The end of a year provides reason to give pause and reflect on what transpired and what the future may hold. In performing that exercise with the pharmaceutical industry, certain key issues emerge. Overall macroeconomic conditions, the ongoing debate on US healthcare reform, and the underlying fundamentals shaping the industry, namely, growth in emerging markets, increased generic-drug incursion, and increased product development in biologics were key themes behind the major developments in 2012.
Taking a macro view
The pharmaceutical industry, although less subject to macroeconomic cyclicality comparative to other industries, is influenced by overall economic conditions, particularly as they may relate to fiscal policy and healthcare spending and financing trends in the life-sciences sectors. The global economy is expected to make a hesitant and uneven recovery over the coming two years, according to a recent analysis by the Organization for Economic Cooperation and Development (OECD). OCED projects that growth in gross domestic product (GDP) in the United States at 2% in 2013 before rising to 2.8% in 2014. In Japan, GDP is expected to expand by 0.7% in 2013 and 0.8% in 2014. The euro area will remain in recession until early 2013, leading to a mild contraction in GDP of 0.1% next year, before growth picks up to 1.3% in 2014., according to GDP.
As the macroeconomic picture unfolds, 2012 was significant for two events as it relates to US government policy on healthcare. The re-election of President Barack Obama in November 2012 and the US Supreme Court decision in July to uphold the Affordable Care Act ended uncertainty, at least in the short term, about the future of US healthcare reform, an issue still under consideration as US policymakers consider fiscal reform in addressing the so-called fiscal cliff. For pharmaceutical and biotechnology companies, the US Supreme Court decision meant a continuation of FDA’s plan to implement the new biosimilars program under the healthcare law and a continuation of discounts to Medicare patients who reach the Part D doughnut hole, an important issues as it relates to reimbursement and spending for pharmaceuticals.
Drilling down to the pharmaceutical industry
Although final projections are not in, 2012 may be regarded as a year of transition for the global pharmaceutical industry as it is poised to near or surpass the $1-trillion mark, led by growth in emerging markets. Tepid growth is expected for developed markets as the pharmaceutical majors continue to face increased generic-drug incursion.
Following several years of slowing growth, the global market for medicines is expected to rebound from a recent low of 3–4% growth in 2012 to 5–7% growth in 2016, according to a recent analysis by the IMS Institute for Healthcare Informatics. Growth will primarily be from emerging markets as growth in established markets in the United States, Western Europe, and Japan remains weak comparative to historical levels. Overall, annual global spending on medicines will rise from $956 billion in 2011 to $1 trillion by 2013, to nearly $1.2 trillion in 2016, representing a compound annual growth rate (CAGR) of 3–6%. For purposes of the IMS analysis, spending is reported as ex-manufacturer prices and does not reflect off-invoice discounts and rebates and is converted from local currencies to US dollars. Absolute growth in global pharmaceutical spending between 2012–2016 will be between $220 billion and $250 billion, compared with $298 billion in the prior five years.
Additionally, patent expiries, which peaked in 2012, as well as increased cost-containment actions by payers, will constrain branded-medicine spending growth through 2016, at 0–3%. Developed markets are expected to experience their lowest annual growth this year, at less than 1% or $3 billion, and then rebound to $18–20 billion in annual growth in the 2014–2016 period. Spending on medicines in developed nations will increase by a total of $60–70 billion from 2011 to 2016, following an increase of $104 billion between 2006 and 2011, according to IMS
Growth in annual global spending is forecast to more than double by 2016 to as much as $70 billion, up from a $30-billion pace in 2012, driven by volume increases in what IMS terms the “pharmerging” markets and some uptick in spending in developed nations. The “pharmerging” markets are defined by IMS as counties with greater than $1 billion absolute spending growth of more than 2012–2016 and which have gross domestic product per capita of less than $25,000 at purchasing power parity. Using that criteria, China is classified as a Tier-1 country, and Brazil, Russia, and India as Tier-2 countries. Tier 3-countries are Mexico, Turkey, Poland, Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan, and Vietnam. Health systems in pharmerging markets will nearly double their medicine spending in five years, according to IMS. Annual spending on medicines in the pharmerging markets will increase from $194 billion in 2011 to between $345 billion and $375 billion by 2016, or $91 in drug spending per capita, according to IMS. The increase will be driven by rising incomes, continued low cost for drugs, and government-sponsored programs designed to increase access to treatments. Generic drugs and other products, including over-the-counter medicines, diagnostics, and nontherapeutics, will account for approximately 83% of the increase. China’s pharmaceutical market is expected to reach $161 billion by 2016, Brazil’s $47 billion, India’s $29 billion, and Russia’s $27 billion. The Tier-3 pharmerging countries are expected to collectively reach $95 billion in pharmaceutical spending by 2016, according to IMS.
The year 2012 was marked by the absence of major megadeals as the pharmaceutical majors continue to restructure, position in emerging markets, and make bolt-on acquisitions for portfolio enhancement. On the manufacturing front, companies are following a similar pattern by continuing restructuring activities and making investment in biologic-based manufacturing or other targeted manufacturing investment in emerging markets.
Pfizer. For Pfizer, perhaps the most important development thus far in 2012 is the revenue loss as a result of the US patent expiry for its top-selling product, the anticholesterol product, Lipitor (atorvastatin), which lost US patent exclusivity in November 2011. Other key developments for Pfizer were the sale of its nutrition business to Nestlé for $11.85 billion and the formation of new joint venture in China. In September 2012, Pfizer and the Chinese pharmaceutical company Zhejiang Hisun Pharmaceuticals launched Hisun-Pfizer Pharmaceuticals, a joint venture formed between the two companies to develop, manufacture, and commercialize off-patent pharmaceutical products in China and global market.
Sanofi. On the manufacturing front, Sanofi is continuing with its Biolaunch project, which is designed to convert its chemical facilities to biotechnology-based production. It is on track to create a monoclonal antibody production facility at its site in Vitry-sur-Seine, France, and is investing in new biosynthetic processes as its sites in Saint-Aubin-Les Elbeuf and Vertaolaye, France. In May 2009, Sanofi began construction of a new EUR 300 million ($364 million) manufacturing center in Neuville-dur Saône, with the the goal to progressively transition existing chemical production to vaccine production beginning in 2013.In September 2012, Sanofi provided information on the adaptation of its upcoming R&D restructuring activities in France through 2015. The company plans to reorganize research activities over the next three years at its sites in France. The adaptations could result in the reduction of 900 positions in France by 2015. The company also plans to re-evaluate the economic performance of Sanofi Pasteur’s industrial units in accordance with competition in vaccine markets and streamline support functions to respond to the company’s diversification and address needs with regard to efficiency.
In May 2012, Sanofi inaugurated a new assembling and packaging line for producing its prefilled insulin injection pen Lantus SoloStar at its facility in Beijing. The company announced a second phase $90-million project to install a cartridge aseptic product line at the facility. The facility has a designed capacity of 48 million units. Sanofi also began production of the enzyme-replacement therapy Fabrazyme (agalsidase beta) at its new facility in Framingham, Massachusetts, following approval of the facility by FDA and EMA in January 2012. In May 2012, EMA and FDA approved a second operation for fill–finish at Genyzme’s Waterford, Ireland, manufacturing plant, which nearly doubles capacity for fill–finish for Myozyme and Lumizyme (alglucosidase alfa) at the 4000-L scale. These developments follow a 2010 consent decree issued by FDA to Genzyme for manufacturing violations at its Allston, Massachusetts, facility and resulting requirements to transfer fill–finish production out of that facility.
GlaxoSmithKline.In March 2012, GlaxoSmithKline (GSK) announced plans to invest more than £500 million ($798 million) in the United Kingdom across its manufacturing sites to increase production of key active ingredients for its pharmaceutical products and vaccines. The company announced selection of Ulverston in Cumbria as the location for the first new GSK manufacturing facility to be built in the UK in almost 40 years. Investment also will be made at the company’s two manufacturing sites in Scotland at Montrose and Irvine. GSK’s announcement followed plans by the UK government to implement a “patent box” to encourage investment in R&D and related manufacturing in the UK by introducing a lower rate of corporation tax on profits generated from UK-owned intellectual property. On the acquisition front, GSK acquired the biopharmaceutical company Human Genome Sciences and increased its stake in the biopharmaceutical company Theravance
Novartis .In October 2012, Novartis announced the construction of a new biotechnology facility in Singapore with an investment of more than $500 million. The new facility will focus on drug-substance manufacturing based on cell-culture technology and will be colocated with the pharmaceutical production site in Tuas, Singapore. Novartis used 2012 to improve quality-control issues at its consumer healthcare operations in Lincoln, Nebraska, and at three facilities of Sandoz. In December 2011, Novartis suspended production at is Lincoln manufacturing site in conjunction with a voluntary recall of all lots of select, bottle-packaged configurations of Excedrin, NoDoz, Bufferin, and Gas-X Prevention. In December 2011, FDA cited quality-control issues at three Sandoz manufacturing facilities in Broomfield, Colorado; Wilson, North Carolina; and Boucherville, Canada. Also, in a move to bolster the generic-drug business of Sandoz, Novartis acquired the specialty dermatology generic-drug company Fougera Pharmaceuticals for $1.5 billion.
In November 2012, Novartis received FDA approval for a seasonal influenza vaccine produced in cell culture. The vaccine, Flucelvax, is approved for use in individuals 18 years of age or older and is the first seasonal vaccine produced by this method to be approved in the US. The virus for the vaccine is produced under closed, sterile conditions in a well-characterized mammalian cell line rather than in chicken eggs. Cell-culture technology has been successfully used to manufacture other vaccines, including those distributed during the H1N1 pandemic, as well as vaccines for polio, rubella, and hepatitis. Novartis partnered with the US Department of Health and Human Services and the Biomedical Advanced Research and Development Authority to develop the cell-culture manufacturing technology, as well as to construct a manufacturing facility in Holly Springs, NC. Total public/private investment in the technology development and facility is more than $1 billion. Flucelvax will be produced in Holly Springs once the facility is ready for full-scale commercial production.
AstraZeneca. AstraZeneca began the second half of 2012 with a new interim CEO, Simon Lowth, formerly, chief financial officer, following the retirement of David Brennan as CEO. Pascal Soriot became the new CEO in October 2012. In February 2012, AstraZeneca announced new restructuring initiatives aimed at delivering annual cost-savings of $1.6 billion by the end of 2014. The restructuring will reduce headcount by 7300. The job cuts include 1350 positions in supply-chain and manufacturing operations. R&D reductions will affect 2200 positions. Part of these reductions result from a new R&D model for its neuroscience research that will employ a virtual model using staff from its R&D facilities in Boston and Cambridge, England. Also, in April, AstraZeneca agreed to acquire the biopharmaceutical company Ardea Biosciences for $1 billion (net of existing cash).
Bristol-Myers Squibb. In May 2012, FDA approved Bristol-Myers Squibb’s biologics manufacturing facility in Devens, Massachusetts, for commercial production of the company’s arthritis drug Orencia (abatacept). The $750-million multiproduct bulk biologics manufacturing facility in Devens represents the largest capital project in the company's history. Also, Bristol-Myers Squibb acquired Inhibitex, a clinical-stage biopharmaceutical company in February 2012. The company’s lead compound is INX-189, a nucleotide polymerase inhibitor and antivral drug candidate in Phase II development. Also, in 2012, Bristol-Myers Squibb acquired the biopharmaceutical company Amylin Pharmaceuticals for a purchase price of $5.3 billion and an additional $1.7 billion for assuming Amylin’s net debt and a contractual payment obligation to Eli Lilly based on Amylin’s terminated agreement with Eli Lilly over the diabetes drug exenatide. Following the closing of the acquisition of Amylin by Bristol-Myers Squibb, AstraZeneca made a $3.2-billion payment to Bristol-Myers Squibb as part of the companies’ previously formed diabetes-drug collaboration.
Eli Lilly. In May, Eli Lilly announced the opening of a new diabetes R&D center in Shanghai. The center employs 150 scientists and staff hired primarily from China. Eli Lilly also is constructing a new insulin production, packaging, and warehouse facility in Suzhou, China, which is expected to open later this year. In June 2012, Eli Lilly announced an expansion of their manufacturing capabilities in China through an expanded collaboration with Novast Laboratories, a generic and specialty pharmaceutical company based in Nantong, China. The collaboration will enhance Lilly’s efforts to build a portfolio of Lilly branded generic medicines in China, and eventually may be used to provide regional manufacturing support for Lilly’s pipeline of products in development
Abbott.In 2012, Abbott has announced that AbbVie will be the name of the new, independent research-based pharmaceutical company. The naming of the new company is part of the process that began in October 2011, when Abbott announced it would separate into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals. AbbVie will include Abbott’s current portfolio of proprietary pharmaceuticals and biologics. In November 2012, Abbott reported that its board of directors approved the separation of its research-based pharmaceuticals business
Merck & Co. In October 2012, Merck & Co. announced plans to relocate the company’s global headquarters within the state of New Jersey with the transition expected to begin in 2014 and be completed by mid-2015. The company will close its current headquarters building in Whitehouse Station, New Jersey, where it has been since 1992, and move the headquarters less than 30 miles to the northeast to its existing property in Summit. The Summit facility currently houses 1800 people in research, manufacturing, animal health, and consumer care operations. About 2000 employees and contractors currently working in Whitehouse Station will move to the Summit location or to other nearby facilities
Roche. In June 2012, Roche announced that it will be closing its R&D site in Nutley, New Jersey, eliminating approximately 1000 positions. The action is being taken to streamline research activities and to reallocate resources to support programs in early clinical development. The company plans to complete the transfer of business operations in Nutley by the end of 2013. Roche’s Genentech division, based in South San Francisco, California, will not be affected by the reorganization. The site closure will be partially offset by the establishment of a Pharmaceuticals Translational Clinical Research Center on the east coast of the US, which is expected to employ approximately 240 people. The center will support US-based clinical trials and early development programs, support and maintain Roche interactions.
Generic-drug strength. To reflect the growing importance of generic-drugs in the pharmaceutical industry, two companies—Teva Pharmaceuticals and Mylan—were among the top 20 global pharmaceuticals in 2011, according to IMS. Seeking to build its position in the market, in November 2012, Watson Pharmaceuticals completed its EUR 4.25 billion ($5.4 billion) acquisition of the Actavis Group. The combination creates the world’s third largest generic-drug pharmaceutical company, with anticipated pro forma combined 2012 revenues in excess of $8 billion, according to Watson. In July 2012, Congress passed the Generic Drug User Fee Act (GDUFA) in an effort to get generic drugs to market in a timely manner, which authorizes the collection of user fees from generic-drug manufacturing companies for the first time in the generic-drug industry’s history.