CHA Brief--Key Forces Driving the Pharmaceutical Industry Into 2004 (1-2004)

8/6/2019 CHA Brief--Key Forces Driving the Pharmaceutical Industry Into 2004 (1-2004)

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2/9004 Cambridge Healthtech Advisors. Reproduction Prohibited.

RIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004

U.

S.

$

BILLIONS

(INFLATION-ADJUSTED

TO

2003

DOLLARS)

1980

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

2002

Figure 1 Increasing Pharmaceutical Investment in R&D, in 2003 U.S. dollars

SOURCES: CAMBRIDGE HEALTHTECH ADVISORS, PUBLICLY AVAILABLE INDUSTRY SOURCES

YEAR

25

35

30

0

15

5

20

10

25

20

15

10

5

0

RATIO

OF

REVENUE

TO

R&D

COST

RATIO

OF

APPROVED

NCEs

TO

R&D

COS

T

1980 8

182

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

2002

R AT I O O F R E VE N UE T O R & D C OS T

R AT I O O F A P PR O VE D N CE s T O R &D C OS T

Notes

(1) Measure of approvals is based on a three-year trailing average;

(2) R&D costs have been offset five years earlier than revenues and approvals;

(3) All revenue and cost figures have been inflation-adjusted to 2003 dollars.

Figure 2 Declining Pharmaceutical R&D Productivity, 19802002

SOURCES: PhRMA and CAMBRIDGE HEALTHTECH ADVISORS

YEAR

5

4

3

2

1

0


3/9

BRIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO

2004 Cambridge Healthtech Advisors. Reproduction Prohi

500

400

300

200

100

0

#

OF

NCEs

NCEs INTRODUCED/FORECAST FROM INTERNAL R&D

NCEs NEEDED TO SUSTAIN 10% ANNUAL REVENUE GROWTH

Figure 3 The Pharmaceutical NCE Gap

SOURCES: CAMBRIDGE HEALTHTECH ADVISORS, INDUSTRY SOURCES

YEAR

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

NCE GAP

COST

(U.

S.

$

MILLIONS)

1985

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03E

04E

2005E

Figure 4 Increasing Cost of Developing a New Chemical Entity, in 2003 U.S. dollars

SOURCES: CAMBRIDGE HEALTHTECH ADVISORS, TUFTS CSDD

YEAR

900

1,100

1,000

400

700

500

800

600

1,200

7.7% CAGR5.5% CAGR


4/92004 Cambridge Healthtech Advisors. Reproduction Prohibited.

BRIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004

Growing NCE gap increasingly undermines industry valuation. With the rate of NCE approvals

essentially flat for the past several years, and no compelling evidence for near-term improvement, the indus-

trys NCE gap between what it needs to sustain its historical growth rates and what it can actually produce

will continue to expand. (See Figure 3.) One consequence is that many large pharma are increasingly

inclined to pursue the blockbuster model,with a small number of highly profitable NCEs rather than a

larger number of compounds with more modest potential. The corollary, of course, is that the loss of a late-

stage compound in a portfolio focused primarily on blockbusters is far more damaging than would be a

similar loss to a more diversified development portfolio.

The cost of drug development is accelerating. The estimate by Tufts that it costs in excess of $800

million to bring a new drug to marketand we estimate that today it exceeds $1 billion, in 2003 dollars

is widely cited throughout the industry. Perhaps more important, but less frequently noted, is that the rate

of increase in the cost of bringing a drug to market has accelerated substantially in recent years. During the

period 1985 through 1995, the cumulative annual growth rate (CAGR) of this cost was 5.5%;during the

period from 1996 through 2005 (estimated),however, the CAGR will have grown to 7.7%a 40% acceler-

ation in the increase of cost. (See Figure 4.) A key driver of this cost acceleration is the tremendous invest-

ment made in recent years in innovative R&D technologiesparticularly the various -omics

approachesthat have as yet failed to deliver a satisfactory return on investment.

THE COST AND COMPLEXITY OF CLINICAL TRIALS CONTINUE TO INCREASE

Much of the cost of drug development may be attributed to the cost of capitala factor directly tied to the long time-

lines inherent to the pharmaceutical business, and which can be mitigated only with difficultyand the need for win-

ningdrugs to cover the costs of the failures. Although pharma has long sought to improve their win-loss ratio, the

prospects for near-term improvement are not immediately clear. A key component of drug development costs that will

certainly increase, at least over the next several years, is that of conducting clinical trials. The average total cost for run-

ning a complete clinical trial (Phase I through Phase III) tripled during the 1990s, driven by the need for both a greater

number of patients and increased per-patient expenses. (See Figure 5.) Three key drivers will continue to drive these

costs:

Increasing per-patient costs. Per-patient expenses will likely increase over the next several years,par-

ticularly following the FDAs recent push in the area of pharmacogenomics data gathering in clinical trials.(For more information on this issue,please refer to Cambridge Healthtech AdvisorsNovember 2003 Brief,

The FDA Seizes the Initiative: Implications of the Draft Guidance on Pharmacogenomics Data Submissions.)

The mere collection of such data will,of course, constitute an additional trial expense,but the greatest

increases in cost will be driven by the need to further investigate and understand the implications of addi-

tional hypotheses generated as a result of pharmacogenomic studies.

Growing demand for trial participants. Pharmacogenomics and related approaches promise to allow

for increasingly focused clinical trials involving fewer numbers of more biologically relevant patients, and

avoid the large patient populations currently needed to ensure the statistical significance of trial results. If

so, those costs associated with the absolute number of patients and their recruitment may decrease over

time. It is, however, likely to be several yearsperhaps even a decade or morebefore the body of accu-

mulated pharmacogenomic data will enable the industry to conduct such focused tr ials (and effectivelyrecruit the patients needed for them) on a routine basis. Until then,the demand for trial participants will

continue to increase.

Increasing use of post-marketing commitments extend trial process. There has been a sub-

stantial increase in the role of post-marketing (Phase IV) study commitments in the FDA approval

process. Indeed, the number of such post-marketing commitments (PMCs) in the period 1998 through

2000 was more than 30% greater than for the previous three-year period. The increased incidence of

PMCs adds a cost component to the trial process that,until recently, had been rather rare.


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THE VALUE OF PHARMA MERGERS REMAINS UNCERTAIN

Although the pharma industry has gone through a whirlwind of consolidations over the last few years, it has yet to

demonstrate that such mergers add long-termor even short-termvalue to the enterprise.

Much of the cost-savings benefit is offset by increased uncert ainty. The most immediately

realizable source of value is in the ability to eliminate duplicative functions. However,much, if not all,of

this theoretical benefit is offset by the uncertainty the mergers create among all levels of staff, and the nega-

tive impact the merger process has on efficient decision making for a period of many months.

Strength cannot be achieved by aggregating weak pipelines. In addition,many of these mergers

appear to include an element of the grass is always greener on the other sidecompany A perceives that

company Bs pipeline is at least complementary to its own, and perhaps superior, and company B perceives

the same of company A. Yet, within only a few years of the merger, the total number of new molecular

entities, the number of NCE projects that progress to clinical development, and the total number of clinicalprojects in development all decline precipitously. This suggests that in at least some mergers, the whole is

substantially less than the sum of the partstwo weak pipelines do not add up to a single strong pipeline.

(See Figure 6.) Moving forward, this unfortunate outcome is believed to be more likely to occur among

mergers-of-equals than outright acquisitions,however, and we expect the latter to become the increasingly

favored mode of pharma company aggregation.

2004 Cambridge Healthtech Advisors. Reproduction Proh


9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

COST

PERP

ATIENT

(U.

S.

$)

AND

NUMBER

OF

PATIENTS

TOTAL

COST

(U.

S.

$

MILLIONS)

NUMBER OF PATIENTS PER NDA

CLIN ICAL TR IAL COST PER PATIENT

Figure 5 Increasing Clinical Trial Patient-Related Costs

SOURCES: CAMBRIDGE HEALTHTECH ADVISORS, BOSTON CONSULTING GROUP, FDA LAW JOURNAL

YEAR

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

50

45

40

35

30

25

20

15

10

TOTAL CLINICAL TRIAL PATIENT-RELATED COSTS


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2004 Cambridge Healthtech Advisors. Reproduction Prohibited.


160

140

120

100

80

60

40

RELATIVE

PRODUCTIVITY

(100

=

PRE-MERGER)

AVERAGE NUMBER OF NCE PROJECTS IN DEVELOPMENT

AVERAGE NUMBER OF PROJECTS IN CLINICAL DEVELOPMENT

Figure 6 Impact of Mergers on Pharmaceutical Productivity

SOURCES: CAMBRIDGE HEALTHTECH ADVISORS, CENTRE WATCH

Pre-merger 1 year post-merger 3 years post-merger

AVERAGE NUMBER OF NCE

SUBMISSIONS/YEAR

PATENT EXPIRATIONS AND FAST-FOLLOWERS UNDERMINE PORTFOLIO VALUES

At the end of the day, large pharma companies sustain their activities by selling innovative drugs at premium prices.

Increasingly, however, the industry is finding many of its leading,premium-priced drugs subject to generic competition as

their periods of patent protection expire. In addition, even relatively new drugs with many years of patent protectionremaining are finding their innovation advantage eroded by fast-follower compounds possessing similar capabilities. In

essence, the value of the industrys drug portfolios is being undermined by an effective degradation of intellectual proper-

ty protection at both the beginning and the end of the compounds life cycle.

Drugs worth $70 billion in annual sales will lose patent protection by 2006. The next sev-

eral years will see an unusually large number of compounds, representing an increasingly significant share of

the industrys revenues, go off patentand with few similarly profitable compounds ready to take their

place. By 2006,nearly 100 currently protected marketed drugs, representing about $70 billion in revenues,

will go off patentand both of these numbers will double by 2010. (See Figures 7 and 8.)

Periods of market exclusivity compressed by fast-followers. The leading pharmaceutical compa-

nies have adopted increasingly similar R&D strategies over the last several decades, with the result that they

are often focused on similar therapeutic areas and developing similar classes of compounds. As a conse-quence, it is rare that any successfully developed drug does not have a competitor following close behind.

Indeed, the competitive market advantage enjoyed by first-to-market drugs has been declining steadily for

years, and today it is not unusual for a competitor drug to be only a few months behind the leader. (See

Figure 9.)


7/9


2004 Cambridge Healthtech Advisors. Reproduction Proh

180

160

140

120

100

80

60

40

20

0

CUMULATIVE

LOST

PE

AK

SALES

(U.

S.

$

BILLIO

NS)

CUMULATIVE

NUMBER

OF

MO

LECULES

LOSING

PATENT

PROTEC

TION

CUMULATIVE MOLECULES LOSING PATENT PROTECTION

Figure 7 Cumulative Impact of Patent Expirations, 20032010

SOURCES: CAMBRIDGE HEALTHTECH ADVISORS, IdDB

YEAR

2003 2004 2005 2006 2007 2008 2009 2010

250

200

150

100

50

0

CUMULATIVE LOST PEAK SALES

2003 Neurontin

Flovent

Cipro-floxacin

2004 Procrit

Lovenox

Duragesic

Diflucan

2005 ZocorPravachol

Zithromax

Zoloft

2006 Actos

Ambien

Paxil

Neupogen

2007 Norvasc

Fosamax

Effexor

Risperdal

2008 Serevent

Levaquin

Aciphex

2009 Prevacid

Cellcept

Topamax

2010 Gemzar

Aricept

Singulair

Advair

Figure 8 Leading Drugs Scheduled to Lose Patent Protection, 20032010

SOURCE: CAMBRIDGE HEALTHTECH ADVISORS

Pfizer Neuralgia/epilepsy

GlaxoSmithKline Asthma

Bayer Antibiotic

Johnson & Johnson Anemia

Aventis Antithrombotic

Johnson & Johnson Chronic Pain

Pfizer Antifungal

Merck Cholesterol controlBristol-Myers Squibb Cholesterol control

Pfizer Antibiotic

Pfizer Antidepressant

Lilly Diabetes (II)

Sanofi-Synthelabo Insomnia

GlaxoSmithKline Antidepressant

Amgen Neutropenia

Pfizer Hypertension

Merck Osteoporosis

Wyeth Antidepressant

Johnson & Johnson Antipsychotic


Johnson & Johnson Antibiotic

Johnson & Johnson GERD

TAP Pharmaceuticals GERD

Roche Immunosuppressant

Johnson & Johnson Epilepsy

Lilly Chemotherapy

Pfizer Alzheimers Disease

Merck Asthma


Year Drug Company Application(s)


8/9

With these challenges as the backdrop to their activities in 2004, R&D leaders within major pharmas will be increasingly

trying to help their companies break out of the productivity vise. It seems clear that some fundamental changes must be

made to the R&D process, and that these changes are most likely to arise from new technologies that are optimally

applied. We hope that during the coming year, we can help clients to identify the best new technologies to bring to bear

on these challenges, share among our clients the practices and experiences of their peers in applying these technologies,

and quantify both the investment and the likely results from these new approaches.

004 Cambridge Healthtech Advisors. Reproduction Prohibited.


Inderal(1965)

Tagamet(1977)

Capoten(1980)

Seldane(1985)

Mevacor(1987)

Prozac(1988)

Diflucan(1990)

Recombinate(1992)

Ivirase(1995)

Celebrex(1999)

14

12

10

8

6

4

2

0

ZANTAC

LOPRESSOR

Figure 9 Declining First-to-Market Advantage

SOURCES: CAMBRIDGE HEALTHTECH ADVISORS, PhRMA

Note

(1) First-to-market drug aligned on x-axis, competitor drugs aligned on graph.

VASOTEX

NORVIR

HISMANAL

KOGENATE

PRAVACHOL

VIOXX

SPORANOXZOLOFT

YEARS

OF

EXCLUSIVITY


9/9

CHAC A M B R I D G E H E A L T H T E C H A D V I S O R S

ABOUT CAMBRIDGE HEALTHTECH ADVISORS

Cambridge Healthtech Advisors is the premier

membership organization for leaders in the

pharmaceutical and biotech industries who

need insight into the latest management

techniques, regulatory issues, and technologies

affecting drug discovery and development.

Our advisory services offer primary research,

decision support, consulting, and private

member events to help clients make the most

of their efforts in pharmaceutical research.

This report is part of the Pathways series,

which helps leaders in pharmaceutical research

develop effective strategies.

Analyst Contact

Andrew F. Branca is Vice President and Senior

Analyst at Cambridge Healthtech Advisors.

Clients and research participants may contact

Andrew at their convenience at:

Office: 617-630-1375

Cell: 617-838-1438

Email: [email protected]

Sales Contact

John W. Talalas is Senior Vice President, Sales

and Marketing at Cambridge Healthtech Advisors.

For additional copies of this Brief, clients may

contact John at:

Office: 617-630-1386

Cell: 617-905-2800

Email: [email protected]

This Brief was produced as part of the Pathways

advisory service from Cambridge Healthtech Advi-

sors.

2004 Cambridge Healthtech Advisors

CHA Brief--Key Forces Driving the Pharmaceutical Industry Into 2004 (1-2004)

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