How can Canada survive in a globally-driven pharmaceutical market?

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By Pierre Bourassa and Dr. John Lawson

Introduction
Canada is a big, big country in size. Its neighbour, the USA, is 5% smaller and yet holds 10 times the population. Eighty percent of Canadians live within 200 km of the USA border, which perhaps says a lot about the attitude of Canadian economic dependence that exists. US GDP per capita in 2005 was $43,555 compared to Canada's $34,273, which is indicative of the comparative value of our loonie.

The USA is the most voracious consumer of not only fossil fuels in the world, but also healthcare products. One would think, therefore, that this is a huge prospective export market for Canadian biotechnology, pharmaceuticals and medical devices. This is especially because the two countries have well-aligned regulatory systems and Canada has more than its fair share of healthcare patents. Despite this, Canada has a negative balance of payments from these products even though it boasts plenty of R&D activity and investment in this area.1

In a series of two articles, the authors intend to unearth the problems and opportunities that exist within the Canadian system. This first part will look at the relationship between Canadian R&D and large multinationals, often called Big Pharma. What does Canada have to attract Big Pharma and how can this relationship be enhanced?

The second part will appear in next month's issue and will examine the proliferation of biotechnology companies, many created as a result of government-funded research emanating from the universities. Is Canada achieving the best value for its investment or is it being sold short because of infrastructural deficiencies, misdirected funding or just plain poor negotiation? If so, what can be done about it?

Biotechnology Focus is not able to print both the entire first part and second part of the story due to space limitations but instead invites its readers to visit the website: www.bioscienceworld.ca for complete versions of both parts.

The Global Context
Less than 20 Big Pharma companies now control over 70% of the revenues generated by the pharmaceutical industry. Generic products account for around 60% of the volume. The ability to achieve premium prices that warp these figures so significantly is a testament to the perceived value of the contributions of this sector to healthcare.

It could be argued that this is helped by the fact that almost 50% of all global cash sales are generated in the USA, a non-Government-price-regulated market. For how long this will continue is open to speculation. Over the last 10 years, the freedom of USA market access has been a driver of Big Pharma policy towards establishing its primary research in the USA. The switch, mainly from European centres, has contributed to the decline in the number of NCEs coming into the R&D pipeline. The added investment in USA research has nowhere near made up for the lack of European innovation. Sadly, for the USA economy, after just a few years of initiating this policy, Big Pharma has also reduced its R&D commitment in the USA too, favouring in-licensing instead of in-house research. Merck alone, for instance, shed some 4,200 scientists’ jobs in 2005/2006. Big Pharma loyalty to this deal has been short-lived.

Although the R&D route to market for a new pharmaceutical or biotechnology molecule has changed significantly over the last 20-30 years, the final marketing solution for any mass-market molecule or potential blockbuster is the same. Big Pharma dominates the market and is arguably the only way to get a mass market product commercialized globally. Big Pharma has access to all the key opinion-leaders (KOLs), coverage of all high-prescribing general practitioners and global negotiating expertise to gain market access to Government and private insurance approved drug plans and prescribing lists.

Big Pharma has changed its role from being a full vertically integrated drug innovator that spends consistently at all points along the 10+ years drug development cycle, to selective players at certain hot spots in the cycle. These are generally at Phase III and patent-protected sales and marketing. This is the point when clinical trial expenses are high, few VCs have the capital or expertise to fund the research, the risks of failure to Big Pharma are more quantifiable and they can start to mobilize its marketing strategies with KOLs to prepare its route to market.

Market Access
pharmacoeconomic arguments
Big Pharma has tried many ways to secure its profitability in light of increasing attempts by governments and other payers to reduce prices or patient access to control its budgets. The launch of a new drug in a market with a hitherto unmet clinical need can be very costly to the drug system. The drug industry’s trade associations have been quick to point out that the availability of these drugs has resulted in lower costs of hospitalization and reduced morbidity. In fact, its argument suggests that there should be a redistribution of funds to facilitate superior pharmaco-economic benefit.

The consequence of reduced morbidity is an increase in the numbers of consumers of drugs for chronic conditions and so 'real' savings may never materialize. Demand for pharmaceuticals appears to be insatiable in an environment of ageing populations and growing prosperity. Forecasters have suggested that this bubble will eventually burst because the wealth-generating younger population will be unable, even unwilling, to contribute to the welfare of the older, wealth-consuming group. The era of early retirement that was experienced in the 80s and 90s, when the post WW2 baby-boomers were at their wealth-generating peak, has now been replaced by the prospect of extended retirement age to retain these boomers in work.

Has Canada already missed the boat?
Big Pharma operates as a truly global business. It is interesting to note that Canada has attracted not a single multinational to establish its head office in the country but, conversely, acquisitions usually result in the movement of intellectual property and innovation southward. The major cash generators are still the USA, Europe and Japan although in recent years there has been a massive growth in South America, India and China. Attempts by these countries to gain acceptance in the international community by respecting patent law have been viewed with some scepticism. Piracy and counterfeiting, in these areas, is still rife.

Big Pharma has accepted, in response, that the only way to win in these markets is to enter them as a full partner hoping that true respect for IP will be gained in time.

The Canadian Context
Canada, federally, has enjoyed a chequered history of interaction with Big Pharma and differences in provincial politics have contributed to a general lack of security that pharmaceutical companies have felt in investing in the country. Companies have long memories, for instance, of the 1970’s mass exodus of companies from Quebec to the USA.

Bills C-22 and C-91:
Canada comes into line with the world
Compulsory licensing of pharmaceuticals was introduced in Canada in 1923 and expanded in 1969 as a measure designed to control increasing drug costs. In 1987 the C-22 amendments to the Patent Act limited compulsory licensing and created the Patented Medicine Prices Review Board (PMPRB). This was introduced to ensure that prices of patented medicines were not excessive. In 1993, the C-91 amendments eliminated compulsory licensing, thereby restoring full patent protection of pharmaceuticals in Canada.

The C-91 amendments also enhanced the enforcement powers of the PMPRB2. In October 2006, new amendments to the Food and Drug Regulations ensured that new, innovative drugs should receive an internationally competitive, guaranteed minimum period of market exclusivity of eight years. This was increased from the former five years and recognized the increased development time to achieve marketing approval.

These regulations also provided a further six months of market exclusivity to innovative drugs that are the subject of studies, in order to encourage companies to provide more information about the effects these products have on children.

The advent of biologics:
a production opportunity for Canada?
Around 25% of Big Pharma pipelines are now populated with biological compounds. This is despite the fact that it is more difficult to achieve the same level of intellectual property protection as with traditional small molecules and manufacturing is more complex and expensive. This second factor is often a new source of IP generation and this feeds Big Pharma’s fixation with patent protection. The higher manufacturing price also has some consequences for the final product price. Being significantly higher priced than small molecules, especially generics, biologics have to be able to demonstrate even bigger cost benefits in order to gain positive listings on drug formularies.

Clinical Research Organizations (CROs)
– a competitive strength for Canada
Canada boasts a larger number of CROs per head of population than other G7 Nations. Having a similar legislative and regulatory framework to America’s FDA, Canada’s CROs offer a more cost-effective and lower risk alternative to US-based clinical trials. These CROs cover a wide range of services from pre-clinical to Phase IV with some specialist companies emerging from more recent tightening of regulatory controls. Access to patients from a truly all-inclusive healthcare system is preferable to the direct payment-for-service fragmented structure that exists south of the border. Patient promiscuity makes the viewing of patients holistically as virtually impossible. Patient screening, in the USA system, has more innate difficulties.

Small Medium Enterprises (SMEs)
– another competitive strength for Canada
Canada’s biggest advantage appears to be the presence of innovative SMEs emanating from the Universities and the prospect of the CRO infrastructure that supports its development. Having funding to get a molecule into Phase III studies has always been a big issue in Canada. Without government support SMEs have to look towards VCs or Big Pharma for funding. Canadian VCs run shy of investing in Phase III clinical studies even though there is a considerable lowering of risk. With the cost of a typical multi-centre clinical trial running at around $70 million for a block buster indication, few can aspire to securing such funding. Big Pharma has found a niche, therefore, as capital provider and ultimate product marketer. Many drug and CRO companies actually operate venture funds. The negotiating power in the hands of the SME, at this stage in the process, is still limited since they do not have the funding to continue, investors are hungry to cash-out and the value diminishes daily with every delay as the patent protection runs out.

Is there a solution?     
Clearly, Canada has had difficulties not only in attracting Big Pharma but also in keeping them. There have been tax concessions, Government grants, realignment to international patent norms and a history of innovation, low development costs and competitive manufacturing prices. None has been sufficient to secure its commitment. Levels of trust between Big Pharma and Canada appear to have gone through cycles just as they have with almost every other westernized country, even the USA. Being an attractive place for investment is a matter of creating the right political environment. Job creation, skills availability, social infrastructure, unionization and taxation are most often cited but instability (or the appearance thereof) has worked against Canada in the past.

Before suggesting 'how' Canada Inc. might get more benefit from Big Pharma, it should be considered what it is that the country wishes to gain from them. As mentioned earlier, the prospect of gaining a positive balance of payments from international trade is probably a most attractive end-point.

To this nirvana might be added 'employment', 'investment', 'education and training' and 'corporate tax revenue'. Since all of these activities also generate 'personal tax revenue' through earnings and subsequent spending, any corporate tax concession given to Big Pharma would not deny Canada Inc.'s gains. Having a readily available infrastructure for bringing Canadian scientists’ innovations to market is also a bonus. These are business decisions and, in considering how Canada Inc. should deal with Big Pharma, it should be remembered that ‘business is business’. Companies can only be expected to behave as they always do – for the benefit of its shareholders, its management and its employees.

Stability
The first requirement of Big Pharma is stability. When you have a product planning cycle of 20 years, you cannot accept any suggestion where the rules of engagement can change every five or 10 years. During the patent life of a drug, 10 plus years is spent in R&D and there is only eight to 10 years to get a satisfactory return on the investment. Maverick or radically changing governments will not attract Big Pharma. Can we suggest, for instance, that this is why Switzerland has performed so well in this sector?

The industry is like a juggernaut or oil tanker. Its ability to change direction in the short term is limited. For this reason, Canada Inc. may have already missed the boat or, any investment made now, will not be recognized for 10-15 years. With only 20 Big Pharma companies controlling 70% of total global drug market cash, the decisions have already been made. It would take an extremely negative government action to make it change now. Having said that, we have seen business cycles of merger and de-merger in other industries – why not in this one? Since there has been a radical change in the way it feeds its drug development pipelines over the last few years, the stated reason for merger (i.e. consolidation of research effort and costs) is no longer relevant. The only drivers of the residual 'big is beautiful' concept is the industry's access to capital, its portfolio approach to handling risk and its global mass-marketing muscle.

In conclusion, therefore, apart from nurturing its intellectual property generators Canada Inc. should concentrate its efforts on a few key issues to facilitate better negotiation between Canadian companies and the Big Pharma MNEs.

Pierre Bourassa is a former entrepreneur who created and owned close to 10 companies. After a career of more than 15 years in pharmaceutical and five years in corporate financing, Bourassa joined the National Research Council - Industrial Research Assistance Program (NRC-IRAP) as an industrial technology advisor (ITA) specializing in the Biopharma sector. A biochemist by trade, he has an MBA in bio-industries management. Contact: pierre.bourassa@cnrc-nrc.gc.ca

Dr John Lawson has spent more than 30 years working in the pharmaceutical and biotechnology business, two thirds of this at local and global senior management team level. A UK-registered pharmacist, he has an MBA and doctorate in business administration majoring in marketing. He now provides strategic marketing and interim management support, mainly to emerging technology organizations. Contact: jlawson@sympatico.ca


References
Canadian Pharma.....Falling Behind? Biotechnology focus April 2002, Vol.5, No. 3 by Bob Reichert & Melanie Windover

2 Palmer D’Angelo Consulting Inc. Background Study on Drug Costs and Benefits Vol. 1: Analysis of Costs and Benefits Ottawa February 1997