Outsourcing in the Pharmaceutical Industry

1
Outsourcing in the Pharmaceutical Industry

• Bob Assenzo
• bassenzo_at_c-path.org

2
Outsourcing in the Pharmaceutical Industry

• Current status of the pharma industry
• Future status?
• Outsourcing
• Mergers and acquisitions
• In-licensing
• Strategic alliances
• Program and project support

3
Progress in Medical Science

• Medical science has made significant advances
  life expectancy has risen from 55 years in the
  early 20th century to 80

4
Pharmaceutical Industry Today

• Medical Progress research-based pharmaceutical
  companies have made great progress in treatment
  of many illnesses, including infectious diseases,
  childhood diseases, some types of cancer,
  cardiovascular disease, diabetes and hepatitis
• Over the past 20 years the cost of developing a
  new drug has increased by a factor of 8

5
Pharmaceutical Industry Today (cont.)

• Geographical shift the industry has shifted from
  Europe to the United States
• The top players are US companies
• 20 years ago the European and US markets were
  roughly equal in size
• Today, the US market is twice the size of the
  European and far more profitable.
• This has implications for global research and
  innovation

6
Pharmaceutical Industry Today (cont.)

• Geographical shift (cont.) European companies
  are channeling more than half of their research
  spending to the US (Novartis)
• The US has a clear edge in the output (new
  products) and input (RD spending)
• The US is the center for the pharmaceutical
  industry (exception Switzerland)
• Humer

7
Consolidation

• 15 years ago the 10 largest companies had 25 of
  the global market
• Today their market share is over 50
• Affects innovation
• To meet market growth target requires about a
  5-fold increase in new launches and doubling of
  average peak sales (Now 1.5 2.5, with ave.
  peak USD 250 m Required 9 10, with ave. peak
  USD 500 m, (or 5 6 launches, one with gtUSD 1 bn
  and 4 5 with USD 750 m))
• Humer and McKinsey analysis

8
Market Capitalization

• Over the past 5-6 years the market capitalization
  has halved to USD 1.2-1.5 trillion
• Shows that financial markets have greatly reduced
  their assessment of the industrys prospects
• Why?

9
Market Capitalization (cont.)

• Stock market bubble burst
• Serious problems with some drugs
• Prices and costs are under scrutiny
• High failure rate in Phase III (50)
• Too long to bring new product to market
• Pressure has led many large pharma companies to
  invest more RD in incremental improvements to
  existing drugs, at the expense of real innovation
• Innovation/Business Model

10
Current Status (cont.)

• Only 3 of every 10 drugs marketed produce
  revenue that exceeds cost of RD
• Business model tied to small molecule
  blockbuster inserts

11
Percent of Revenue from Blockbuster Drugs

• Pfizer 77
• Merck 63
• Astra Zeneca 61
• Lilly 60
• GSK 56
• BMS 37
• Novartis 24
• Roche 23
• Aventis 18
• McKinsey Analysis

12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
15
Mervis, J., Science 309726, 2005
Success rate falling
50
1994 overall 31 -- 1998 overall 8
16
To develop one drug1991 231 Million and 7
years (DiMasi, Tufts)2003 802 Million and 12
years (DiMasi, Tufts)2010 1.7 Billion (Bain
Company) Unacceptable delays for life-saving
drugs Unacceptably high prices for new products
In spite of scientific/technological advances,
drug development efficiency declines
17
RD Spending

• Large pharmaceutical companies spend 15 - 20 of
  revenues on RD
• In 2006, Pfizer spent USD 8.18 bn on RD (Pfizer
  is the worlds biggest RD spender)
• Pfizers annual revenue is ca. USD 51 bn, with
  one-fourth of this from Lipitor
• The 2006 increase in RD spending ranged from 10
  (GSK) to 24 (Merck)

18
Future TrendsDemographic Change

• Today there are about 450 million people
  worldwide over 65 years of age (ca. 7)
• This figure will double by 2020 and more than
  triple by 2050 (17)
• In 2050 in the USA there will be more than 80
  million people over 65. Globally, there will be
  ca. 400 million over 80
• This represents a growing burden on the health
  care system

19
Future TrendsDemographic Change (cont.)

• Chronic illnesses have already replaced
  infectious diseases as the main cause of death
  (absolute terms) e.g. cancer of the colon,
  Alzheimers
• Prevention is an important factor (disease
  models, biomarkers)
• Emerging countries, like China and India, face a
  different situation. Rapid economic population
  growth will drive up demand for healthcare
  (infectious diseases)-industry presence needed
• 50-60 m Indians can now afford private health
  insurance.

20
Future TrendsMore Individual Medical Treatment

• Drugs often do not have the expected effect
• PhRMA estimates that about USD 100 million are
  wasted every year in the US because patients are
  prescribed drugs that are ineffective or have
  serious ADRs
• Many reasons drugs not taken, people afraid of
  ADRs, DDIs biological makeup (genetic
  differences), inadequate info

21
Future Targeted Therapy -Personalized Medicine

• Biomarkers for diagnosis, prognosis, effect
  (surrogate variables)
• Biomarkers for safety (pre-clinical and clinical)
  and efficacy
• Biomarkers for dosing (warfarin)
• Biomarkers for improving clinical trials
• Goal of targeted therapy to maximize benefit and
  minimize ADRs not here yet

22
Future TrendsTheranostics

• Develop biomarker devices and drugs
  simultaneously
• Earlier diagnosis of disease
• Cancer breast, leukemia
• Development of solutions to healthcare
• Still a way off

23
Future TrendsBiotechnology

• Key technology of the 21st century
• Together with automation and information
  technology it is opening up new perspectives for
  all areas of life sciences, especially medicine
• Highly potent, selective biopharmaceuticals have
  proven successful especially in the treatment of
  cancer
• www.fda.gov/cber/

24
Future TrendsBiotechnology (cont.)

• In the future, the treatment selected for cancer
  will depend on the genetic pattern of the tumor
• A knowledge of genetic differences among patients
  can also aid in the development of new drugs
  (e.g., inclusion and exclusion criteria)

25
Strategies for Filling Pipelines

• Mergers and acquisitions
• In-licensing
• Strategic alliances and partnerships (pharma
  biotech)

26
Mergers and Acquisitions

• To gain RD economies of scale
• No proof that it does
• To acquire biotechnology
• Results mixed (merging cultures, retaining key
  researchers, maintaining an innovative
  environment) (J J)
• To address the erratic nature of drug discovery
  process (stop gap)
• Cohen, Gangi, Lineen, Manard, Kellogg School of
  Management NW University

27
In-licensing

• In 2003 licensed products accounted for more
  than USD 70 bn in revenue for the top 20 pharma
  companies. By 2008 licensed products will account
  for USD 100 bn, 1/3 of industrys total projected
  revenue (Wood Mackenzie)
• 24 of drugs in active RD are available for
  licensing another 25 are already licensed out
  or in co-development (Pharmaprojects)
• Allows big pharma to spend less money than having
  to acquire an entire organization
• Competition driving up the costs and in-licensing
  at earlier stages

28
Strategic Alliances Partnerships

• Products co-developed by a pharma and biotech
  company more likely to be commercialized (Shalo,
  BioPartnerships)
• The 20 largest pharmaceutical companies formed
  about 1,500 alliances with biotech companies
  between 1997 and 2002 (Shalo, BioPartnerships)
• Roche and Genentech the most successful
  strategic alliance (Lam, Pharmaceutical
  Executive)
• Challenge is cultural incompatibility

29
Strategic Alliances PartnershipsRoche and
Genentech

• In 1990, Roche bought 10 of Genentech for USD
  490 m, 60 stake control
• Roche gained access to Genentechs data after
  Phase II trials, option to decide whether they
  wanted the product
• If Roche took the product they were bound to pay
  50 of all Genentechs RD costs to date, all
  ongoing costs of getting registration outside the
  US, and royalties on all sales outside US

30
Strategic Alliances PartnershipsRoche and
Genentech (cont.)

• Genentech maintained its independence Roche
  obtained a growing entrepreneurial company
  without fear of stifling innovation
• Roche gained access to a pipeline it could
  market outside US
• Deal benefited Genentech by providing needed
  funding and freed up management to focus on core
  business, rather than raising capital.
• Roches investment was ca. USD 7.7 bn, it took
  out USD 8 bn after IPO they still own 54 of
  Genentech, worth about USD 28 bn.
• Cohen, Gangi, Lineen, Manard, Kellogg School of
  Mngmnt, NWU

31
Outsourcing Program Project Support

• Market 2005 USD 33 bn
• Market 2007 (est.) USD 40 bn
• Growth at 10 per year
• Share of the market
• Clinical Research 29 (growing at 13 per year)
• Dosage form manufacture 26
• API manufacture 24

32
Outsourcing Program Project Support (cont.)

• Basic Research Services (discovery and
  development) Market USD 4bn growing at a rate
  of 23 per year
• Currently, the outsourcing industry averages only
  about 24 of the estimated total potential for
  outsourcing (great opportunities)
• Pharmbiz, India

33
Outsourcing Program Project Support INDIA

• The Indian patent act, amended in March 2005, has
  opened a new avenue for India into the global
  pharma market
• Over 10,000 pharma companies, about one fourth
  can provide GMP contract manufacturing facilities
• At least 25 CROs with infrastructure and
  experienced staff
• Frost Sullivan

34
Outsourcing Program Project Support INDIA
(cont.)

• Many excellent English speaking scientists
• Excellent software skills bioinformatics
• AstraZeneca in 2005 built a research facility in
  Bangalore that focuses on tuberculosis. AZ plans
  to invest another USD 30 m. (CEO The only
  reason for opting for India is the quality of the
  scientists.)
• PharmTech

35
Outsourcing Program Project Support INDIA
(cont.)

• Company A Has hired 300 statisticians
• Company B Has hired 150 statisticians
• The costs of direct and indirect personnel,
  depreciation costs and material are about 40
  lower in India
• Reluctance by pharma companies conservatism
  loss of control

36
Outsourcing Program Project Support (cont.)

• Reasons for Outsourcing
• Large companies have recognized, for a long time,
  the need to leverage in-house resources with
  specialized, competent partners
• Smaller companies cannot master the entire skill
  range within the industry
• Even large, well-established companies may lack
  the flexibility to implement and perform critical
  projects in a timely fashion

37
Outsourcing Program Project Support (cont.)

• Reasons for Outsourcing(cont.)
• Outsourcing has become a strategy of choice for
  moving multiple projects forward simultaneously
• Companies are rationalizing their manufacturing
  facilities, thus demand for contract
  manufacturing will increase

38
Outsourcing Program Project Support (cont.)

• Factors Driving Outsourcing
• Search for efficiencies in the drug development
  cycle
• Extending pharmaceutical company capacity
• Pharmaceutical industry consolidation
• Augmenting small sponsor resources and experience
• Access to specific therapeutic expertise
• Globalization

39
Outsourcing Program Project Support (cont.)

• What Does Outsourcing Provide
• In an atmosphere of change and uncertainty
  companies are making major strategic decisions
  about their current and future operations,
  organizational structure, products, and relations
  with other players
• Outsourcing provides a mechanism for leveraging
  risk, and
• Flexibility to adapt to rapidly changing
  conditions

40
Outsourcing Program Project Support (cont.)

• Reasons Companies Outsource(1998 Survey by The
  Outsourcing Institute)
• Reduce and control operating costs (54)
• Improve company focus (55)
• Gain Access to world-class capabilities (36)
• Free internal resources for other purposes (38)
• Resources are not available internally
• Accelerate reengineering benefits
• Function difficult to manage/out of control
• Make capital funds available
• Share risks (12)
• Cash Infusion

41
Outsourcing and Competition from Other Countries

• Globalization means an increasingly tough race
  for innovation
• The US, EU and Switzerland are competing for jobs
  and investment
• Before long Asian countries like China, India and
  Singapore will narrow the gap in the field of
  research
• New knowledge is sourced where it is available
  and cost effective and where the general
  framework is right

42
Political Regulatory Framework

• Politics has a major impact on the future of the
  pharmaceutical industry
• Regulations on clinical trials, patent
  protection, parallel imports, market approval
  requirements and reimbursement prices determine
  the pace of innovation and play an important role
  in determining the relative attractiveness of
  different locations

43
RD Costs and Returns by Therapeutic Category

• DiMasi JA, Grabowski HG, Vernon J. RD Costs and
  Returns by Therapeutic Category Drug Information
  Journal, 38 211 223, 2004

44
Critical Factors Regarding Decision to Develop a
Given Drug

• Selection of disease area businesses
• Economics of medical product development
• Current portfolio
• IP
• Medical needs
• In-house expertise/outsourcing availability
• Market competition and cost to enter market
• Regulatory requirements