The launch of our updated
website provides a fitting occasion to assess the future of the sector that has
been Mehta Partners’ primary occupation for over 20 years. Perspectives is a
new platform for our team members and other opinion leaders in our network to
share their views on the important events of the day that will shape the future
of the BioPharma industry worldwide. Through this column we hope to provide
insight and context for those developments. We invite you to visit often and
share your feedback.
It was only a generation ago that the US
spent just 6% of GDP on healthcare (v. 15% today), a proportion more in-line
with its peers. In those days, pharmaceutical innovation was a trial-and-error
chemistry exercise with modest budgets. A drug with $250 million in sales was a
blockbuster; product lifecycles were measured in decades, and the FDA was
generally happy to approve new drugs as long as they did not cause cancer.
“Globalization” meant having some sales in Europe and an agent in
Japan. Emerging markets were largely ignored and generics were considered a
minor annoyance. At that time, one thousand salesmen (and a few women)
constituted a huge sales force, and the CEO of a major pharma company rose
through the ranks as a salesman.
Above all, computers and IT had yet to
usher in a “paperless society” and transform the world as we knew it.
The recombinant technique, which ushered in the new era of biotechnology, was
still nearly a decade away. Stomach ulcers were considered as serious as cancer,
and Pharmaceuticals was a respected industry commanding top valuation — the
living was easy.
The times they are a changin’!
Underpinned by the tools of biotechnology
and IT, multiple scientific disciplines are growing increasingly more
integrated, rapidly transforming the process of discovery and development for
innovative therapeutics. But this is a long and arduous Research and
Development (R&D) journey that requires ample resources, ideally from a
stable cash flow generated by top-selling drugs. Maintaining stable cash flows
has become challenging as increased competition, both branded and generic, can
decimate major drug franchises at pharmaceutical companies and even mature
biotechs. Sustainable R&D productivity from this “new science” is
still some distance away, though currently disappointments often follow hints
of initial promise.
Last year, when we analyzed the pipelines
of 150 companies in our BioPharmaceutical universe, it looked as if the number
of drug launches would surge in 2008 and be sustained into 2009. However, the
first generation output from “new science” is yielding products with
mixed profiles, while simultaneously producing more sophisticated tools for
discovering safety issues. Consequently these enhancements have also induced
the FDA to raise its own safety standards.
Of the 11 “blockbuster” drug
launches expected during 2007, our analysis categorized 10 as Low Risk. Sadly,
four are facing major multi-year delays (Accomplia, Galvus, Pristiq and
Bifeprunox), two have had shorter 6-12 month delays (CERA and Atripla EU), and
only four have been approved, with one still awaiting the FDA review — a 36-55%
attrition rate for mostly low risk products! Clearly, our original analysis was
overly optimistic: the surge will not come to fruition just yet.
The problem is not just the FDA. A major
portion of the responsibility rests with the industry, which still lacks much
of the understanding necessary to safely develop novel drugs. All too often a
company simply ignores suggestions from the FDA, as was the case with GPC
Biotech, which attempted to use an endpoint other than survival in the PhIII
trial for its prostate cancer drug, satraplatin. This is a relatively common
occurrence within some small and mid-sized BioPharmaceutical companies, who
often seem to worry more about short-term share price and stock options, than
creating long-term value.
Many have called for fundamental changes
in the industry’s business model, and several modifications have been
attempted. However, time may be running out. If R&D productivity does not
quickly become more predictable, the next wave of generic competition could
prove insurmountable. Even under the best of circumstances, no industry that
prides itself on innovation can spend twice as much on Selling, General and
Administration costs (SG&A) as on R&D. If the biopharmaceutical
industry is unable to right its ship and critically change its cost structure,
while focusing on increasing product approval success rates by the turn of the
decade — then the biopharmaceutical industry may no longer exist as we know it.
Global Pharma companies will see $54b
worth of their products, or approximately 18% of total sales, go off patent
between 2010 and 2012, including major products like Lipitor, Plavix and
Lexapro. Their future will be like watching a train wreck in slow motion, as
these companies face significant sales erosion with limited pipelines to
replace off-patent products. While 18% represents an average, some companies
have as much 85% of their sales at risk.
During the “new economy” boom
of the late 1990s, many were predicting that the pharmaceutical industry would
transform itself in the coming years, becoming smaller and more efficient.
Unfortunately, because they have not become more efficient, may now be forced
to become smaller.
We hope you’ve found our
inaugural column thought-provoking. The views expressed are not intended as
recommendations; rather we wish to foster discussion and arouse interest in an
industry that has the potential to improve the quality of life for the next
generation, as much as IT has done for this generation. We look forward to
sharing our analysis and views as major trends unfold and welcome your candid
feedback.