Bioidentical

Big Pharma Aims For Reinvention 
The Financial Times

 By Andrew Jack 5/13/2010 5:30 AM

Summary:

Reported that for many years, large pharmaceutical companies have relied on a handful of “blockbusters” that generate billions of dollars a year in sales, but as patents expire on drugs such as Lipitor, big pharma is having to rethink its business model.

According to the article, most large pharmaceutical companies have adopted four principal strategies to diversify. First, expand the range of products in the research and development pipeline and the use of external as well as in-house scientists to discover them. Second, expand geographically, especially into emerging markets. Third, increase sales of products other than patented prescription medicines. Fourth, experiment with greater flexibility in pricing in different countries and with ways to ensure drugs provide value for money. 
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Leading drug companies have long focused on blockbuster medicines to drive their profits, but the model is changing, writes Andrew Jack.

With some of his most profitable medicines going off patent, and the uncertainty of replacement drugs continuing to rise, US healthcare reform has been the least of Andrew Witty’s recent worries.
When the chief executive of GlaxoSmith-Kline presented his company’s most recent financial results last month, he gave a sense of how the UK’s biggest drugmaker – and the industry more generally – is responding to structural pressures: diversify to survive.

For his company, he says, this means a shift away from “white pills in western markets”, with the proportion of traditionally core patentprotected, chemically based drugs, which are sold mainly in North America and western Europe, falling to just more than a quarter of total sales.

For many years, large companies such as GSK have relied on a handful of typically high-priced, mass-market “blockbusters” that generate billions of dollars a year in sales. But as patents expire on drugs such as Lipitor, Pfizer’s anti-cholesterol medicine that is the biggest selling medication in history, big pharma is having to rethink its business model.

Most large pharmaceutical companies have adopted four principal strategies to diversify. First, expand the range of products in the research and development pipeline and the use of external as well as in-house scientists to discover them. Second, expand geographically, especially into emerging markets. Third, increase sales of products other than patented prescription medicines. Fourth, experiment with greater flexibility in pricing in different countries and with ways to ensure drugs provide value for money.

As John Lechleiter, head of Eli Lilly, put it recently: “At a time when the world desperately needs more new medicines . . . we’re taking too long, spending too much and producing far too little. Re-powering pharmaceutical innovation is an urgent need.” 

The most widespread tactic to change this is to restructure in order to boost innovation. Chief executives talk about adopting a more entrepreneurial approach, simulating in-house the incentive-based, smaller-scale, science-based environment of biotech companies, finding external partners and broadening their portfolios.

Merck, once proud of its go-it-alone approach, has started to tap research conducted by other companies and academics. Last year, it helped fill holes in its own pipeline with the purchase of Schering-Plough.
GSK last year spun off its HIV work entirely into ViiV Healthcare, a joint venture with Pfizer to share the expertise, costs and benefits of new product development. As Jeff Kindler, Pfizer’s chief executive, put it at the time: “The new company can reach more patients and accomplish much more for the treatment of HIV globally than either company on its own.”

Most companies have also diversified their research portfolios, shifting from their traditional reliance on chemical-based drugs to biological ones including vaccines. AstraZeneca cemented such a move with its purchase of biological medicine-focused companies such as CAT and Med-Immune. Roche’s full takeover of Genentech last year re-emphasised its focus on biological products to treat cancer.

Perhaps the biggest trend in recent months has been removing a taboo on cutbacks in R&D, which had previously been largely spared when marketing and other costs were trimmed instead. For example, one rationale behind Pfizer’s takeover of Wyeth last year was to defer the pain of patent expiries. That has allowed it to pare back in-house research, freeing up resources to forge partnerships with external researchers instead.

But even if overhauling R&D boosts innovation, the benefits for some companies will not come fast enough. “There’s a lot of talk about the patent cliff,” says Nils Behnke, a partner with Bain, the consultancy. “The problem could maybe have been solved 10 years ago. But now there is going to be a gap.” 

He estimates that $100bn (€79bn, £67bn) in sales from medicines will be lost in the next five years as intellectual property protections expire, while the value of drugs in development in the industry’s collective pipeline that could be launched during that period are worth just $30bn.

Given both the time pressures and the difficulties of innovation, another means of diversification has been to expand into new geographical regions to boost income from existing medicines.

Some companies remain wedded to traditional markets, such as Bristol-Myers Squibb, which still relies on the US for more than 60 per cent of its sales. Others – notably European pharmaceutical companies with relatively small domestic markets and strong historical links abroad – have made efforts to increase sales in emerging markets.

Many companies have sealed deals to expand through acquisitions – such as Abbott’s purchase of Solvay, a European company with a strong presence in emerging markets. Others have stepped up their own organic growth by investing in everything from clinical trials to manufacturing facilities and marketing.
Pharma companies are expanding the breadth of their own activities, and buying up or forging partnerships with others in different niches.

Last year, Sanofi-Aventis acquired Zentiva in Slovakia, Medley in Brazil and Kendrick in Mexico. Pfizer, by contrast, has so far opted for partnerships, agreeing to license medicines from Aurobindo and Claris Life Sciences in India, as did GSK with Aspen in South Africa.

Novartis has moved into eyecare products with its acquisition of Alcon; GSK has strengthened its position in consumer healthcare by purchasing Stiefel for dermatology; and Sanofi-Aventis and Merck have invested in an expanded version of Merial, their joint venture for animal health.

Such businesses typically provide a more stable, long-term flow of income than patented medicines. But the markets are often smaller, the margins lower, the competition more intense and the techniques beyond the traditional expertise of the pharmaceutical companies.

Geographical expansion compounds these challenges in fragmented, uncertain markets. Daiichi Sankyo of Japan found that out to its cost, when it bought Ranbaxy in 2008 just ahead of intensifying troubles with US regulators over manufacturing forced the Indian generic-drugmaker to post large losses.

Andrew Baum, pharmaceuticals analyst with Morgan Stanley, cautions that even in a country like China, which currently reimburses many innovative drugs at western levels, the situation could deteriorate. “I wonder about the sustainability of prices,” he says.

A final option for drug companies has been to diversify their commercial approaches. Some – such as Novo Nordisk and Roche – remain focused on a single global price for their drugs to maximise returns and reduce the risk of “leakage” from lower to higher priced markets. Others continue to justify high prices by pointing to high development costs.

But as healthcare systems increasingly seek ways to save money, the emphasis is shifting. GSK and Pfizer have sought to boost volumes in poorer countries by offering deeper discounts. Novartis, Sanofi-Aventis and Merck have recently negotiated prices in Europe and North America linked to the performance of their drugs.

Others are forging partnerships with doctors, nurses and other specialists to encourage better compliance among patients for whom their medicines do work, but are often not taken as prescribed.
In the long term, as Gary Pisano from Harvard Business School puts it: “Real innovation is the source of true long-term advantage in the industry.” 

In the short term, diversification by product and region may at best provide the testing ground to develop new skills that are applicable globally. At worst, it may be one of the few ways for those with the greatest pipeline problems to buy themselves some time.

• http://www.bioidenticalhormoneinitiative.com/sites/default/themes/bluepr...); padding: 0px; margin: 0px; border: 0px initial initial;">Research & development: groups are restructuring in an effort to boost innovation and create drugs more quickly
• http://www.bioidenticalhormoneinitiative.com/sites/default/themes/bluepr...); padding: 0px; margin: 0px; border: 0px initial initial;">New markets: companies are expanding into new regions, notably big emerging markets such as India, China and Brazil
• http://www.bioidenticalhormoneinitiative.com/sites/default/themes/bluepr...); padding: 0px; margin: 0px; border: 0px initial initial;">Value and pricing: organisations are becoming more flexible on pricing and trying to add value for healthcare providers
• http://www.bioidenticalhormoneinitiative.com/sites/default/themes/bluepr...); padding: 0px; margin: 0px; border: 0px initial initial;">Product diversification: businesses are broadening the depth of their activities and moving into different niches