Friday, July 30, 2010

Patent cliff, other factors force industry to rethink itself

Pharma Reformulates

It’s not a secret. Numerous blockbuster drugs are about to lose patent exclusivity, and revenue at big pharma is projected to fall off at a rate of 20% a year for the next three years. What is less known, at least by the increasingly pharma-skeptical public-at-large, is that innovation is restructured, and alive and well—it just may not look like your father’s Oldsmobile.

“The largest selling drug in the world today is Lipitor,” said G. Steven Burrill, founder and CEO of Burrill & Company, a merchant bank in San Francisco specializing in the life sciences. He posits that the enormous revenue generated by the sale of the drug—some $14 billion annually—illustrates why the industry approach of building a company around potential blockbusters was all quite reasonable at the time. “The model was discover on one end, develop, manufacture, market, and distribute on the other—so you can think of it vertically.” And for years it worked. “Well, that model is totally flawed today.”

Burrill takes the industry apart and looks at the pieces, first at the broken bits. He then suggests a future direction for what remains. In the beginning, pharma was the land of discovery. “But discovery is ubiquitous now—we’ve got hundreds of small companies and people doing discovery all over the world.” It’s not realistic, given the ready availability of technology and life science datasets, for discovery to have a favored venue.

Moving on to the craft of development, “We have an entire industry in place to do this now,” said Burrill, referring to contract research organizations. Their use by big pharma is already commonplace and growing. And manufacturing? Obviously, there’s China, India, and soon, Eastern Europe to do the work at lower cost. The one piece left that Burrill acknowledges as the strong suit of big pharma is distribution, which, it could be argued, is the business of business: getting a product to the consumer at the lowest possible internal cost. “What you see now in big pharma is that they’re disintegrating most of the things that historically gave them strength, and they’re looking for new business models.”

Burrill sees the strongest evidence of this shift in the executive suites. “Years ago, big pharma was led by guys that moved up through the R&D organization. … Just 10 or 15 years ago these guys became much more sales and marketing oriented, strategic kind of guys.” For instance, Jeff Kindler, the present CEO of Pfizer, is a Harvard Law graduate and came to his current position by way of McDonald’s. Pfizer first hired him as general council, where one can easily assume he often focused on patent protection.

Back to the Drawing Board

Figure 1. Spending Vs. New Drug Approvals
*Inflation adjusted per U.S. Bureau of Labor statistics to 2008 dollars.

The drive for new models has produced a purchasing war among giants: Roche captured Genentech, Merck merged with Schering Plough, Pfizer grabbed Wyeth, Novartis set its sights on eye-care giant Alcon, and the snatching up of morsels continues. Sanofi-Aventis acquired BiPar Sciences, an innovator in poly ADP-ribose polymerase technology, Abbot supplements its pipeline with Facet Biotech … and many more.

With the dust far from settled, Pam Narang, PhD, senior analyst for the global business information provider Datamonitor, took a look at what has actually been accomplished. Dr. Narang considered the merger and acquisition (M&A) trends of big pharma over the last eight years, first by noting the spike. “We see a jump from six deals in 2000 to 14 in 2008.” Diversification was a big part of this move.

So, the question is this: Is diversification away from pharmaceuticals a good way to deal with the patent cliff? “We see about 47% of all these M&As were actually involving companies that were not pure pharma companies,” said Dr. Narang. Alcon is a good example. The idea was to bring in products not subject to patent expiration.

The surprise for Dr. Narang was the variable profitability of a mega-merger based on brand. “I found a distinct, positive correlation between branded pharma focus and operating margins. This suggests that companies which are highly pharma focused are just more profitable.” It further implies that big pharma should seek to increase branded focus either by acquiring companies that are more branded than the buyer or by divesting assets that are not branded pharma. Dr. Narang said Bristol-Myers Squibb is a good example of a company that’s done this. “It’s been divesting its non-core assets and also going out there and buying into branded pharma companies, bringing those products in house and essentially making themselves more branded.”

M&A done in the right way, then, can boost or retain profitability. “It gets there in solving the pipeline issue, because you get marketed products; they don’t have to worry about the FDA [U.S. Food and Drug Administration] risk or the development risk, and they can take it further into the current indication,” said Mark Monane, MD, senior analyst for biotechnology and life sciences, Needham & Company, New York. “That’s becoming a favored level of maturity for big pharma.”

For bringing up new, novel products, Dr. Monane sees pharma’s strengths in its recognition of outside talent and its ability to do large clinical trials. To the first point, pharma is working with biotech, mindful that the two corporate cultures should remain separate: Witness how Genentech has retained its identity, though it is now part of Roche. “Another good example is Regeneron and Sanofi,” said Dr. Monane. “They have a monster deal with Sanofi to do antibody drug development. Regeneron is doing the work and Sanofi’s paying for it, but the bottom line is they want to retain that culture.”

There are also the good fits of capability—pharma does the big trials. “It’s very unlikely that a biotech company can develop, say, a diabetes drug on their own. That’s why Amylin has a deal with Eli Lilly for exenatide.” Cardiom has partnered with Astellas in a huge trial for its drug to treat atrial fibrillation. Portola Pharmaceuticals, in partnership with Merck, has a large trial for its factor Xa inhibitor, betrixaban, a drug with enormous—and profitable—potential as a replacement for warfarin.

Dr. Monane also notes the shift in targets; the low hanging fruit of easily understood and manipulated pathologies like high blood pressure has been picked. Much of what remains—high stakes, high dollar puzzles—is in oncology. And the chase is on. “There’s a lot more focus in pharma to look at cancer agents, hoping to develop high-priced, premium drugs in areas of unmet need.” Pfizer, in particular, has recently established and heavily invested in an oncology franchise, and others are following suit.

Dr. Monane thinks the field is large enough to accommodate any number of players, but he’s concerned about the finite nature of the game. “The undertold story in clinical development is the lack of patients. The number of adults in the United States volunteering for trials is only 5% of the patient population.” That 5% may represent 50,000 individuals, but with hundreds of trials underway at any given time, it’s just not enough. “That’s why the trials are going to Europe, to Russia, Israel, China. … This is translating into a huge problem in drug development.”

Greg Wiederrecht, PhD, MerckWe’re looking to go upstream and work with biotech and academia on the basic research. I have a worldwide network of scouts who are completely non-transactional. This is a highly pedigreed group. Almost all are former bench scientists or MDs.
—Greg Wiederrecht, PhD, Merck

Bridging Toward Innovation

Charles Magness, PhD, president and CEO of Kineta Inc., a Seattle biotech firm formed in 2007, identifies another ongoing issue in drug development. “We think the biggest hurdle is the translational gap between the earlier academic-type discoveries and advancing a drug into clinical trials. So, that’s exactly where we’re focusing our business.” Dr. Magness has used this approach effectively before, having founded Illumigen Biosciences with his current Kineta partner, Shawn Iadonato, PhD. After advancing a lead compound for hepatitis C, the company was acquired by Cubist Pharmaceuticals in 2007.

“If you look at the structure and number of deals over the last decade, you can see this strategy evolving,” said Dr. Magness. It’s been apparent for some time that big pharma is no longer efficient at early stage research. “They realize it, and they’re moving away from the old model and outsourcing innovation. Almost everybody is doing it.”

Dr. Magness’ latest entry at Kineta is a suite of ShK analogs, highly specific, peptide potassium channel inhibitors derived from the venom of the Caribbean sea anemone. ShK, which is nontoxic to mammals, has shown immune response modulating activity in animal models of multiple sclerosis and rheumatoid arthritis. This makes the molecules attractive not just for their potential applications in lucrative markets, but also because Dr. Magness believes that, as a biologic, ShK has a better chance of making it through to final regulatory approval.

“Historically, there’s a greater likelihood that a biologic can get approved because you know more about the molecule. You generally have a pretty good idea what it’s doing in the parent organism.” The possibility of having off-target toxicity in the clinic is far less likely if you already know the mechanism of action. This perception goes a long way to explain why big pharma has recently been pushing hard to acquire biologics. “If you file an IND [Investigational New Drug application] on a biologic today you have a 33% chance of getting ultimate approval from the FDA, whereas if you file on a small molecule, looking back 10 years, the average rate of regulatory success is about seven percent.” As for the Shk program, Dr. Magness is looking to partner after navigating the hurdles of Phase 1 dose safety trials—positioning it to move into some big pharma pipeline.

G. Steven Burrill, Burrill  & CompanyWhat you see now in big pharma is that they’re disintegrating most of the things that historically gave them strength, and they’re looking for new business models.
—G. Steven Burrill, Burrill & Company

The Body in the Room

Discussing the patent cliff directly with big pharma is problematic; several of the largest players contacted by PFQ declined to comment, perhaps uneasy about how poorly the public perceives their current efforts. However, Greg Wiederrecht, PhD, vice president and head of external scientific affairs at Merck & Co Inc. in Whitehouse, N.J., was eager to talk about Merck’s prospects, and, in fact, about prospecting.

“We have a new group called external development and preclinical sciences—it’s not a licensing group. These guys are charged with bringing in just one particular type of collaboration, and that’s basic research.” Dr. Wiederrecht, who comes from the bench himself, sees the offerings of early development companies like Kineta as all well and good, and will pursue those opportunities of interest. But, as he puts it, “These things are well picked over. We’re looking to go upstream and work with biotech and academia on the basic research. I have a worldwide network of scouts who are completely non-transactional. This is a highly pedigreed group. Almost all are former bench scientists or MDs. Most come from Merck Research Laboratories.” Dr. Wiederrecht’s team spends their days meeting with technology companies; meeting with biotech, small and mid-sized; and attending basic science meetings to identify promise at the earliest opportunity.

One recent find resulted in the signing of a collaborative deal with researcher Laurie Glimcher, MD, of Harvard Medical School, an opportunity to exploit advances in new therapies for osteoporosis.

Though unrelated to Dr. Wiederrecht’s initiative, collaboration has also recently been established among the giants. This February, Merck, Eli Lilly, and Pfizer launched the Asian Cancer Research Group Inc., an independent, not-for-profit company established to accelerate research in cancers that genetically differ from, or are more prevalent than, those seen in the West. The initial focus will be gastric and lung cancers. It is hoped that combined forces and shared datasets will result, sooner rather than later, in new drug candidates for this vast emerging market.

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