
The pharmaceutical and biotechnology industries are facing difficult times. The industry is grappling with increased market penetration of generic drugs, the decline in US market growth, and reduced levels of productivity from research and development as measured by the number of new chemical entities (NCEs). These weak underlying fundamentals have been exacerbated by the economic and financial decline, which has hurt small pharmaceutical and biopharmaceutical companies, but which is providing   the potential for Big Pharma to replenish its pipeline at reduced prices for acquisitions or licensing deals.




US pharmaceutical industry growth is stagnating, and growth from Big Pharma is also expected to be sluggish. US sales of prescription drugs  increased only 1.3% in 2008 to $291 billion, according to IMS Health (Norwalk, CT). Dispensed prescription volume in the US increased only 0.9% in 2008.

The sobering data continue a downward trend of the contribution of US drug sales to global pharmaceutical growth. Although the US accounts for nearly 50% of global pharmaceutical sales, its contribution to global pharmaceutical industry growth declined from 42% in 2000 to only 9% projected for 2009, according to Sarah Terry, president and global managing director of Life Science Analytics (Scranton, PA), a biomedical database company whose product is MedTRACK. She spoke at the Drug, Chemical and Associated Technologies Association (DCAT) “2009 PharmaChem Outlook,” an education program held last month in New York City. As the growth contribution of the US has declined, the contribution to global pharmaceutical growth by emerging countries (China, Brazil, India, South Korea, Mexico, Turkey, and Russia) and countries other than the US, member states in the European Union, and Japan have increased by one-third each.

Reflecting increased generic incursion, fewer NCEs, and smaller returns on NCEs, the compound annual growth rate (CAGR) of prescription drug sales from Big Pharma is expected to be only 1.8% through 2013, increasing from $366.6 billion in 2007 to a projected $407 billion in 2013, according to Datamonitor. As small-molecule drug sales are pressured, sales of biologics from Big Pharma are expected to rise, with biologics expected to account for 20% of Big Pharma’s prescription drug sales by 2013. At the same time, sales from its core products are expected to fall by nearly 50% to $47 billion by 2013.

In contrast, although representing a much smaller base, the CAGR of prescription drug sales from mid-sized pharmaceutical companies and biotechnology companies are expected to be relatively strong. The CAGR from mid-sized drug companies is projected at 6.1% through 2013, increasing from $44.0 billion in 2007 to $62.9 billion in 2013. Small molecules will continue to dominate mid-sized pharmaceutical companies’ revenues, accounting for 92% of their prescription drug sales by 2013, according to Datamonitor.

The CAGR from biotechnology companies is projected to increase 5.6%, from $34.6 billion in 2007 to $48 billion in 2013, according to Datamonitor. Biologics accounted for more than 50% of biotechnology companies' 2007 sales, and therapeutic proteins are projected to represent nearly 70% of sales by 2013.

Unlike Big Pharma and to a lesser extent, mid-sized pharmaceutical companies, biotechnology companies are not as vulnerable to generic incursion. “Although biotechnology companies will see 50% less return on their launches through 2013, they won’t suffer from patent expiries unless there is rapid implementation of a follow-on biologics pathways in the US,” says Terry.  In contrast, of the top 15 pharmaceutical companies by revenue, more than $70 billion worth of products will be going off patent during the next four years. according to Datamonitor. Pfizer alone is facing patent exipiries totaling $17.1 billion, principally due to the the patent expiration of the industry’s and its top-selling drug, Lipitor (atorvastatin). Mid-sized pharmaceutical companies will be losing approximately $8 billion in revenues to generics through 2013.




Although there are positive signs from the biologics sector, the overarching issue now facing the biotechnology market is the impact of the economic crisis on financing.

Almost 60% of the 370 publicly traded biotechnology companies had their market capitalizations fall below $100 million in 2008, according to a recent analysis by Burrill and Company, a San Francisco-based private merchant bank. More than 100 North American public and private biotechnology and pharmaceutical companies announced corporate restructuring in 2008. By the end of 2008, 120 companies were trading with less than six months of cash on hand, a 90% increase compared with 2007, according to Burrill & Company. The mean number of years in cash for nonprofitable, public US biotech companies is 1.7 years, according to a MedTRACK analysis.

“We started to see a clear pattern evolving for these companies in the final quarter of last year,” said G. Steven Burrill, CEO of Burrill & Company, in a Feb. 25 press release. “Companies were shrinking to conserve cash and extend their runway. The more mature and blue-chip biotech companies weathered this period quite well since they have plenty of cash, product-revenue streams, strong pipelines, and Big Pharma partners.”

But for the small- to medium-sized US biotechnology companies, 2008 was a difficult year. Financing and partnering deals collectively brought in $30.1 billion for US companies in 2009, with $10.1 billion in financing and $20.0 billion in partnering. Although funds raised through partnering only slightly declined in 2008 from 2007 ($20.0 billion in 2008, $22.4 billion in 2007), private and public financing for US biotechnology companies declined by more than 50% ($10.1 billion in 2008, $22.0 billion in 2007), according to Burrill & Company.

Initial public offerings (IPOs) were hardest hit, with only $6 million raised through US biotech IPOs in 2008, compared with $2.0 billion in 2007.  Again reflecting the devaluation in the stock market, the value of follow-on public offerings declined substantially in 2008, reaching only $1.7 billion in 2008 compared with $6.3 billion in 2007. Financing from publicly traded corporate debt also decreased significantly, from $6.7 billion in 2007 to $2.8 billion in 2008. Private investment in public equity also fell, from $1.6 billion in 2007 to nearly $1.1 billion in 2008, according to Burrill & Company.

Although venture capital funding for US-based biotechnology companies declined in 2008, its decrease was not as marked as the declines seen in public biotech financing. US biotech venture capital funding in 2008 was nearly $4.2 billion, a 5.6% decline from the $4.4 billion raised in 2007.

“Biotechs are tackling their funding crisis on two fronts, by cutting costs and reducing their high cash-burn rates, and by attempting to access cash from external sources,” says Terry. “However, this is becoming a tough task. Biotech is facing a funding crisis with many traditional avenues for accessing debt now closing or already shut off.”




Facing pressure and difficulty in raising money through public and private financing, partnering deals have become an attractive, if not the only viable option for biotechnology companies. “Cash-hungry biotech companies are turning to cash-rich Big Pharma for funding,” says Terry. “With biotech’s position destabilized, Big Pharma now wields greater power when negotiating deals, both licensing and mergers and acquisitions, and will have the ability to access much needed late-stage drug candidates at knock-down prices.”

Terry points out that until the financial crisis, licensing was becoming an increasingly expensive and complex option for Big Pharma. The number of US licensing deals (both in-licensing and out-licensing) performed by the top global pharmaceutical companies (based on 2007 annual revenues) declined by 28% between the first quarter 2006 and the third quarter 2008, according to MedTrack. “But Big Pharma now has the upper hand and has been bargain-hunting for late-stage products,” says Terry. This situation is a reversal of early trends in licensing deals that favored candidates in early-stage development, which could be acquired at better prices. For example, in the third quarter of 2007, approximately 65% of licensing deals involved Phase I candidates and only roughly 16% of deals involved Phase III candidates. A year later, in the third quarter of 2008, these numbers reversed almost entirely, with roughly 58% of deals involving Phase III candidates and about 20% of deals involving candidates in Phase I.

The need to put up cash in deals is giving Big Pharma a decided advantage. “Given the current credit crunch, only Big Pharma can afford to pay for assets in cash,” says Terry. Smaller companies looking to deal outside of Big Pharma have to be more resourceful. “Small- and medium-sized companies will therefore try and negotiate milestone payments into the deal and/or the use of facilities such as manufacturing plants or expertise as part of the payment structure for the deal.”




These deals reflect an ongoing trend in the drug industry in which outsourcing, be it in research and development, manufacturing, or sales and marketing, has shifted from a tactical to strategic focus. At the same time, Big Pharma and medium-sized companies are interested in improving their balance sheets through cost-cutting initiatives, which include rationalization of manufacturing plants and increased outsourcing. Active pharmaceutical ingredient (API) manufacturing accounted for 15% of all divesture deals in the pharmaceutical industry between the first quarter 2006 and the third quarter of 2008, according to a MedTRACK analysis. “As pharmaceutical companies need to cut costs, this has led to the sale of API units and the outsourcing of such functions.”

The combination of increased outsourcing, tighter resource allocation, operational cutbacks, and the resulting pressure on drug-development pipelines is likely to shape the pharmaceutical industry during the next several years.

Articles

Global Feature

The financial crisis is adding further injury to already weakened prospects for the pharmaceutical industry.

A Sobering PharmaChem Outlook


Facing slower growth prospects for small molecules and a highly competitive market for small-molecule generic drugs, pharmaceutical companies, both large and small, are evaluating opportunities in the biosimilars or follow-on biologics market.

 “Financial strength and a combination of generic and branded business expertise will be key factors in determining success in the biosimilars market,” says Sarah Terry, president and global managing director of Life Science Analytics (Scranton, PA), a biomedical database company, whose product is MedTRACK. She spoke at the Drug, Chemical and Associated Technologies Association (DCAT) “2009 PharmaChem Outlook,” an education program held last month in New York City. She classifies three type of players in the biosimilars market: leading biosimilar developers; new, smaller biosimilar-focused companies;  and emerging biosimilar players.

On a strategic basis, these companies may use mergers and acquisitions or licensing deals as a means to build biosimilar capabilities. Follow-on biologics developers conducted a relatively large number of licensing and collaboration deals (approximately 55 deals) and mergers and acquisitions (approximately 44 deals) during the past six years, says Terry. “Deals are used extensively to enable biosimilars to penetrate new markets,” says Terry. “Mergers and acquisitions are the preferred tool to gain access to a specific emerging or Western market. A core focus for licensing deals is to source marketed and/or pipeline products to build biosimilar product portfolios. Also, biosimilar developers can use licensing deals to gain access to reformulation and/or drug delivery technology.”




“Leading biosimilar developers currently dominate the biosimilar market due to commercial and financial strength and in-house expertise,” says Terry. These companies include generics companies such as Teva Pharmaceuticals (Jerusalem) and advanced biosimilar developers such as BioPartners (Barr, Switzerland).

Teva, the leading global generics company, is actively building its capabilities in biosimilars. In January 2009, it announced the formation of a joint venture with the contract manufacturer Lonza (Basel, Switzerland) for developing, manufacturing, and marketing biosimilars. The move adds to earlier deals by Teva in building biosimilars capabilities, which included the 2004 acquisition of Italy’s Sicor for $3.4 billion.

"We had identified biosimilars as a major growth driver for Teva in our long-term strategy and have been augmenting our knowledge base, capabilities and infrastructure to position Teva as a leader in this market," said Shlomo Yanai, Teva's president and CEO, in a January 2009 company press release. "This strategic partnership bolsters our biologics capabilities. Lonza is an ideal partner for Teva in this field with its deep knowledge and experience in biopharmaceutical development, large-scale manufacturing, and state-of-the art manufacturing facilities. Combined with Teva's global leadership and expertise in clinical development and marketing of generic pharmaceuticals, the joint venture generates significant opportunities and benefits for both companies."

Biopartners (Barr, Switzerland), owned by the Polish biotechnology firm Bioton, is developing biosimilars. The company received European regulatory approval for a biosimilar version of recombinant human growth hormone in 2006. A second biosimilar, Alpheon (interferon alpha) is under European regulatory review, and a third biosimilar, erythropoietin, is in preclinical development.

Sandoz (Holzkirchenf, Germany), the generics arm of Novartis (Basel, Switzerland), and Merck & Co. (Whitehouse Station, NJ), with its decision to form Merck BioVentures, are two leading examples of Big Pharma’s involvement in biosimilars. Sandoz had the first biosimilar product, Omnitrope (recombinant human growth hormone), approved in Europe and the US in 2006. Binocrit and Epoetin alfa Hexal, Sandoz’s tradename for a biosimilar version of epoetin alfa and the first glycosylated protein biosimilar to receive marketing authorization from European regulatory authorities, was approved in 2007. Binocrit/Epoetin alfa Hexal was developed as a similar biological product to the reference product Erypo/Eprex (epoetin alfa) by Janssen-Cilag (Beerse, Belgium), which is part of Johnson & Johnson (Raritan, NJ). Sandoz received European  approval for its third biosimilar, filgrastim, in February 2009. The Sandoz product is approved for the same range of indications as the reference product, Neupogen, by Amgen (Thousand Oaks, CA).

In December 2008, Merck announced the establishment of a new division called Merck BioVentures, which is designed to leverage the company's position in glyco-engineering technology for both follow-on and novel biologics. Merck gained a position in glycol-engineering through its acquisition of GlycoFi in 2006. Merck's first follow-on biologic program, MK-2578 for anemia, is in clinical development, and the company plans to launch MK-2578 in 2012.  In addition, the company says it anticipates having at least five follow-on biologic candidates in late-stage development by 2012.

Merck added to its biosimilars position with the pending acqusition of the follow-on biologics business of the biotechnology firm Insmed (Richmond, VA) and a Boulder, Colorado, manufacturing facility of Insmed. Merck announced the deal in February 2009, and as of press time, the deal was scheduled to close at the end of March.  Insmed's pipeline of follow-on biologic candidates include NS-19, an investigational recombinant granulocyte-colony stimulating factor (G-CSF) in Phase III development, and INS-20, a pegylated recombinant G-CSF designed to allow for less frequent dosing that is currently in Phase I clinical trials.




New, smaller biosimilar-focused companies will drive the next wave of the biosimilars market. “These companies are in a more precarious situation since they lack the financial security and/or the commercial experience of the leaders,” says Terry. Companies in this category include Cangene (Winnipeg, Canada), Hospira (Lake Forest, IL), Phage Biotechnology (San Diego), and GeneMedix (Offaly, Ireland)




Already competitors in the small-molecule generics markets, companies from India and China may be classified as emerging biosimilar developers. “Biosimilar companies in India and China are positioning to enter Western markets, either directly or through strategic alliance,” says Terry.

The higher cost structure needed to develop a biosimilar product compared with developing a traditional small-molecule generic drug, however, erodes an often competitive advantage that Indian companies can have in the small-molecule generics market. “Also, with biosimilar development, a low-cost structure is not sufficient if biotech manufacturing skills are limited,” adds Terry. She observes, however, that several Indian companies have a range of biosimilars (e.g., streptokinase, insulin, G-CSF, erythropoietin, and human growth hormone) available in the domestic market in India and in other markets in Asia, South America, and Africa. “Indian players will have a major part to play in Western markets, either directly or through marketing alliances.”

Chinese companies also may be potential candidates for acquisitions or partners in licensing deals. “With a rapidly growing technology sector and lack of intellectual property recognition, China is an important location for early biosimilar development and marketing,” says Terry. “While most Chinese companies are selling locally only, their manufacturing experience is certain to make them useful acquisition or partners.”

She points out there are numerous low-cost players investing in biopharmaceuticals in China, making it a highly competitive market. For example, it is estimated that at least 20 G-CSF products are already on the market in China. 

 Dragon Pharmaceutical (Vancouver), Shantha Biotech (New Delhi, India), and Bharat Biotech (Hyderabad, India) are some examples of companies in the emerging markets whose local expertise could be beneficial to larger biosimilar companies set to enter these markets or that offer low-cost manufacturing and outsourcing.

Biotech

Follow-on biologics or biosimilars offer a niche growth market for the pharmaceutical industry. As the process for establishing a regulatory pathway for biosimilars is debated, companies, including Big Pharma, are positioning themselves to gain this piece of the pharmaceutical pie.

Gauging Opportunities in the Biosimilars Market

We are about nine months into the downturn in early drug-development activity and executives at contract services research and manufacturing organizations (CROs and CMOs) are anxiously asking, "When will things get back to normal?"  

More to the point, CRO and CMO executives should be asking themselves, "What will the new normal look like?" It is clear that the biopharmaceutical and pharmaceutical industries are experiencing more than just a cyclical downturn in drug-development activity like the one they endured in the early years of this decade. We are looking at a wholesale restructuring of the industry that will leave the landscape looking very different than it has in recent years. The factors driving that restructuring are well known—patent expirations, few new drug approvals, national efforts to control healthcare spending—and contract services industry executives must prepare themselves for a new set of market dynamics. 

While I don't have a crystal ball, I'm reasonably certain that the "new normal" for the next three to five years will have most of the characteristics outlined herein. 

 Major pharmaceutical companies are experiencing the biggest changes. The viability of the 15 largest pharmaceutical companies, which today account for nearly two-thirds of industry sales and research and development (R&D) expenditures, is being undermined by patent expirations and the dearth of new drug approvals. They are responding with an array of strategic initiatives, including refocusing their development pipelines on high-end therapies such as biologics and high-potency oncology drugs, reestablishing market positions in generics (including biosimilars), targeting emerging markets, and making massive acquisitions such as the recently announced Pfizer-Wyeth deal and the ongoing Roche-Genentech deal. As their business models transform, so will their service needs and sourcing strategies. 

 As the positions of the current Big Pharma companies change, other companies can be expected to play larger roles. Major Japanese pharmaceutical companies, for example, have become more aggressive in establishing their presence globally; they are no longer content to outlicense their products for sale in North America and Europe. Many of the generic- drug companies in India are creating programs to develop proprietary products for domestic and global markets, and Chinese pharmaceutical companies are only a few years behind them. Many of these new players are still vertically integrated and may not be willing to outsource activities, at least not to the degree of the mature pharmaceutical companies of North America and Europe. 

 CROs and CMOs will have to fight over a smaller market opportunity in the foreseeable future. The early development pipeline (i.e., preclinical and Phase I) nearly doubled between 1998 and 2008, but the increased number of drug candidates didn't yield a concomitant jump in new products. Now, major pharmaceutical companies are making radical cuts to their portfolios to improve R&D efficiency, while equity investors are cutting back support for early-stage companies and candidates. We expect to see substantially fewer pipeline candidates in the next three to five years, which will have a major impact on CROs and CMOs offering services such as process development, preclinical testing, and clinical-trial materials manufacturing. 

CMOs, in particular, must come to grips with the fact that waiting for the number of new product approvals to increase is like waiting for Godot: it's not coming. The industry should accept that 20 or so approvals annually for new molecular entities (NMEs) are the norm, and that a return to the high numbers of the 1990s is just not in the cards, at least not on a sustained basis. Further, industry consolidation means that these few approvals will be concentrated in the hands of fewer pharmaceutical companies, many of which have captive manufacturing capacity or preferred manufacturing suppliers. That will mean reduced opportunities for many CMOs. 

More drug development in emerging markets.

 Major and mid-size biopharmaceutical and pharmaceutical companies are moving rapidly to establish R&D operations in emerging markets, especially India and China. This strategy is not chosen because of cost alone, although labor and capital cost differences have certainly been a factor. The move also reflects the large market opportunity presented in those countries as their middle classes and national wealth grow. North American and European CMOs and nonclinical CROs seem to be slow in embracing this reality and are leaving the opportunity open for competitors based in those emerging markets. 

  Healthcare costs are a big issue in every nation, and the political and economic pressure for lower costs will only intensify as expectations rise, populations age, and the recession drags on. Major drug companies are responding to these pressures at both the high end (oncology drugs and biopharmaceuticals) and the low end (generics), but cost reduction will be a constant theme throughout industry. As critical components of the value chain, CROs and CMOs will be forced to work as hard as their clients to identify cost-saving opportunities and to pass those savings on to their clients if they want to keep the business. 

 There is no question that outsourcing will be a critical element of every biopharmaceutical and pharmaceutical company's business strategy going forward, and the extent to which companies outsource key activities will only grow. The trend among big companies toward handing off functions previously considered core competencies, including toxicology, clinical data management, and manufacturing, is likely to accelerate in the coming years. As I argued in this column in January, however, the trend is likely to favor CROs and CMOs with the greatest capabilities and financial strength. 

These industry changes have been apparent for some time, so I'm hardly going out on a limb here. The key point is to recognize that these changes are vast and they are occurring concurrently and interactively. In addition,  the industry these changes are creating will look far different from the one most CROs and CMOs were built to operate in. Executives need to prepare their companies to respond to a different group of players with new needs. 

There is one more thing I can safely predict about the "new normal" that is upon us: no matter what shape these changes take over the next few years, we'll need to be thinking about an even newer "new normal" by then.  

 is president of PharmSource Information Services, Inc., and publisher of 

Outsourcing

When the business environment returns to "normal," our industry may appear quite different.

PTSM: Pharmaceutical Technology Sourcing and Management-04-08-2009

A Sobering PharmaChem Outlook

Gauging Opportunities in the Biosimilars Market

The New Normal: The Changing Face of Pharma