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This article is Part I of a three-part series on biopharmaceutical issues in public health, government, and developing-world markets. Part 1 focuses on drug-development. Part II, which examines manufacturing, appeared in the April 2011 of Sourcing and Management. Part III, which analyzes distribution and administration,appeared in the May 2011 issue.
The market for pharmaceutical development continues to evolve rapidly. One important change is the increasing prominence of drug development for public sector, nonprofit, and developing-world markets. Not long ago, pharmaceutical industry involvement with these sectors was limited to certain government-sponsored vaccination programs, and donations of drugs and vaccines to the developing world were done on essentially a charitable basis. For the most part, these interactions did not significantly impact the business model of commercial pharmaceutical companies, which was supported by developed country (i.e., Western Europe, US, and Japan) focused sales of blockbuster drugs to high-margin commercial healthcare markets.
During the past decade, global attention to biodefense and pandemic preparedness has given rise to major government-development programs, such as Project Bioshield and the Biomedical Advanced Research and Development Authority (BARDA) in the US. At the same time, nonprofit organizations, such as the Bill and Melinda Gates Foundation, have become important sponsors of drug-development programs, adding to an increased focus on affordable treatments for widespread diseases of the developing world, including neglected tropical diseases (NTDs), such as malaria and tuberculosis. The pursuit of drugs for rare or orphan disease indications also has taken on a higher profile.
These markets are distinct in some ways, but they are similar in that they all challenge the profit margin that supported the development programs of major pharmaceutical companies in the past. The pervasive challenge of lower profitability potential is due to low sales prices or small volumes. Other challenges include complex payer arrangements and attendant “lumpy” revenue streams as well as poor long-term sales visibility with substantial political or policy risks. The unique circumstances faced by customers and end users often impose additional constraints, such as the need for a long shelf life, tolerance to poor refrigeration, or the ability to administer the product safely with a low level of medical oversight. In addition, technology transfer and intellectual property (IP) issues can be unusually challenging. These challenges are outlined in Table I.
Table I: Comparison between traditional commercial and government, nonprofit, and developing-world markets.
Traditional commercial markets
High (with patent protection)
Low (developing world)
Dose volumes per product
Moderate (developed world)
Medium–high (developing world)
Very high (traditional medicines for developing world)
End-use environment constraints
Variable and can be severe
IP and regulatory issues
Interestingly, these drug-development challenges are analogous in many ways to those faced by the biopharmaceutical industry as the era of the blockbuster commercial drug comes to an end. Therefore, the innovative approaches being explored in these difficult markets point the way toward potential solutions for sustainable mainstream drug development in the 21st century. Some of the most important approaches include novel research and development (R&D) models; partnering arrangements and merger and acquisition strategies; new approaches to cofunding and public–private partnerships; and IP and regulatory strategies. The opportunity, however, is to build large-volume markets by providing traditional high-margin medicines, such as diabetes, cardiovascular, and lifestyle drugs, to the vast developing-country markets alongside NTDs, biodefense drugs, and vaccines.
Innovative R&D Models
The first step to profitably serving these markets involves innovating further up the drug- development value chain. Simple donation or distribution of the finished drug does not meet most requirements, and measures focused on procurement, such as pooled purchasing, also are generally insufficient. The drug-development process itself is, therefore, a key focus of innovation.
New R&D models aim to dramatically reduce the cost of the traditional vertically integrated drug-development process by broadly leveraging investments and capabilities across multiple partners. Product development partnerships (PPD) are alliances of development partners, often brokered and contracted by a central development organization, which may contribute only funding. The Bill and Melinda Gates Foundation is one of the PDP model’s most visible champions, and it leverages the model for most of their own development programs. As an aggressive outsourced R&D model, it goes beyond the “virtual pharmaceutical company” concept by delegating many coordination and program-management functions to outside partners. This scenario allows the Gates Foundation to develop many classes of drugs in parallel without intramural R&D capabilities of its own and enables recruitment of low-cost partners, such as universities. However, successful implementation requires careful standardization of end-to-end processes across PDPs to ensure products are developed and transitioned effectively.
As an example, in 2001, the international nonprofit organization PATH and the World Health Organization (WHO) used seed funding from the Gates Foundation to establish a network of development partners, including the Serum Institute of India Ltd. and international nonprofits, to develop a meningococcal meningitis vaccine for sub-Saharan Africa. With this low-cost network of partners, the Meningitis Vaccine Project was able to develop and license a vaccine in only four to five years, at one-tenth the cost of a traditional vaccine-development program. The Drugs for Neglected Diseases Initiative (DNDi) is taking a similar approach to development of treatments for trypanosomiasis, Chagas disease, and other illnesses.
The use of consortia, especially for precompetitive exploratory development, is a trend being adopted from other industries, such as oil and gas, faced with high risks and daunting development costs. Consortium-based leveraging of existing information for new purposes is a key element of the R&D model of the Institute for OneWorld Health (iOWH). Licensing data and teaming with other organizations has allowed iOWH to screen pre-existing candidate libraries for efficacy against diarrheal diseases, visceral leishmaniasis, and other indications endemic in poor countries. GlaxoSmithKline (GSK) recently teamed with several bioinformatics and drug-discovery institutes to share scientific data on 13,500 candidate molecules that could lead to new malaria treatments. The advantages of this model for commercial drug development are already being recognized in the form of initiatives, such as the Pistoia Alliance, a consortium started by GSK, AstraZeneca, Pfizer, and Novartis, and now involving several dozen organizations to develop standards to facilitate the widespread sharing of precompetitive scientific data across the pharmaceutical industry.
Some entities are even experimenting with a completely open-source approach to drug development for low-profit markets, modeled on the open-source development of free software such as Linux. In this ultra low-cost approach, discrete development activities are parceled out among volunteers, often working in academic or nonprofit laboratories. The Open Source Drug Discovery (OSDD) consortium, funded by India’s Council for Scientific and Industrial Research, is championing this approach with an initial focus on treatments for tuberculosis.
These innovative R&D models can radically reduce development costs and provide a magnified return on a limited available investment. Because they depart from the traditional vertically integrated development model, these models present significant management challenges, particularly in ensuring consistent program coordination, and alignment with effective end-to-end frameworks with well-administered, stage-gate criteria.
Joint ventures and acquisitions
For major pharmaceutical firms looking for cost reductions and market access while remaining closer to traditional R&D models, commercial joint ventures with emerging drug developers in the developing world are an attractive option. Many of these partnerships evolved from earlier relationships limited to in-country distribution or licensed manufacturing and now encompass R&D as the developing-world firms continue to expand their capabilities. Some are contract research–like deals, focused on the major pharmaceutical company’s existing pipeline of Western-focused drugs with no sharing of IP. A spate of deals in the past two to three years focuses on true codevelopment of products for the developing world, highlighting the rising status of the emerging partners in IP and product development (see Table II)
Table II. Examples of recent codevelopment joint ventures with developing-world firms.
Amgen, Jubilant Biosys (India)
Merck, Orchid Research Laboratories (India)
Antibacterials and antifungals
GlaxoSmithKline, Fiocruz (Brazil)
Novavax, Cadila Pharmaceuticals (India)
Hepatitis E, dengue fever, others
GlaxoSmithKline, Fiocruz (Brazil)
Chagas disease, leishmaniasis
The same advantages accrue to acquisitions of developing market firms. For example, sanofi-aventis acquired the Indian firm Shantha Biotechnics in 2009 for $784 million. Shantha has developed and marketed several recombinant vaccines and protein products. Similarly, in 2009, Novartis acquired the Chinese vaccine developer Zhejiang Tianyuan Bio-Pharmaceutical Ltd. for $125 million.
A major element common to biodefense drugs, orphan drugs, and products for diseases of the developing world is the expanding role of public–private partnerships. For instance, vaccines and therapeutics for defense against biological, chemical, and radiological weapons are niche products with challenging regulatory pathways. Therefore, government investment is required to secure private pharmaceutical firm engagement in developing products for this market. In the US, BARDA and its counterpart in the Department of Defense, the Chemical and Biological Medical Systems program, have expanded the role of the government well beyond that of its traditional support of early-stage scientific research by investing approximately $1.5 billion during the past decade in direct support for advanced biopharmaceutical R&D at private companies, in addition to more than $5 billion appropriated for manufacturing and procurement through Project Bioshield. Recently, emphasis is evolving from highly focused investments supporting individual drug candidates toward dual-use platform technologies with both defense and commercial applications. Major nonprofit public health sponsors, such as the Gates Foundation, function similarly to governments in the role they play, pursuing operating models reminiscent of public–private partnerships. Like government sponsors, they offer the benefits of nondilutive capital and do not claim patent rights.
Another new concept is the Advance Market Commitment (AMC), an up-front contract to purchase a specific quantity of developmental drug product at an agreed price, if certain criteria are satisfied. This greatly reduces risk for drug developers in these markets by ensuring sales revenue if a drug is successfully developed
The US government is expanding its biodefense focus on partnering with firms in other regions, in the recognition that exotic diseases endemic to the developing world can become health-security threats for the US. By establishing relationships with biopharmaceutical firms in the developing world, the US can obtain better access to new treatments against these threats. Public support is equally important to the development of treatments for rare or neglected diseases. In addition to long-running tax incentives under the Orphan Drug Act, the US government is testing additional incentives. One leading innovation, Priority Review Vouchers, offers a company that develops such a drug-accelerated FDA review for a different commercial drug candidate in its pipeline, thereby enabling a 4–12 month faster time to market and potentially providing attractive financial benefits.
Regulatory and IP issues
Whatever R&D model and business strategy is chosen, firms developing products for these markets will need to contend with challenging issues regarding regulatory pathways and IP. In the case of drug products intended for the developing world, developers must choose which regulatory regime to follow from choices that include FDA, European Medicines Agency, WHO, and other country-specific national regulatory authorites. For instance, costs are high to obtain FDA approval for a new drug, making alternative licensure attractive to achieve a low development cost. However, this choice may preclude marketing the drug in the US. Because of these tradeoffs, the choice of regulatory regime should closely align with the business plan and market strategy for each product.
IP issues regarding drug patents and generics play a central role in the developing world. The issues were elevated by the WTO’s 2001 Doha Declaration and the subsequent August 30 decision in 2003, which affirmed the power of governments to issue compulsory licenses for generic versions of patented drugs for urgent public health needs in the developing world. Brazil, Thailand, and Canada have all invoked this power to date, either for domestic use or for export to least-developed nations elsewhere that lack their own generic-drug production capability. More widespread use has been forestalled by various bilateral agreements from nations with leading pharmaceutical industries, meaning that the IP landscape is complex and nonuniform.
The last step is to build truly sustainable public–private partnerships by creating a regulatory infrastructure to nurture development of local capabilities. This process allows for the flourishing of local R&D or manufacturers that have a vested interest in getting their products out to the marketplace. A local, private business has a long-term view in delivering the products and services needed throughout the region, such as by hiring local skilled labor, which in turn creates true sustainability.
Pharmaceutical markets in the developing world, in biodefense and public health, and for orphan diseases, offer special challenges to firms. Business innovations are contributing greatly to progress. The solutions in development point toward new business practices that can help major drug companies navigate the increasing challenges in their own target markets and build new ones globally.
Chan Harjivan is a partner and heads the global public health practice at the global management consulting PRTM, firstname.lastname@example.org. George Dougherty is a manager in the global public practice at PRTM, email@example.com.
This article is Part I of a three-part series on biopharmaceutical issues in public health, government, and developing-world markets. Part II, which focused on manufacturing and access, appeared in the April 2011 issue of Sourcing and Management.