Big Pharma, Big Money

Facing a myriad of challenges including anemic pipelines, regulatory uncertainty, investment doldrums, and diminishing public perception, the pharmaceutical industry worldwide is at a crossroads. Three reports released this summer assess the future of drug discovery and development and offer prescriptive advice for the industry to get back on track financially and in the eyes of society.

According to the investment community, as represented by three major institutional pension fund investors, Big Pharma needs to make public more and better information about the pipeline "quality" of early-stage research, especially the number of compounds and their progress in Phases I and II clinical trials. "Good solid data on early-stage pipeline research could be used to increase the overall value of the pharmaceuticals group-especially if targets are developing into novel products," states a new report.

"Pharma Futures: Prescription for Long-Term Value," by SustainAbility, Ltd., presents results of a year-long collaboration between global institutional investors and company executives into critical issues facing the drug industry. The Big Pharma side was represented by senior executives from AstraZeneca, Bayer, GlaxoSmithKline, Novartis, Novo Nordisk, and Pfizer, among others. Together, these companies have a global market capitalization of $820 billion.

The Big Money side included major pension fund operators ABP Investments in the Netherlands, the Ohio Public Employees Retirement System (OPERS) in the US, and the Universities Superannuation Scheme (USS) in the UK. The three have more than $474 billion of assets under management, of which $20 billion is invested in healthcare and pharmaceuticals. Collectively, pension funds worldwide have $51 billion invested in healthcare. "This sector-and pharmaceuticals within it-therefore represents a significant part of our portfolio," the report states. To maximize value "we need to understand better the different strategies industry uses to meet the significant challenges and opportunities it faces."

As an outgrowth of this collaboration, the investors offer several recommendations: Big Pharma needs to address the complex changes taking place in the "payer landscape" in which value for money is increasingly defined by patients, consumers, and public and private insurers. Industry also needs to get a better handle on safety and regulatory issues, opportunities in emerging economies, and challenges from developing countries. Finally, industry had better address issues of "reputation management," since the market holds Big Pharma responsible for such problems as predatory pricing, managing risk, and over-emphasizing "me-too" drug development while downplaying innovative research.

"No company can single-handedly overcome the distrust that many feel toward the pharma sector, and redefining the value of medicine today is incredibly complex," said Scott Streator, OPERS' director of healthcare. "But balancing pressing health needs and return on investment demands nothing less from all of us."

The investment market has not been overly optimistic that Big Pharma is capable of addressing these problems, as evidenced by awarding the sector no premium above the net present value of marketed and visible pipeline products. This contrasts to the 1990s, when stock prices traded at premiums ranging from 20% to 40%, reflecting investors' confidence in future products and performance, the report states.

For their part, the drug company execs responded they have already demonstrated a willingness to work towards greater transparency and report on early toxicity and clinical trials through, for example, the clinicaltrials.gov online database. Innovation, they argued, also occurs incrementally by offering patients new formulations and improvements in safety and side-effect profiles. Making medicines affordable to poorer nations and populations needs to be a responsibility that industry shares with governments and public payment structures.

"Collaborations and engagement with key actors in the payer community-from governments, insurance companies to patients and consumers-will be the test of how well we meet the world's growing need to combat disease and illness," said Viggo Birch, Novo Nordisk's vice president for Europe North.

Offering a different take, the consulting firm PriceWaterhouse-Coopers (PWC) argues the core of industry's problems comes from a lack of productivity in the lab. While various external factors have exacerbated the difficulties, industry's main problem is that it spends far more on R&D and produces far fewer new molecules than it did 20 years ago. "The shortage of good medicines in the pipeline underlies many of the challenges pharma faces, including its increasing expenditure on sales and marketing, deteriorating financial performance, and damaged reputation," notes the PWC report, "Pharma 2020: The Vision-Which Path Will You Take?"

The current pharmaceutical industry business model is both economically unsustainable and operationally incapable of acting quickly enough to produce the types of innovative treatments demanded by global markets, the report states. And while the worldwide pharmaceutical market will more than double to $1.3 trillion by 2020, "both the composition of that market and what it will demand and pay for is also anticipated to be very different."

Industry must use new technologies to improve its understanding of diseases, reduce R&D costs significantly, and spread its bets to increase productivity, the report suggests. Industry must also work more closely with governments, regulators, and the healthcare community to make drugs that patients need, test them as quickly and effectively as possible, and provide a more holistic healthcare service. "Pharma's traditional strategy of placing big bets on a few molecules, marketing them heavily to primary care physicians, and turning them into blockbusters will no longer suffice," PWC states.

A third approach suggests that pharmaceutical companies should focus more on the needs of healthcare payers, patients, and policymakers and less on physicians to make new drugs commercially successful. IMS Health, a healthcare consultancy, analyzed the launches of nearly 2,500 new drugs from 1997 to 2004. They found sharp differences in how drugs were received and wide variations of the same product in different countries.

Only 35 of the drugs, spanning 27 therapy areas, showed outstanding results, IMS found, based on factors such as market dominance, promotional effectiveness, and maximizing opportunity. "Pharmaceutical companies really do have to prove value," John MacCarthy, IMS' head of client thought leadership group, told The Financial Times. The average difference between countries where a drug sold best and where it sold worst was 26%, indicating that modifying marketing strategies to fit local factors was essential to boosting sales.