Strategy & Management

Discovering the Future of Pharma

How can the Pharmaceutical Industry Overcome Today’s Challenges and Successfully Commit to Innovation Again?

30.09.2014 -

Dramatic changes to the scientific and business environments have made it impossible for pharmaceutical companies to continue operating as they have in the past. A perceived decline in innovation, market competition from generics, skyrocketing R&D costs, increased regulatory hurdles to develop and test new drugs, and key patent expirations on a number of blockbuster drugs - the so-called patent cliff - have all put significant pressure on branded pharmaceutical companies. The pharmaceutical industry (pharma) has responded to these challenges by embarking on a range of initiatives. The vibrant M&A activity in the sector, however, has not helped a lot to increase the output of new drugs. Dr. Magid Abou-Gharbia, a pharmaceutical industry veteran and director of the Moulder Center for Drug Discovery Research at Temple University School of Pharmacy in Philadelphia, discusses the challenges facing the pharmaceutical industry and pharma's responses, focusing on the industry's changing perspective and new business models for coping with the loss of talent and declining clinical pipelines.

CHEManager International: In a 2012 PricewaterhouseCoopers (PwC) report, a line by Charles Dickens was used to describe the situation that pharma finds itself facing: "It was the best of times, it was the worst of times ... ." Does that quote describe the industry's situation adequately?

M. Abou-Gharbia: The quote from Charles Dickens seems very appropriate. Dramatic changes to the business and scientific environments in the pharmaceuticals sector have fundamentally altered how business must operate in order to survive in the 21st century. The industry has seen significant advancement in its ability to conduct scientific research through the development of an amazing array of tools, and revenue from drug sales is at or near an all-time high. Scientifically, it is the best of times. At the same time, however, the industry is faced with numerous challenges that must be addressed in order for the industry to thrive. A perceived decline in innovation, fierce market competition from generics, increased regulatory hurdles and key patent expirations on a number of "blockbuster" drugs - the so-called patent cliff - have all put significant pressure on branded pharmaceutical companies and threatened the future of the industry as a whole. Many companies have downsized, cut the number of research projects, outsourced functions, and undergone mergers and acquisitions in response to these challenges and the economic uncertainty that they create. The industry consolidation that we have witnessed over the past 15 years has dramatically decreased the number of industrial scientists pursuing novel therapies, decreasing the likelihood of success. From this standpoint, it is the worst of times.

In your opinion, which challenges are putting the highest pressure on pharmaceutical companies?

M. Abou-Gharbia: Without a doubt, the pharmaceuticals industry is facing significant challenges. The clearest threat to the branded pharmaceuticals companies is the lack of new products that can replace the products whose patents will expire in the next decade, which will result in a significant loss of revenue. It has been estimated that between 2011 and 2015, over $250 billion in sales of patent-protected drugs will be -  or have become - vulnerable to generic competition. In the absence of new products, it is not clear how branded companies will move forward. Ironically, over the last 10 to 15 years, the majority of branded companies have been laying off the scientists and staff responsible for identifying the new drugs that they so desperately need. The ever-changing regulatory environment further complicates the task of bringing new drugs to market. Gaining regulatory approval for new drugs will always be required, but the shifting sands of the regulatory requirements are difficult to predict and sometimes contradictory across multiple jurisdictions. There are many examples of drugs that are FDA-approved but were turned down by the EMA - European Medicines Agency - and vice versa. In summary, the predominant challenge facing the industry is identifying and commercializing novel therapeutics in a changing and challenging environment.

We have seen entire industry sectors vanishing in the past because of fewer challenges. Do you think that the pharmaceutical industry is threatened as a whole?

M. Abou-Gharbia: The industry is indeed under threat, but it is highly unlikely that the industry will collapse on itself any time in the next several decades. There are many diseases and conditions, which remain poorly served or unserved, that can serve as profit centers for the industry once appropriate medications are developed. Novel treatments for Alzheimer's disease alone are a massive untapped market. At the same time, payer institutions such as insurance companies and governmental organizations are less willing to pay for "me too" drugs. Innovation is being rewarded, and companies that are unable to provide truly innovative therapies will almost certainly disappear.

Which new business models could turn out to be the most promising guarantors of success for pharma?

M. Abou-Gharbia: There are no guarantees of success in the pharmaceuticals business. Until we can accurately predict which drug candidates will work in a given clinical program, there will always be substantial risk in this industry. As to organizational structures, the best scenario is to establish an organization that bases program advancement on sound scientific data. In addition, companies that recognize that innovation can arise in many places outside of their own organization will flourish, while those that do not will flounder. Academic institutions and startup biotechnology companies are a thriving source of innovation that is available to the industry for those with the foresight to recognize opportunities in diverse locations.

Does the pharmaceutical industry have a social responsibility to discover new drugs, even if the R&D efforts and costs involved would not get remunerated by patients or the health-care systems?

M. Abou-Gharbia: No, they do not. They have an ethical obligation to their employees, investors and, most importantly, to the patient that they serve to remain solvent and able to provide medications to the patients in need. No company can stay solvent long term if it is forced to take on a program for which there is no hope of profit. Long term, no one is served on this path.

Commercial potential must dictate the direction of research, the selection of projects, and the final drug candidates that are commercialized. At the same time, however, the industry should take the initiative to create programs that provide commercially viable medications to patients who are unable to afford the medication. Many pharmaceutical companies have programs designed to substantially decrease the economic burden of therapeutic intervention for patients who cannot afford to pay for their medications.

Having worked in both industrial and academic research, do you believe that the task of discovering new drugs to treat unmet medical needs is best done by joint efforts of industry and academia, and with support from governmental research groups?

M. Abou-Gharbia: Multiple sources of support for research programs is almost always of benefit to scientific advancement and the discovery of novel therapeutics, but support from each of these entities may not always be warranted. Decisions should be made on a case-by-case basis with respect to the importance of the disease/condition and its impact on society as a whole. Support from all three of these entities to develop novel treatments for drug addiction, Alzheimer's disease and ALS, for example, could be rationalized by the clear need in each of these areas. The same is not necessarily true of less threatening conditions such as erectile dysfunction, male pattern baldness and restless leg syndrome. All of these conditions provide significant profit and may improve life for some patients, but it would be difficult to argue that government or academic resources should be directed towards these types of programs. The pharmaceutical industry focuses primarily on programs and research that are low-risk opportunities, while academic institution and governmental organizations have more freedom to take on riskier programs and orphan diseases where there is no guarantee of a return on the investment. To be clear, however, novel clinical candidates identified in academic or government research laboratories will not make it to market in the absence of a commercial partner.

Since the beginning of the 21st century, pharma M&A activity has exploded, reaching a total value of about $800 billion. Have these transactions had a positive effect on drug R&D?

M. Abou-Gharbia: The final determination on the overall impact of the industry consolidation that has occurred in the last two decades remains unclear. Short term, these transactions have bolstered the profitability of companies, allowing them to satisfy the investment community. Whether or not this will translate into a more viable industry, however, has yet to be determined. Many of the mergers and acquisitions were predicated upon increased efficiency in the identification of new marketable therapies, but the FDA - Food and Drug Administration - approval rate remains unchanged. The merging companies often claimed that they would take advantage of "synergy" that existed between the two companies to improve efficiency. Those of us who have direct experience with mergers and acquisition understand that the term "synergy" is a synonym for "severe job cuts" with a heavy focus on drastic cuts to R&D budgets. The industry as a whole has decreased scientific head count, which has in turn decreased its ability to conduct cutting-edge research, which will limit the industry's ability to develop novel therapies internally. This will likely create a greater dependence of the industry on academic and governmental laboratories for the identification of novel clinical candidates and increases in partnership agreement between pharmaceutical companies, academic organizations and biotech startup companies. Clinical trials, however, are likely to remain the purview of the pharmaceuticals industry.

The patent cliff is one major challenge for Big Pharma. Some estimates say that over $290 billion in sales may be at risk for the period 2012-2018. Do pharmaceutical companies have to abandon the blockbuster mentality and consider other approaches to survive?

M. Abou-Gharbia: In short, yes. Blockbuster drugs are certainly important, but they are a rare find. When they are identified, they can change the course of a company, catapulting it into the major leagues of the industry. There are, however, many very profitable drugs that are not blockbuster in status that can provide the revenue required to maintain operations within an organization. Baseball players do not swing for the fences every time they come up to bat; they hit the pitches they are thrown in the best way that they can. The pharmaceuticals industry should adopt the same approach. At the same time, the blockbuster mentality is increasingly driven by payer demands. Payer organizations are only willing to pay top dollar for truly innovative therapies. The industry has responded to an extent by increasing its focus on biologics, which can command a high price and, at least for the moment, are not as vulnerable to generic competition from biosimilars. This will certainly change over time, at which point the industry will have to regroup and determine how best to face the new set of challenges that present themselves.

The establishment of shared risk/shared reward partnerships has increased significantly. Can these partnerships accelerate drug discovery and fill up the innovation pipelines?

M. Abou-Gharbia: Drug discovery and development take time. The formation of a partnership does not change this fact. In vitro assay, animal studies and clinical trials time requirements are still the same, irrespective of whether they are done as part of a collaborative effort or within an individual organization. The value of the partnership is in shared access to resources, scientists and expertise, as well as distribution of risk across multiple organizations. It is likely that these partnerships will help refill the pipeline, but the speed at which this is accomplished will still be dictated by the time required for scientific exploration and navigation of the bureaucracies that are a part of the industry for better or worse. There is also a benefit to be derived from the shared risk aspect of partnerships. The cost of developing novel therapeutics is extremely high. The most recent estimate is on the order of $1.7 billion. Partnerships and collaborations diffuse the risk, and at the same time provide opportunities for companies to use their resources to explore other opportunities. The opportunity for a single company to take part in the development of new therapies is expanded, while the risk of failure is diminished. Of course, shared development also means sharing the profits, so individual companies will reap the same level of reward in partnered programs. That being said, there are numerous examples of these kinds of partnerships, especially in high-risk areas such as Alzheimer's disease and cancer, some of which have produced marketed drugs.

The market for biopharmaceuticals has a potential to reach $320 billion by 2020, up from $139 billion in 2011. Can the biopharmaceuticals sector become a safe haven for pharmaceutical companies?

M. Abou-Gharbia: Over the last decade, the pharmaceuticals industry has shifted its focus from small molecules drugs to biopharmaceuticals. An enormous amount of capital and resources have been dedicated to biopharmaceuticals and as a result the biopharmaceutical pipeline has over 5,000 new clinical candidates under development around the world. Certainly, the biopharmaceuticals market has the potential to offer new therapies for the industry but is no longer the safe haven it once was. The creation of pathways for generic versions to enter the market has changed the dynamic in this commercial space. In the early days of the biopharmaceuticals market, patent protection and the lack of a clear path forward for generic biopharmaceuticals served to protect many important products for the branded companies. Now that there are defined mechanisms for the approval of generic biopharmaceuticals, generic companies are beginning to enter these markets. Today, strong patent positions are the only barrier to generic competition in the biopharmaceuticals sector, which is the same as it is for small molecules.

More importantly, can biopharmaceuticals provide the new drugs needed to cure the world's most serious diseases?

M. Abou-Gharbia: It is possible that they can, but just like any other platform, methodology or tool, there are limits to what can be accomplished with a biopharmaceutical. Biologics and macromolecular therapies have certainly proved useful in diseases that have been difficult to treat with traditional small molecules, but there are limitations to their utility as a result of the required mode of administration. To my knowledge, there are no examples of orally delivered biologics, which leaves them vulnerable to replacement with orally delivered small molecules.

Drug approvals are increasingly becoming dependent on the value a drug provides for the patients. How can pharma respond to these heightened regulatory hurdles?

M. Abou-Gharbia: The value proposition has certainly become a major issue as the overall cost of health care has come into focus over the last few decades. In order for the industry to thrive, it must adapt to the new, cost-constrained paradigm that has been established. It is easy to say that the industry should focus on developing drugs that are significantly improved over previous generations of drugs, but this is by no means an easy feat. Tackling unmet medical needs that prevent significant downstream medical costs, such as developing treatments for ALS or increasing the cure rates for hepatitis C are clear examples of this. The industry as a whole could also make significant strides towards lowering drug prices long term if it focused its cost efforts on areas other than research and development. Eliminating these areas makes a high-profile statement by lowering R&D costs, but it also substantially decreases the industry's ability to innovate and develop novel therapies that are truly value propositions for patients and the health-care system as a whole.

The industry also has a serious image issue that must be addressed. The pharmaceutical industry improves the lives of millions of people on a daily basis. It is responsible for modern medical miracles such as HIV treatments that turned HIV infection into a chronic issue instead of a death sentence and cancer therapies that dramatically lowered the number of cancer deaths. At the same time, however, the pharmaceuticals industry is routinely taken to task and vilified for its lack of productivity and the production of "bad drugs." The industry needs to take on the challenge of promoting the good that it accomplishes and educating the public on the immense challenges and costs associated with developing new drugs.

Of course the FDA has established policies and guidelines for new drug approval, but they are subject to change. Some changes have created stricter guidelines, while others are aimed to speed approval of new drugs. In 2000, for example, the FDA altered the approval guidelines for anti-infective drugs by requiring companies to demonstrate their new drug candidates truly possessed superior efficacy when compared to existing therapeutics. This dramatically increased the complexity and cost of clinical trial, leading the majority of major pharmaceutical companies to abandon the area altogether. Efforts to speed up the new drug application review process, on the other hand, have been a welcome, positive change. Accelerated reviews, priority reviews and fast-track programs will almost certainly have a positive impact on the industry and patient in need. The first "breakthrough therapies" were designated in the last few months and have provided an indication to patient advocacy groups that the FDA is willing to take greater risks to move desperately needed therapies through the clinical process as rapidly as possible. Most HIV drugs were pushed forward under an accelerated approval process. There are, however, many people who are concerned that this designation will be overused and will increase the likelihood that flawed or dangerous medications will reach the market. Post market-approval surveillance of new therapies will be required in order to mitigate this very real risk.

It is a fact that despite a four-fold increase in R&D spending between 1992 and 2012, the number of drugs or NCEs - new chemical entities - has stagnated. However, a recent increase in FDA approvals in 2011 and 2012 could indicate that the drug drought might be coming to an end. How can the pharmaceutical industry improve its R&D success rate?

M. Abou-Gharbia: There is no doubt that increased R&D spending has not increased the number of new drugs reaching the marketplace. With the exception of 1996, a year that saw 56 new drug approvals, the number of new approved drugs has been declining despite the massive increase in R&D expenditures. The number of new drug approvals has dropped to 19 to 20 per year. In 2011, there was cause for hope when 30 new drugs were approved by the FDA, but these results are misleading. Two of these agents were actually imaging agents and not therapeutics, and six more were already approved in the EU or for other indications. Thus, in reality, only 22 new therapies were approved by the FDA in 2011. The fact remains that increased R&D expenditures have not led to an increase in new drug approvals.

Why this is the case and how to fix this issue is the proverbial "$64,000 Question" that no one has been able to answer. The best answer is to focus efforts and resources on high-quality science, testable hypotheses, and remove corporate politics from scientific decisions. High-quality science will lead to high-quality therapies, but good science takes careful planning and time. Careful planning is the easy part. Time is the hard part. Management, investors, and politicians are often not willing to be patient enough for scientific advancement. Many high-quality programs that were headed in the right direction have been discarded because they were not advancing rapidly enough in the eyes of management, investors and politicians. This is especially true when mergers and acquisitions occur. Allowing high-quality science to runs its course probably will not shorten the cycle time, but it would result in an increase in the positive results at the end of the cycle, thus improving overall productivity. In order to accomplish this, the industry will need to reverse course and re-establish its ability to execute research programs and identify other areas to decrease overall company costs. There will also need to be an increased focus on optimizing clinical candidates in the discovery stage of research by ensuring that clinical candidates have suitable pharmacokinetic profiles, oral bioavailability and druglike properties. Clinical trials are by far the most expensive portion of the drug discovery and development process, but at the same time the failure rate of clinical candidates is 90%. A 25% reduction in the failure rate would dramatically decrease overall R&D costs. This can only be accomplished, however, by increasing resources and staffing in discovery operations.

Academic drug discovery groups have appeared to support the transition of innovative academic discoveries and ideas into attractive drug discovery opportunities. Will academic drug discovery groups fill the innovation gap left behind by the downsizing of pharma R&D groups?

M. Abou-Gharbia: Academic drug discovery has provided innovation for the industry for several decades, and this is unlikely to change. The development of academic drug discovery centers will certainly improve the quality of the drug discovery science that is developed in the halls of academia, but like everything else in life, it is not without costs of its own. While the industry will gain access to novel science by partnering with these centers, it will also have to share the rewards with the academic institutions and scientists that produce the innovations that move forward. Milestone payments, royalties and other financial compensation that would have been profit for the industry will instead go outside of the industry. Expertise and knowledge that had been previously available inside the industrial organizations will also decrease over time as more of the drug discovery process is moved from industry to academia.

Another challenge faced by pharma is the failure rate for compounds in clinical trials. How could clinical dropout be reduced?

M. Abou-Gharbia: The pharmaceuticals industry has already made great strides in adopting early testing of safety and pharmacokinetics by implementing numerous in-vitro ADME screening techniques designed to ensure that lead compounds have druglike properties. This has helped alleviate some of the issues that can cause clinical failures such as safety, toxicity and pharmacokinetic issues, but there is still a great deal of work to do. One possible avenue to an improved success rate lies in the ability to identify subpopulations within disease categories that are more likely to benefit from a particular new form of therapy. This has been very effective in the treatment of breast cancer, especially with regard to the BRCA gene. Expansion of this type of clinical targeting of novel therapeutics could help the industry a great deal.

Which role do CROs/CMOs or CRAMS play in the drug discovery/development value chain today, and how will their role change in the future?

M. Abou-Gharbia: Pharmaceutical contract research and manufacturing services - short: CRAMS - is an $80+ billion market, and contract research constitutes approximately 50% of the outsourcing activities in discovery and clinical research. Contract research organizations - CROs - will almost certainly continue to play a role in drug discovery and development, but as their importance to the process grows, it is likely that they will want an increasing share of the downstream profits. Milestone payments and profit-sharing clauses are likely to become more common in CRO agreements. In addition, some CROs have decided to take advantage of the infrastructure, capacity and experience that they have developed to launch internal drug discovery programs of their own. Scynexis, a small company in Durham, North Carolina, for example, was founded as a CRO in 2000. Over time, they built on the expertise and infrastructure required for CRO activities and added an internal drug discovery program to their operation. As of 2014, Scynexis has nine programs in its pipeline. The CRO sector may prove to be a launch point for the next generation of pharmaceutical companies.