Even Bigger Pharma? What's Next?

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By John Lawson and Pierre Bourassa

From there being over 500 companies doing international pharmaceutical business in 1970, there were only 49 in 2008 and the term Big Pharma (with sales of more than $10 billion) can only be applied to 19 of them.

This elite group accounts for 84 per cent of the business1. None of them, incidentally, have their head offices in Canada. Is this a good thing? If so, for whom? If not, why not? In this article we will question the common sense of consolidation from the perspective of various stakeholders.

It has been argued that the cost of bringing a drug to market is in excess of $800 million and that consolidation would remove the wasted cost of duplicated research. This assumption was made, however, upon the basis that Big Pharma did everything from soup to nuts – basic research, drug targeting, ADME, clinical research and pre-launch marketing.

Is that now the case? No! Perhaps two-thirds of all new molecules now come from external sources and the industry has become merely an investment resource and global mass marketing machine. Indeed, it has been argued that it is virtually impossible to launch a product globally without the assistance of Big Pharma. From their investors’ perspective, are they now making bigger profits than they were 40 years ago?

Are they discovering more new breakthroughs? Are there consistently higher returns than other high technology industries, especially considering that the hunger for healthcare is growing rapidly with an aging population? Have the cost savings deployed by the industry been passed on to the payer? We hardly need try to answer these questions since clearly the industry’s current business model is not working. Cutting costs (Surprise! Surprise!) does not lead to increased innovation. So, why do they continue to pursue such a fruitless strategy?

The personalized medicine dilemma
Innovators lately most often come from biotechs and universities. With few companies able to maximize the global marketing potential of the drugs being developed, the negotiating power of innovators is extremely limited. Indeed, few products actually pass the stage-gates of the industry’s new product development process. Filtering is intense. Successful marketing is no longer the final filter. It is lack of funding that kills the majority.

It kills products that might otherwise have had a significant, albeit non-blockbuster, potential. But, what choice do these researchers have? Very little, it would seem, if you have a product for the mass-market. Of course, this assumes that all products must have blockbusting appeal to be of interest to Big Pharma but this, sadly, is probably true. Even though the average global pharmaceutical achieves sales of $350 million per year, Big Pharma seeks $1 billion plus. Big Pharma, for instance, has yet to devise a way of dealing with the emerging concept of personalized medicine.

It does not fit their mindset. Better diagnostics, stem cell therapy and vaccines, which activate individual immune responses, might fit this category. At best, the industry passively follows such developments with caution to ensure that they are not left behind rather than try to drive it.

Indeed, individualized medicine would break the blockbuster paradigm completely, leaving only the processing of autologous and allogenic stem cell cultures (extraction, expansion, differentiation and storage) as fitting the one-size-fits-all paradigm of the industry. Since Big Pharma now subcontracts the majority of its manufacturing activity, this is no longer a core competence. Specialist CMOs are far better at fulfilling this need.

The emergence of theranostics
A few companies have invested in diagnostics and successful products have been launched on the basis of emerging theranostic technology (i.e. diagnosis followed by a therapy). Herceptin™ is an example. From a payer’s perspective this makes sense. Many reports claim that drugs do not work for all patients and many are administered sub-therapeutically. Such wastage is hardly the concern of drug manufacturers who merely maximixe patient penetration until their patent expires. There are no money-back guarantees! Comparative data on treatments is often dubious just because of sample numbers. At the same time, cost-effective arguments abound from the industry using data that is intellectually flawed.

We seem to forget that humans are mortal – we have to die of something and extending life for the sake of it has to be questioned. The medical profession and drug treatment payers have always had to grapple with this issue and the search for treatments for chronic diseases, rather than cures, predominates in Big Pharma psyche. It has been argued that 10 year iatrogenic deaths rates in the USA amount to 7.8 million people and costs around $282 billion annually2. This results in the loss of more American lives than in all the wars in which it have ever taken part. Medical and nursing professions, however, can only work with the tools that they have been given. The proliferation of off-license use of drugs is testament to the fact that, although significant advances have been achieved, we are still far from a point of meeting the often-quoted ‘unfulfilled medical need’.

This phrase is rarely omitted from the business plans of emerging biotechs. We must balance, therefore, the element of patient demand against the industry’s capability of supplying.

New life style treatments
Patients appear to have an unrelenting demand for new treatments, not only for (potentially) life-threatening conditions but also for a growing plethora of life-style conditions – erectile dysfunction, mood elevators, sports performance enhancers and hair tonics. Drug payers are, understandably, anxious not to pay for these cosmetic products but how do clinicians separate physical and mental causes that might be at the root of this demand. Is this really a medical need? It is also perverse that we spend so much on the rehabilitation of individuals who have become hooked on self-abuse substances – alcohol and tobacco, for instance. Is it far too easy for individuals to pass responsibility for their own shortcomings to society? Should society pay for it? Government has tough choices. The solution to narcotics abuse is tackled in Canada mainly by policing and prosecution rather than by education and treatment. Is life so bad that people want to escape its realities through substance abuse? On the one hand we appear to want to live longer; on the other we indulge in life-shortening activities. Notice that consumer-orientated brand marketing driving the sale of erectile dysfunction drugs has resulted in a level of ‘me-too’ molecular roulette that the industry stated it was trying to avoid by its consolidation efforts! This activity was not cost-driven!

As the search for new treatments shifts from drug companies, the process requires other types of investors, mainly starting with government. It would be fair to question whether government gets adequate return on its investment. Federal and provincial coffers are the first places that most researchers look to fund their research. By pushing this highly risky investment to government the core industry should have become significantly more profitable since they have removed the greatest element of product failure. Many government agencies have become very skilled at recognizing winners amongst their massive number of requests. They, however, are not experts in every facet of healthcare technology.

Research is a passion, not just a discipline. That’s why Big Pharma has finally woken up to the fact that you cannot dial-up a blockbuster just by throwing money at a problem. The next question may be emotive to readers of this article but does government have enough say in how their money is spent? Do they get their just rewards from their investment? Should they share in the eventual transfer of the technology according to the level of their investment? Do they add sufficient value to the equation to justify a share in such success? Indeed, the same question can be asked of the venture capital community. Many researchers perceive that these parties add additional tiers of administration and reportage but interfere with their creativity and flair, but it is not their money at risk!

The technology transfer dilemma
The nearest we get to understanding the worthiness of new technologies might actually be the universities themselves. The offices of technology transfer are key agents in value transmission. University hospitals are similarly essential as testing grounds for new technologies but, interestingly, there is strong competition for Key Opinion Leader engagement. Big Pharma excels in tying up KOLs in clinical work that fits their existing paradigms rather than serving research that might challenge the status quo. Money talks! Since government is both funding agent for research and payer for healthcare services, there appears to be a good argument for agencies working together to seek alternative solutions that might show benefit in terms of outcome, cost and overall financial return. Return on investment, naturally, is linked to levels of risk. In the early stages it is actually government that is least risk-averse. That is we tax-payers! Do we get a satisfactory return on such investment? We can certainly expect greater longevity and an arguably better quality of life (when we are not abusing it). How much of this, however, is a direct result of improved sanitation, water and food quality, environmental controls, relative absence of war and implementing health and safety procedures at work? Interestingly, in over 35 years of technology transfer, most inventions are still not patented and do not generate an income. By industry standards only one in 200 is commercially successful3.

At the end of the day who is really making money?
In summary, we would ask “how many successful researchers achieve the same level of return for their efforts as drug industry executives?”. Are these managers merely investment portfolio managers? How much real value is lost by hedging and risk spreading across product portfolios rather than singularly pursuing the best interests of viable technologies? Should individual investors be allowed to choose the level of risk and return that is right for them, or are they happy with that such decisions are denied them by the drug industry? There has been a general movement away from ‘diverse multinational’ companies towards focusing upon primary competences.

Is there an argument, therefore, for the pharmaceutical industry to de-merge into smaller companies to leverage specific technologies, healthcare providers, diseases or patient types? Could we end up with, say, a few hundred more closely targeted companies that seek to satisfy the needs of their customers rather than their own longevity? Is this too much to ask? Probably! After all, vested self-interest has always been a strong business driver and fits the short-termism of financial markets. It could be postulated that Big Biotech will replace Big Pharma but their ownership and paradigms are so intertwined that it is currently difficult to separate them.

Paradoxically, the protection of the status quo brings sub-optimal results for investors, patients, payers and providers.

It is only the power of the investors (individual, institutional, pension funds) that can change this paradigm. Investing in focused biotechnologies would appear to be an answer. If investments do not give the returns, change WILL eventually happen. If the industry sticks to its existing paradigms then these two “potential” cynics will not be too surprised at the outcome!

References
1.     http://en.wikipedia.org/wiki/Listof_pharmaceuticalcompanies
2.     http://www.ourcivilisation.com/
medicine/usamed/deaths.htm
3.     The governance of university : a critical review of the literature. Aldo Geuna, Allessandro Muscio. (ed). Springer Science+Business Media B.V. 2009,
Minerva, Vol. 47, pp 93-114.

Pierre Bourassa, B.Sc. MBA is a former entrepreneur who has worked more than 10 years with the NRC-IRAP program. He is currently under secondment to the NSERC, managing the Québec Montreal office. You can reach him at pierre.bourassa@nserc-crsng.gc.ca

John Lawson, DBA, MBA, BPharm is a business consultant with Tri:M-V Inc., a member of the BioStrategis consortium. He often assists innovative companies during their early stages of development. He can be contacted on john@biostrategis.com