma to advance drugs through the clinic is not without major challenges, including differing cultures (blue-sky versus goal-oriented outlooks, openness and trade secrets), IP rights, conflicts of interest, as well as legal and public relations issues.
Some early steps in this direction are already being taken. In a partnership with academia that focuses on discovering new uses for existing compounds, Pfizer has agreed to give scientists at Washington University School of Medicine (St. Louis) unprecedented access to information regarding a vast number of small molecules and small-molecule candidates. Recently, Pfizer and the University of California San Francisco (UCSF) entered into a collaboration whereby the pharmaceutical company will pay up to $85 million to explore whether UCSF discoveries can be translated into biologic drugs. UCSF scientists will have access to Pfizer's drug development expertise. Ownership rights to the development results will be shared. In another example, Sanofi-aventis has teamed up with Harvard University (Cambridge, MA, USA) to collaborate in key therapeutic areas with a view to enhancing the pharma company's product portfolio.
Technology platforms can also provide novel ways to advance drug development. For instance, Pfizer recently entered into a research collaboration with Biovista (Charlottesville, VA, USA) to seek new indications using the latter's literature-searching platform to identify additional new indications for existing drugs. Another strategy related to platform technology, with inherent limitations, is to pool resources to access so-called precompetitive platforms. These can involve novel tests, imaging methods or safety-testing methodology. For example, Eli Lilly, Johnson & Johnson (New Brunswick, NJ, USA), Merck and Pfizer have invested in venture fund PureTech's Enlight Biosciences (Cambridge, MA, USA), which was established for the purpose of creating enabling technology platforms to meet needs shared across the industry.
In terms of in-licensing drugs, various approaches can be exploited to enhance the probability of success. For example, pharma can license the drug in a collaboration that leaves the biotech to advance the product unfettered during the early stages of development and then take over management of late-stage trials in which big pharma has the greater expertise; or, alternatively, pharma may option only the right to commercialize the compound and leave all the development efforts with the biotech company, thereby avoiding the development costs and risks.
A way to get access to compounds already under development is to use captive venture capital arms. For example, Novartis relies on its own venture capital fund while, at the same time, partnering with an external private equity group to share the costs and development risks. This model also incorporates a mechanism that enables Novartis to have an option to acquire the program if it is successful.
To avoid overpaying for compounds up front, big pharma has employed a risk-sharing arrangement whereby contingent payments are made upon the future commercialization of the licensed or acquired compounds.
In addition, when there is a constraint on R&D spending, one potential solution is to find outside resources to share the costs and risks. For example, TPG-Axon Capital (New York) and Quintiles Transnational's NovaQuest (Charlotte, NC, USA) partnering group has agreed to fund Eli Lilly's two Alzheimer's disease compounds in phase 3 testing. There are also firms, such as my own, Symphony Capital (New York), that are engaged in structured drug development financing to further the development of biotech compounds and, in the case of Symphony Capital, do so in a manner that also ameliorates an adverse impact on earnings.
Another major factor that can increase the chances of successfully accessing external drugs is to improve the manner in which collaborations are being pursued and conducted. Collaborations at big pharma require an internal champion, 'socializing' the opportunity across multiple departments and getting buy-in. Thus, potential partners must often negotiate strategy, marketing, portfolio managers and cross-functional committees, all of which weigh in on a decision for whether a collaboration should proceed. Is it any wonder that some transactions between big pharma and biotech have been reported to take two years; or that there is a high likelihood that this entire decision process will suffer from death by committee? What's more, as internal champions are moved to other areas, numerous biotech firms have encountered the frustration of stalled or terminated collaborations or at least having to start the collaboration process afresh with the new, designated pharma appointee (who may have interests different from the former incumbent). Pharmaceutical management needs to recognize that this painful incremental process of decision making needs to be streamlined so as not to turn off important external opportunities in the biotech sector.
Negotiating with different pharmaceutical companies can also be daunting for biotech companies. Several big pharmas follow a rigid template to conduct business development. Often, an investment in a program is determined on a numbers game relying solely on averages and probabilities, ignoring the more fundamental aspect of the innovation. Decision makers within pharma companies need to embrace a more flexible approach to structure the collaboration. Similarly, it is important for the teams engaged in the negotiations to have a clear understanding as to what is the key ingredient in the collaboration. They must determine at the outset if this is an IP transaction or whether there is a need to retain key people with the programs. Will big pharma just bring needed capital or will it provide additional expertise?
It is also important to conduct the negotiations to create a win-win outcome. Even though the current environment has tipped the negotiating balance in favor of big pharma, it would be detrimental if bargaining is driven so hard it ultimately creates serious friction between the participating parties to the detriment of the programs being conducted. Finalizing the agreement is only one aspect of a research collaboration on a drug candidate. The manner in which the collaboration is conducted afterwards is paramount, as a poorly executed collaboration can easily destroy a drug's prospects. It has been reported that over two-thirds of the collaborations in pharma fail or suffer significant downside events during the alliance10. Thus, effectively managing the collaboration is necessary to ensure that the value of the alliance is not jeopardized.
Often rigid policies impose constraints on business development teams, such as requiring them to rely on internal expertise in connection with the transaction. Pharmaceutical decision makers need to be allowed by upper management to engage outside expertise for domain and other resources, rather having to rely on suboptimum internal teams.
Finally, as the pharmaceutical industry continues to evolve, development tools, clinical outcome tracking and other activities may create new opportunities for business development. For example, it may make sense to outsource to a much greater extent various activities currently conducted within big pharma to academic institutions that contain the specific expertise, or to use health screening companies to get better outcomes data.
The current adverse environment confronting both the pharmaceutical and the biotech sectors is not likely to change dramatically in the near term. Big pharma's internal R&D activities, even if restructured and conducted more effectively as suggested, in and of themselves, are not going to yield the number of drugs necessary to deal with the coming patent cliff. At the same time, Wall Street in the current environment is not likely to fund the biotech industry to the extent needed to continue innovative drug development. Thus, big pharma's partnering activities are increasingly going to be needed by the biotech sector to further its drug development efforts.
The present environment provides big pharma with an opportune time to abandon its traditional R&D business model, which no longer produces the intended results, and expand its external collaborations in an effective manner. But this will require bold leadership to change the conservative culture that is embedded throughout big pharma. By creating the right culture and achieving the right balance between its internal and external R&D efforts, the pharmaceutical industry can reinvigorate its drug pipeline and drive growth and earnings in a sustainable manner. But the window of opportunity to attain that culture and balance may only remain open for a short time.
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