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Pharmaceuticals At Critical Juncture
The industry faces a number of issues today, including pressures from weak stock performance, research failures, drug pricing issues, increasing regulation and generic competition, according to “Partners With Vision,” a global pharmaceutical report released recently by Ernst & Young.
The industry has reached a critical juncture in its history, said Blake Devitt, E&Y’s pharmaceutical and medical devices sector leader.
It’s generally believed that the Golden Age of Medicine is just over the horizon.
“Partners with Vision” brought together more than 45 experts from around the world to discuss just how the industry might get there.
What’s driving the industry in that direction, in part, is the fact that the baby boom population is approaching retirement and a period of their lives where more pharmaceuticals will be part of their daily existence, Devitt explained.
Coupled with that is the intense focus on solving the riddle of the human genome and the prospect for developing hundreds of new drugs that are specific to individual diseases.
Add to that the growing trend toward R&D alliances to develop new drugs, he said.
The convergence of all those factors, Devitt thinks, is going to lead to both an increased use of pharmaceutical solutions, as well as increased prospects for improving the productivity of finding pharmaceutical solutions to serious diseases.
The report identifies four key areas the industry must address to move on to the next stage:
- Global regulatory and legislative risk management
- Corporate accountability and leadership
- Pricing and intellectual property
- Expanding innovation horizons
Regulation is a big factor in the industry’s image as it has intensified and more companies have been found to be lacking in terms of either their quality or their ethics in the promotion and pricing of drugs, Devitt noted.
He said the implications of regulatory findings, in the short term, are significant in regard to shareholder value declines. Such findings sometimes make the FDA wary of approving new drugs for those companies, too.
“We think that at the end of the day, innovation and regaining public trust are really very big issues that could overcome regulation. The new FDA commissioner has announced that he will work closely with the industry to speed drug approval. I think that’s a good sign.”
Besides the FDA, in the United States there are the Office of Inspector General, the Department of Justice and state regulators to deal with.
E&Y analysts believe the industry ought to consider partnerships with government to help work through some of those issues and encourage “regulatory harmonization.”
For example, the Sept. 11 terrorist attacks and postal anthrax attacks that followed positioned the industry as a “defense contractor” and partner against bioterrorism.
According to Michael Friedman, senior vice president of Pharmacia Corp., the best chance of achieving “the most robust biomedical security, therapies and vaccines” lies in combining the best of government and nongovernmental organizations with private industry.
A key paradox is driving the pharmaceutical marketplace, however.
It seems that governments and the public just want the pharmaceutical companies to be good guys — to invest their own money, do the R&D, and come up with life-enhancing drugs that can be offered cheaply and made widely available to all the world’s people.
It’s almost as if they’re being pressured to be first and foremost humanitarians.
“Hopefully it’s not a no-win situation,” Devitt said. “There has to be dialogue and there has to be leadership exerted by the industry to overcome that or strike some sort of reasonable compromise.
“The economies of some of the world’s countries just can’t afford some of the solutions that are out there now. The pharmaceutical industry is sometimes painted as profiteering and that’s not a fair assessment in our view.”
According to Pfizer Chairman and CEO Hank McKinnell, who contributed to the report, “At no other time has our industry had to cope with such a polarized environment, with even our basic business model coming under attack. We have become a lightning rod for frustration over the barriers to health and health care worldwide.”
McKinnell suggested one way to move forward is through partnerships that bring together governments, companies, non-governmental organizations and “the best academic thinking.”
He predicted that a greater number of increasingly complex development and marketing alliances will be struck in the move toward the Golden Age of Medicine.
Strategic alliances are the industry’s future, according to Anton Gueth, director of alliance management for Eli Lilly and Co.
The investment of the research-based pharmaceutical industry has tripled over the past 10 years, with no increase in output. The pharmaceutical sector invests $50 billion annually on R&D, and individual companies spend upwards of $2 billion a year on R&D, he noted.
But, on average, companies produce less than one new product each year that might yield $300 million in revenue.
Pharmaceutical companies have used merger and acquisition strategies and R&D outsourcing for more that a decade in an attempt to increase research productivity.
Gueth said it’s now clear that merger alternatives aren’t the answer; merged companies have generally experienced slower sales growth than non-merged companies. He said the emerging model uses strategic alliances at every phase of the value chain.
To develop breakthrough treatments, pharmaceutical companies need partners.
“The amount spent on R&D is going up and up each year by the industry but the number of new, significant drugs being introduced is no greater than it was five years ago,” Devitt added. “So there has to be better effort made at increasing the productivity of the research.”
He said part of the answer is in cooperating more closely with government, but in large part it hinges on developing more alliances between pharmaceutical and biotechnology companies — stronger and more focused alliances of innovative companies that, together, can be more productive in their research efforts.
“That is critical. You have to reach beyond your four walls to find many of the solutions of the future,” Devitt stressed.
He predicts consolidation in the industry will continue, but not at a frantic pace.
“We think there will be some measured, continued consolidation. But because it is still a very splintered industry, the largest player in the industry, even after the Pfizer–Pharmacia merger, will only have 10 percent market share in the world.
“There’s still a lot of room for consolidation, but our authors seem to believe that there is not any clear conclusion that that’s a better answer — that you’ll get more research and lower prices just by getting bigger.”E&Y analysts also think in the future there will be a lot more small successful drugs, more targeted to narrow disease categories, than there will be blockbusters.