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.

Here’s why:

More competition. Nearly two thirds of the R&D pipelines of the major innovative drug companies are now focused on specialty drugs. Assuming some of these will be authorized for sale, the result is going to be increased competition and declining market exclusivity per therapeutic category – mirroring the trend already evident in primary care.  The overall impact is more choice for payers, leading to increased pressure on specialty’s ability to command premium pricing.

Fiscal pressures. More of the high cost burden for specialty drugs is being passed on to patients. This is shredding the argument that specialty drugs are “special needs” and thus exempt from the normal dictates of a price-conscious consumer market. The ability of industry to determine how patients contribute to the cost is critical to specialty, due to a smaller prescribing base, the need to keep as many patients as possible on therapy, and the importance of tracking compliance with complex regimens,.

Unfortunately, the trend in pharmacy benefit programs is to replicate “one size fits all” solutions introduced for asymptomatic and chronic care medicines. Industry thus has to focus on creative ways to help a key untapped constituency – the under-insured – pay for high-end specialty drugs. Occupying the vast middle ground between subsidized low-income patients and the larger self-insured employer and union pools, the needs of the under-insured must be addressed. Failure to do so will make the specialty pricing model politically non-viable. Its fate will be no different than the path for so-called “me too” drugs – can CMS negotiated prices or even price controls be far behind?

Value. Specialty’s future depends on living up to its name – the business imperative is differentiate or die. In other words, define your value to the customer, or the customer will do it for – to – you.  The challenge here is that industry is not really stepping up to the plate with the hard evidence of value where it counts, in improving health outcomes, against existing products and from a system-wide perspective. A recent survey of US payers conducted by Amerisource Bergen found that 50 per cent felt they had “zero” input into the development process for new specialty drugs, with a mere eight per cent finding it “adequate.” And almost all this input occurred during the Phase III stage, which is equivalent to stopping the clock at the eighth inning, with bases loaded.  Will companies really want the input at that point, or more directly can they do anything about it?

The discussions set up a stark display of two alternative futures. One is the politicians’ vision of a commoditized drug world focused on basic primary care. Innovation will drive more toward finding efficiencies in low cost services to meet budget priorities, rather than spreading the adoption of new technologies widely enough so smaller diseases or indications get priority. The other is the flexible application of innovation in drug discovery to seed the promise of personalized medicine, where specialty drugs can justify higher price points if they can demonstrate real value as a coordinating driver toward better health outcomes.

Achieving this latter outcome – which carries significant advantages to both industry and the patient – depends on investing a lot more in customer-based insight and doing what that insight actually tells you. Is big pharma alert and nimble enough to adapt to a environment where good prices are simply the result of a value proposition agreed with the customer? The answer will determine whether specialty remains special.  If past is prologue, what do you think?