Clayton Christensen

A keynote speaker at the 9^thAnnual SaS Health Care & Life Sciences Executive Conference on May 10, ‘disruptive’ author of The Innovator’s Dilemma and Harvard business professor Clayton Christensen sat down with PharmExec to discuss the future of the pharmaceutical industry, and what Mitt Romney could bring to the White House.

Ben Comer: Like tech companies a decade ago, many pharmaceutical companies are now outsourcing more and more of their core competencies in the name of efficiency, often short-term efficiency. Do they risk losing their core in the process?

Clayton Christensen: We absolutely worry that that’s exactly what is happening. I wrote a book called The Innovator’s Prescription, about the future of healthcare, and chapter nine is our view of where the pharmaceutical industry is headed. But the genesis is that, when we thought that diseases were defined by their symptoms rather than their causes, there were big blockbusters out there that were very attractive for [treatment]. And now we realize that a disease should not be defined by the symptom, but rather by the cause. It used to be that the FDA clinical trials process was like a final exam. If 30 to 35 percent of the patients responded to a drug, it was judged as a passing grade. And if your percentage was less than that, then you failed the test. But now we realize that if only 20 percent of the patients responded, then there must be something different about those 20 percent. They must have a different disease than all the rest. Rather than just project it, now we understand that managing clinical trials is an indispensable element of drug discovery. And so if you outsource that, then you’re outsourcing the activities that in the future will be the critical capabilities.

BC: How can big pharma companies foster a culture of innovation in the context of a large, lumbering bureaucracy?

CC: Rarely is the development or the absence of a product the problem in a company. Almost all companies are awash in ideas for new products. What they don’t do – and they could but they choose not to – is to create new business models that are tailor-made to the characteristics of the new product. You come up with this great idea, and you can’t do anything with it unless you get funded. To get funded, you have to, little by little, morph and shape and modify your business plan so that it fits the current business model. If it doesn’t fit the business model, they don’t perceive that it will be successful. So what comes out of the process is incremental innovation after me-too innovation. It’s not that the original idea wasn’t innovative, but in order to get it funded, you have to change your strategy so that it ultimately conforms to your company, rather than to the problem or unmet need in the market.

BC: Is it a viable strategy for pharma companies to spin out a separate entity, away from headquarters, to facilitate new kinds of development?

CC: It doesn’t have to be totally thrown outside of the corporation, but it needs to be a different business unit underneath the corporate umbrella. And you have to manage it at the level of the CEO, differently, than the mainstream. Almost never do you need to accomplish or accept lower profits when you set up this new business. But the formula by which you make acceptable money will be different.

BC: Is current US public policy harming or helping innovation in this country?

CC: I think that it facilitates a particular type of innovation. But I don’t think government is the core problem. I think finance and hedge funds and private equity funds are the big bad actors in the system. Investors like hedge funds and private equity funds and venture capitalists have a measure of performance called internal rate of return. And internal rate of return is a ratio; the way you get internal rate of return up is that you only invest in things that have a very short time horizon. If you just invest more and more for faster and faster quick wins, IRR goes way up. And you think that you’re innovating, because of the quick returns you’re getting. But what that means is that you can’t invest for the long term, because the truly disruptive business units don’t pay off for five to eight years. So then because the government says, ‘Well if you keep your money in the investment for 366 days, we’ll count it as long-term capital gain.’ There isn’t anything about 366 days that is long term. So the government should re-frame that, so that if you keep your money in for five years, there’s no tax, and if you keep it in for eight years, it’s a negative tax. All of these massive amounts of capital that are in private equity funds and so on, you re-purpose it through the tax code, and it would behave very differently, and invest in very different kinds of things.

BC: What is your message to the pharmaceutical industry, and is there a solution to the productivity gap?

CC: I think I know the right question, but I don’t know the answer. I would love to get together with deep thinkers in the industry to sort it through. As a general rule, when other industries are at this kind of an intersection, what has happened is that, at one stage in the value-adding stack in an industry, at one stage if it’s becoming commoditized and modular, you cannot make money at that level in the stack. But the whole industry doesn’t become unprofitable, rather its activities above and below that original [product or service], that’s where the money is made. And that has to be happening in the pharmaceutical industry, but I can’t see what it is yet. By example, the auto industry is becoming commoditized; cars are being assembled by sub-assemblies from tier-one suppliers. Anybody can get these modules and snap together a car. So it’s really hard to differentiate your car from anybody else’s car, so where the money is being made is in the subsystems that define the performance of the car, and by activities that sit on top of that, like OnStar. That’s where the money is made. Somehow, I have a sense that selling the pill, in the future, is not where the money will be made. It will be the attachments on top or underneath it. I haven’t heard anybody articulate what those look like, but I think they’re emerging, and we need to identify them.

BC: I read in The New Yorker that you’ve lived near the Romneys, and both you and Mitt are active in the Mormon church. Do you have any thoughts about a President Romney?

CC: He’s really a good man. He’s very smart, but it’s true that he was raised in a wealthy home, in a prominent home, and then accrued even more wealth, and his kids have been raised in an even more prominent family. And that’s actually about the toughest environment in the world to be raised in, and have your head be screwed on straight. It truly is. And so people think of that, that he’s not connected with the real world. But he has raised his family to create unbelievably good kids. But more important than that, in the Mormon church, we don’t pay professional ministers to teach us and to take care of us, but we help other people and teach each other the gospel of Jesus Christ. What that means is – because the members have to take care of one another – you meet everybody. And so Mitt was the bishop of our church, and bishop just means that he had responsibility for about 500 members of the church. And he had a family, he was trying to build Bain at the same time, and to be the bishop meant that he spent, on top of all that, 30 hours a week. And I don’t know if you ever saw the first Star Wars movie, but Luke Skywalker came in to meet Han Solo at some kind of a café, and the band that was playing, there was one of every conceivable form of life in the band, that’s what a Mormon church looks like; one of every conceivable type of person. If you’re the bishop, you’ve got to help all of those people. Under his leadership we built three significant new congregations in the inner city, in three different languages. So he really has seen a lot. I don’t think journalists have really realized, when he left [Bain & Company], the consulting firm, to create Bain Capital, that was going great. And the original owners of Bain & Company decided to sell their ownership stake to the next generation of partners. In order to pay the selling founders off, they had to take all of the profits the consulting activity made, and then some, to pay off [the owners]. And these people were just sitting at the side, rolling it in. As a result, Bain & Company would have gone bankrupt in two weeks. So they said, ‘Mr. Romney, could you please leave [Bain Capital] and come here and take presidency of Bain & Company, and somehow you have to prevent bankruptcy.’ So Mitt sat down with the six selling partners, and essentially convinced them to agree to take one-sixth of the amount of money that they thought they were owed, and got them to feel good about it. Just the way that he got these people, instead of knocking their heads together, he led them to agree on something that was very counterintuitive to all of them, and that is the idea that we are all best served if we try to help the other side win. I just think that someone with that instinct in the White House, in the climate of Washington, that would be a good skill.

Christensen’s new book – How Will You Measure Your Life? – takes his experience and thinking in business and applies it to personal decision-making. He has been the subject of lengthy profiles this month in both Bloomberg Businessweek and The New Yorker.

D'vorah Graeser

While the FDA continues to develop its guidance for U.S. biosimilars, including a one-day public hearing on May 11, 2012, the basic legal underpinnings of biosimilars in the U.S. may be under threat, as the Supreme Court debates the healthcare law, a large chunk of which includes provisions for biosimilars.

As background, biosimilars were discussed for many years in the U.S., but unlike Europe, no regulations were developed. As part of the health care law’s cost controlling measures and to promote biosimilars innovation in the U.S., the Biologics Price Competition and Innovation Act (PPACA) was included in the bill. However, the act was stated to be “non-severable” from the rest of this law, meaning that if the PPACA is struck down, so is the biosimilars part of the law. That means, even if the Supreme Court does not specifically object to the Biologics Price Competition and Innovation Act, its mere inclusion in the PPACA could lead to its downfall.  As a side note, the Supreme Court does not seem to have much of an opinion on generic biologics one way or the other, with Supreme Court Justice Stephen Breyer referring to “the biosimilar thing” during oral arguments.

This uncertainty comes at precisely the wrong time. Innovation in biologics has taken off in the U.S. The FDA reported that at least 35 requests for biosimilar pre-IND meetings were made in reference to 11 biological drugs as of February 15, 2012; as of that date, 21 pre-IND sponsor meetings were held and 9 INDs had been received. The FDA is instituting measures which are likely to further increase the popularity of this program, including providing a path to regulatory approval in the U.S. for similar biological products licensed outside the U.S.

Although the Biologics Price Competition and Innovation Act could be passed again as a separate law, the upcoming presidential election and campaign maneuvering are both likely prevent any real action on that particular motion. The bill will probably be swept to the side as “politicking” takes the place of “policy making.” This would be unfortunate, as the Act would clearly benefit consumers by reducing the price of biological drugs, which are typically among the most expensive on the market. The bill would also prevent originator biotech companies from enjoying a de facto “post patent” monopoly, due to the current expense and uncertainty of achieving regulatory approval for “generic” forms of these drugs.

Dr. D’vorah Graeser is the founder and CEO of Graeser Associates International (GAI), an international healthcare intellectual property firm.

Related: Biosimilars Spend to Reach $2.5 Bln by 2015: IMS

Genzyme execs didn’t go so far as to reiterate former CEO Henri Termeer’s 2010 prediction of $3 billion plus in potential sales for Lemtrada (alemtuzumab), but they did tout clinical results suggesting a reversal in MS-related disability for some patients.

New phase III data from Genzyme’s CARE-MS II was unveiled yesterday at the American Academy of Neurology’s annual meeting, and while Biogen Idec’s BG-12 (dimethyl fumarate) – a twice or thrice daily oral drug – has gotten more and better attention over the last year, Michael Panzara, therapeutic area head, multiple sclerosis, immune diseases and neurology at Sanofi-owned Genzyme, says consider the trial design. Without speaking directly to other clinical programs in the MS space, Panzara tells PharmExec that Genzyme’s decision to use an active comparator, rather than a placebo, raises the bar. “When you have a therapy as efficacious as [Lemtrada] with a risk profile that’s manageable – but it does have a risk profile – you want to set a standard of going against what is viewed as the most effective platform therapy, which is Rebif,” says Panzara.

This strategy, while riskier than testing against placebo, pays dividends if the results suggest superiority, according to Panzara. “I think [active comparator data] will be viewed favorably by physicians, who practice medicine and have to make these treatment decisions every day,” says Panzara. “And I would hope regulatory authorities would take notice as well, because they’re always looking to better understand risk and benefit versus therapies that are already available, especially in Europe.” Bill Sibold, senior vice president, head of multiple sclerosis at Genzyme, says the comparator data will aid in reimbursement discussions with payers, so the risk of knockout in a head-to-head battle is warranted. “I think most companies hesitate to do [active comparator] trials, so I think it says a lot about Genzyme and the approach that we’ve taken, specifically with this program.”

But is Rebif still the lead contender in MS? Raghuram Selvaraju*, head of healthcare equity research at Aegis Capital, says going head-to-head against Rebif in MS is akin to playing a game of chicken and waiting a bit longer before turning away. “Rebif is no longer the standard as far as efficacy is concerned…that honor now belongs to [Novartis'] Gilenya,” says Selvaraju. Gilenya was approved in late 2010, which illustrates a key difficulty with comparator trials; when Lemtrada went into the clinic, Gilenya wasn’t yet on the market. Concerns regarding Gilenya in patients with a history of cardiovascular issues have recently reemerged, however, which could add a few pounds to the scale for Lemtrada.

If approved – Genzyme is on track to file for US and EU approval of Lemtrada for relapsing MS this quarter, according to Panzara and Sibold – the company has worldwide rights and the lead role in development and commercialization, although  Bayer HealthCare retains an option to co-promote the drug, and would receive contingent payments based on sales, according to a company statement. Sibold says Genzyme will be hiring sales reps closer to launch. “You’ll see a lot of growth” with respect to marketing and promotional capabilities in MS, says Sibold. Sales force headcount and the specifics of a co-promote with Bayer are details for a later date, he said.

Sibold added that Genzyme has the modest goal of “becoming leaders in MS,” and that “starts with the portfolio.” In addition to Aubagio (teriflunomide), a phase III once-daily oral treatment with “efficacy similar to the platform therapies,” according to Sibold, Genzyme is “looking within our internal pipeline, and looking externally for ways to continually evolve our MS franchise…our plan is to be here for a long time, so we need the supporting portfolio to do so,” says Sibold.

Lemtrada is administered as an infusion over five consecutive days, and then again one year later, for three days. Autoimmune side effects, particularly hypothyroidism and hyperthyroidism, occurred at a rate as high as 30% of patients during phase II, but were down at 15.9% for the CARE-MS II study. A rare autoimmune disorder called immune thrombocytopenic purpura, or ITP, occurred in less than one percent of patients. Only 5% of the Rebif comparator arm had autoimmune thyroid side effect. As a result, analysts have been cool on Lemtrada, but Panzara insists that most of the occurrences were mild to moderate, and they’re well managed. “We’ve gotten very good at detecting and managing [thyroid-related autoimmune side effects], and it doesn’t cause people to leave the trial early, or refuse additional doses; it doesn’t impact that,” says Panzara. “It’s easy to call attention to [Lemtrada’s] side effects, without calling attention to the risks of MS itself,” says Panzara. Of the benefit side of the coin, the CARE-MS II study used the Expanded Disability Status Scale (EDSS) to show that 29% of patients with an EDSS score of two or more – two is characterized as “minimal disability” – had a preexisting disability that was reversed, says Panzara. “Those patients had a reduction in their disability scores that was sustained, so that is a reversal in what they had before,” he says.

Lemtrada’s active ingredient – alemtuzumab – is already on the market in a subcutaneous formulation known as Campath, indicated for the treatment of certain cancers. In 2010, Genzyme execs publicly considered discontinuing Campath and giving it to cancer patients for free, to prevent off-label MS usage, but Sibold wouldn’t elaborate on the company’s current strategy with respect to Campath, beyond expressing a “commitment to ensuring that patients who need Campath receive it.” The pricing issue is problematic, says Selvaraju. “Currently, a dose of Campath that is over 10 times higher than the dose being used in MS patients is sold for roughly $30,00 per year. Just as Genentech/Roche found with their Avastin/Lucentis problem, Genzyme/Sanofi are going to run into trouble if they ask reimbursement agencies to swallow a higher price than roughly $3,000 per patient per year for alemtuzumab in MS,” he says. Taking Campath off the market and providing it for free to cancer patients while putting a premium price on the MS version “is probably not going to fly with reimbursement agencies either here or in Europe,” says Selvaraju.

Lemtrada has patent protection in the US until 2017, and most of Europe until 2014, the company said.

*Raghuram Selvaraju does not currently have ratings or price targets on any of the companies mentioned in this article, nor does he own securities or any derivatives thereof pertaining to these companies. Aegis Capital has not conducted any investment banking business for any of these companies, either.

On exiting a theater, writers are often astounded and dismayed by the film resulting from a screenplay they’ve sold to a producer. Punch-up writers have added corny jokes, directors have replaced nuanced dialogue with bombastic proclamation, and editors have substituted long-form visual narrative with jump cuts and montage. However, these collaborators – the directors, punch-up writers and editors – often determine whether a film is a commercial hit or a box office bomb. Writers and producers have to work together so that both parties are satisfied with the end result.

A similar relationship exists between scientists at academic institutions and the pharma industry; intellectual property is like a screenplay, in that it holds the potential for commercial gains, but it takes a team of different kinds of people to bring that potential to fruition. Academics who spend most of their time in the lab regard the commercialization process with skepticism; they may have concerns about the application of their discovery, or they may feel swindled by the financial arrangement.

With the proliferation of university partnerships in recent years, tech transfer offices have sought to provide intermediary staff that academics can trust, so they don’t automatically assume that industry has shown up in the lab for a fleecing. “University tech transfer offices are hiring biotech and pharma people that can say, ‘You really don’t need another mouse study,’ for example. This helps unlock value faster,” noted one participant at PharmExec’s 2012 Dealmaker’s Roundtable yesterday (the full conversation on trends in deal-making will drop in June; for last year’s roundtable conversation, click here).

Susan Desmond-Hellmann, chancellor at the University of California, San Francisco (UCSF), has been credited as a facilitator on deals with Pfizer, Sanofi-Aventis and Bayer; before she joined UCSF, she was president of product development at Genentech. “As a former head of product development myself, I think that future investment by industry in more deals with academia will depend on a very business-like assessment by companies on what their return on investment has been. They’re going to do that math, as I would expect them to,” Desmond-Hellmann told Nature Reviews Drug Discovery last year. Academics are doing the math, too. Increasingly, institutions “want to be treated like a small biotech,” said another roundtable participant. To avoid distrust, tech transfer offices and academics should “be able to get advice from someone on their side,” and this can be done through the creation of an advisory board peopled with ex-industry expertise.

Job losses at major pharmas over the last couple of years could result in a larger pool of relevant applicants, and many institutions, including Duke University, the University of California San Diego, the University of Michigan, and many others, already have former industry workers in their tech transfer offices. As for writers, they’ll need to cough up Writers Guild of America dues and hold out for DVD royalties.

In judging the Prometheus patents invalid, the Supreme Court may have shown its hand on the upcoming Myriad Genetics case.

United States Supreme Court building

In a unanimous decision on Tuesday, the Supreme Court stripped two Prometheus patents on the grounds that the company didn’t go far enough beyond merely identifying a natural law. Natural laws – a product of the natural phenomenon doctrine in patent law, are the province of everyone in the US, ever since Justice Rehnquist wrote in 1981 that “laws of nature, natural phenomena, and abstract ideas” aren’t patentable.

But to what extent must a biopharma organization show an application of a natural law, to support a claim? In Mayo Collaborative Services v. Prometheus Laboratories, the latter held two patents describing a method for optimal dosing of thiopurine for autoimmune disorders. To wit: if metabolite levels are too high with patients using thiopurine drugs, toxicities are likely to occur; if they’re too low, the drugs lose efficacy in the patient. Prometheus markets a blood test to measure metabolite levels, and the Mayo Clinic, acknowledging the relationship to thiopurine dosage and efficacy, created it’s own blood test to be used by physicians. Prometheus (acquired by Nestle last May) sued, claiming the Mayo Clinic violated its patents, and despite winning a Federal Circuit decision, the Supreme Court begged to differ.

With the Myriad Genetics case on the Supreme Court’s horizon, some attorneys following both cases are predicting another reversal. In the Prometheus decision, the court directly cites an amicus brief from two organizations – the American College of Medical Genetics, and the Association for Molecular Pathology – in defense of its judgment; both organizations are also named plaintiffs in the Myriad case. The amicus brief quoted in the Prometheus decision argues that if “claims to exclusive rights over the body’s natural responses to illness and medical treatment are permitted to stand, the result will be a vast thicket of exclusive rights over the use of critical scientific data that must remain widely available if physicians are to provide sound medical care.”

This is precisely the argument being made against Myriad, which holds patents on two genes known as BRCA1 and BRCA2; mutations in those two genes are associated with increased risk of breast and ovarian cancer, and Myriad sequences the genes to reveal the mutations. In light of the Prometheus decision, “there is a good chance the Supreme Court will remand the pending Myriad Genetics case to the Federal Circuit, to have it reconsider its opinion,” says Craig Smith, a partner at Lando & Anastasi. The Federal Circuit court ruling on Myriad upheld patent claims on isolated DNA, defined by patent law as composition of matter claims, but the diagnostic claims made by Myriad – first debunked by United States District Court Judge Robert Sweet – were similarly refuted by the Federal Circuit. Judge Sweet also stripped the BRCA1 and BRCA2 gene patents, but the Federal Circuit court reinstated those patents.

Many companies have gene patents; Myriad is hardly the first to receive composition of matter patents on genes. However, the argument that patents stifle, or erect barriers to medical research, seems to be gaining traction with the Supreme Court. “I’m not buying the argument that the court threw in there as a policy palliative…it seems to me that the court is saying the [Prometheus] claims go to far, and any benefits from patent protection are outweighed by the chilling effect on future innovation,” via medical research, says James Mullen, partner at Morrison & Foerster. How strongly this argument is made will have a least some bearing on the Myriad outcome, although gene patents are more or less entrenched as precedent.

What does this mean for industry? Unfortunately, the Promethius case offers little in the form of new guidance. If a claim is so broad as to state a law of nature, with the added suggestion that it be applied, it won’t be considered patentable, but “everyone knew that ahead of time,” says Mullen. “I think the decision creates more uncertainty,” because “the Court didn’t give any signposts as to what level of post-solution activity is necessary to go beyond the order to ‘go out and apply this law,’ which isn’t a patentable claim…there was no detail as to what application – by doing a, b, or c – by opening the mold for your rubber plant, at a particular temperature point, like the Court did with Diamond v Diehr.”

D’vorah Graeser, CEO at Graeser Associates International, says the Prometheus decision, and the upcoming Myriad case, may cast a “pall over the entire diagnostic industry.” Without specific guidance, “Where do you draw the line?” wonders Graeser. “Is it having an antibody involved, or some kind of machinery? From the Prometheus decision, it’s impossible to tell.”

At first blush, a system whereby countries or geographic areas are carved out along socioeconomic lines maximizes profit: prices are set according to consumers’ “willingness or ability to pay,” which can bring previously unaffordable treatments into use. However, a tiered price can work against local competition in a given area, which tends to deliver a lower sustainable price over the long term, according to a critical analysis of tiered pricing done by authors from Medecins Sans Frontieres and Harvard School of Public Health.

Of the case studies examined in the report, Abbott’s price for the HIV treatment lopinavir and ritonavir (LPV/r) remained at $500 in African countries and other “least developed countries” from 2002 to 2007, or until the Clinton HIV/AIDS Initiative announced a generic LPV/r for $470. Abbott then reduced its price to $440, suggesting that manufacturers “do not have strong incentives to reduce tiered prices in the absence of competition, nor are tiered prices immune to competition when it does arise,” according to the report.

In the case of Bristol-Myers Squibb’s antiretroviral (ARV) treatment for HIV, the company created a Category 1 tier including 57 primarily low-income and African countries, but excluding southern African countries, which were lumped into a higher income Category 2. Southern Africa has the highest HIV-prevalence rates in the world, and the impact of a Category 2 placement means that BMS “prices its important second-line drug atazanavir 25% higher, at $547, in southern Africa, compared with $412 in other [Category 1] countries where HIV prevalence is lower, and in a few cases, income is higher,” the report found.

In the case of Lilly’s drug-resistant TB products capreomycin and cycloserine, however, tiered pricing did work to create lower prices than competitive production, but there were special circumstances. For example, TB endemic countries participating in the “preferential price” scheme facilitated by the WHO Green Light Committee beginning in 2002 – a program that also transferred technology to local generics manufacturers in support of local production – did not see a cheaper generic reach the market. In the case of capreomycin, no generic products were WHO pre-qualified for use as of September 2011, and cycloserine had gone up in price by a multiple of four, after Lilly stopped producing the drug. Lilly’s tiered pricing did in fact keep prices at the lowest rates, although demand was low and production capacity was limited.

“Tiered pricing does not necessarily result in the lowest sustainable prices, nor does it reliably lead to price reductions over time,” the report’s authors conclude. “In comparison, when markets are sufficiently large and multiple sources of production exist, robust competition has consistently proven across different therapeutic areas to result in lower prices.” Tiered pricing also leaves “too little decision-making power to governments, which are accountable to their populations under international law for insuring access to medicines.”

Countries that aren’t strong negotiators, and can’t convincingly threaten compulsory licensing, for example, get the short end of the stick with tiered pricing. In 2006, Honduras purchased LPV/r for about six times more than Brazil paid, despite the fact that HIV rates are equivalent in both countries, and Honduras per capita gross national income is roughly 25% of Brazil’s. To create a truly “win-win” situation for manufacturers and patients, governments and manufacturers will need to consider new models that “de-link” medicine prices from R&D costs. How countries contribute to R&D financing as a global public good will influence the new models that help to bring new medicines to the most needy.

According to the World Health Organization, neglected tropical diseases affect more than one billion of the world’s poorest 2.7 billion people. Many of these diseases, which can cause blindness and other debilitating symptoms, have reached endemic levels in 149 countries and territories. In a difficult-to-break cycle, such diseases are born in poverty-stricken areas, and then shackle patients to that poverty when symptoms prevent populations from working; and of course, the cost of treatment compounds the issue.

A new consortium of public and private sector organizations spearheaded by the World Intellectual Property Organization (WIPO)—dubbed WIPO Re:Search—aims to promote the development of new vaccines, drugs, and diagnostics to treat neglected tropical diseases through intellectual property (IP) sharing. Organizations committed to the new consortium include pharma players AstraZeneca, GlaxoSmithKline, Novartis, Pfizer, Sanofi, Merck, Eisai, and Alnylam; in addition, BIO Ventures for Global Health (BVGH), the NIH, and nonprofits such as the California Institute of Technology, the Center for World Health & Medicine, the Drugs for Neglected Diseases Initiative, Medicines for Malaria Venture, and others are on board.

“The demand for these products is huge,” said Dr. Margaret Chan, Director General of the WHO at a round table discussion held on October 26^th at WPIO’s Geneva headquarters. “As we all know, market forces fail to drive innovation, because this particular market has virtually no capacity to pay; any price, when you multiply it by the millions, is way too high for the bottom billion to pay. With the world now facing a new era of financial austerity, I view innovation as a key way to maintain the great momentum for better health that marked the start of this century.”

Don Joseph, COO of BIO Ventures for Global Health, agrees. “Today, biopharmaceutical companies invent most of the new medicines for cancer, cardiovascular disease, or diabetes. These are diseases that offer companies a clear commercial return for their investments,” he says. “But neglected tropical diseases do not promise the same type of financial return. This financial reality makes it difficult for biopharmaceutical companies to invest the millions of dollars and 10+ years of research and development needed to create a new drug, vaccine, or diagnostic. WIPO Re:Search brings the horsepower typically expended on developed world diseases to bear on the neglected tropical diseases of the developing world.”

WIPO Re:Search is a searchable, royalty-free public database of available assets, resources, patent rights, expertise, and knowledge, to which any individual or institution can gain access and express interest in obtaining additional proprietary information. WIPO Re:Search’s Partnership Hub will connect neglected disease researchers to one or more of the pharmaceutical companies, research institutions, or government organizations that have resources or expertise to help move the neglected disease research project forward.

During the round table discussion, David Brennan, CEO of AstraZenenca—which has made its entire patent portfolio available to the consortium—said: “We need to make more progress. I don’t think we can underestimate in any way the social consequences, or the policy and health consequences.”

“I hear this time and time again from ministers of health: a vaccine or medicine that is too expensive is worse than having no vaccine or no medicine at all,” said Dr. Chan at the round table. “Equally important … in developing countries is support and assistance that helps them build their own R&D capacity and to manage their own priority diseases and health needs. The objective of any form of health development should be to build self-reliance; in other words, good aid aims to put itself out of business.”

If there is one message that big pharma has applied consistently over the years, it is that drug development is very expensive. Big bucks and long-term investment in the institutional know-how and capacity built exclusively through private enterprise are what count in delivering new therapies to patients.  But like everything else in a dog-eared play book written in what might as well be the technological equivalent of the quill pen, that consensus is now being “goosed” — and from within the industry’s own ranks at that.

In a September 27 speech to the Indian pharma association that attracted little notice here in the US, GSK CEO Andrew Witty plucked some of the substance out of that linear defensive policy wall built by the industry over the past two decades, namely, that the high risk of compound failure leads inevitably to high costs and that this in turn justifies big margins on new launch therapies, across the board.  In his remarks, Witty literally turned the argument on its head, declaring that the industry-backed estimate of more than a billion dollars on average to bring a compound forward from discovery to market authorization was “unacceptable.”  The only “evidence”  it provides is for the perpetuation of a 25 year old model of commercialization, one that frames the debate around larger issues of pricing, IP  and access in a manner that serves the interest of neither the patient, society — or the industry.

What Witty was alluding too is the folly of a message that relates high costs and high prices to what is in essence the burden of low R&D productivity — and the honest way to call that is an “industry failure,”  which he did in his talk.  “We need to fail less, and deliver more,” he said, and directly linked success in restructuring the R&D enterprise to lower development costs in making the best new innovations more affordable, at all income levels, within and across markets.

As usual, Witty raises important and provocative issues that all stakeholders in health ought to take into account.  Just one that comes to mind:  If high prices that lower access are attributable to a flawed R&D development model, is there a readily applicable formula that industry can embrace in delivering better results at lower costs?

From an industry-wide perspective, Witty has accentuated the need for a consensus to promote those “lean management” business tools that can boost productivity and dramatically lower the cost of failure.  Yet to date almost all the evidence accumulated and backed by industry focuses on the inevitability of escalating commitments, whether it be the opportunity cost of sinking scarce funds into early discovery ventures, or the inability to predict with any certainty the response of payers to pricing post-launch.  Overall, the numbers paint a scenario of gloom:  a survey released by the consultant group KPMG last month finds that ROI from in-house investment in R&D among the 30 top drug makers is today half of what it was in 1990.

And while pressure for more affordable pricing is gaining momentum everywhere, due to a demographic and income transition in many emerging markets and the fiscal meltdown in mature countries, new costing commitments placed on the industry are rising too.  How many CEOs are really aware of the multi-million dollar price tag for post-marketing safety studies required by regulators over a time period that often extends beyond the life of the product’s patent?  Funding the demand for post marketing information about how well innovations work in practice is beginning to exceed what is spent to obtain a license to sell in the first place.   Or the endless, “write another check” implications of expanded access programs for yet to be approved drugs, where for ethical reasons there is no end point for giving drugs for free to patients with no other treatment options.

Hard data drives policy — it makes industry positioning credible.  Fresh arguments with verifiable metrics to show the industry actually has a strategy to make its own technology cheaper — and thus suitable for a global market of radically diverse price points — will be vital to the repositioning that Witty seeks.   In other words, the challenge is that while the problem is now defined by the industry itself as an industry responsibility, can industry deliver on the solution?

William Looney, Editor-in-Chief

Asked whether DTC ads on television should be retired, Read answered unequivocally – “No” – and noted the difficulty of educating patients when “so many warnings are required that [a drug ad] scares more people than it helps.”

Robert Bazell, NBC’s chief science and health correspondent – and Read’s interlocutor during a lunch session at the Cleveland Clinic’s annual Medical Innovation Summit – picked up on Read’s comments about excessive warnings on televised drug ads, noting Pfizer’s 2007 Celebrex ad that lasted over two minutes, almost all of which was spent on the recitation of warnings (Celebrex, along with its fellow NSAIDs, picked up a black box warning in 2005).

Responding to the question of why Pfizer decided to go ahead with Celebrex DTC ads, post black box warning, Read said “the trials that gave rise to [black box] labeling in Celebrex, the data, if one patient had gone the other way, there would have been a different statistical result.”

Asked by Bazell about the issue of trust: “What is your perception of the public’s perception of Pfizer and the rest of the industry?” Read said Big Pharma’s reputation could use some improvement. “We’re above Congress and tobacco, and slightly below physicians and hospitals…there is blame on [industry’s] part for that.” Read said increasing transparency in clinical trials and other areas could ameliorate industry’s reputation. “We don’t sell a pill, we sell data. If you believe the data, there must be transparency,” he said.

Read emphasized the importance of incremental innovation to society, the need to protect industry’s intellectual property, and called for an explicit risk/benefit profile for drug development. He called the U.S. tax rate “uncompetitive,” citing tax rates in Europe “as low as 15%.” Industry “can’t work with one hand tied behind our back,” said Read. “Elites have lost faith in innovation as a social benefit…it’s a cost only conversation.”

Thirty years is a long time in any industry. The coalmining industry, the market for air travel, or telecommunications and computing technologies each offer compelling demonstrations of how much can change in such a short period. Few market leaders in those sectors have survived.

Against that background, the pharmaceutical industry has done pretty well over the last thirty years — and so have many of its players. Eli Lilly, Pfizer, Boehringer Ingelheim, Hoffman-La Roche, Merck Sharpe and Dohme — all were big beasts, and they still are. The industry was one of the darlings of the investment community back then, and still today it is seen as one of the safer counter-cyclical havens. And the industry’s enduring qualities as a powerhouse of scientific advance and a generator of high-quality jobs and exports continue to assure drug firms of sympathetic ears in many of the corridors of power.

Survival has, however, been very much the prize of the fittest. In a world grown harshly competitive, many firms have fallen by the wayside, been trampled underfoot, or have simply been lost without trace. Three decades of successive concentrations have thinned the ranks of the industry to a mere shadow of its former self. The roll-call of once-illustrious names has been abbreviated by bankruptcy, mergers and acquisitions. Who now recalls Richardson, which merged with Merrell before being taken over by Dow? There are many working in the industry today who are unaware that a proudly independent Beecham – with its breakthrough work on antibiotics – merged with SmithKline and French before its name was obliterated altogher from the marquee when Glaxo took over the entire operation. The French industry was dominated by Rhône Poulenc and Rousel Uclaf when Sanofi was still a struggling adolescent.

The relentless search for efficiencies, for leaner management, for shareholder value, and for  market share has hit the pharma sector hard. Gone are many of the notorious extravagances of the past. Product launches on the Orient Express or on yachts in the Mediterranean attracted hostility and accusations of a greater focus on marketing than on research. Armies of highly organised sales forces provoked questions among the sceptical about how much success had come to depend on science, and how much on subversion. The rise of a new and assertive form of consumer activism in the 1980s found ample fuel here, and prompted deeper soul-searching among the organisations that were paying for medicines — the consequences of which are still being played out today.

Major advances in diagnosis and treatment (AIDS was an ill-understood but fatal condition in the 1980s) tend to obscure the fact that it is some thirty years since the first blockbuster medicines emerged. Huge optimism was created by the revenues from innovations like cimetidine and ranitidine. But the resulting search for world-beating products not only led to some revolutionary earnings by revolutionary products. It also imposed new economic strains that took their toll of the sector. For many, the development costs and high risk were more than they could comfortably sustain.

In parallel, the operating context was changing rapidly. High-profile cases of big new products with big adverse effects led to some conspicuous withdrawals from the market — and to constantly-rising requirements from regulators who had burnt their fingers through injudicious authorisations. Extensive demands for greater preclinical and clinical testing tightened the screws still further on the industry’s business model, just as the opportunities opened up by biotechnology applications were also making research more expensive and unpredictable. And alongside the strains on innovation, challenges multiplied in the marketplace, from increasingly adventurous generic producers, and the still-sharper elbows of the burgeoning parallel trade sector.

The spectacular increase in international products and international marketing exposed as never before the fundamental weakness confronting the industry in Europe: the divergent national requirements, which split a potentially large market into a patchwork of distinct fragments and hindered the continent-wide launch of innovations. This was the background to the development, throughout the 1980s, of the first attempts at a pan-European system of obtaining marketing authorisations. It was, at times, a painful experience, handicapped (and occasionally even sabotaged) by resistance from national authorities to what they saw as an erosion of their prerogatives, and boycotted by some major firms fearful of concentration of power at European level.

The deficiencies of those initial procedures led to the construction of the more robust mechanisms of the European Medicines Agency. This has, over the fifteen or so years of its existence, brought a new degree of harmonization to product authorization — and extended its authority to a wide range of related issues that have arisen, from advanced therapies to the promotion of smaller biopharm companies.

Over the same period, the industry in Europe managed to persuade the European Union to take action to compensate firms for the growing delays in bringing new products through the ever-lengthening development periods. Patent term restoration legislation and subsequently data protection rules provided some relief for innovators against the depredations of generic competitors.

But if the industry had some success in winning arguments about the merits of innovation, it was conspicuously less successful in convincing national or European authorities to put their money where their mouth was. Attempts by brandname companies to contain the rampant growth in parallel trade  failed repeatedly — and on more than one occasion, spectacularly. European court rulings consistently upheld the EU doctrine of free movement of goods within the EU, and when one European Commissioner acceded to industry urgings to raise the question of overturning this sacrosanct principle, he was left high and dry because industry failed to deliver on its promise to provide him with the supporting evidence. It took years for the industry’s credibility to recover.

More significantly, European countries, even within the EU, retained absolute sovereignty in their decisions on pricing and reimbursement. So the best that the industry was able to obtain was an EU directive requiring national authorities to operate in a transparent fashion about their reasoning for decisions – but the decisions nonetheless remained entirely autonomous, and increasingly parsimonious, so industry gained little or nothing.

This divergence in economic decision-making continues to bedevil the operating climate for the industry — and all the more so as the winds of economic crisis whistle more threateningly. The assumptions that had prevailed for so long, that healthcare spending should continue to rise, are now subject to open challenge. The pressures on drug budgets — which have in any case been an easy target in healthcare financing over recent years — are inevitably increasing as a consequence.

The industry in Europe has been engaged for more than two decades in a protracted  lobster quadrille of round tables, forums and high-level groups with politicians, payers and patients, ostensibly to build a European policy for pharmaceuticals that can guarantee access to medicines while promoting research. But the overall effect has been to blunten rather than sharpen industry arguments for better treatment in terms of market access and adequate pricing and reimbursement.

The recent emphasis on ensuring the sustainability of healthcare systems — a constant theme now in European political debate — is not helpful to industry’s renewed bid for recognition of the importance of innovation.  There is plenty of talk on all sides about the need to promote innovation — in Europe this type of rhetoric has attained epidemic proportions — but the talk is yet to produce any real shift in attitude among healthcare payers. The debates are complicated by new uncertainties over the prospects and perils from advances in areas such as personalised medicine or e-health, or the challenges of providing care for increasing numbers of old people. But it will be unwise of Europe to spend another thirty years looking for solutions. The game has been changed out of all recognition, and the schedule dramatically abbreviated, by the rise of the new economies. No longer will the debate focus on the decline in Europe’s performance compared to the US and Japan. Now the industry lives under the shadow of China and India’s might — and they will not stand patiently aside while Europe reflects on how to maintain industrial competitiveness.

Reflector is Pharmaceutical Executive’s EU correspondent.