One of the laggard industries in the current stock market boom has been Big Pharma--the collective name for the world's largest pharmaceutical companies. Its troubles include (a) a shortage of new drugs in the pipeline while (b) old "cash cow" drugs' patents are expiring leading to (c) competition from generic or "unbranded" manufacturers. Meanwhile, (d) legal challenges over drug safety are becoming commonplace while (e) legislation on health care reform (read: cheaper drugs) is once again on the table Stateside with a Democratic Congress. I could go on for quite a while, but I'll save you the trouble. Do watch out for controversial documentary maker Michael Moore's new movie Sicko, which catalogs the ills of America's medical system--including overpriced drugs, natch. As if things couldn't get worse, a whole lot more negative publicity is headed Big Pharma's way. [6/18 UPDATE: Industry association PhRMA has branded Moore's documentary as a piece of "sensationalism" that isn't "fair and balanced."In the meantime, Sanofi-Aventis's weight loss drug Acomplia was denied on safety grounds by the Food and Drug Administration (FDA). The entire FDA document is available from the WSJ:
Sanofi-Aventis SA has failed to demonstrate the safety of its proposed weight-loss drug Acomplia, a Food and Drug Administration advisory panel said Wednesday.The unanimous decision by the expert panel's 14 voting members made it unlikely they would recommend the FDA approve the drug. They were to vote later Wednesday on whether the drug's benefits outweigh its risks, a finding generally required to merit approval.
Earlier, Richard Gural, Sanofi's vice president of drug development and scientific affairs, said Acomplia, known generically as rimonabant, shouldn't be given to patients being treated for depression or a history of depression.
He also said the company hasn't seen an increase in psychiatric problems associated with the drug in post-marketing reports. Rimonabant was approved by the European health authorities last June. Paris-based Sanofi is seeking approval to sell the drug in the U.S., a key market that would likely propel it to blockbuster status of $1 billion or more in annual sales. If approved, the drug would likely be sold under the brand name Zimulti.
The FDA typically follows its panels' advice but isn't required to do so. The FDA is set to make a final decision on whether to approve the drug by the end of July.
The FDA has been concerned about psychiatric side effects such as depression. The agency also said there was a doubling of the rate of suicidal thoughts and behaviors seen in clinical studies of the drug. Last February, the FDA rejected Acomplia as a smoking-cessation product and said it needed more information on psychiatric side effects before it would consider approving the drug as a weight-loss treatment.
GlaxoSmithKline's diabetes drug Avandia has been giving shareholders health woes as well with its problems and investors are now suing the company over undisclosed health risks. Ambulance chasers are all over the scene, unsurprisingly. Here is a backgrounder:
Just how poorly is the industry doing? PriceWaterhouseCoopers suggests it needs to change its business model reliant on "blockbuster" drugs or face further deterioration:Since the New England Journal of Medicine published an article last month querying the prudence of continued prescribing of Avandia, one of GSK’s most lucrative drugs, the shares have dropped to their lowest level in two years.
The pressure is only the latest glitch deterring investors from the sector in general, including representatives quoted in the UK.
The wave of consolidation over the past decade has left two significant companies – GSK and AstraZeneca – with a primary London listing. The two have vied for position, with AZ outperforming GSK for most of 2004 and much of 2006 as it recovered from product failures and offered the prospects of change under new management.
For most of the rest of the period, under the leadership of Jean-Pierre Garnier, GSK has performed better as it stepped up investor relations activities and dangled the prospect of an innovative pipeline of new drugs before its shareholders.
Yet compared with the benchmarks of the FTSE 100 and the FTSE All Share indices, both have consistently underperformed. Once seen as solid, defensive stocks for investors of all sorts, the appeal of pharmaceuticals has sharply waned since the millennium.
In spite of the argument in the industry’s favour as populations grow, become richer, age and seek to tap into more interventionist healthcare, investors have seen greater potential elsewhere.
“It’s a perfect storm,” says one City-based analyst. ”Things are just not going right for pharma, and investors question whether it’s safe to be in the sector at all.”
One pressure is the “patent cliff”, with the intellectual property protection on both companies’ leading products – like many of those of their rivals – disappearing by early into the next decade. That is even before the effect of an increasingly aggressive generics sector challenging patents in court.
In the past, healthy pipelines offered the prospects of promising new drugs to take the place of those that were expiring. Yet GSK is only on the cusp of testing a series of new medicines in the market, and AZ has significant holes it needs to fill among late-stage drugs in development.
US pharma businesses seemed to be facing worse problems of patent expiries until recently, although they have already been heavily penalised by investors and have embarked on extensive cost-cutting.
Ironically, GSK and AZ may be more exposed than some European peers because of their substantial US activities. In the short term, that has triggered pressure on earnings due to the weakening dollar. In the months ahead, they could face more problems. Partly, as GSK has found concerns over the safety of drugs such as Avandia become political tools in a battle by [those] keen to attack the Food & Drug Administration.
More broadly, with a Democrat-dominated legislature and the prospect of the same party claiming the White House, pressure is growing for further US healthcare reform, likely to include efforts to reduce drug prices.
No surprise that in this context GSK and AZ have been part of the trend of seeking to placate shareholders through dividend pledges and share buy-backs.
For a long time, their sheer size and a dissipated investor base protected them from the pressure of shareholder activists. Yet as private equity becomes more powerful, the security of incumbent managements in pharmaceuticals is starting to look a little weaker than it did.
If anything lifts the stocks in the months ahead, it could be the prospect of restructuring or takeover as much as the more fundamental progress of a new generation of drugs.
Pharmaceutical companies must shift more investment from marketing into research, and link their drug prices more tightly to efficacy in the next few years or face collapse, a new report on the industry's future warns.
In "Pharma 2020: the vision", PwC, the consultancy firm, argues: "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 firm highlights that increased investment by the industry to develop new drugs has yet to compensate for those coming off-patent in the years ahead, while corporate financial performance and reputation has slumped, and predicts as "very likely" a private equity takeover of a large company within 13 years.
It stresses that improving research and development productivity is the most important challenge, but highlights that R&D spending by the leading companies rose only from 15 per cent to 17.1 per cent of total expenses in 1995-2005, while sales and general administration expenses rose from 28.7 per cent to 33.1 per cent.
Steve Arlington, global pharmaceutical research and development advisory leader at PwC, said: "The industry is investing twice as much in R&D as it was a decade ago to produce two-fifths of the new medicines it then produced. It is simply an unsustainable business model."
The report says companies will increasingly shift from "linear" R&D that ends with regulatory submission towards the issue of "live licences" allowing more rapid but restricted launch of medicines that are continuously tested and modified if necessary.
It predicts a shift towards collaboration and sharing of data between international regulators, and even the move to a single global system by 2020 to reduce the costs of compliance and time to market for new drugs.
It calls for changes to intellectual property laws so that prophylactics and novel products meeting unmet medical needs would be rewarded with longer patents than the existing 20 years, while less innovative "me-too" medicines and new formulations would receive shorter patent lives.
PwC argues that risk-sharing agreements in the industry will become mainstream, with manufacturers adjusting prices according to the results of outcome data about efficacy after launch.
It says companies will increasingly become involved in monitoring patients to ensure they are taking their medicines as prescribed, in a move that would improve safety, efficacy and generate up to $30bn a year in extra sales.
The report also highlights a shift from treatment towards prevention and the sale of disease management programmes and services alongside medicines.
By 2020 the pharmaceutical market is anticipated to more than double to $1.3 trillion, with the E7 countries - Brazil, China, India, Indonesia, Mexico, Russia and Turkey - accounting [for] around one fifth of global pharmaceutical sales. Further, incidence of chronic conditions in the developing world will increasingly resemble those of the developed world. But Pharma 2020: The Vision - Which Path Will You Take? indicates that 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. In order to make the most of these future growth opportunities, the industry must fundamentally change the way it operates. Some of the major changes PwC anticipates for the industry are:
- Health care will shift in focus from treatment to prevention
- Pharmaceutical companies will provide total health care packages
- The current linear phase R&D process will give way to in-life testing and live licensing, in collaboration with regulators and health care providers
- The traditional blockbuster sales model will disappear
- The supply chain function will become revenue generating as it becomes integral to the health care package and enables access to new channels
- More sophisticated direct-to-consumer distribution channels will diminish the role of wholesalers.
