Healthy Skepticism Library item: 10751

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Publication type: news

Beyond the blockbuster
The Economist 2007 Jun 28
http://www.economist.com/business/displaystory.cfm?story_id=9409230

Notes:

Chart of PricewaterhouseCoopers data, showing number of US drug approvals and total R&D expenditure by PhRMA companies 1995-2006, not reproduced here. For access follow link to Economist.com site.

Full text:

Drugs firms are rethinking their business model

LIPITOR is a drugs company’s dream. The cholesterol pill made by Pfizer, an American pharmaceuticals giant, is the world’s best-selling drug. Last year it earned over $13 billion in revenues. Other hugely successful drugs include GlaxoSmithKline’s Advair, an asthma remedy, and Plavix, a blood thinner, which is sold by Bristol-Myers Squibb and Sanofi-Aventis. Both enjoy billions of dollars in annual sales. Despite such rewards, however, pharmaceutical companies are reconsidering their pursuit of blockbuster drugs, as new technology permits the creation of niche remedies that target rare ailments or sub-populations of people suffering from common diseases.

That explains the $3 billion hostile takeover bid announced this week by Roche, a Swiss pharmaceutical firm, for Ventana Medical Systems, an American diagnostics firm. This year, Roche has gobbled up several diagnostics and genetic-testing firms making technologies that enhance the value of its targeted cancer therapies. The firm recently completed a $155m takeover of 454 Life Sciences, which makes gene-sequencing technology and last week spent some $273m on NimbleGen, which makes technologies used in identifying the genetic causes of disease.

Roche is being drawn away from conventional one-size-fits-all drugs partly by the allure of the lucrative new markets being created by the development of “personalised medicine”. But drugs giants are also victims of their own success. Blockbusters like Lipitor are already so effective, argues Tom Nagle of Monitor, a management consultancy, that it is difficult to come up with alternatives that are good enough to command a higher price.

Worse, many blockbusters are going off patent soon and pharmaceutical giants are finding it increasingly difficult to come up with new drugs to replace them-despite throwing pots of money at the problem (see chart). Makers of generic drugs are also growing more assertive in attacking patents. As a result of all this, reckons IMS, an industry consultancy, the industry saw a record $18 billion in branded sales collapse in 2006.

There are signs that long-term investors are growing concerned. A coalition of institutional investors representing over $1.1 trillion in assets, issued a report this month demanding a “rethink of core business assumptions”. Martin Eijgenhuijsen of ABP, a Dutch pension fund that is part of the coalition, says, “We have serious doubts that the current business model can deliver targeted drugs. This requires radical change.”

So is the industry ready to follow Roche’s lead toward specialty products, targeted therapies and the like? The answer seems to be yes. Ray Hill of IMS calculates that although the vast mainstream market for chronic diseases like high blood pressure or diabetes is still important, specialty drugs accounted for nearly two thirds of total revenue growth last year, up from just a third in 2000. And only a quarter of drugs launched last year tackled chronic diseases, suggesting the pipeline is shifting toward targeted therapies.

For that trend, thank both technology and regulation. Anthony Farino of the consultancy arm of PricewaterhouseCoopers argues that such technologies as high-throughput sequencing, genomics and personal phenotyping, which were not available five years ago, are now transforming how drugs are discovered and tested. Ron Krall, GSK’s chief medical officer, thinks the trick is identifying which patients will benefit most from new treatments-or, equally usefully, which ones will have adverse reactions. To determine that, his firm has just opened a new facility in London run jointly with Imperial College and Hammersmith Hospital, where experimental drugs are tested. The “micro-doses” they administer to patients are analysed in real time by molecular scanners.

Regulators could play a decisive role in the large drugs companies’ shifting strategies. The risk-averse stance they have taken since safety problems led Merck to recall its painkiller, Vioxx, may help propel the industry more rapidly away from blockbusters. Viren Mehta, an industry expert, speculates that although new drugs will always carry unknown risks, the regulatory burden might prove lighter for those aimed at specific, acute conditions (as opposed to ongoing maladies like diabetes). After all, he says, “Fewer people are at risk for a shorter time.”

Another regulatory boost may come from cost-benefit analysis that considers the long-term benefits, and not just the high price tags, of innovative new drugs. Britain’s National Institute for Health and Clinical Excellence (NICE) has approved Herceptin, a targeted cancer drug, despite an annual cost per patient of nearly $50,000 because, in the words of Sir Michael Rawlins, NICE’s chairman, “it provides long-term value”. NICE has also agreed to buy a cancer treatment made by Johnson & Johnson that has little effect on a third of patients, on the condition that it pay only when the drug works. And with an expensive Alzheimer’s drug, the agency ruled that it would not pay for patients with the mildest form of dementia to take it-a ruling that was challenged in a London court this week.

Such lawsuits are a sign that the transition to a new way of doing business carries risks. But as Graham Higson, head of regulatory affairs at AstraZeneca, a British drugs firm, notes: “There’s no such thing as no risk. The industry simply cannot continue developing drugs exactly the same way it has for 40 years.”