The year 2003-2005 have been extremely difficult for innovator pharmaceutical companies as they have been besieged by a host of problems including fall in innovation levels, threat from generics and drug recalls. The innovator pharmaceutical companies that were once the outstanding performers on the stock markets have seen their stock prices plummet in the last three years. While the net sales of global pharmaceutical companies have increased by over 38 percent during the period 2003-2005, the industry was just able to give returns of around 4 percent during the same period. This disparity mirrors the current outlook that the various stakeholders have about the future potential of pharmaceutical companies to sustain such high historical sales growth through the most challenging times the pharmaceutical industry has ever witnessed.
While R&D expenditure has been increasing at a steady rate, the direct measure of the productivity of R&D, for example, the new molecular entities (NMEs) submitted to the FDA has shown a gradual decline. The number of new molecular entities has dropped from a high of 50 in 1995 to a low of 33 in 2004. The recent high profile drug recalls of Vioxx and impending patent expiry of drugs, which account for $72 billion in present day sales, has put the entire pharmaceutical industry into a challenging situation. The spate of M&A activities followed by the pharmaceutical companies to strengthen the weakening pipeline has failed to deliver appropriate returns and has been successful only in creating 90 percent fewer pharmaceutical companies than there were during the 1980's. Scales of efficiencies seem to have not worked in the case of R&D efforts.
While the R&D expenditure has been able to maintain its pace with the rise in drug sales across the world, it has seemingly failed to keep up the innovation levels. There is now a pressing need amongst the pharmaceutical companies to strengthen their pipelines in order to sustain the historic growth rates of sales revenues in the next five years.
In addition to a productivity crisis, the drug discovery companies are also battling the continued onslaught of generic drugs. Generic drugs, which have been witnessing strong growth rates, are now contributing to around 48 percent of total drug sales in the world's largest pharmaceutical market, the United States. Pharmaceutical companies have reacted to the generics challenge by spending money on protecting blockbuster revenues by reformulating or by finding newer applications. Though this money would be less than the money required in discovering a new drug, this clearly is not sustainable in the long run. All these issues have made drug discovery companies look into their efficiencies and productivity, which were neglected due to the continuous years of high sales growth.
This challenging period, which is still continuing has also seen the completion of the human genome project (HGP), which acted as point of inflexion for the entire drug discovery industry. It brought around a significant change in the beliefs of the life science community regarding disease and patient homogeneities. The life science community has slowly but surely started using the power of computational tools to increase their efficiencies and productivity. Though a lot still needs to be achieved, the HGP has been successful in changing the entire paradigm of drug discovery. Significant advances are being made in genomics, proteomics and other allied omics areas. These advances are making large pharmaceutical companies rethink their R&D operations.
Solutions
The HGP has seen the evolution of a whole new breed of biotech companies that were able to amass large amounts of investment from venture capitalists. However, the recent past has seen a lot of biotech companies going through the classic 'boom to bust' kind of story. Many of the companies ceased to operate and now the remaining ones are slowly coming out of the slump and are in need of investments. This has created an ideal situation for pharmaceutical companies that have realized the increased need of investments in R&D and the size of R&D budgets. The large pharmaceutical companies have money and have regulatory, marketing and manufacturing expertise, which the biotech companies often lack; however, the biotech companies have fresh innovative ideas that the pharmaceutical companies are in need of. However, this does not necessarily lead to more number of drugs in the market.
Having unsuccessfully implemented M&A strategies to shore up their falling productivity levels, pharmaceutical companies are looking at strategic alliances and licensing deals to help them tide over the weakening pipelines and achieve sustainable revenue growth.
One example of a strategic alliance, which set a trend amongst the pharmaceutical companies, was the deal between Roche and Genentech. The deal, which was executed in the 1990, had Roche acquiring 60 percent stake in Genentech for $409 million. The deal entails access to Genentech's data after phase II clinical trials with an option for Roche to license that particular product. If the product is licensed, Roche is liable to share 50 percent of the total R&D costs for that product. This innovative deal ensured Roche access to the innovative capabilities of a small biotech company without having to share much of the risks involved, while Genentech remained independent. Large pharmaceutical companies started to focus on licensing deals by having separate business development teams to scan the marketplace and enter into alliance deals with other companies.
The contribution from licensed products is expected to increase from 20 to 40 percent. There is now a clear trend towards licensing and alliance deals with pharmaceutical companies like Merck, which was once regarded as the best in internal R&D efforts amongst pharmaceutical companies. The company has now transformed itself and is today one of the prolific deal makers in the market.
However, the market is witnessing a change in the stage at which deals are struck. While licensing of the late stage compounds was the most attractive for the pharmaceutical companies due to the low risk quotient, the paucity of such kind of compounds has meant companies now are looking at early stage compounds with a greater focus. The heightened late stage compound licensing also meant the cost of such kind of deals has become very high for it to be continued as a successful strategy. Companies are now focusing their efforts on licensing the early stage compounds where the costs are lower but with a higher risk quotient.
Give below is a list of key alliances in drug discovery in 2005 by some of the global pharmaceutical majors.
Key alliances in drug discovery:
1) In November 2005, Pfizer, Inc gained development and commercialization rights to Incyte Corporation's portfolio of CCR2 antagonist compounds (area of co-operation: a wide range of indications including rheumatoid arthritis, diabetes but not multiple sclerosis and other indications). Under this deal, Incyte retains certain compounds for its own internal development. Pfizer will also provide research funding to Incyte to support the continued expansion of the CCR2 compound portfolio.
2) In December 2005, GlaxoSmithKline entered into an alliance with Vertex Pharmaceuticals for its compound VX-409 (area of co-operation: pain management). The alliance offers an upfront payment of around $20 million and potential of $385 million in milestone payments based on the development of VX-409 and backup compounds in major pharmaceutical markets across a range of indications. GSK will also pay Vertex royalties on its annual net sales.
3) In October 2005, Johnson & Johnson (J&J) partnered with Bayer Healthcare for the compound BAY-59739 (area of co-operation: antithrombosis). As per the agreement the companies will share development costs. J&J will pay around 30 percent as royalties based on certain sales threshold. J&J will have rights to promote the product in the United States, while Bayer will have marketing rights outside the United States.
4) In October 2005, Merck & Co entered into an agreement with Agensys for the compound AGS-PSCA (area of co-operation: oncology). The agreement grants Merck worldwide rights to AGS-PSCA and an exclusive license to PSCA, a proprietary Agensys target, as well as rights to other therapeutic and diagnostic products developed under the alliance.
5) In December 2005, AstraZeneca entered into an agreement with Protherics for its compound CytoFab (area of co-operation: anti sepsis). As per the agreement AstraZeneca will undertake all clinical development work for CytoFab and Protherics will be primarily responsible for bulk drug manufacturing, including the supply of clinical trial material
6) In December 2005, Novartis AG partnered with Astex Therapeutics on AT9311, AT7519 (area of co-operation: oncology). Astex will maintain responsibility for completing the preclinical development and IND/CTA filing for AT9311 to the US and UK authorities as well as phase I clinical study with the agent. Novartis will be responsible for additional clinical development and commercialization of AT9311. Astex also is responsible for the ongoing clinical development of AT7519 until the completion of phase II studies when Novartis can assume responsibility by exercising its licensing option.
(This is an extract from - Key Alliances and Partnerships in the World Drug Discovery Industry, Frost & Sullivan Research. For further information please contact Shwetha Thomas: )