Personalized medicine, which targets individualized treatment and care based on personal and genetic variations, holds much promise for the pharmaceutical industry. Several pharmaceutical majors continue to invest in this emerging field as evident by Roche’s $5.7-billion bid last week for Illumina, a provider of gene-sequencing tools and related analytics.

Roche, perhaps, more than any other pharmaceutical company, is banking heavily on the combination of diagnostics and drug development to drive pharmaceutical innovation. In reporting its 2010 results in February 2011, Roche reported that it had 12 new molecular entities in late-stage development, of which six were potential personalized healthcare medicines with planned companion diagnostic tests, which included Zelboraf (vemurafenib) and its companion diagnostic for BRAF mutation-positive metastatic melanoma. FDA approved Zelboraf for treating BRAF V600E mutation-positive, inoperable, or metastatic melanoma and the cobas 4800 BRAF V600 Mutation Test, a diagnostic test developed by Roche, in August 2011.

Earlier this month, the European Medicines Agency’s Committee for Medicinal Products for Human Use recommended that Zelboraf be granted full marketing authorization as a monotherapy for treating adult patients with BRAF V600 mutation-positive unresectable or metastatic melanom. The corresponding European Commission decision on the marketing authorization of Zelboraf is expected in February 2012. Marketing authorization submissions for Zelboraf also are under review by health authorities in Australia, New Zealand, Brazil, India, Mexico, Canada, and other countries worldwide.

Roche also is using its diagnostic strategy to support new indications for existing drugs. Last month, it reported that the cobas EGFR Mutation Test was CE-marked, an indicator of a product’s conformity with EU requirements, and is now commercially availabile in Europe and other countries that recognize the CE mark. The cobas EGFR Mutation Test is a companion diagnostic to identify patients with non-small-cell lung cancer (NSCLC) who harbor mutations in the EGFR (epidermal growth factor receptor) gene and who may benefit from treatment with anti-EGFR tyrosine kinase inhibitors, such as Roche’ Tarceva (erlotinib). Tarceva, an oral EGFR inhibitor, was first approved in September 2004 to treat locally advanced or metastatic NSCLC after failure of at least one other chemotherapy treatment. It later was approved by the European Commission in September 2011 as a first-line monotherapy in people with locally advanced or metastatic NSCLC with EGFR-activating mutations.

Other companies also are reporting success with certain personalized medicines. In August 2011, FDA approved Pfizer’s Xalkori (crizotinib) for treating locally advanced or metastatic NSCLC that expresses the abnormal anaplastic lymphoma kinase (ALK) as detected by an FDA-approved test. The agency approved the drug along with a diagnostic test for the ALK gene abnormality, Abbott Molecular’s Vysis ALK Break Apart FISH Probe Kit. Up to 7% of those patients with NSCLC, typically patients without a history of smoking, have the gene abnormality.

Although personalized medicines will likely hold only a small part of the overall pharmaceutical market by value and volume in the near term, these successes portend of a changing paradigm in drug development.

Joe Panetta, president and CEO of BIOCOM, discusses an emerging model of M&As in which human and IP assets are valued and biotech brings expertise to Big Pharma as venture capitalist funding dwindles and patent cliffs loom large.

Pharm Exec: Can you tell me about how small biotech and specialty companies have started switching from relying on venture capitalist (VC) funds to M&As, and when that shift came about?

Joe Panetta: I wouldn’t say they’re switching from relying on VC. I think the fact is that VC investment has taken on a different approach than it had traditionally; so we’re seeing a different, let’s say more conservative, shorter-term VC investment model. That’s combined with the fact that we’ve seen for a couple of years now that VC firms have been much more engaged in investing in their current portfolio companies, and there’s been less of an appetite for investment in new companies than there was five years ago.

Part of that is the fact that we’ve got economic challenges; part of it is the fact that we have a tremendously challenging environment at FDA; and part of it is the fact that we have uncertainty from a political standpoint. So those kinds of things have created a much more conservative approach to VC investing than we’ve seen in the past, and that’s had an impact in terms of the ability of our companies to be able to raise the kind of funding that they still need to raise to move their products through the pipeline.

What that means is that companies need to turn toward alternative sources of funding beyond VC. VC is also taking a much shorter timeframe perspective in terms of the investments that they’re making now. But that leads us to the need that large pharma companies see for innovative technology to fill their pipelines; the ability of biotech companies to attract large biotech and large pharma partners much more successfully than they have in the past; and the dynamic that we’re beginning to see—biotech companies becoming much more focused on management of the products that they’re developing, and on partnering to gain the expertise that is needed to move through development and clinical testing and commercialization.

So that creates the opportunity for companies to focus on innovation and to team up and partner with the experts on product development, commercialization, and manufacturing. And that’s where pharma comes in and plays an enormous role. Obviously pharma’s pipelines have become more depleted in terms of new innovative products over time, so there’s a greater appetite from the pharma side to engage in real partnerships with biotech companies. It’s not outright acquisition; rather, what I’m hearing more and more from a number of different pharma companies, is that the partnering model is more attractive than the outright acquisition model. And if the outright acquisition takes place, then the ability to allow a biotech company to continue to function as a satellite entity is much more attractive than simply acquiring the assets and letting the people go.

PE: What has changed in the industry or the economy that has larger pharma realizing that partnerships where both organizations work together on a level playing field may be more valuable than the straight acquisition model?

JP: There isn’t so much of an appetite any more in biotech, from the investor side or even from the management side, for creating fully integrated future large biotech companies that look like pharmaceutical companies. That used to be much more the direction that the companies were headed in, and for the most part that model has gone by the wayside. Now there’s a more virtual model, a leaner model, and that makes it much more attractive for partnering. The larger partner doesn’t have to worry about what to do with an entity that is duplicating—or at least attempting to duplicate—what they already have the ability to do.

The other thing that’s changing is the fact that we’re seeing generics come on the scene. Now there’s a future road map for biosimilars that is being developed. We see that way forward, and larger companies are beginning to plan for the world of biosimilars. Also, Big Pharma is beginning to plan more for the world of generics and of patents expiring, and I think they’re beginning to realize that they need to go into fast forward to begin to fill the pipeline, and to develop more innovative products. That’s not coming out of the merger of pharmaceutical companies. Those mergers are actually resulting in the large pharma companies having to deal with duplicate organizations and integrating existing products together, so that isn’t providing for innovation.

PE: So the mergers with smaller or more specialized biotech companies are where you believe the more specialized knowledge can come from?

JP: Absolutely—the more specialized knowledge, and the ability to do early-stage research and development much more nimbly and more quickly, resulting in more candidate products that can be developed through partnerships.

PE: How is this working so far as an economic strategy? Is this helping to bridge the financial gap that’s left from VC funding?

JP: I think it’s more than bridging the gap. Last year we did our first pharma/biotech partnering conference here in San Diego, but the relationship between large pharma and biotech has been evolving slowly over time. There was a time when the attitude on the pharma side was, ‘don’t call us, we’ll call you.’ But what we saw at out partnering conference last year and we are continuing to see now is a real appetite for equal partnership on both sides.

Everything we hear and everything we see points to a greater desire for there to be a real partnership between the two. And I think that can sustain smaller biotech companies. Pharma needs biotech as a partner, and biotech needs pharma, but pharma especially needs to continue to appreciate the value of biotech as a partner in terms of the people assets, and not just the intellectual property assets.

PE: Can you tell me more about the dynamic? How is this model of partnering different in terms of what both sides might be gaining, compared to the traditional acquisition model?

JP: The major difference is that by utilizing the resources of smaller biotech companies and by creating partnerships with various smaller biotech companies, a larger pharma can take advantage of the diversity of technologies that these small biotech companies are working in; they can take advantage of the creative environments that exist within these companies; they can harness all of that energy. Just as the biotech model is evolving away from creating a fully integrated pharmaceutical company, the pharma model is evolving away from creating these enormous R&D organizations; if we look at the performance over the last few years for the investment that’s been made, it’s pretty clear that that model isn’t as successful as it was years ago.

PE: What are some factors that result in VCs not being as willing to invest as they were in the past?

JP: I think FDA is overwhelmingly the concern right now. I don’t think a day goes by where I don’t hear or read something about how the FDA is negatively impacting the ability of the industry to be competitive in terms of developing and introducing new drugs. The climate has changed. Because of the risk-averseness at FDA, the lack of ability to accept innovation at FDA, the investor community—particularly the VC community—has been encouraging its members to obtain their approvals outside of the US, in Europe in particular. And that’s because the review process at the European Medicines Agency (EMA) is much more predictable and much more innovation-focused than the FDA is here.

If we look at what has happened with a number of drugs that have been reviewed by the FDA in the last year or two, in the obesity arena in particular and in diabetes drugs, the FDA has shown a real reluctance to approve new products and new technologies. So why invest in a process that’s unpredictable and has demonstrated that the ability to get all the way through the process to commercialization is pretty slim? That wasn’t the case years ago with FDA, especially when the Prescription Drug User Fee Act (PDUFA) came into play 15 years ago. There was a real desire on the part of the FDA to move products through the pipeline more efficiently, to take advantage of the user fees and the deadlines that were agreed upon. But now we’ve got an FDA that’s just mired in bureaucracy and risk-averseness.

Part of that is fear of making a mistake. We’ve got examples like Vioxx where, post-approval, there have been issues that have come up, and FDA is taken to task by Congress for having made a mistake. There’s a lack of understanding of the fact that there are risks associated with all products that are approved; from a media standpoint, from the Congress standpoint, from the public’s standpoint. So that all makes for a very risk-averse climate and VCs won’t invest in a process that isn’t predictable. That’s why we’re seeing a lot of VC investment moving more towards early-stage product development with an investment period of maybe three years. This way, they can be more focused on the part of the process that doesn’t involve FDA review, and can let pharma or other partners deal with the later stages of review at FDA.

I think FDA is beginning to appreciate the fact that this is an issue, and is beginning to talk more about the need to focus more on innovation. But making good on that is a long-term process, and it’s going to take years for it to happen.

PE: How do you see all of this panning out in the next five to ten years? Will M&As continue to spread, and will VCs come around if they see certain changes occurring within industry?

JP: I think pharma will continue to need to engage in M&A over the next five years. I think biotech is becoming more sophisticated in terms of its ability to rely on outside expertise and predictive tools.

Two weeks ago I talked to a VC firm that actually has an FDA expert within the firm, who now goes in and looks at all of the relationships that the biotech company might have had with the FDA before making a decision on investing. I think that’s good; I think it helps to focus in on the companies that are doing it right, and it helps to drive other companies to understand that they need to bring in the expertise to help them to create greater predictability for the investors.

But I think in the next five years, if we see an FDA that truly responds to this call that’s coming from the industry and from Congress to focus more on innovation, and we begin to see some results, then I don’t think there’s any doubt that we will see the VC community engaging in later-stage investing. But I don’t think that changes anything in terms of the need for Big Pharma to create more partnerships across the board with biotech companies. And I think we’ll continue to see that happening as there’s a need to fill pipelines and as the patents expire on products, and as we move more towards the implementation of the biosimilars legislation. VC funding and healthy, dynamic M&A deals do not have to be mutually exclusive.

As the country struggles with the current economic malaise, and the pharmaceutical industry enters into yet another difficult quarter of “trying to make the numbers,” one matter that I doubt many Rx execs are thinking about today is the HCR Taxman.  That’s too bad.  They probably should.  That’s because he’s coming for the entire industry on September 30^th.

Now that I have your attention, what in the world am I talking about?  It’s a long story, but let’s just say that the HCR chit that the industry signed in Washington, D.C. during the summer of 2009 has come due, and it’s time to begin paying up.  If your company does more than $5 million a year in sales to various federal government entities, you should read on.

On August 22^nd, the IRS issued temporary rules on the matter that direct the following:

“Drug manufacturers that sell $5 million or more annually through the federal government’s Medicare Parts B and D, Medicaid, Veterans Affairs, the Department of Defense and TriCare programs, are required to make combined total fee payments of $2.5 billion by Sept. 30, 2011.”

The Obama Administration, in the push for HCR in 2008, understood that it needed to bring the Rx industry “into the fold.” The subsequent deal – $80 billion over 10 years – struck between the Administration and PhRMA required the Rx industry to “fill the donut hole in Part D,” offer up other payments to ameliorate the costs of Medicare Part B, and to “contribute” to various military health services. In exchange, the Administration would back off demands for additional HCR taxes on the Rx industry, going forward.  Clearly, the industry’s theory was that the Rx volume to be generated by 35 million newly covered HCR patients would more than offset the costs of the deal. But now, two years later, PhRMA is back in protective mode, as the same fee proposals have begun to resurface. So much for the Administration’s 2009 deal with industry.

Back to the impending September tax obligation. According to the preliminary rules the IRS released on August 22^nd, the aggregate fee amount due from the Rx industry for each year of the HCR funding is:

• $2.5 billion for fee year 2011;
• $2.8 billion for fee years 2012 and 2013;
• $3 billion for fee years 2014 through 2016;
• $4 billion for fee year 2017;
• $4.1 billion  for fee year 2018;
• $2.8 billion for fee year 2019 and thereafter.

The fees for each year will be allocated:

• Using a specified formula, among covered entities (i.e., manufacturers & importers) with aggregate branded prescription drug sales of over $5 million to specified government programs (Medicare Part B program, the Medicare Part D program, the Medicaid program, any program under which branded prescription drugs are procured by the Department of Veterans Affairs, any program under which branded prescription drugs are procured by the Department of Defense, and the TRICARE retail pharmacy program).

Provides that the annual fee for each covered entity is calculated by determining the ratio of:

• The covered entity’s branded prescription drug sales taken into account during the preceding calendar year to…
• The aggregate branded prescription drug sales taken into account for all covered entities during the same year, and applying this ratio to the applicable amount.

So what is the Rx industry’s tax liability?  Here’s a 2010 estimated look at how this lays out, courtesy of Foley-Hoag, LLC:

The table that follows illustrates the graduated structure of the fee for a (hypothetical) covered entity, “ Q Pharmaceuticals,” with $1 billion in total branded prescription branded drug sales in 2010 (under specified programs):

To calculate a covered entity’s share of the statutorily determined aggregate fee, the IRS would multiply the fee by the ratio of the covered entity’s total sales taken into account to the aggregate of all covered entities branded drug sales taken into account.

Under the above scenario, where Q Pharmaceuticals total sales taken into account is $783 million in 2010, and where the aggregate sales taken into account for all covered entities is $10 billion, Q Pharmaceuticals fee would be:

If you’re an Rx firm doing an aggregate one billion dollars of business with the federal entities listed above, you’re on the hook for nearly $200 million by September 30, according to the IRS and the 2010 Foley-Hoag formula. This is a hypothetical, but the above formula is pretty straightforward.  You should be able to load in your federal sales numbers, as appropriate, and figure out where you will actually stand on September 30th.  It could be a very interesting number.

For brand managers who are sweating out sales every quarter, trying to make quota, the idea that the profitability of their product may be adversely impacted by this new HCR “fee” is no small matter. Will these fees have an impact on 2011 bottom line, year-end bonuses, for example? As HCR continues to roll out, keep an eye on the activities happening beneath the surface of the law. Rx industry CFOs and industry tax departments are well aware of this development, but I’m guessing that the September 30^th tax obligation might come as a surprise to many in the C-suite. I would be interested in your thoughts on this latest development in HCR.

Updated numbers from the Florida BioDatabase, maintained by the University of Florida’s Sid Martin Biotechnology Incubator. in Alachua, show 29 new companies opened during the last three years for a total of 165 in Florida. Biotech companies tracked by the BioDatabase are characterized by having a true research and development core that helps fuel the innovation of new products for Florida’s growing biomed industry.

“Florida is on track to become a strong player in the biotechnology industry,” says Dr. Michael Schmitt, editor of the Florida BioDatabase. “Our state has the key ingredients for growth including a strong research base and an increasing trend in venture capital funding.”

Mirroring national trends, Florida’s biomedical industry is off to a strong start in 2011 with the level of investment dollars at more than $75 million in the first quarter alone, representing nearly 50 percent of total funding in 2010, according to data collected for the Florida Biodatabase. Moreover, venture capital funding comprises over half this amount and consists of three deals valued at a total of $40 million.

The University of Miami Life Science & Technology Park—whose first phase is slated to open mid-June—is likely to impact those numbers as the park takes shape (construction shown below). The park will house wet and dry labs, offices, and lab-ready development suites and is intended to help life science and technology research teams advance and commercialize their work via collaborations between academia (University of Miami faculty) and industry. It’s the largest facility of its kind in South Florida, and will eventually total nearly 2 million square feet. The park is expected to attract new-to-market companies who are seeking to use Miami as a stepping-stone to the hot biotech markets in Latin America, as well as Latin American companies wanting a foothold in the US. Additionally, many local companies have expressed interest in relocating or expanding their business at the new park.

On a call with reporters yesterday, Murray Aitken, executive director of the IMS Institute for Healthcare Informatics, said adoption rates for biosimilars are challenged by manufacturing complexity, patent exclusivity periods and an untested regulatory pathway in the U.S., plus a reticence “of providers and patients to accept biosimilars in place of original brands.” Current U.S. law allows for 12 years of patent exclusivity for new biologic drugs, although the Obama Administration’s proposed budget for 2012 would shorten that period to seven years, and prohibit the practice of “evergreening,” or making minor changes to a drug in order to extend patent exclusivity.

“We’re not expecting the U.S. regulatory pathway to be cleared, such that biosimilars can enter the U.S. market until 2014,” said Aitken. “We’ve been watching this in the European market, and we’ve seen a pattern where for the first two or three years, the penetration was relatively low, but it’s begun to take off, especially in Germany,” although not all European markets have been keen to adopt biosimilars. “I think it’s fair to say that we expect in the 2015 to 2020 period, biosimilars will see a high rate of growth and share of the market,” said Aitken on the call.

Total spending, globally, on all medicines is expected to cross the trillion dollar threshold by 2015. That figure represents a slowdown, from 6.2% growth over the last five years, to between 3%-6% estimated growth between 2010 and 2015, according to the forecast. By 2015, emerging markets will represent 28% of worldwide spending, up from 18% in 2010. IMS’s designated emerging markets include China, Brazil, India, Russia, Mexico, Turkey, Poland,Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan and Vietnam. Spending rates in China are expected to grow by 19-22%, more than any other country. Spending in China increased by 23.9%, to $41.1 billion, between 2005 and 2010.

The top three therapeutic classes in 2015, according to the forecast, are likely to be oncology ($75-80 billion), antidiabetics ($43-48 billion) and respiratory products ($41-46 billion).

Aitken noted on the call that off-invoice drug discounts,increasingly offered to payers in the U.S., France and Germany, were not reflected in IMS’ forecast. The estimated amount of such discounts in 2010 is $60-65 billion, he said.

The full report is available as a free download here.

While intellectual property (IP) protections and the Chinese government’s willingness to pay for expensive new products represent two large and lingering question marks, Joe Panetta, president and CEO at BIOCOM, said his last trip to China was surprising.

“We visited one of the largest pharmaceutical companies in China – Yangtze River Pharmaceuticals – which is pretty strongly government-backed and which has been long known to be a generics and traditional Chinese medicine company,” said Panetta, noting a statue of Mao Zedong in the company’s courtyard. “When I got there, not only did I see their long-established generics manufacturing facilities, but I also saw their 14- and 10-story innovative research towers that are under construction. They assured me that the future for them is not in generics, and the CEO said clearly to us: ‘I want to meet companies in San Diego, and I want to access new therapies that we can commercialize here.’”

Panetta said a portion of China’s population – by some estimates a portion as large as the total US population, according to Panetta – is becoming increasingly affluent, and has the “desire to access new therapies as well as the means to access new therapies.”

Despite a rising tide of affluence in major cities, many people living in China’s outer provinces are still in need of basic medical services, a problem China’s ambitious, $125 billion health reform initiative hopes to alleviate. “First they have to build delivery centers, and [the Chinese government] is talking about building hundreds of hospitals and thousands of clinics throughout the provinces in China, and they have to first deliver basic therapies and diagnostics and devices, but the question is how soon will it be before the government begins to take an interest in more innovative technologies,” said Panetta. “They have a long way to go, but to me, what that says is that there’s a lot of opportunity for a long time in China.”

The best way to enter the Chinese market is through partnerships, said Panetta, citing talks with companies residing in “large biotech parks in Shanghai and Beijing, and the China Medical City that’s being built from the ground up in Taizhou,” as well as US and European pharmaceutical companies that have a presence in China. “The Chinese would love for our companies to go over there and set up shop,” said Panetta. “What they tell us is that they want to learn how to innovate…I think the payback for our companies is clearly the 1.3 billion person market in China.”

BIOCOM hopes to facilitate partnerships with Chinese companies through conferences and trips to China, in order to “understand who we can build relationships with, what those relationships need to look like, and where we can build those relationships,” said Panetta. “[US] companies need to be careful about how much of their intellectual property they take to China when they create partnerships, and how much they keep [in the US],” said Panetta, and concerns remain about the level of talent and skill that exists, beyond the research level. “Several years ago, the discussion on Asia tended to gravitate toward outsourcing, low-cost research and low-cost early stage discovery efforts,” said Panetta. “That’s changed pretty drastically. It’s a terrific opportunity four our life sciences industry in Southern California,” he said.

Billed as the first Chinese product development partnership (PDP), the Global Health R&D Center of China (GHRC) hopes to discover and develop new treatments for tuberculosis (TB) and other diseases by collaborating with pharmaceutical companies, the Chinese government, academic institutions and other groups, according to a statement.

The GHRC was created through a partnership between The International Scientific Exchange Foundation of China (ISEFC), a translational sciences group, and the TB Alliance, a not-for-profit organization focused on developing new and better TB medications.

Mel Spigelman, president and CEO of the TB Alliance, said in an email that pharmaceutical companies stand to gain from sharing resources, such as intellectual property, with the GHRC. “The GHRC will offer companies financial and world-class discovery and clinical development resources to advance compounds for neglected diseases that they otherwise may not be able to [develop] on their own,” said Spigelman. “In addition, companies will establish strong working relationships with key discovery, regulatory, and clinical resources in the fastest-growing pharmaceutical market in the world.”

The TB Alliance has drug development partnerships with AstraZeneca, Bayer, GSK, Novartis, Sanofi-Aventis, and Tibotec, and is currently managing three drug candidates in clinical trials, according to organization’s website. Spigelman declined to specify which compounds the TB Alliance itself will contribute to the GHRC.

“The vision of the GHRC is to focus on translational medicine for public health and bridge the innovation gap that currently exists into new treatments and cures,” said Geng Jianyue, secretary-general assistant of the ISEFC, in a statement. In China alone, some 1.3 million people develop active TB annually, and 150,000 die from the disease each year, according to the TB Alliance.

A recent World Health Organization (WHO) report found that only a 10% of the multidrug-resistant tuberculosis (MDR-TB) cases identified globally received treatment in 2009. The WHO report called multidrug-resistant and extensively drug-resistant tuberculosis a global epidemic, and TB in general kills almost 2 million people each year, according to the TB Alliance. The announcement of the GHRC coincides with World TB Day, which is celebrated on March 24 each year, to commemorate Robert Koch’s discovery of TB bacillus, the cause of the disease.

While access to treatment remains a major problem in many of the 27 countries most burdened with MDR-TB, the treatments themselves, many over forty years old, present further difficulties, since first-line drugs like isoniazid, ethambutol, pyrazinamide and rifampin require a six to nine month regimen. Failure to adhere to a treatment regimen can result in drug resistant strains of TB, which require second-line drugs, many with severe side effects.

In addition to developing new TB treatments and addressing other public health diseases in China, the GHRC will also develop compounds for the rest of the developing world, according to Spigelman. “Global development programs will likely be partnered with disease-specific PDPs or with global pharmaceutical companies, who will then work with GHRC to register the compounds throughout the world,” he said.

California’s biotech industry has taken its annual pulse of business conditions — and while the prognosis is not for putting the state on the policy equivalent of life support, corrective therapy is clearly needed. The 2011 California Biomedical Industry report, issued on February 1, is a joint effort of the California Healthcare Institute, the BayBio trade association and consultancy PwC. Its signal finding is that maintaining California’s status as the world’s biggest locus for biotech innovation depends on enlightened, world class regulation.  Unfortunately, however, this is not being provided by the bureaucrats in Sacramento or Washington, especially the FDA.  

The report is a public relations tool with statistics that documents how biotech is an essential driver of productivity and high-value growth.  Nearly 14 per cent of the state work force depends on investments in the sector, which employs some 268,000 people [or 783,000 indirectly] at an average salary of $72,000.  Some 16 per cent of total employment is in the area of academic research, a trend that highlights the growing importance of external partners in seeding the innovation that generates a commercial return.  Likewise, 12,000 new jobs were added by companies in 2008-2009, making biotech “the most resilient of the state’s high tech industries.” More important in an era of fiscal retrenchment, the 1,000-plus biotech and device companies operating in California contribute $86 billion to the local tax base.

The report incorporates a survey of CEOs of local biotech companies, in which the mood was mainly upbeat after the punishing financing reversals of the recent recession.  Access to venture capital, a key asset for the state, is returning in strength;  most of those polled expect a steady increase over the next several years, above the $2 billion recorded in 2010. R&D operations are staying in-state, although only 41 per cent of CEOs expect manufacturing investments to remain at par or increase over the next two years.

In terms of threats and challenges, the report and its CEO polling data are definitively frank — there are three.  Foremost is duplicative and unpredictable state and federal regulation in key areas like risk benefit, tax and reimbursement, followed by an unprepared workforce and finally environmental standards that primarily impact manufacturing.  The FDA is cited repeatedly for its tilt toward risk over benefit, which is causing the US to fall behind Europe in the pace and scale of innovation.

Many of the CEOs surveyed believe that China, India and other emerging Asian markets will pose a similar threat in being able to “replicate the California biotech ecosystem” without the drag imposed by FDA.  Global competition for a place at the table is intense, with 80 per cent of the CEOs confirming they had been “courted” by other US states or countries for investment in the past year.

Surprisingly, a conference call on the report hosted by the Institute yielded little on what the industry should do to help resolve the state’s current budget crisis, which is likely to force steep cuts in support for California’s world-class university system.  The outcome is far from academic, as one company represented on the call, OncoMed Pharmaceuticals, exists today because of a university-held patent on its key therapy.

Noting that powerhouse California-based biotechs like Chiron and Genentech also had their early roots in the work of academic researchers, OncoMed CEO Paul Hastings said “we were born from this legacy of public investment in basic science.”

Hence we are back to the central question:  who provides the physical and intellectual infrastructure to let the private sector do its best?

The current business model on which biotech has relied is flawed. Due to poor rates of

Jo Pisani, PwC

return, investment has dried up as the model carries very high risk of failure. This was illustrated recently by a study that highlighted that of the 1,606 biotech investments realised between 1986 and 2008, 704 investments resulted in a full or partial loss, while 16 only just covered their costs.

The same study showed that the gross rate of return on these 1,606 biotech investments was 25.7% compared with a pooled average return of 17% on all venture capital invested over the

same period. However, costs and ‘overhang’ from unrealized investments reduced the net rate of return to about 15.7%. There were also huge variations in the cash multiples earned by the 886 investments that did make a profit. On top of this, the external conditions that have allowed companies to thrive are now vanishing.

As Asia’s emerging economies invest more heavily in higher education and the reverse ‘brain drain’ picks up pace, the research base is shifting East. This is shown by the number of students graduating with doctorates in the physical and biological sciences.

Between 1998 and 2006, the number soared 43% in India and a staggering 222% in China, far outstripping the rate of increase in the West. Emerging economies are also now competing more aggressively and many are even actively building domestic biotech industries.

In the last 18 months, China has invested $9.2 billion in technologies R&D, including biotech, and India is currently exploring plans to become one of the top five biosimilars producers by 2020. These particular companies pose even more of a risk to Western biotech having learnt from their mistakes. They are now sidestepping the costly infrastructure that places burdens on companies in developed countries to create new business models that are leaner and more economical, as well as pioneering innovative products and processes.

Furthermore, financial investors are getting increasingly more cautious and capital is no longer easy to raise. In 2008, biotech raised just $16.3 billion in the US, Europe and Canada, 45% less than in 2007, and no significant improvements are expected.

According to one estimate, 207 of the 266 private and public European biotech companies with products or platform technologies either in clinics or on the market, urgently need to raise around $8 billion between them. Given that the total amount of European venture capital invested in the sector was just $666.6 million in the first half of 2010, it is doubtful many will succeed. However, yet another change is taking place as the boundaries between biotech and pharma continue to blur resulting in the creation of the biopharmaceutical industry. Despite this development, all biopharmaceutical companies will need to adopt a very different business model if they are to survive.

A united front
So, what would this new model look like? Efficiency is the name of the game and, as collaboration will accelerate and facilitate innovation, discovery and development, which in turn will reduce costs, two new concepts — precompetitive discovery federations and competitive development consortia — lend themselves to just such an approach and could be the keys to unlocking the industry’s potential.

Pre-competitive discovery federations
Pre-competitive discovery federations are public-private partnerships in which biopharmaceutical companies swap knowledge, data and resources with each other and additional third parties, such as government agencies and universities. Their aim is to overcome bottlenecks in early-stage biomedical research and a number have already been established. Many of these are fairly new and sit toward the philanthropic end of the spectrum. One such alliance, the Structural Genomics Consortium, has already proved a success.

Backed by organizations such as GlaxoSmithKline, Merck and Novartis it published 450 protein structures within three years of starting work, and aims to publish another 660 structures by July 2011. It is much too early to assess the overall impact of pre-competitive discovery federations in terms of reducing lead times and costs, or treating intractable diseases. Nevertheless, given the benefits, including, cash savings as investments costs will be lower and reduced duplication, it’s probable that all precompetitive research will be conducted in this way by 2020.

Determining the boundaries between pre-competitive and competitive research is difficult and opinions will vary. However, it’s possible to see how some of the lines might get drawn. For example, data preceding the point of filing for a patent could provide various opportunities for pre-competitive collaboration with many companies possibly prepared to go considerably further.

Competitive development consortia
Closer collaboration could also benefit the development process with the introduction of competitive development consortia (as we’ve called them). These consortia allow rival biopharmaceutical companies to join forces with each other, as well as with contract research organizations and platform technology providers.

The pooling of their portfolios could enable them to concentrate on the best drug candidates, regardless of which company had invented them, thereby eliminating a great deal of waste. Big Pharma has traditionally shied away from such arrangements, yet competing heavyweights in a number of other industries have successfully come together to develop new products.

General Motors, Daimler and BMW collaborated to create the hybrid petroleum-electric engine, for example. And there’s evidence that some large pharma companies may now be willing to take a more open stance Indeed, AstraZeneca and Merck recently embarked on a partnership to develop a combination therapy for cancer, each contributing an investigational compound to the mix. Combination therapies for cancer are common, but they’re usually tested late in clinical development, after registration, or a new potential treatment is tested in combination with the standard therapy.

However, AstraZeneca’s compound was still in Phase II, and Merck’s compound had only been tested on 100 people, when the two companies decided to join forces. As trials have moved on, and look promising, collaboration has also been agreed for testing the treatment in Phase 1 trials. The big question is how regulators will respond if they are successful as no one has ever co-registered two unregistered drugs before. The success of these new federations and consortia will hinge on the existence of data aggregators. No such organizations currently exist. Nor, indeed, do some of the tools required to manage vast amounts of biological and chemical data.

Nonetheless, solutions to the challenges are starting to emerge as big technology providers enter the computational bioinformatics space and the use of semantic technologies for integrating and analysing data grows. An ‘innovation culture’ and a new spirit of realism, on the part of all involved in the chain, will also be vital if this approach is to succeed. Organizations will need to share assets and insight that they have previously ring-fenced for themselves, will need to be willing to take risks and work with third parties and assets that they don’t own and this will require investors to take a longer term view on rates of return and change the funding model.

The size of the prize
By following this new model, the biopharmaceutical industry would be able to use their precious resources more intelligently, make more astute investment decisions and ultimately develop and deliver better medicines and even small savings could yield significant savings. We have estimated that, given average development costs and lead times, a 5% increase in success rates for each phase transition and a 5% reduction in development times could cut R&D costs by about $160m, as well as accelerating market launch by nearly five months. In fact, a 5% improvement in phase transition rates alone would trim about $111m from the tab.

In addition, there is also room for companies to benefit individually. The biggest companies will see increased access to innovation, higher productivity and lower costs — improvements that will help them to fend off growing criticism from healthcare payers and patients angered by the high prices of many new medicines that are currently coming to market. Meanwhile, the smaller companies will be in a position to obtain more stable, long-term financing, better opportunities for benchmarking the value of their own contributions and access to vital regulatory and marketing skills. There are considerable cultural, behavioural and practical hurdles to overcome if the industry is to succeed but, given the rewards collaboration can bring, they’re well worth resolving.

Making the sums add up
Hard-pressed governments are now struggling to meet the healthcare demands of growing populations and their changing demographics. More effective and more economical medicines are now more important than ever and only when the industry can work together will it be on track to meeting the demands of today’s society.

About the Author
Jo Pisani is Partner, Global Pharmaceuticals and Life Sciences at PriceWaterhouseCoopers, UK.

A study examining the state of alliance management in pharmaceutical companies has revealed that, despite nearly unanimous agreement among study participants that alliances and other collaborations are increasingly important to company strategies,  investment in managing alliances is not keeping pace.

The Practice of Alliance Management in the Biopharmaceutical Industry, co-sponsored by the Biopharma Council of the Association of Strategic Alliance Professionals (ASAP) and The Rhythm of Business, found that while a majority of alliance managers at companies with an established alliance management function believe they are viewed by their CEOs as essential to achieving corporate strategy, they are not being afforded the influence necessary to drive those outcomes.

Two-thirds of participants are not satisfied with the influence they presently have and veterans of functions in existence for more than five years are most likely to be unhappy with the sway they have within their organizations. This phenomenon is further crystallized in terms of alliance managers’ perceptions of their growth prospects; over time, alliance managers are less likely to see the position as a path to senior leadership, despite the fact that the role is a sophisticated one, requiring a savvy business person with multi-dimensional talent.

Despite the perceived importance of alliances, companies’ lack of follow-through can be seen in the amount and quality of manpower committed to achieving company objectives through the alliance function—a majority of study participants report five or fewer full-time alliance management professionals, who are most commonly responsible for three or fewer alliances.

In many companies, alliances generate more than half of both revenue and product pipeline. Sixty percent of participants report alliances in their company’s portfolio that are not managed by alliance professionals. The study examines in detail the role, responsibilities, and organization of the alliance management function in biopharmaceutical companies. Clear differences were found when the data were segregated based on the maturity of the function and its size. Among the findings:

• Alliance management groups take on an increasing array of responsibilities throughout their first five years. After that they relinquish key responsibilities, including planning and evaluation.

• As the alliance portfolio grows, alliance management groups will be required to diversify the alliance management capability with functional managers who have part-time alliance management responsibility.

The study concludes that to realize the strategic and financial objectives of their alliances, companies must take steps to ensure that their alliance and collaboration capability is aligned with the management needs of their alliance portfolio. As portfolios grow larger and increasingly more complex, the risk is that by not investing in the professional management of alliances, they will underperform.