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Pharma 2020: Challenging business models

Which path will you take.

Most Big Pharma companies have traditionally done everything from research and development (R&D) through to commercialisation themselves. However, by 2020 this model will no longer work for many organisations. If they are to prosper, they will need to improve their R&D productivity, reduce their costs, tap the potential of the emerging economies and switch from selling medicines to managing outcomes. These activities few companies, if any, can accomplish on their own.

Pharma 2020: Challenging business models   ,  the fourth in the Pharma 2020 series, explains how even the largest pharmaceutical companies will have to collaborate more closely with players inside and outside the sector to be able to respond to the demands from the different stakeholder communities. To do so they will have to ‘profit together’, by joining forces with a wide range of organisations, from academic institutions, hospitals and technology providers to companies offering compliance programmes, nutritional advice, stress management, physiotherapy, exercise facilities and health screening. The paper suggests that alternative business models with varying degrees of collaboration will emerge to provide a basis for the industry to operate more effectively as times change. It also evaluates the advantages and disadvantages of each alternative, their strengths and weaknesses and lists some key questions to make the transition to a new business successful.

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Download Pharma 2020: Challenging business models - Which path will you take?

This report highlights how Pharma’s fully integrated business models may not be the best option for the pharma industry in 2020; more creative collaboration models may be more attractive.

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Building effective business development in pharma.

By  Mark Lubkeman ,  André Kronimus , and  Filip Hansen

At a time of rapidly evolving scientific breakthroughs and, coincidentally, of the expiration of many blockbuster drug patents, the key to innovation and revenue growth is pharmaceutical business development. While some innovation and new revenue can come from internal pipelines and assets, business development teams are under intense pressure at most companies to supplement internal efforts with external licensing agreements and M&A. Unfortunately, those teams are frequently unable to deliver the transactions needed for innovation and growth.

Often a major reason for this shortfall is that executive team members are not fully aligned on the role of business development in achieving the company’s strategic priorities. They may agree in theory that business development should pursue partnerships, ecosystems, and collaborations, but that consensus falls apart when it comes to making decisions about specific deals.

We have identified six success factors that enable more rapid and effective decision making, which, in turn, will lead to substantially enhanced business development performance.

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Biopharma m&a and licensing remain strong.

Biopharma M&A deal value more than doubled between 2017 and 2019, from $138 billion to $336 billion, and valuations reached all-time highs. Most of those deals involved midsized biotech companies, for which the average premium paid was close to 70%, with an average EV/sales multiple of nearly 8x. All in all, close to 60% of new therapeutic drugs in the last five years have been externally sourced.

The COVID-19 pandemic slowed biopharma M&A activity in 2020, especially in the first half of the year. But since the core drivers of deals remain intact—scientific breakthroughs, expiring patents, and an increasing focus on key therapeutic areas or on modalities such as cell and gene therapy—deal activity will continue to rebound. A recent example is AstraZeneca’s acquisition in late December of Alexion for $39 billion.

Moreover, biopharma companies can finance transactions cheaply with today’s very low interest rates. They also have significant financial resources to pursue business development. BCG’s ValueScience team estimates that the top 20 biopharma companies have more than $700 billion in cash, short-term investments, and additional debt capacity. But as a result, many companies are pursuing the same assets, driving up valuations and the risk of overpaying.

Six Success Factors for Pharma Business Development While we focus here on M&A, the six success factors we have identified will enable business development teams to create value through both M&A and licensing. (See Exhibit 1.)

pharma business model

1. Prioritize what business development needs to accomplish for the company. Executive team members often have differing views about how to prioritize business units, technology areas, and technology platforms and what types of deals to pursue (early- versus late-stage R&D deals, for example, or transformative versus tuck-in acquisitions). To ensure alignment, it’s critical that team members agree on how and where they want to create value. Will they use business development to generate near-term revenues or to build the pipeline for future innovation? Will they seek to maximize the core, expand into adjacent markets, or explore new frontiers? (See Exhibit 2.)

pharma business model

As part of this prioritization process, the executive team needs to regularly review and agree on how much revenue growth the current internal portfolio or pipeline will deliver. Only then can it determine the revenue gaps that business development needs to address in which specific therapeutic areas or modalities—and with what urgency. It’s astonishing how often management teams are misaligned on this simple setting of objectives, which often results in business development teams wasting time assessing opportunities that are fundamentally unattractive to the executive team and will never get approved. To avoid such situations, the team should ask itself two key questions about every transaction early on: What revenue gap will the transaction fill? And who on the executive committee will champion the transaction from start to finish? By forcing these decisions early, the team can avoid a lot of wasted time.

2. Build relationships with prospective targets. Executive teams should commit to building relationships with potential partners or acquisition targets for two or three years. Proactive sourcing, screening, and relationship building are far better for deal execution than simply showing up at the target’s headquarters with a banker and an offer. An established relationship will give a prospective buyer an edge over other bidders, perhaps even preempting the bidding process altogether. Such relationships can also accelerate due diligence.

Active engagement with potential targets over several years also gives companies a better grasp of the range of potential deals available. It might, for example, make a pharmaceutical company more likely to take small equity stakes in a number of promising biotechs, perhaps supporting Phase 1 trials with its own clinical and regulatory expertise.

3. Agree on how to assess value. Depending on one’s assumptions when valuing a target, the same transaction may seem spectacularly attractive or exceptionally unattractive. So teams need to agree about how they will value all aspects of each deal and then apply that valuation with discipline. Too often, companies end up redoing their analysis and engaging in repetitive decision making because they haven’t agreed on valuation approaches or metrics from the start.

One common valuation pitfall is to focus only on core asset value, that is, the value of the cash flow generated by current and future products in the market. Valuation models need a wider lens, encompassing multiple dimensions of value, including the following:

  • Synergies. What is the value of cost, revenue, and capability synergies across the value chain—for example, in R&D, manufacturing, and sales?
  • Platform Value. What is the value of the future products a technology platform might make possible?
  • Strategic Value. What is the value of preempting a competitor from acquiring an asset, gaining access to a large proprietary data set, or being recognized as a leader in an emerging field?

Because these advantages are less tangible than core assets, large swings in valuation are possible depending on the underlying assumptions. We have found that companies with a clearly defined and endorsed valuation approach are able to use a common “language” in their deliberations, leading to better, faster decision making. These advantages are amplified when the company is highly transparent about the underlying assumptions and entertains a range of scenarios and associated probabilities.

4. Define integration issues early. Executive and business development teams are frequently so focused on due diligence and valuation that they don’t consider the integration process until after a term sheet has been signed. Integration issues should be considered at the outset, when assessing the deal’s attractiveness and viability, and in parallel with due diligence. Teams should ask such questions as: Will the acquired company be a distinct entity or be integrated into the acquiring company? What governance will be applied to the acquired assets? How will cost synergies factor into the valuation?

Knowing the answers to these questions early on is critical to realizing the full potential of the transaction. Our research shows that successful integration can drive 8% to 10% more value compared with the average transaction. Planning for that success right from the start is essential.

5. Enable agile business development teaming and governance. Even when a company has a clear vision for the transaction, it still needs an agile process and governance to execute the deal quickly and effectively. But because the business development process is highly cross-functional (and often involves many junior-level people), it can be unclear who has the authority to make decisions and who will provide the necessary analytical resources. In addition, preexisting governance committees (such as executive committees) often meet too infrequently to keep up with the fast pace of business development decision making.

To address these challenges, we recommend three best practices:

  • Designate resources. Within each function, several senior staff members with business development experience and authority should be on call. This will help build continuity and organizational learning.
  • Establish clear processes and responsibilities. All members of a business development project team should be aligned on processes, deliverables, and timelines. That should include who is responsible for what and who has what decision rights. For example, who in R&D will calculate the probability of success of a specific asset under review?
  • Create nimble governance. A few members of key governance committees should meet more frequently than the entire group (perhaps even on a weekly basis, depending on deal volume) and have the authority to mobilize the entire committee within 24 or 48 hours if there’s an urgent issue to be addressed.

6. Design an organizational structure suited to strategic priorities. Because companies have different revenue gaps and objectives and use business development in different ways, there is no single “right” organizational structure. One company might focus on early-stage and another on late-stage acquisitions. One company might be looking for deals to strengthen the core business, another to build up new therapeutic areas. A company’s business development organization must be suited to its strategic purpose, whatever that may be. There are three main approaches (with various permutations) to consider:

  • Centralize business development in one group. A central function maximizes scale, alignment of activities, and resource prioritization. This setup works well for companies looking to make relatively few late-stage or transformative acquisitions.
  • Separate R&D and commercial transactions. Assessing an early-stage R&D acquisition requires a different mix of expertise than assessing a late-stage, commercial acquisition. When a company intends to pursue both types of transactions, it’s best to keep at least some of these due diligence activities separate. But such companies can still centralize certain functions—valuation modeling, for example—in order to maximize scale.
  • Separate by business lines or therapeutic areas. It can be sensible to separate business development activities by business lines or therapeutic areas at different levels of maturity. This arrangement works well if a company has a mature business area looking for transformative deals and a smaller business unit looking for technology platform acquisitions. Here again, certain aspects of the business development process, such as valuation modeling, can be centralized for scale and efficiency.

Current market conditions present unique opportunities to tap into external innovation and drive revenue growth, but the inherently complex and cross-functional nature of business development makes it difficult for many pharmaceutical companies to execute effectively. As a result, these companies are not winning the transactions necessary for future success. We believe that the six success factors described above can significantly improve business development capabilities and are worth serious consideration by management teams.

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ABOUT BOSTON CONSULTING GROUP

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Recent trends in specialty pharma business model

The recent rise of specialty pharma is attributed to its flexible, versatile, and open business model while the traditional big pharma is facing a challenging time with patent cliff, generic threat, and low research and development (R&D) productivity. These multinational pharmaceutical companies, facing a difficult time, have been systematically externalizing R&D and some even establish their own corporate venture capital so as to diversify with more shots on goal, with the hope of achieving a higher success rate in their compound pipeline. Biologics and clinical Phase II proof-of-concept (POC) compounds are the preferred licensing and collaboration targets. Biologics enjoys a high success rate with a low generic bio similar threat, while the need is high for clinical Phase II POC compounds, due to its high attrition/low success rate. Repurposing of big pharma leftover compounds is a popular strategy but with limitations. Most old compounds come with baggage either in lackluster clinical performance or short in patent life. Orphan drugs is another area which has gained popularity in recent years. The shorter and less costly regulatory pathway provides incentives, especially for smaller specialty pharma. However, clinical studies on orphan drugs require a large network of clinical operations in many countries in order to recruit enough patients. Big pharma is also working on orphan drugs starting with a small indication, with the hope of expanding the indication into a blockbuster status. Specialty medicine, including orphan drugs, has become the growth engine in the pharmaceutical industry worldwide. Big pharma is also keen on in-licensing technology or projects from specialty pharma to extend product life cycles, in order to protect their blockbuster drug franchises. Ample opportunities exist for smaller players, even in the emerging countries, to collaborate with multinational pharmaceutical companies provided that the technology platforms or specialty medicinal products are what the big pharma wants. The understanding of intellectual properties and international drug regulations are the key for specialty pharma to have a workable strategy for product registration worldwide.

1. Defining specialty pharma

“What is specialty pharma?” many people question me. Is it in-licensing specialists? Niche marketers? Drug delivery firms? Will generic drug manufacturers be included? How about biotech companies that move into drug development? Well, depending on whom you ask, they are all of the above [ 1 ]. Wall Street’s definition is a catch-all, and includes drug delivery, biotech, and generic firms. For instance, Morgan Stanley coverage of specialty pharma includes: generic companies like Teva, Mylan, and Actavis; over the counter companies like Perrigo and Warner Chilcott; development centric companies like Allergan, Forest, and Valeant (previously Biovail); drug delivery companies like Alkermes; and animal healthcare company like Zoetis (formerly Pfizer animal healthcare division) [ 2 ]. As the popularity of the specialty pharma business model has expanded, so has its scope. Today, many use the term “specialty pharma” interchangeably with development-centric pharmaceutical or biopharmaceutical companies. Others apply it to companies developing generics, reformulating existing drugs, or targeting niche markets. Some others more often use the term to identify companies that are “not biotech not big pharma”, where big pharma is defined as large-cap pharmaceutical companies. In other words, “specialty pharma” has become such a broad term that it covers just about everything except the big pharmaceutical companies and medical device and diagnostic makers.

2. Specialty pharma business model

After defining specialty pharma is inclusive of all healthcare-related firms that are neither big pharma houses nor medical device and diagnostic makers, the next question is “What is specialty pharma’s business model and why it gains so much popularity nowadays?” In order to answer these questions, it is necessary to compare and contrast big pharma with specialty pharma. Big pharma typically follows a vertically integrated business model. It means that big pharma carries out the work from the beginning to the end on a worldwide scale including discovery research, drug synthesis, preclinical research, clinical development, regulatory work, scale up and manufacturing, and worldwide distribution, sales, and marketing. Moreover, big pharma has more breadth by working in four to six therapeutic areas. These may include cardiovascular, antimetabolite (such as antidiabetics), central nervous system (CNS), oncology, and infectious diseases. Specialty pharma, by contrast, acquires drugs from academia, research institutions, or other companies, and seeks to commercialize them in new markets. It selects a core of activities while relying on a network of contract research organizations (CRO), contract manufacturing organizations (CMO), and other preferred pharma partners to accomplish its commercial goal. Specialty pharma focuses most of its efforts on one or two therapeutic areas with specified physician populations. These specialized non-primary care physicians can be managed with a smaller sales force. Specialty pharma often has a small research and development (R&D) organization and contracts out animal and human tastings to CRO and its manufacturing to CMO. It is a business model that has been prevalent in the last years as venture investors seek to find a way around the long, expensive, and risky drug discovery process. The attributes of specialty pharma are “small”, “niche”, “agile”, and “focused” that are popular with Wall Street. The specialty pharma business model is compared with that of traditional big pharma in Table 1 .

Comparison of business models between specialty and traditional pharma.

3. Four categories of specialty pharma

The business model of specialty pharma can be divided into four categories ( Fig. 1 ). Some companies are experts in the search of compounds for in-licensing; some focus on marketing specialty medicines to a limited number of clients; some started as a generic company; and some with a specific delivery technology knowhow. The world largest generic company, Teva (“Nature” in Hebrew) is on the list of specialty pharma. In fact, the largest product of Teva is a specialty brand medicine, glatiramer (Copaxone), which constitutes nearly 50% of profit and 20% of revenue which is $20.3 billion in 2012 [ 3 ]. Glatiramer, the most popular multiple sclerosis drug, was originally discovered by three professors at the Weizmann Institute of Science in Israel. It is a random polymer (6.4 kD) composed of four amino acids (namely glutamic acid, lysine, alanine, and tyrosine) that are found in myelin basic protein [ 4 ]. Administration of glatiramer shifts the population of T cells from pro-inflammatory Th1 cells to regulatory Th2 cells that suppress the inflammatory response. Given its resemblance to myelin basic protein, glatiramer may have acted as a decoy, diverting the autoimmune responses against myelin. Glatiramer was approved in 1996 in the US and in 2000 in the EU. It is currently marketed in 49 countries.

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Various specialty pharma business models.

4. Story of Teva and generic glatiramer

Teva’s glatiramer patent expires in 2014 and 2015 in the US and Europe, respectively. Two generic glatiramer products from Sandoz/Momenta Pharmaceuticals and Mylan/Natco Pharma partnerships that Teva assumes in a news release for the 2015 budget, will launch in September 2015. Mylan, the first filer of generic glatiramer, is in litigation with Teva which has filed two citizen petitions trying to stop the launch of generic glatiramer. In the meantime, Teva is developing a sustained injection of glatiramer reducing the dosing frequency from 20 mg/day to 40 mg three times/week, which was approved by the Food and Drug Administration (FDA) in January 2014 [ 5 ]. The new formulation with a different strength and dose regimen would not be subject to generic competition. Once patients convert, it would be hard for insurers to force them to use a generic that would require them to go back to daily injections. However, if Teva’s own history is of any lesson, Teva is unlikely to prevail, albeit with a changed role from a generic aggressor to a brand defender. While the competition in specialty pharma may be fierce, Teva will still be working hard in specialty drugs. It anticipates four specialty product approvals and five submissions next year “which we believe will improve treatment options for patients and add value for all of our stakeholders,” Teva CEO Vigodman said [ 6 ].

5. Defining specialty medicine

The reader now may understand what specialty pharma is but wonder what specialty medicine is. Specialty medicines are those indicated for rare conditions that affect a small number of patients that are managed by specialty pharmacies, who handle insurance prior to authorization, patient compliance management and patient education since these agents often require special handling, administration, and clinical support. According to EMD Serona, a pharmaceutical company headquartered in Geneva, Switzerland, which resulted from the merger between Merck KGaA and Serono in Janurary 2007, the number of specialty pharmaceuticals on the market has grown from only 10 in 1990 to >250 in 2010. This trend is expected to continue, as there are now >600 specialty pharmaceuticals in the pipeline. It is estimated that costs for these agents will exceed $160 billion by 2013. Most of the so called “specialty pharma companies” have one or more specialty medicines products.

The other characteristics of specialty pharmaceuticals are high price and high profit margin, consequently also called “niche products”. The growth trend of specialty products is being driven by breakthroughs in genomics, accelerated development of targeted therapeutics and improvements in genetic testing to facilitate personalized medicine approaches. As major nonspecialty brand drugs become available as lower-cost generics, specialty drug spending, according to Catamaran (formerly informed Rx) Prescription Management Services, is projected to grow from 18% of total pharmacy costs in 2010 to 43% in 2020 [ 7 ].

6. Mylan’s EpiPen niche play

Teva is not the only generic company marching into specialty medicine. Mylan, the third largest generic company in the world, has a specialty pharma division which markets EpiPen, an auto-injector with a protected needle to deliver a measured dose of epinephrine (better known as adrenaline) [ 8 ]. Epinephrine is used widely to open the trachea in life-threatening allergic reactions (also known as anaphylaxis). EpiPen is the number one prescribed auto-injector with a 90% world market share in the US and worldwide. EpiPen has constituted 27% of Mylan’s profit since 2008. Mylan licensed in the EpiPen technology, which was originally developed as the ComboPen, a product developed for the military for treating exposure to nerve agents used in chemical warfare. EpiPen is manufactured by Meridian Medical Technologies, interestingly a subsidiary of Pfizer. Teva has filed an Abbreviated New Drug Application (ANDA) of generic EpiPen and Mylan settled with Teva on June 22, 2012, which allows the launch of Teva’s generic version of EpiPen in June 2015 [ 9 ].

EpiPen is not the only specialty medicine in Mylan’s treasure trove. Mylan is also big in transdermal drug delivery systems. Mylan acquired Vermont based Bertek Inc. in 1993, and in 1999 renamed the company Mylan Technologies Inc. (MTI). MTI is the first company to receive approval for generic nitroglycerin, estradiol, clonidine, and fentanyl transdermal patches. MTI also does contract manufacturing work for others. MTI is the CMO for the brand EMSAM (selegiline) transdermal patch [ 10 ].

7. Actavis on a merging spree

Teva and Mylan each have a major presence in drug delivery alternative sectors, although they are not yet dominant in any individual area. Teva’s liquids and inhalants (i.e., budesonide) account for 13% of the US generic inhalant business and Mylan’s transdermal products account for 13% of the US generic transdermal business. Actavis (previously Watson), is another major transdermal technology company. Actavis acquired Theratech Inc. for $300 million in stock in 1998 [ 11 ]. Theratech is a small company in Salt Lake City near the University of Utah, which was founded by Professor William Higuchi, a pioneer in transdermal technology. On July 1, 2014, Actavis completed the acquisition of Forest Laboratories, another specialty pharma company with branded skin products. The merged company now markets a slew of topical skin products including testosterone patch (Androderm), estradiol cream (Estrace), progesterone gel (Crinone) and nitroglycerin ointment (Rectiv). Watson’s first-to-file status on generic Lidoderm is to add significant revenue to its transdermal franchise. On November 17, 2014, Actavis announced yet another merger plan to acquire Allergan for $219/share, a valuation of about $66 billion [ 12 ]. Allergan is best known for Botox, but it has a long history of developing pharmaceuticals. Completion of the deal would mean that Actavis has increased its market capitalization from < $5 billion to $100 billion in 5 years [ 13 ].

8. The race to dominate the alternative drug delivery sector

While Teva is also a leader in liquids (~$1.4 billion market) and inhalants (~$1.2 billion market), it lacks critical mass in injectable, dermatological cream and ointment, and transdermal. In 2010, Teva was fourth in injectable (10% share). Separately, we note Mylan’s impressive 51% share in the $1 billion generic transdermal market, but it lacks significant exposure to other alternative dosage forms including inhalation and injectable. As a result, Mylan acquired the privately-held Bioniche Pharma Global Injectable Pharmaceuticals Business in September 2010 [ 14 ]. Mylan acquired again in November 2011, the rights from Pfizer to make generic versions of two GlaxoSmithKline respiratory drugs: Advair Diskus (fluticasone propionate) and Seretide Diskus (fluticasone propionate and salmeterol) using Pfizer’s proprietary dry-powder inhaler delivery system [ 15 ]. The underlying reason for the expansion into the nonoral solid area is the better profitability of specialty medicines and is also because of the rise of biotech protein and peptide drugs that require alternative routes of administration such as injection. The fourth big generic player, Sandoz, is already big in biosimilar credited for the US launch of growth hormone Omnitrope using the 505(b)(2) pathway back in May 2006 [ 16 ]. The big four: Teva, Sandoz, Mylan, and Actavis are poised to compete in the specialty biosimilar pharma space.

Oral solid sales of ~$27 billion in 2010 represented 71% of the total US generics market (excluding branded generics). However, the number of players in oral solids is huge with intense competition. According to 2010 IMS sales figures, there are 33 players in oral solids with revenue exceeding $100 million, while there are only three players in transdermal [ 17 ]. The 2010 US generic market specialty pharma players in each of the niche dosage form areas are presented in Table 2 .

Number of players in US generic market by specialty medicine area.

9. Big pharma productivity crisis

The business model of specialty pharma all started with the downfall of big pharma and the rise of the generic industry. It is no secret that the pharmaceutical industry has been grappling with diminishing R&D productivity [ 18 ]. R&D investment more than doubled over the last decade, while new molecular entity (NME) approvals plummeted [ 19 ]. At the same time, the ability of big pharma to sustain an investment return on the NME development has greatly diminished with patent cliff and generic competition. Innovator’s product peak sales revenues of > $200 billion had lost to generic by 2010 and $142 billion more will be at risk from patent expiration by 2015 according to IMS Health. Big pharma, in response, has been closing down of facilities and cutting back on the number of scientists so to save the money it spends on R&D. According to OrbiMed Advisors, employment in the 14 big pharma multinational companies is to fall ~20% between 2009 and 2015. That means some 200,000 jobs are disappearing not only in research, but also in sales and back office functions.

Facing diminishing R&D productivity and the threatening generic entry due to patent cliff, the brand companies employed several defense strategies. The first strategy is to delay generic entry by intensive life cycle management of existing products [ 20 ]. The second strategy is aggressive in-licensing of new products/projects [ 21 ]. In-licensing has brought many blockbusters to big pharma, especially those new chemical entities sourced from Japanese companies back in the 1980s. At one time, new chemical entities which originated in Japan constituted > 50% of the US FDA approvals in a year. The outflow of pharmaceutical scientists from big pharma to specialty houses, including the ones in the emerging market, could accelerate new drug development overall in the next few years. The third strategy is for brand companies to fight aggressively to retain the market share post generic entry, such as recently seen with Pfizer on Lipitor [ 22 ]. Brand companies used to abandon off-patent drugs and turn their attention to the development of NMEs such as the early case of Prozac by Lilly. With the lackluster record to develop new blockbuster drugs, brand companies became more aggressive in protecting the revenue from blockbusters that face generic competition. The recent case of Lipitor by Pfizer is an eye-opening demonstration of generic aversion strategies.

10. Patent cliff: the story of Lilly and Prozac

The patent cliff scenario is generic to all big pharma, albeit to a different degree. Pfizer, the largest pharmaceutical company worldwide, lost ~32% revenue to generic in the 5 years leading to 2013 while the midsize big pharma, Lilly fared worse and lost ~42% in the same period [ 23 ]. The expiration of Prozac (fluoxetine) patents in 2001 provides a telling example of the impact of patent expiration on brand company revenue [ 24 ]. The original compound patent on Prozac was to have expired February 2, but the FDA extended it for 6 months because Lilly was conducting research on using the drug in children. Five pharmaceutical companies received FDA approval letters with first-to-file exclusive rights to sell a different version of fluoxetine for 6 months. Barr Laboratories, which went to court to end the patent, will have exclusive rights to produce 20 mg capsules, which account for $2.2 billion of the current $2.7 billion Prozac market. Dr. Reddy’s Laboratories will produce 40 mg capsules, Teva Pharmaceuticals will produce 20 mg liquid fluoxetine, Geneva Pharmaceuticals will manufacture 10 mg capsules, and Pharmaceutical Resources will make 10 mg and 20 mg tablets. Within 1 year of expiration, generic fluoxetine was available from > 10 generic companies at 2% of the price of Prozac brand product. Upon generic entry, Prozac revenues fell from $1.3 billion in the first half of 2001, to $380 million in the first half of 2002 [ 25 ].

11. Lipitor: the biggest generic entry in history

The patent on Lipitor (atorvastatin calcium tablet), Pfizer’s $12 billion-a-year blockbuster cholesterol medicine with lifetime sales of > $131 billion, expired on 29 November, 2011. Pfizer did not invent Lipitor but bought it through the merger with Warner-Lambert at a price tag of $90.2 billion [ 26 ]. Pfizer, unlike Lilly, did not lay down and die but employed an unprecedented aggressive strategy to protect and extend Lipitor sales both pre- and post-patent expiration. In a report by the Public Policy Institute of Association of American Retired Persons, Pfizer’s strategies are summarized as below [ 22 ].

  • “Pay-for-Delay” agreement with first-to-file Ranbaxy Laboratories. Ranbaxy was the first-to-file for generic Lipitor in 2003 [ 27 ]. In 2008, Pfizer and Ranbaxy reportedly entered into an agreement that Pfizer would stop trying to block Ranbaxy’s efforts to launch its product if Ranbaxy delayed introduction until November 2011. In return, Ranbaxy gained the right to sell a generic version of the significantly less popular drug Caduet, a combination pill of Lipitor and the blood pressure drug Norvasc, 7 years earlier than would have otherwise been possible. Several major US retailers have filed lawsuits against Pfizer and Ranbaxy that accuse them of violating antitrust laws by striking a deal that kept generic versions of Lipitor off the market.
  • “Authorized Generic” agreement with Watson Pharmaceuticals. Watson marketed and distributed an authorized generic of Lipitor that launched at the same time as Ranbaxy’s generic version of atorvastatin. In return, Watson gave about 70% of its Lipitor-related profits to Pfizer, allowing Pfizer to protect some of the revenue it would have lost to Ranbaxy. After Ranbaxy’s 180-day exclusivity period ended on May 31, 2012, other generic manufacturers’ versions of atorvastatin entered the market, and atorvastatin’s price dropped dramatically. The May 2012 date is not incidental. Pfizer did receive a 6-month patent extension in the EU after developing a pediatric version for children with high cholesterol, allowing Lipitor to maintain exclusivity in most EU countries until May 2012.
  • Coupon to patients and rebates to the insurance plans and pharmacy, especially mail-order pharmacies, which account for almost one-half of all Lipitor prescriptions. Pfizer’s efforts to minimize the impact of Lipitor’s patent expiration have been effective. Lipitor maintained 33% of the US market nearly 4 months after generic entry (early March 2012), which is much better than the usual drop of around 10% [ 28 ]. Lipitor worldwide sales maintained at 40% from $9.6 billion in 2011 to $3.9 billion in 2012, a decrease. Given the present difficulties of big pharma, Pfizer’s aggressive strategies could become a model for other brand name drug manufacturers in future, although Pfizer’s strategy is not without legal repercussions. Pfizer and Ranbaxy are facing multiple class action and antitrust lawsuits [ 29 ]. In the meantime, generic drug companies, when faced with the prospect of being unable to gain market share during the first-to-file 180-day exclusivity period, may decide not to challenge brand name drug patents in the future [ 30 ]. This decline in competition would slow the entry of generic drugs and represents a lost opportunity in the reduction of health care spending.

12. NME licensing trends

In-licensing has brought many blockbusters to big pharma. Current licensing trends include: (1) rising in biologics deals, cancer being the most popular category; (2) favoring later stage development compounds; and (3) increasing complex deals with cascading milestone payment, and opt-out clauses for risk sharing [ 31 ]. In general, deals made in later phases of development tend to be more strategic and therefore more complex, involving multiple categories of development with cascading milestone payments. One of the purposes of a later stage deal is to share risks and opt-out clauses are frequently inserted based on the expectation of the risks becoming clear at future time points. The Medtrack data shows that the complex deals with multiple categories increased from 10% in 2005 to 33% in 2009 [ 32 ].

13. Valuation of clinical leads by clinical trial phases

Similarly, biopharmaceutical company equity valuation varies by clinical stage. Fig. 2 shows statistics of value creation by biopharmaceutical initial public offering. The initial public offering valuation minus the venture capital investment represents the increase of value created by the progress of NME from preclinical to clinical phases [ 33 ]. The biggest jump is at Phase II with $162.5 million/Phase II compound. This is one of the reasons why most emerging pharma target to carry their compounds through Phase 2 proof-of-concept (POC) [ 34 ] before licensing them to large pharma.

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How much is your compound worth? Biopharmaceutical company valuation by clinical stage.

14. High value and high success rate of biologics

Biologics such as therapeutic proteins and monoclonal antibodies are high value medicines typically costing patients > $100,000/year. They are also relatively immune to generic competitions. Although US congress passed a bio-similar law in 2009 [ 35 ], there is a lack of FDA approval pathway and final guidance on any specific product yet to be issued. The EU remains the only market where a number of biosimilars are approved for use. So far, only a couple of biosimilars have been submitted for FDA review: Sandoz’s copy of Amgen’s white blood cell booster Neupogen, and a biosimilar version of Johnson and Johnson’s blockbuster antiin-flammatory Remicade from South Korea’s Celltrion [ 36 ]. Sandoz is already marketing Zarzio, the top-selling copy of Neupogen in > 40 countries where regulations for generic biologics follow mostly that of small molecules. In the meantime, Amgen itself has six biosimilar molecules in development including a Phase III candidate, ABP 501, a knockout of Humira (adalimumab) in patients with moderate-to-severe plaque psoriasis [ 37 ].

The success rate for biologics to reach commercialization is higher than chemical drugs. The 2003 Federal Trade Commission (FTC) report [ 38 ] compared the success rate between biologics and small molecules according to the phases of drug development ( Fig. 3 ). The success rate for small molecules increases from 12% to 38% as the compound progresses from clinical Phase I to Phase III clinical stage. Comparatively, biologics has a higher success rate of 53% compared to 38% for small molecules at Phase III. As a result, biologics at a later stage have become hot properties, with bidding wars among large pharma.

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FTC 2003 report on probability of US commercial entry of clinically developed drugs from phases of development.

15. High attrition at clinical Phase II POC

The other reason most emerging pharma target out-licensing upon completion of Phase II POC is the high attrition/low success rate of Phase II compounds into Phase III clinical trial [ 39 ]. Fig. 4 presents the data from the Pharmaceutical Benchmarking Forum [ 40 ] on R&D compound survival rates by development phase for 14 large pharmaceutical companies: Abbott, AstraZeneca, Bayer, Bristol-Myers Squibb (BMS), Boehringer-Ingelheim, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Merck, Novartis, Pfizer, Roche, Sanofi-Aventis, and Schering-Plough. Overall, 24 preclinical leads are needed to enter clinical development in order to yield one commercial product. These data highlighted that compound attrition in Phase II is the key industry challenge. Only one of four compounds entering Phase II was able to proceed through into full Phase III clinical studies. Thomson Reuters Life Science Consulting in 2011 analyzed the 87 reported reasons for Phase II failures from 2008 to 2010: 51% (44 out of 87) were due to insufficient efficacy; 29% (25 out of 87) were due to strategic reasons; 19% (17 out of 87) were due to safety reasons; and only 1% due to pharmacokinetic/bioavailability reasons [ 41 ]. Future improvement of success rates in Phase II will depend on the better understanding of target disease relationship or in other words, a leap of faith in translational medicine [ 42 ].

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Success rate by development stage of new molecular entity drugs.

16. Open innovation model

The term ‘open innovation’ was coined by Henry Chesbrough of Harvard Business School in 2003 to describe the increasingly widespread of knowledge and technology such that integration of knowledge and expertise from multiple sources is the key for success [ 43 ]. Chesbrough made the point again in 2006, suggesting the only way for a high tech business to thrive is to embrace open innovation [ 44 ]. With falling R&D productivity, increasing regulatory scrutiny, and patent expirations eroding a substantial amount of revenues, big pharma realized the need to look beyond their own walls for innovation. Many companies shifted R&D expenditures externally for in-licensing of technology platforms or drug ideas, or even discovery lead compounds for further development.

By the turn of the 21 st century, most companies had revenue derived from in-licensed compounds exceeding that which originated from the organic growth of internal R&D. AVOS Life Sciences has analyzed the revenues from drugs at least $500 million in annual sales from the top 14 pharma companies. Contribution of organically developed products declined from 45.3% of revenue in 2008 to 39.7% in 2013, whereas the proportion of revenue from licensed products grew from 29.2% to 30.8%, and that from acquired products grew from 22.4% to 25.8% [ 45 ].

In a Price Waterhouse Coopers 2009 Special Report: Pharma 2020: marketing the future, a detailed breakdown of R&D cost is presented [ 46 ]. The cost leading to clinical Phase II POC constitutes 43.2% of the total R&D budget. This allocation is before the days of open innovation, when 60% of R&D budget is devoted to the discovery and development of internally originated compounds. This cost distribution of large pharma is not different from that of biotech companies [ 47 ]. The author’s own large pharma experience through the transformation of the traditional business model to the open innovation model has seen firsthand that the internal R&D expenditure shrunk substantially to about 30% of the total R&D budget, evident from the large number of R&D staff layoffs. Instead, the R&D money is re-allocated, to a less extent in-licensing lead compounds and novel target platforms, and to a larger extent the acquisition of late phase assets and further development of these assets into late clinical phases followed by regulatory registration. These collaborative efforts can take up to 50% of the budget, while the remaining 20% may be reserved for life cycle management of blockbuster compounds facing generic threats ( Fig. 5 ). We know the old blockbuster innovation model is unsustainable. We will have to see whether the new open innovation model will work for the pharmaceutical industry in the next 10 years.

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Open innovation model.

17. The license of Taxol from the National Cancer Institute to BMS

In the years that followed, universities and research institutes such as the National Institute of Health (NIH) became the major sources of innovation for new drugs. One of the most successful stories is the license of paclitaxel from the National Cancer Institute (NCI), a division of the NIH to BMS. Paclitaxel was discovered in 1962 as a result of NCI screening program [ 48 ]; Monroe Wall and Mansukh Wani isolated the drug from the bark of the Pacific yew, Taxus brevifolia , and named it “Taxol”. In 1977, Dr. Susan Horwitz, Albert Einstein College of Medicine, identified the mechanism of Taxol as stabilizing the microtubules and slow cancer cell division and growth. In 1984, the NCI began Phase 1 clinical trials against a number of cancer types. In 1989, investigators at Johns Hopkins reported partial or complete responses in 30% of patients with advanced ovarian cancer. In August 1989, the NCI decided to out-license the drug because of the practical difficulties in semi-synthesis of Taxol from Yew tree extract and the large financial scale of the program. Four companies responded including the American firm BMS, which was selected as the partner in December 1989. BMS submitted Taxol NDA within a period of 18 months and Taxol was approved in 1992. The choice of BMS later became controversial and was the subject of Congressional hearings in 1991 and 1992. While it seems clear the NCI had little choice but to seek a commercial partner, there was also controversy about the terms of the deal, eventually leading to a report by the General Accounting Office in 2003, which concluded the NIH had failed to ensure value for money [ 49 ].

18. Externalization of R&D: academia versus specialty pharma

Most big pharma have long standing collaborations with academic institutions. However, the collaborative innovation model suffers from, for the most part, the lack of common languages bridging the basic research and clinical development [ 50 ]. The traditional conflicts between public and corporate collaborations are confidentiality, publishing, and intellectual property rights and ownership. With respect to confidentiality and publishing, most parties recognize the nature of competition and accommodate reasonable delays in publication in order to allow time for patent filing. Intellectual property rights, however, continue to pose a challenge since at least three parties are involved: the inventor(s), the institution, and the commercial corporation. Companies need to understand that many universities are limited by federal and state laws with respect to ownership rights of the intellectual property generated by their faculty. Successful negotiations will have to be based on the fact that the value process is equitable, that all parties receive a return on their investment, and that the collaborators receive equity on the basis of their contributions.

Frustrated with the limitations imposed by law or institution regulations, professors of industrial entrepreneurship have come out and founded a crop of small specialty pharma backed by venture capital. The “small” or “niche” or “focused” specialty pharma without the overblown bureaucratic systems seem more adapted to close the gap between basic research and clinical development. Two separate analyses comparing small biotechnology companies with large pharma companies have concluded that company size is not an indicator of success in terms of R&D productivity [ 51 ]. A more recent survey conducted of 842 clinical Phase II compounds from 419 companies from 2002 to 2011 by the Boston Consulting Group, again found no correlation between company size and the likelihood of R&D success [ 52 ]. Instead, scientific acumen or good judgment and proximity of location to a science hub such as Cambridge or the San Francisco Bay area were found to correlate significantly with success. In fact, the decision to advance a compound in a large pharma is often influenced by a progression-seeking behavior motivated by self-interest of the team responsible for the project. A recent publication from Pfizer showed that two-thirds of the company’s Phase I assets that were progressed could have been predicted to fail [ 42 ]. It is no wonder with the poor decision making that the low R&D productivity follows suit. The fact that size does not matter is an encouraging sign to many small specialty pharma companies, especially in the pharmerging countries such as Russia, India, Mexico, Korea, and Taiwan.

19. Pharma’s corporate venture

Externalization of R&D is nothing new but the systematical externalization of R&D by corporate venture of big pharma is new. Externalization used to occur through product licensing, program partnerships, or company acquisitions. The problem has been that these activities have not fundamentally changed the economics of R&D or dramatically improved the return on R&D investments. The challenge is to increase the number of drug programs to which a pharmaceutical company has access without increasing, to the same degree, the capital or resource investment required to access these R&D programs. The quickest way to enlarge one’s pipeline is through merger. However, more and more post-merger analysis showed that merger does not necessarily benefit R&D [ 53 ]. Instead, a growing number of companies have begun corporate venture investments. Venture money is invested in a specialty pharma company in exchange for preferential rights to an R&D program and, in this process preferential access to the data may lead to an early decision on whether to exercise those rights. This way, options can be purchased to license future successful programs without day-to-day operational responsibilities and the associated commitments of resources and management time which also free up the smaller niche players from bureaucratic interferences from the big corporation.

20. The success story of Lilly Ventures

Lilly Ventures is probably the oldest and largest corporate venture endeavor among the big pharma [ 54 ]. The Chorus group, small and relatively independent from the Lilly R&D headquarter, conducts only critical path experiments to address POC questions. The other necessary (but costly and time-consuming) early-development work, such as formulation, delivery, and manufacturing scale-up, comes after Chorus decides to advance a program. To date, Chorus has advanced two dozen compounds into early development, and half of the 10 compounds that have completed POC studies have advanced to full development. Chorus’s success has inspired Lilly to seek ways to replicate the model in low-cost countries by entering into risk-sharing partnerships in India and China. Vanthys, a joint venture with India-based Jubilant Organosys, was created for the low-cost company to take on development responsibilities for specified programs through POC. Lilly has the option to regain rights to the compound in exchange for milestones, royalty payments, and in some instances, co-promotion rights in local home geographies. A prelude to Vanthys is the deal Lilly made with Suven, an Indian active pharmaceutical ingredient (API) manufacturer, to bring a limited set of CNS candidates into POC. Lilly then forged a deal with Piramal, a large India pharma to take compounds contributed by Lilly through Phase 3 development. The Lilly Asia Ventures fund is thus born.

Lilly had then taking it to a next level in accessing more Phase III clinical operation capacities from clinical contract research laboratories that operate globally, with a significant presence in China, India, Russia, and Eastern Europe. Lilly moved two Alzheimer’s compounds to Quintiles, the premier clinical CRO, to conduct the development work while enlisting TPG-Axon Capital to finance up to $325 million of development expenses in exchange for milestones and royalties on the products. Through these deals, Lilly gained access to Quintiles’ Alzheimer’s clinical expertise while it transferred much of the financial risks to TPG-Axon. Lilly can thus approach Phase III development more aggressively in maintaining control over both Alzheimer programs, while freeing up internal resources and capital for other candidates in its pipeline. Lilly remains dedicated to new drug discovery and development, with R&D spending among the highest, close to 20% of sales, while the industry giant Pfizer spent around 15.5% in 2010 [ 55 ].

21. The “first-generation” specialty pharma

This open innovation paradigm has been used by the “first-generation” specialty pharma themselves. These include, among others, King Pharmaceuticals, Allergan, Forest Labs, and Shire Pharmaceuticals; the latter two have managed to build successful businesses on a pure in-licensing strategy. The UK-based Shire plc has a product portfolio composed of acquired molecules deprioritized by big pharma, with a strategic focus on the CNS and the gastrointestinal disorders. It became so successful that AbbVie attempted in 2014 to buy Shire, but withdrew the $55 billion merger offer and paid Shire a breakup penalty of $1.7 billion [ 56 ]. AbbVie withdrew the offer in lieu of heightened attention of US congress on inversion legislation. The Tennessee-based King Pharmaceuticals, following a similar strategy with the pipeline, consists of Phase III products from big pharma in the areas of hypertension and pain. King boosted its sales potential so much that King ended up being bought out by Pfizer in 2010. All four companies have a small R&D unit relative to their revenue, but a large business development budget for in-licensing of development candidates.

22. Repurposing of big pharma leftovers

Acquisition of late-stage product candidates or even marketed products from big pharma is a clever strategy, but not without its limitations. There are several reasons why big pharma put compounds up for sale can be several folds. It could be either because they have performed unremarkably in clinical trials or because their market potential is not compelling enough to pursue. Also, big pharma might have a number of small marketed products that do not really add much to the bottom line. Plus, newly merged big pharma have an assortment of marketed products and product candidates that no longer fit the strategic direction of the combined company. All of these products, it seems, are there for the picking, as long as the specialty pharma can pay the price. As the competition to bid on the left-over compounds between the specialty pharma heats up, product acquisition from big pharma is likely to get more and more expensive. Moreover, data shows that big pharma is not an endless source of compound acquisition for the smaller players. A 2004 survey of the top 20 global big pharma that had products filed or approved for marketing in the US with sales potentials of $5–100 million, found a fair number of those compounds; very few, however, had a remaining patent life of > 3 years [ 57 ]. In the end, less than a half dozen patent-protected products were found suitable for out-licensing. The sourcing of late stage compounds is getting more and more difficult, unless one can form a special alliance with a specific big pharma such as Singapore’s Aslan with Lilly.

23. Shire’s orphan drug strategy

As a result of the scarcity of late stage acquisition targets, some specialty pharma are headed upstream forming their own research units in discovery and early development of new compounds. Of the first-generation specialty pharma, Allergan and Forest Labs have built their own discovery operations, while Shire [ 58 ] purchased the R&D capability through the 2006 acquisition of Human Genome Therapies (HGT). HGT is a small company focused on genetic diseases that are very rare and have a very high unmet need, i.e., orphan drug indications. An orphan disease is one that hits anywhere between 2000 and 200,000 people in the US [ 59 ]. According to the NIH, there are close to 7000 such rare diseases. The HGT portfolio of orphan drug products focuses on the very rare end of the orphan diseases with target populations between 2000 and 3000. What this means is that the development programs have to be global in nature in order to bring products to the market [ 60 ]. By focusing on a niche area of patient care, Shire must trawl the world to find patients to complete its clinical studies, and as a result, Shire now operates in 43 countries to create a viable business model. The capability to commercialize products in a global scale to reach each patient is the important last step to complete the business model. The success of such a strategy can be seen in two of the company’s currently marketed products, Elaprase and Replagal, which are used in over 43 countries as enzyme replacement therapies. Shire’s example is a reality check for specialty pharma companies in the emerging countries interested in orphan drug indications, but which do not have the infrastructure to perform global clinical trials, not to mention recruiting rare disease patients worldwide.

24. Celgene’s transformation of orphan drug into blockbuster

More curious yet, orphan drug status for very very old drugs has been a gold mine for some specialty pharma companies. The most outstanding cases are Celgene’s thalidomine (Thalomid), lenalidomide (Revlimid), pomalidomide, and apremi-last [ 61 ]. Thalidomide, a drug designed as an antiemetic agent that fell out of favor after it was linked to birth defects in Europe in the 1960s, was approved in 1998 as an orphan drug for the treatment of leprosy and in 2006 for the treatment of multiple myeloma. The second generation lenalidomide is about 1000 times more potent than thalidomide in the in vitro tumor necrosis factor-alpha (TNF-α) inhibition assay, an indication of anti-inflammatory properties [ 62 ]. Pomalido-mide is about 10 times more potent than lenalidomide. The inhibition potency of apremilast in TNF-α production is similar to lenalidomide but with additional Phosphodies-terase-4 (PDE4) inhibition activities. Lenalidomide costs $164,000/patient/year and is expected to exceed $4 billion in revenue in 2013 [ 63 ]. The third and fourth generation pomalidomide and apremilast will follow suit. Perhaps one will say the key reason for the success of the thalidomide family of four products is because of Celgene’s persistent improvement in the chemistry and pharmacology, where Celgene has been able to grow the products on multiple indications.

25. Genzyme’s focus on rare disease

Another great example is Genzyme’s Cerezyme (imiglucerse) for the treatment of Gaucher’s disease [ 64 ]. Gaucher’s disease is a genetic disorder leading to a hereditary deficiency of the enzyme glucocerebrosidase. The enzyme acts on the fatty acid glucosylceramide. When the enzyme is defective, glucosylceramide accumulates, particularly in white blood cells, most often macrophages (mononuclear leukocytes) and in the spleen, liver, kidneys, lungs, brain, and bone marrow creating blood and bone disorders. Cerezyme is extremely effective – but it is also extremely expensive with annual treatment costs as high as $300,000/patient. As a result of this high price, Cerezyme’s 2010 sales were over $700 million [ 65 ], a respectable number for any drug. Genzyme’s success in the rare disease area attracted the attention of big pharma. Genzyme was subsequently acquired by Sanofi in 2011 [ 66 ]. At the time of merger, Genzyme was the world’s third largest biotechnology company, employing > 11,000 people around the world. As a subsidiary of Sanofi, Genzyme has a presence in approximately 65 countries, including 17 manufacturing facilities and nine genetic testing laboratories; its products are sold in 90 countries. The combined company employed two strategies that should be familiar with the readers by now: (1) corporate venture capital to enlarge early clinical lead pipeline; and (2) patient advocacy group dedicated to rare diseases with Genzyme orphan drug programs. Sanofi-Genzyme BioVentures, different from traditional venture capital firms, only invest in early-stage life science companies developing innovative products that may become future Sanofi products. The current portfolio contains venture investment on 13 companies. Genzyme Rare Community has been established since 2001 with patient advocacy teams around the world.

Companies like Pfizer, Novartis, and GlaxoSmithKline have not only looking for orphan drug candidates outside, but also established their own research units exclusively devoted to seeking cures for rare diseases. According to lifesciencenation.com , five of the 20 pharma-licensing deals publicly announced in the first 4 months of 2014 involve an orphan or rare disease asset. The accelerated approval pathway for these drugs is driving pharma merging strategies toward small biotech that have cultivated expertise and assets in these rare diseases. Consequently, drug research into rare diseases was no longer exclusive to biotech but expanded to large and small pharma.

26. Old drug new money: the curious case of colchicine

Perhaps the most amazing story in recent years on old drug making big bugs is URL Pharma’s colchicine [ 67 ] (Colcrys). The colchicine plant was used as a therapeutic agent for gout more than 3000 years ago, since ancient Greece time. Colchicine tablets are widely available as a generic prescription drug in the US since the 19 th century. In July 2009, the FDA approved URL Pharma’s version of colchicine with 3 years of market exclusivity. The NDA submission contains some pharmacokinetic studies and a randomized controlled clinical trial in 185 patients with acute gout that somewhat reproduced a previous clinical trial in the literature. The study showed that lower doses of colchicine with fewer side effects are as effective as high doses, facts which are known from experiences among the practitioners. On the basis of this new trial, combined with the previously published evidence, Colcrys approval is technically interpreted by the FDA as a new indication 505(b)(2) approval that the Waxman–Hatch Act stipulates 3 years of market exclusivity [ 68 ].

The financial reward of market exclusivity is substantial. After the FDA approved Colcrys, URL brought a lawsuit seeking to remove any other versions of colchicine from the market and raised the price by a factor of > 50, from $0.09/pill to $4.85/tablet. According to the Centers for Medicare and Medicaid Services, the cost increased from approximately $1 million to as much as $50 million for about 100,000 prescriptions/year. The financial reward appears to be out of proportion to the level of investment and the FDA is under attack for its action in an article in the New England Journal of Medicine in 2010. Dr. Janet Woodcock, the FDA director of Center for Drug Evaluation and Research (CDER) in an article to the editor, defended FDA’s approval of Colcrys quoting 117 deaths associated with colchicine and the improved label of Colcrys for the safer lower dosage [ 69 ]. The authors in an Author/Editor Response responded back and suggested that the FDA modifies the statutory languages so that future legislation will provide more flexibility to reward advancements only when they are optimally useful to the public health [ 70 ]. Nevertheless, the taxpayer is bearing considerable costs for a poorly executed legislation by the FDA.

URL Pharma was subsequently acquired by Takeda in 2012 [ 71 ]. Takeda has another gout drug, Uloric (febuxostat). The acquisition of Colcrys complements and strengthens Takeda’s position on Uloric in the gout marketplace, by providing patients with multiple options to treat and prevent gout flares. It is a strategy of portfolio play with additional drugs added to the existing portfolio while maintaining the same size sales and increasing utilization of the marketing infrastructure.

27. The bumpy road for the antiobesity drug Qsymia

Obesity is a serious chronic health problem affecting > one third of US adults (35.7%), according to the US Centers for Disease Control. The medical costs associated with obesity had already reached $147 billion back in 2008. However, the development of antiobesity compounds has been a tough area since the fenphen diet pill litigation in 1997 after one of the medication’s components was linked to heart valve damage. More failure followed in 2007 with the FDA’s rejection of Sanofi’s Acomplia on concerns that the drug increased the number of suicidal events among users. Also, Merck and Pfizer scrapped plans in 2008 to continue developing similar drugs.

Vivus submitted Qsymia (older name as Qnexa) NDA to the FDA on December 29, 2009. Qsymia is composed of two generic drugs, phentermine (an appetite suppressant) and topiramate (a seizure and migraine medication). The FDA disapproved the NDA on October 29, 2010 based on the potential teratogenic effect of topiramate seen in animal studies, although of the 19 pregnant patients carried to term in the Qsymia clinical study, no birth defects were seen. Vivus resubmitted the NDA with the addition of a strict risk evaluation and mitigation strategy (REMS) to assess comprehensively Qsymia’s teratogenic potential [ 72 ]. This includes a detailed plan and strategy to evaluate and mitigate the potential teratogenic risks in women of childbearing potential taking the drug for the treatment of obesity [ 73 ]. The FDA subsequently approved Qsymia on July 17, 2011. Vivus changed the drug name from Qnexa to Qsymia presumably to shake off the bad public press.

Topiramate is an anticonvulsant, sold by Johnson & Johnson as Topamax since 1996. It is known to have the potential to cause birth defects and suicides [ 74 ]. It does not seem important as an anticonvulsant drug, but becomes critical as a diet pill with a target patient population of women of child bearing age. This incidence was viewed as a calamity at the time, but the FDA required a REMS program which later became a reason for doctors not to substitute the more expensive Qsymia with the generic version of phentermine and topiramate. The difference in monthly bills is $160 against $90.

Qsymia was initially touted by Wall Street analysts with a peak sale of $3.6 billion/year. With the potential of generic substitution with the individual drug, the peak sales estimate dropped to $1.2 billion/year. Although Vivus was successful in securing FDA approval, it foundered without a marketing partner, an issue that ignited shareholder unrest that led to a boardroom overhaul in the summer of 2013. Worse yet, Actavis filed an ANDA for Qsymia with the FDA just months after the product launch. Actavis claimed in a letter to Vivus in May 2014 that the seven US patents Vivus holds are either invalid, unenforceable, or will not be infringed by Actavis’ knockoff [ 75 ]. The peak sales estimate dropped again to $400 million/year. In fact, among the three diet pills approved recently, Wells Fargo’s analyst Matthew Andrews forecasted $1.2 billion for Contrave, $481 million for Belviq, and $396 million for Qsymia in spite of Qsymia’s first-to market timing and best efficacy data [ 76 ].

Looking back, Vivus invested on Qsymia heavily with two main clinical studies of 3700 patients for 56 weeks (2200 patients taking three doses of Qnexa to about 1500 on placebo) [ 77 ]. It delivered excellent efficacy data with a weight loss of 10.6% for the highest dose, 8.6% loss for the middle dose, and 5.1% for the lowest dose; the value was 1.7% for patients on placebo. However, the side effect of topiramate was overlooked in the mist of clinical development. The potential of generic substitution is dismissed, and the poor execution of marketing strategies further cut into the profit. Indeed, the success in any specialty pharma product demands full consideration in every aspect of the development activities and eventual commercialization.

28. Innovator’s life cycle management opportunities

Life cycle management of on-patent pharmaceuticals has become increasingly important to big pharma since it is more and more difficult to replace off-patent drugs with new blockbusters, as they are challenged to meet revenue and profit growth expectations. Given this environment, companies have started and been successful not only internally, but also at in-licensing technology or projects from specialty pharma for the protection of the life cycles of their blockbuster drug franchises. The study of life cycle management consequently becomes the focus for a subset of specialty pharma specializing in drug delivery platforms and for another subset of specialty pharma concentrating on old drug, new use, especially if the old drug is a blockbuster from a large pharma. The innovator, relying on their own proprietary preclinical and clinical data in the original NDA, can supplement the original NDA and obtain a license for an improved version of their own drug [ 10 ]. Whereas for the specialty pharma working on an improved version of the other’s drug, the regulatory filing route is NDA 505(b)(2) that requires patent certification of non-infringement to the innovator’s patent, in order to rely on the safety and efficacy data filed in the original NDA for the approval of the improved version of the old drug [ 78 ]. In this process, inefficiency may kick, in since the specialty pharma is not privy to the innovator’s database leading to possible erroneous assumptions and repetitive guesswork. Therefore, it is beneficial to approach the potential customers for one’s technology and project ideas before investing significant money in the type of life cycle management projects. The other advantage for the specialty pharma to collaborate with the innovator is to capitalize on the innovator’s infrastructure of marketing and sales. It is resource intensive if not impossible, to launch a product when the innovator holds fast to the target patient population. The key to secure the innovator’s interest in one”s technology would be the demonstrable clinical advantages of the improved version over the old version.

29. Intellectual property strategies

In assessing different technology approaches to old drug, new use, companies need to consider several factors on a molecule-by-molecule basis. First and foremost, they will have to be confident that there is a potential for clinical improvement of the original molecule through reformulation and/or chemical modification. Companies must also consider their tolerance for risk and willingness to invest in either less-proven technologies and/or radical modifications of the original molecule, as the old saying the idea of being able to achieve rewards without the risk is not sustainable. Finally, the distinctiveness of the technology, including the intellectual property situation, must be carefully assessed. The patents derived from product life cycle management are called ancillary patents, which are distinct from the basic compound patents. The ancillary patents range from polymorph, salt, formulation, prodrug, delivery device, new indication, alternative route of administration, to new method of use. In general, the ancillary patents, particularly if the new product patent expires later than the original patent, are weaker and attract more patent challenges from generic competitions.

30. Regulation and regulatory strategy

The regulatory pathways for the projects described herein may follow three different filing routes: NDA 505(b)(1), NDA 505(b)(2), and ANDA 505(j). The Hatch-Waxman Amendment of 1984 amended the Food, Drug, and Cosmetic Act of 1938 that created a regulatory pathway for the FDA to approve an identical or improved version of a brand drug based on the Agency’s previous finding of safety and/or effectiveness for the brand drug [ 79 ]. The generic drug, being an identical copy, is filed under ANDA while 505(b)(2) is for an improved version, both of which require patent certification of noninfringement to the brand patents. Consequently, the brand patents need to be consolidated in a place to facilitate the process of patent certification. The Orange Book is the place to gather all brand patent listings. Both NDA and 505(b)(2) are considered brand name products subject to generic challenge and therefore require patent listing in the Orange Book. In short, the NDA requires patent listing, ANDA requires patent certification, and 505(b)(2) requires both patent listing and patent certification.

There are four types of patent certification: Paragraph I is no brand patent listing; Paragraph II is the brand patent(s) has expired; Paragraph III is a commitment not to market one’s drug until brand patent expires; Paragraph IV is to challenge the brand patent(s) as a means to secure early market entry [ 80 ]. Paragraph IV certification by a generic firm is to assert that relevant innovator’s patents are invalid or not infringed by the new product, albeit a new generic product or a new 505(b)(2) product by a company other than the innovator. The basic chemical compound patents are seldom challenged, since it is difficult if not impossible to bypass the basic compound patent. Other patents filed by either the brand name drug maker for the purpose of prolonging the product life cycle by making an improved version of the drug product, or a 505(b)(2) filer also making an improved version of the drug product, are called ancillary patents. These ancillary patents with incremental inventions developed internally or purchased externally are otherwise a frequent target of patent challenges.

It is important for specialty pharma to identify a regulatory filing route at the outset of project initiation so that the required data can be collected in a way suitable for the type of filing. It is a no brainer to select an NDA for an NME or to select an ANDA for an identical copy of a brand product. It is tougher to select 505(b)(2), which encompasses a variety of situations.

A 505(b)(2) is most suited for those who are doing an improved version of a brand drug, which can have its own patents and may not be comparable to a reference labeled drug (RLD). The selection of RLD is necessary for 505(b)(2) filings, so that the FDA may reference the safety and efficacy data on the RLD. This way, a 505(b)(2) filing may need less preclinical and clinical data. However, the 505(b)(2) filer needs to certify no infringement on the RLD patent and the new version of the similar product must be superior to the RLD. Therefore careful selection of RLD, should there be several, may means product approval or disapproval by the FDA in the end.

A 505(b)(2) application may itself be granted 3 years of Waxman-Hatch exclusivity if one or more of the clinical investigations, other than Bioavailability/Bioequivelence (BA/BE) studies, was essential to approval of the application and was conducted or sponsored by the applicant. A 505(b)(2) application may also be eligible for orphan drug exclusivity (21 CFR 314.20–316.36) or pediatric exclusivity (section 505A of the Act). For blockbuster products, there may be several firms looking for copycat development with perhaps not identical formulation. Once one firm obtains a 505(b)(2) approval, the second runner up is left with no approval until after 3 years, when the market exclusivity is expired for the first filer. In this case, a full NDA may be advantageous, should one’s product differ enough from the RLD.

In addition, an applicant may submit a 505(b)(2) application for a change in a drug product that is eligible for consideration pursuant to a suitability petition under section 505(j)(2)(C) of the Act (ANDA generic filing). For instance, one’s formulation for intravenous injection (IV) is not identical but you think superior to the innovator. An ANDA cannot be filed even if the formulation is bioequivalent to the innovator’s product. This is because the FDA requires a generic IV formulation to be identical to that of the innovator. In this case, one may file 505(b)(2) followed by a suitability petition. A 505(b)(2) is indeed a versatile rout of regulatory filing used preferentially by the specialty pharma companies.

31. Conclusion

The global trends of open innovation, fast growing emerging markets, and patent cliff threat provides ample opportunity for smaller specialty pharma companies to gain the upper hand provided that the technology platforms or specialty medicinal products is what the big pharma wants. The easy around the clock internet telecommunication also provides the specialty pharma in emerging countries with opportunities to merge or work with western big pharma on the wide-spanning niche products and the opportunity to improve the use of old drugs. It takes one to evaluate one’s own strength and weakness to strategically select partners with complimenting strengths, in order to maximize the probability of success. However, this vast opportunity is not endless. The rise of densely populated countries such as India and China is going to accelerate the competition in the pharmaceutical industry worldwide. Smaller players in smaller countries with no domestic demands will eventually lose out to the big players in big countries, except for the ones with the vision to collaborate with the stronger to make themselves strong.

Acknowledgments

The author acknowledges Ms. Peichun Kuo for her assistance in collecting the reference articles, and preparing the figures, and her help in the preparation of this manuscript.

Conflicts of interest

The author declares no conflicts of interest.

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pharma business model

  • 11 Jul 2023

Big Pharma has a model to make a profit and save lives. So, what’s the hold-up?

BiGS actionable intelligence: A business model developed at Harvard Business School and applied in the real world proves that Big Pharma can simultaneously earn additional profits and expand access to lifesaving drugs, if firms have the will to work differently and establish new relationships. It’s more important than ever for Big Pharma to adopt this model in light of the COVID-19 pandemic.

COVID-19 heightened urgency for global action

After developing the template 15 years ago with colleagues, Rangan argues that it’s more critical than ever for Big Pharma to adopt the proven model more broadly. He says the pandemic elevated urgency by:

  • Exposing new risks and opportunities with Big Pharma’s current models
  • Driving global use of video-conferencing technology, which created a sustainable way to forge and maintain new cross-sector and cross-border partnerships needed to execute the model, and
  • Adding a new layer of knowledge about how pharmaceutical companies handle global public health challenges

Jessica Martinez , a former Big Pharma executive who joined the Bill & Melinda Gates Foundation nearly five years ago to help improve access to therapies in lower middle income countries (as defined by the World Bank) , told the BiGS Fix:

“It is no longer acceptable that these highly innovative medicines and vaccines are only available to high-income countries. The rationale for this dichotomy is getting weaker and weaker. We’ve seen the terrible consequences of our old ways of thinking with COVID.”

Decision to adopt the model is a matter of equity

Rangan grew up in India where he says the travails of the extreme poor were always in sight. “Rich and poor lived shoulder to shoulder, unlike in Western countries where you don’t know your neighbors,” he said. “In India, you grew up knowing abject poverty and that has stayed with me throughout my adult life and influenced my research.”

He came to the United States about 40 years ago to research how business advances the prosperity of people in developed markets. As an HBS marketing professor, he understands the mindset of the average pharmaceutical executive, who tends to be obsessed with protecting their organization’s inventions to drive profits.

But as the world emerges from the coronavirus, Rangan said business and government should be asking a different question: “How can it be that on the African subcontinent, only 30 percent of people have been vaccinated, while in the rest of the world, that number is closer to 80 percent?”

More essentially, Rangan asks with his research: “How can it be that with regard to access to medicine, which is such a fundamental human need that there is not more equity?”

Voluntary licensing unlocks overlooked, less-understood markets

The model that Samuel developed in the wake of his adoption of BBOP’s principles featured a tiered pricing strategy that combined sales of branded products at prices set based on both the disease burden and GNI per capita across 140 low- and middle-income countries plus voluntary licensing to enable dramatically lower pricing for the poorest of the poor in low-income or middle-income countries.

This model recognizes the economic diversity of low middle income countries and reflects a nuanced approach with sales of the brand alongside voluntary licensing to reach the billions of people who live at what Rangan calls the “base” of the economic pyramid.

“These markets are not easy, and reaching them is not cheap, but one important thing that business leaders should know is that there is a satisfactory incremental profit to be made in these markets,” Rangan said. “The profitability might not be the same as one might get in the developed markets. But because there is scale, because there are 5 billion people at the base of the pyramid, if you bring these medicines to them at an affordable price, then because of the volume of sales at little fixed cost, worthwhile profits can be made, while bringing enormous health and happiness to large populations.”

The approach turns traditional marketing on its head

Under this model, manufacturers will offer their patented technology (which is often contested) for a modest, but worthwhile, royalty to producers in low-income countries instead of zealously guarding it and in the end neither achieving access for patients in need nor realizing profits. The licensees then work with local governments and markets while paying the pharmaceutical company for the right to sell generic versions of the products, creating a revenue stream for the originator.

With a foothold in these markets, pharmaceutical companies will also sell their branded drugs— at appropriately tiered prices—to higher income consumers and insurers who can afford the products—even as the companies earn royalties from their sales to the mass market through partnerships with producers of generics.

For Hepatitis C, Samuel leveraged the formula in Egypt and in more than 100 other countries.

In fact, he said, Gilead generated substantial revenues through this hybrid approach for viral hepatitis and HIV. In doing so, this method helped patients regardless of whether they were living at the base or the top of the economic pyramid in places such as India, Nigeria, Pakistan, South Africa and dozens of other countries.

“The evolution of Gilead’s access to medicines program is a direct result of what I learned from my visits to Kash Rangan’s lectures,” he said. Typically, drug manufacturers perceive countries such as these as too difficult to make profits, said Samuel, former senior vice president of the company’s Access Operations & Emerging Markets business unit.

Financial and societal rewards or status quo?

Despite the model’s proven effectiveness, most pharmaceutical manufacturers have been slow to adopt the voluntary licensing and BBOP approach to help a population of people who typically live on less than $30 a day. They are wary of the considerable challenges to success.

To get new pharmaceuticals to the working poor in emerging markets, pharmaceutical companies must figure out a way to license the technology to foreign manufacturers while protecting their intellectual property. They must navigate often Byzantine regulatory approval processes and ensure that generic manufacturers maintain quality and have ways to track and trace the product. Foreign partners must tackle how to manufacture, store and distribute the medications.

Perhaps thorniest of all, pharmaceutical companies must be willing to accept different profit levels in different markets and work through insulating their higher priced markets through commercial practices that allow such life-saving innovations to be available both in developed and developing country markets.

From the foundation lens, Martinez hopes that more pharmaceutical companies will use this approach and other tools to improve health equity, with the understanding that “the value in these countries is largely accretive and represent new and untapped revenue streams.” Other companies have also had success, she said, citing Suzuki, Unilever, SK Bioscience and Eubiologics.

Questions : What do you think is preventing more pharmaceutical companies from marketing their products to lower middle income countries? And why aren’t the companies that have effectively done so not doing it more often?

We want to hear from you!

Do you have questions about the intersection of business and global society that you’d like to see HBS address or ideas for mini-case studies? Reach out to HBS BiGS Fix Editor Barbara DeLollis at [email protected] or on LinkedIn .

How to engage with HBS’s BiGS

We invite you to join HBS’s BiGS on LinkedIn . Contact us with any pressing questions and ideas on how business can play a role in addressing societal issues and making an impact in society. Feel free to reach out to HBS BiGS Fix Editor-in-Chief Barbara DeLollis at [email protected] or on LinkedIn .

Could a Business Model Help Big Pharma Save Lives and Profit?

With Hepatitis C running rampant in Egypt in 2012, Clifford Samuel, then of California-based Gilead Sciences, convened a series of urgent meetings with Egyptian government officials, doctors, and patients. His goal? To make Gilead’s lifesaving Hepatitis C drugs available for Egypt’s most vulnerable by harnessing a new business model.

The bold approach worked.

Gilead, one of the world’s leading antiviral makers, would sell its branded Hepatitis C medicines while offering local manufacturers voluntary licenses to produce generics, requiring only royalties in return. The company realized reasonable profits and reduced Hepatitis C, and rates of which are expected to fall by 86 percent between 2020 and 2030, according to Egypt’s Ministry of Health.

This real-world example demonstrates how a business model can help Big Pharma address a complex societal problem.

“You get to bring life-saving medicine to people who need it. And you’re actually growing your business,” Samuel told The BiGS Fix in an interview. “You find that you started from nothing, and you end up cultivating a viable market.”

Samuel, Harvard Business School professor V. Kasturi Rangan, who developed the model, and advocates from the Bill & Melinda Gates Foundation, recently discussed the approach at a seminar hosted by the Institute for the Study of Business in Global Society (BiGS).

COVID-19 heightened urgency for global action

After developing the template 15 years ago with colleagues, Rangan argues that it’s more critical than ever for Big Pharma to adopt it more broadly. He says the pandemic elevated urgency by:

  • Exposing new risks and opportunities with Big Pharma’s current models.
  • Driving global use of video-conferencing technology, which created a sustainable way to forge and maintain new cross-sector and cross-border partnerships needed to execute the model.
  • Adding new information about how pharmaceutical companies handle global public health challenges.

Jessica Martinez, a former Big Pharma executive who joined the Bill & Melinda Gates Foundation nearly five years ago to help improve access to therapies in low- and middle-income countries, told the BiGS Fix:

“It is no longer acceptable that these highly innovative medicines and vaccines are only available to high-income countries. The rationale for this dichotomy is getting weaker and weaker. We’ve seen the terrible consequences of our old ways of thinking with COVID.”

Decision to adopt the model is a matter of equity

Rangan, the Malcolm P. McNair Professor of Marketing, grew up in India where he says the travails of the extreme poor were always in sight.

“Rich and poor lived shoulder to shoulder, unlike in Western countries where you don’t know your neighbors,” he says. “In India, you grew up knowing abject poverty and that has stayed with me throughout my adult life and influenced my research.”

He came to the United States about 40 years ago to research how business advances the prosperity of people in developed markets. As an HBS marketing professor, he understands the mindset of the average pharmaceutical executive, who obsesses about protecting their organization’s inventions to drive profits.

But as the world emerges from the coronavirus, Rangan said business and government should instead ask: “How can it be that on the African subcontinent, only 30 percent of people have been vaccinated, while in the rest of the world, that number is closer to 80 percent?”

More essentially, Rangan asks with his research: “How can it be that with regard to access to medicine, which is such a fundamental human need that there is not more equity?”

Voluntary licensing unlocks overlooked, less-understood markets

Gilead’s tiered model combined branded product sales at prices based on disease burden and per capita income of 140 low- and middle-income countries plus voluntary licensing to enable dramatically lower pricing for the poorest of the poor. By selling branded therapies alongside generics, Gilead could reach the billions of people who live at what Rangan calls the “base” of the economic pyramid.

“These markets are not easy, and reaching them is not cheap, but one important thing that business leaders should know is that there is a satisfactory incremental profit to be made in these markets.”

“These markets are not easy, and reaching them is not cheap, but one important thing that business leaders should know is that there is a satisfactory incremental profit to be made in these markets,” Rangan says.

“The profitability might not be the same as one might get in the developed markets,” he adds. “But because there is scale, because there are 5 billion people at the base of the pyramid, if you bring these medicines to them at an affordable price, then because of the volume of sales at little fixed cost, worthwhile profits can be made, while bringing enormous health and happiness to large populations.”

The approach turns traditional marketing on its head

This model encourages manufacturers to offer their often-contested patented technology for a modest-but-worthwhile royalty to producers in low-income countries, instead of zealously guarding it, cutting it off from patients and profits. The licensees then work with local governments and markets while paying the pharmaceutical company for the right to sell generic versions of the products, creating a revenue stream for the originator.

With a foothold in these markets, pharmaceutical companies will also sell branded drugs—at appropriately tiered prices—to higher income consumers and insurers who can afford them, even as the companies earn royalties from mass-market sales through their generic partnerships.

For Hepatitis C, Samuel leveraged the formula in Egypt and in more than 100 other countries.

In fact, Gilead generated substantial revenues through this hybrid approach for viral hepatitis and HIV. In doing so, this method helped patients regardless of whether they were living at the base or the top of the economic pyramid in India, Nigeria, Pakistan, South Africa, and dozens of other countries.

Typically, drug manufacturers perceive countries such as these as too difficult to be profitable, said Samuel, former senior vice president of the company’s Access Operations & Emerging Markets business unit.

Financial and societal rewards or status quo?

Despite the model’s proven effectiveness, most pharmaceutical manufacturers have been slow to adopt the voluntary licensing and BBOP approach to help a population of people who typically live on less than $30 a day. They are wary of the considerable challenges to success.

To get new pharmaceuticals to the poor in emerging markets, pharmaceutical companies must figure out a way to license the technology to foreign manufacturers while protecting their intellectual property. They must navigate often Byzantine regulatory approval processes and ensure that generic manufacturers maintain quality and have ways to track and trace the product. Foreign partners must tackle how to manufacture, store, and distribute the medications.

Perhaps thorniest of all, pharmaceutical companies must be willing to accept different profit levels in different markets. That might require insulating their higher-priced markets through commercial practices that allow such life-saving innovations to be available both in developed and developing markets.

From the foundation lens, Martinez hopes that more pharmaceutical companies will use this approach and other tools to improve health equity, with the understanding that “the value in these countries is largely accretive and represent new and untapped revenue streams.” Other companies have also had success, she said, citing Suzuki, Unilever, SK Bioscience and Eubiologics.

This article originally appeared in The BiGS Fix .

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Why the Big Pharma Business Model Must Change

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The pharmaceutical industry is in the middle of a perfect storm. First, what has been termed a patent cliff has materialized with more than $150 billion in drugs coming off patent worldwide in 2011–2014. This is particularly disastrous for the industry.

With Big Pharma gross margins around 90% of revenue for established drugs, and sales and marketing at 30%, every dollar of lost revenue impacts operating profit by about $0.60. For example, Lipitor, at its peak a $13 billion drug worldwide for Pfizer, lost patent protection in the U.S. in November last year. With almost $8 billion in U.S. sales, this means a potential negative impact on operating profit of well more than $4 billion, approximately 30% of Pfizer’s 2011 operating profit. In that first week in November, off-patent, U.S. Lipitor sales plunged by more than 50%.

Companies have weathered patent issues in the past. This one is more troubling as R&D productivity, the value driver of the industry, have dropped precipitously. In a 2008 Goldman Sachs industry report on Big Pharma companies in the U.S., it was noted that in the past 10 years R&D spend had increased threefold while new molecules introduced to the market had decreased by 40%. This resulted in two outcomes. In the short run, the product pipeline development process was not robust enough for the pharmaceutical industry to weather the looming patent cliff. Of equal importance, however, was the long-run impact—the cost to discover and bring a new drug to market was increasing dramatically. The report concluded by stating that the business model for Big Pharma was broken.

This brings us to the third aspect of this perfect storm, the business model issue. How has the industry responded? Some players have responded the old fashioned way—investing more resources in R&D hoping to fill the pipeline. Eli Lilly has taken this a step beyond by moving to a more open innovation model partnering with firms in emerging markets to broaden its research and development capability—what it terms “more and better shots on goal.” Others have taken more drastic steps via mega-acquisitions. Pfizer acquired Wyeth for $68 billion. Likewise, Merck, with close to 80% of its revenue stream at risk due to the patent cliff, followed suit acquiring Schering-Plough for $41 billion. This clearly helped with pipeline issues but at what cost?

Building a Better Big Pharma Business Model

Andy Grove wrote an interesting reflection on his time at the helm of Intel, titled Only the  Paranoid Survive . In it, he talked of the importance of recognizing inflection points in an industry’s life cycle—that point in time when the old ways of doing business no longer hold. A business model has three balls that must be juggled constantly. First, one must  create value by meeting the needs of a targeted market segment in a manner such that the value in the mind of the customer is greater than the offered price. Then, one must  deliver  this value by marshaling and aligning resources to support processes necessary to meet the targeted customers’ needs in a manner that competitors would find difficult to imitate. And, finally, the last ball is to  capture value . All this has to be done in a manner that results in increased investor value. Simply put, the cost to the company to deliver the value must be less than the price—that is, the target customers’ willingness to pay. When these three balls are juggled correctly, it results in profitable growth. Unfortunately, the perfect storm factors described above are changing the nature of the industry fundamentally, making this process of value creation, delivery, and capture extremely challenging.

The long-practiced business model for the pharmaceutical industry can be described as The Search for the Next Blockbuster. Find a large patient population with an important therapeutic need, spend on average about $1 billion to discover, develop, and launch a drug in the market, ensure strong patent protection, convince the market of the drug’s benefits by promoting it heavily, and then hope that annual sales exceed $1 billion (a blockbuster drug is one that has sales of at least $1 billion annually). When this business model works, the rewards are enormous. The large market size is essential since the costs incurred are so high and the process is highly risky since a large majority of attempts at drug discovery fail. This risk is justified only if the return is large enough. As mentioned above, in the 14.5 years Lipitor enjoyed patent protection, it generated some $125 billion in sales for Pfizer resulting in an estimated $80 billion in pre-tax operating profit. This is what researchers in the industry dream about every night. Although this is the extreme example, many other drugs have had success returning 40X to 50X the cost of development.

This blockbuster model did not work perfectly for all medical needs of society. What happens when the patient population or sales potential of a particular therapeutic need is small and so cannot justify the cost and risk of creating a treatment? Rational economic thought says these are not viable options for development. In the U.S., this industry-wide business model was abridged in the 1980s with passage of the Orphan Drug Act where pharmaceutical companies were given liberal tax incentives and market exclusivity for focusing on rare diseases with target populations of less than 200,000—a market segment size that held too high a risk for the traditional blockbuster model. But market exclusivity led to firms attaining monopoly status resulting in astronomically high costs for orphan drugs. The potential return had to be increased artificially to incentivize the development of these orphan drugs.

Targeted therapeutics are causing this inflection point today. Breakthroughs in genome mapping now allow drugs to be targeted at the molecular level. For instance, in the past chemotherapy treatments for a cancer type were nonspecific thus applicable to a large target group (i.e. market segment). But, by now focusing at the molecular level, these treatments can be much more specific. This holds great promise for patients since it is more effective with fewer side effects. But, how will these be developed given the now much smaller target market segment? Can economic logic justify current levels of R&D expenditures for smaller markets? The level of risk remains high, although some feel it is lower than for the blockbuster model. Still others suggest the government might need to step in and have a hand in this new era of drug discovery, as it did in the 1980s with orphan drugs.

With health care costs now about 17% of GDP for the U.S. this will be a challenge. Payers such as insurance companies and governments cannot afford prices akin to orphan drugs. Wall Street is now waiting. Pharmaceuticals were downgraded as a portfolio option a number of years ago due to the three factors discussed above, and there has been little upward movement since then. Pharmaceutical firms will have to chart a new course to once again be the foundation of investment strategies.

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The future of healthcare: Value creation through next-generation business models

The healthcare industry in the United States has experienced steady growth over the past decade while simultaneously promoting quality, efficiency, and access to care. Between 2012 and 2019, profit pools (earnings before interest, taxes, depreciation, and amortization, or EBITDA) grew at a compound average growth rate of roughly 5 percent. This growth was aided in part by incremental healthcare spending that resulted from the 2010 Affordable Care Act. In 2020, subsidies for qualified individual purchasers on the marketplaces and expansion of Medicaid coverage resulted in roughly $130 billion 1 Federal Subsidies for Health Insurance Coverage for People Under Age 65: CBO and JCT’s March 2020 Projections, Congressional Budget Office, Washington, DC, September 29, 2020, cbo.gov. 2 Includes adults made eligible for Medicaid by the ACA and marketplace-related coverage and the Basic Health Program. of incremental healthcare spending by the federal government.

The next three years are expected to be less positive for the economics of the healthcare industry, as profit pools are more likely to be flat. COVID-19 has led to the potential for economic headwinds and a rebalancing of system funds. Current unemployment rates (6.9 percent as of October 2020) 3 The employment situation—October 2020 , US Department of Labor, November 6, 2020, bls.gov. indicate some individuals may move from employer-sponsored insurance to other options. It is expected that roughly between $70 billion and $100 billion in funding may leave the healthcare system by 2022, compared with the expected trajectory pre-COVID-19. The outflow is driven by coverage shifts out of employer-sponsored insurance, product buy-downs, and Medicaid rate pressures from states, partially offset by increased federal spending in the form of subsidies and cost sharing in the Individual market and in Medicaid funding.

Underlying this broader outlook are chances to innovate (Exhibit 1). 4 Smit S, Hirt M, Buehler K, Lund S, Greenberg E, and Govindarajan A, “ Safeguarding our lives and our livelihoods: The imperative of our time ,” March 23, 2020, McKinsey.com. Innovation may drive outpaced growth in three categories: segments that are anticipated to rebound from poor performance over recent years, segments that benefit from shifting care patterns that result directly from COVID-19, and segments where growth was expected pre-COVID-19 and remain largely unaffected by the pandemic. For the payer vertical, we estimate profit pools in Medicaid will likely increase by more than 10 percent per annum from 2019 to 2022 as a result of increased enrollment and normalized margins following historical lows. In the provider vertical, the rapid acceleration in the use of telehealth and other virtual care options spurred by COVID-19 could continue. 5 Bestsennyy O, Gilbert G, Harris A, and Rost J, “ Telehealth: A quarter-trillion-dollar post-COVID-19 reality? ” May 29, 2020, McKinsey.com. Growth is expected across a range of sub-segments in the services and technology vertical, as specialized players are able to provide services at scale (for example, software and platforms and data and analytics). Specialty pharmacy is another area where strong growth in profit pools is likely, with between 5 and 10 percent compound annual growth rate (CAGR) expected in infusion services and hospital-owned specialty pharmacy sub-segments.

Strategies that align to attractive and growing profit pools, while important, may be insufficient to achieve the growth that incumbents have come to expect. For example, in 2019, 34 percent of all revenue in the healthcare system was linked to a profit pool that grew at greater than 5 percent per year (from 2017 to 2019). In contrast, we estimate that only 13 percent of revenue in 2022 will be linked to profit pools growing at that rate between 2019 and 2022. This estimate reflects that profit pools are growing more slowly due to factors that include lower membership growth, margin pressure, and lower revenue growth. This relative scarcity in opportunity could lead to increased competition in attractive sub-segments with the potential for profits to be spread thinly across organizations. Developing new and innovative business models will become important to achieve the level of EBITDA growth observed in recent years and deliver better care for individuals. The good news is that there is significant opportunity, and need, for innovation in healthcare.

New and innovative business models across verticals can generate greater value and deliver better care for individuals

Glimpse into profit pool analyses and select sub-segments.

Within the context of these overarching observations, the projections for specific sub-segments are nuanced and tightly connected to the specific dynamics each sub-segment is currently facing:

  • Payer—Small Group: Small group has historically seen membership declines and we expect this trend to continue and/or accelerate in the event of an economic downturn. Membership declines will increase competition and put pressure on incumbent market leaders to both maintain share and margin as membership declines, but fixed costs remain.
  • Payer—Medicare Advantage: Historic profit pool growth in the Medicare Advantage space has been driven by enrollment gains that result from demographic trends and a long-term trend of seniors moving from traditional Medicare fee-for-service programs to Medicare Advantage plans that have increasingly offered attractive ancillary benefits (for example, dental benefits, gym memberships). Going forward, we expect Medicare members to be relatively insulated from the effects of an economic downturn that will impact employers and individuals in other payer segments.
  • Provider—General acute care hospitals: Cancelation of elective procedures due to COVID-19 is expected to lead to volume and revenue reductions in 2019 and 2020. Though volume is expected to recover partially by 2022, growth will likely be slowed due to the accelerated shift from hospitals to virtual care and other non-acute settings. Payer mix shifts from employer-sponsored to Medicaid and uninsured populations in 2020 and 2021 are also likely to exert downward pressure on hospital revenue and EBITDA, possibly driving cost-optimization measures through 2022.
  • Provider—Independent labs: COVID-19 testing is expected to drive higher than average utilization growth in independent labs through 2020 and 2021, with more typical utilization returning by 2022. However, labs may experience pressure on revenue and EBITDA growth as the payer mix shifts to lower-margin segments, offsetting some of the gains attributed to utilization.
  • Provider—Virtual office visits: Telehealth has helped expand access to care at a time when the pandemic has restricted patients’ ability to see providers in person. Consumer adoption and stickiness, along with providers’ push to scale-up telehealth offerings, are expected to lead to more than 100 percent growth per annum in the segment from 2019 to 2022, going beyond traditional “tele-urgent” to more comprehensive virtual care.
  • HST—Medical financing: The medical financing segment may be negatively impacted in 2020 due to COVID-19, as many elective services for which financing is used have been deferred. However, a quick bounce-back is expected as more patients lacking healthcare coverage may need financing in 2021, and as providers may use medical financing as a lever to improve cash reserves.
  • HST—Wearables: Looking ahead, the wearables segment is expected to see a slight dip in 2020 due to COVID-19, but is expected to rebound in 2021 and 2022 given consumer interest in personal wellness and for tracking health indicators.
  • Pharma services—Pharmacy benefit management: The growth is expected to return to baseline expectations by 2022 after an initial decline in 2020 and 2021 due to the COVID-19-driven decrease in prescription volume.

New and innovative business models are beginning to show promise in delivering better care and generating higher returns. The existence of these models and their initial successes are reflective of what we have observed in the market in recent years: leading organizations in the healthcare industry are not content to simply play in attractive segments and markets, but instead are proactively and fundamentally reshaping how the industry operates and how care is delivered. While the recipe across verticals varies, common among these new business models are greater alignment of incentives typically involving risk bearing, better integration of care, and use of data and advanced analytics.

Payers—Next-generation managed care models

For payers, the new and innovative business models that are generating superior returns are those that incorporate care delivery and advanced analytics to better serve individuals with increasingly complex healthcare needs (Exhibit 2). As chronic disease and other long-term conditions require more continuous management supported by providers (for example, behavioral health conditions), these next-generation managed care models have garnered notice. Nine of the top ten payers have made acquisitions in the care delivery space. Such models intend to reorient the traditional payer model away from an operational focus on financing healthcare and pricing risk, and toward more integrated managed care models that better align incentives and provide higher-quality, better experience, lower-cost, and more accessible care. Payers that deployed next-generation managed care models generate 0.5 percentage points of EBITDA margin above average expectations after normalizing for payer scale, geographical footprint, and segment mix, according to our research.

The evidence for the effectiveness of these next-generation care models goes beyond the financial analysis of returns. We observe that these models are being deployed in those geographies that have the greatest opportunity to positively impact individuals. Those markets with 1) a critical mass of disease burden, 2) presence of compressible costs (the opportunity for care to be redirected to lower-cost settings), and 3) a market structure conducive to shifting to higher-value sites of care, offer substantial ways to improve outcomes and reduce costs. (Exhibit 3).

Currently, a handful of payers—often large national players with access to capital and geographic breadth that enables acquisition of at-scale providers and technologies—have begun to pursue such models. Smaller payers may find it more difficult to make outright acquisitions, given capital constraints and geographic limitations. M&A activity across the care delivery landscape is leaving smaller and more localized assets available for integration and partnership. Payers may need to increasingly turn toward strategic partnerships and alliances to create value and integrate a range of offerings that address all drivers of health.

Providers—reimagining care delivery beyond the hospital

For health systems, through an investment lens, the ownership and integration of alternative sites of care beyond the hospital has demonstrated superior financial returns. Between 2013 and 2018, the number of transactions executed by health systems for outpatient assets increased by 31 percent, for physician practices by 23 percent, and for post-acute care assets by 13 percent. At the same time, the number of hospital-focused deals declined by 6 percent. In addition, private equity investors and payers are becoming more active dealmakers in these non-acute settings. 6 CapitalIQ, Dealogic, and Irving Levin Associates. 7 In 2018, around 40 percent of all post-acute and outpatient deals were completed by an acquirer other than a traditional provider.

As investment is focused on alternative sites of care, we observe that health systems pursuing diversified business models that encompass a greater range of care delivery assets (for example, physician practices, ambulatory surgery centers, and urgent care centers) are generating returns above expectations (Exhibit 4). By offering diverse settings to receive care, many of these systems have been able to lower costs, enhance coordination, and improve patient experience while maintaining or enhancing the quality of the services provided. Consistent with prior research, 8 Singhal S, Latko B, and Pardo Martin C, “ The future of healthcare: Finding the opportunities that lie beneath the uncertainty ,” January 31, 2018, McKinsey.com. systems with high market share tend to outperform peers with lower market share, potentially because systems with greater share have greater ability not only to ensure referral integrity but also to leverage economies of scale that drive efficiency.

The extent of this outperformance, however, varies by market type. For players with top quartile share, the difference in outperformance between acute-focused players and diverse players is less meaningful. Contrastingly, for bottom quartile players, the increase in value provided by presence beyond the acute setting is more significant. While there may be disadvantages for smaller and sub-scale providers, opportunities exist for these players—as well as new entrants and attackers—to succeed by integrating offerings across the care continuum.

These new models and entrants and their non-acute, technology-enabled, and multichannel offerings can offer a different vision of care delivery. Consumer adoption of telehealth has skyrocketed, from 11 percent of US consumers using telehealth in 2019 to 46 percent now using telehealth to replace canceled healthcare visits. Pre-COVID-19, the total annual revenues of US telehealth players were an estimated $3 billion; with the acceleration of consumer and provider adoption and the extension of telehealth beyond virtual urgent care, up to $250 billion of current US healthcare spend could be virtualized. 9 Bestsennyy O, Gilbert G, Harris A, and Rost J, “ Telehealth: A quarter-trillion-dollar post-COVID-19 reality? ” May 29, 2020, McKinsey.com. These early indications suggest that the market may be shifting toward a model of innovative tech-enabled care, one that unlocks value by integrating digital and non-acute settings into a comprehensive, coordinated, and lower-cost offering. While functional care coordination is currently still at the early stages, the potential of technology and other alternative settings raises the question of the role of existing acute-focused providers in a more integrated and digital world.

Would you like to learn more about our Healthcare Systems & Services Practice ?

Healthcare services and technology—innovation and integration across the value chain.

Growth in the healthcare services and technology vertical has been material, as players are bringing technology-enabled services to help improve patient care and boost efficiency. Healthcare services and technology companies are serving nearly all segments of the healthcare ecosystem. These efforts include working with payers and providers to better enable the link between actions and outcomes, to engage with consumers, and to provide real-time and convenient access to health information. Since 2014, a large number and value of deals have been completed: more than 580 deals, or $83 billion in aggregate value. 10 Includes deals over $10 million in value. 11 Analysis from PitchBook Data, Inc. and McKinsey Healthcare Services and Technology domain profit pools model. Venture capital and private equity have fueled much of the innovation in the space: more than 80 percent 12 Includes deals over $10 million in value. of deal volume has come from these institutional investors, while more traditional strategic players have focused on scaling such innovations and integrating them into their core.

Driven by this investment, multiple new models, players, and approaches are emerging across various sub-segments of the technology and services space, driving both innovation (measured by the number of venture capital deals as a percent of total deals) and integration (measured by strategic dollars invested as a percent of total dollars) with traditional payers and providers (Exhibit 5). In some sub-segments, such as data and analytics, utilization management, provider enablement, network management, and clinical information systems, there has been a high rate of both innovation and integration. For instance, in the data and analytics sub-segment, areas such as behavioral health and social determinants of health have driven innovation, while payer and provider investment in at-scale data and analytics platforms has driven deeper integration with existing core platforms. Other sub-segments, such as patient engagement and population health management, have exhibited high innovation but lower integration.

Traditional players have an opportunity to integrate innovative new technologies and offerings to transform and modernize their existing business models. Simultaneously, new (and often non-traditional) players are well positioned to continue to drive innovation across multiple sub-segments and through combinations of capabilities (roll-ups).

Pharmacy value chain—emerging shifts in delivery and management of care

The profit pools within the pharmacy services vertical are shifting from traditional dispensing to specialty pharmacy. Profits earned by retail dispensers (excluding specialty pharmacy) are expected to decline by 0.5 percent per year through 2022, in the face of intensifying competition and the maturing generic market. New modalities of care, new care settings, and new distribution systems are emerging, though many innovations remain in early stages of development.

Specialty pharmacy continues to be an area of outpaced growth. By 2023, specialty pharmacy is expected to account for 44 percent of pharmacy industry prescription revenues, up from 24 percent in 2013. 13 Fein AJ, The 2019 economic report on U.S. pharmacies and pharmacy benefit managers , Drug Channels Institute, 2019, drugchannelsinstitute.com. In response, both incumbents and non-traditional players are seeking opportunities to both capture a rapidly growing portion of the pharmacy value chain and deliver better experience to patients. Health systems, for instance, are increasingly entering the specialty space. Between 2015 and 2018 the share of provider-owned pharmacy locations with specialty pharmacy accreditation more than doubled, from 11 percent in 2015 to 27 percent in 2018, creating an opportunity to directly provide more integrated, holistic care to patients.

Challenges emerge for the US healthcare system as COVID-19 cases rise

Challenges emerge for the US healthcare system as COVID-19 cases rise

A new wave of modalities of care and pharmaceutical innovation are being driven by cell and gene therapies. Global sales are forecasted to grow at more than 40 percent per annum from 2019 to 2024. 14 Evaluate Pharma, February 2020. These new therapies can be potentially curative and often serve patients with high unmet needs, but also pose challenges: 15 Capra E, Smith J, and Yang G, “ Gene therapy coming of age: Opportunities and challenges to getting ahead ,” October 2, 2019, McKinsey.com. upfront costs are high (often in the range of $500,000 to $2,000,000 per treatment), benefits are realized over time, and treatment is complex, with unique infrastructure and supply chain requirements. In response, both traditional healthcare players (payers, manufacturers) and policy makers (for example, the Centers for Medicare & Medicaid Services) 16 Centers for Medicare & Medicaid Services, “Medicaid program; establishing minimum standards in Medicaid state drug utilization review (DUR) and supporting value-based purchasing (VBP) for drugs covered in Medicaid, revising Medicaid drug rebate and third party liability (TPL) requirements,” Federal Register , June 19, 2020, Volume 85, Number 119, p. 37286, govinfo.gov. are considering innovative models that include value-based arrangements (outcomes-based pricing, annuity pricing, subscription pricing) to support flexibility around these new modalities.

Innovations also are accelerating in pharmaceutical distribution and delivery. Non-traditional players have entered the direct-to-consumer pharmacy space to improve efficiency and reimagine customer experience, including non-healthcare players such as Amazon (through its acquisition of PillPack in 2018) and, increasingly, traditional healthcare players as well, such as UnitedHealth Group (through its acquisition of DivvyDose in September 2020). COVID-19 has further accelerated innovation in patient experience and new models of drug delivery, with growth in tele-prescribing, 17 McKinsey COVID-19 Consumer Survey conducted June 8, 2020 and July 14, 2020. a continued shift toward delivery of pharmaceutical care at home, and the emergence of digital tools to help manage pharmaceutical care. Select providers have also begun to expand in-home offerings (for example, to include oncology treatments), shifting the care delivery paradigm toward home-first models.

A range of new models to better integrate pharmaceutical and medical care and management are emerging. Payers, particularly those with in-house pharmacy benefit managers, are using access to data on both the medical and pharmacy benefit to develop distinctive insights and better coordinate across pharmacy and medical care. Technology providers, together with a range of both traditional and non-traditional healthcare players, are working to integrate medical and pharmaceutical care in more convenient settings, such as the home, through access to real-time adherence monitoring and interventions. These players have an opportunity to access a broad range of comprehensive data, and advanced analytics can be leveraged to more effectively personalize and target care. Such an approach may necessitate cross-segment partnerships, acquisitions, and/or alliances to effectively integrate the many components required to deliver integrated, personalized, and higher-value care.

Creating and capturing new value

These materials are being provided on an accelerated basis in response to the COVID-19 crisis. These materials reflect general insight based on currently available information, which has not been independently verified and is inherently uncertain. Future results may differ materially from any statements of expectation, forecasts or projections. These materials are not a guarantee of results and cannot be relied upon. These materials do not constitute legal, medical, policy, or other regulated advice and do not contain all the information needed to determine a future course of action. Given the uncertainty surrounding COVID-19, these materials are provided “as is” solely for information purposes without any representation or warranty, and all liability is expressly disclaimed. References to specific products or organizations are solely for illustration and do not constitute any endorsement or recommendation. The recipient remains solely responsible for all decisions, use of these materials, and compliance with applicable laws, rules, regulations, and standards. Consider seeking advice of legal and other relevant certified/licensed experts prior to taking any specific steps.

Before the COVID-19 pandemic, our research indicated that profits for healthcare organizations were expected to be harder to earn than they have been in the recent past, which has been made even more difficult by COVID-19. New entrants and incumbents who can reimagine their business models have a chance to find ways to innovate to improve healthcare and therefore earn superior returns. The opportunity for incumbents who can reimagine their business models and new entrants is substantial.

Institutions will be expected to do more than align with growth segments of healthcare. The ability to innovate at scale and with speed is expected to be a differentiator. Senior leaders can consider five important questions:

  • How does my business model need to change to create value in the future healthcare world? What are my endowments that will allow me to succeed?
  • How does my resource (for example, capital and talent) allocation approach need to change to ensure the future business model is resourced differentially compared with the legacy business?
  • How do I need to rewire my organization to design it for speed? 18 De Smet A, Pacthod D, Relyea C, and Sternfels B, “ Ready, set, go: Reinventing the organization for speed in the post-COVID-19 era ,” June 26, 2020, McKinsey.com.
  • How should I construct an innovation model that rapidly accesses the broader market for innovation and adapts it to my business model? What ecosystem of partners will I need? How does my acquisition, partnership, and alliances approach need to adapt to deliver this rapid innovation?
  • How do I prepare my broader organization to adopt and scale new innovations? Are my operating processes and technology platforms able to move quickly in scaling innovations?

There is no question that the next few years in healthcare are expected to require innovation and fresh perspectives. Yet healthcare stakeholders have never hesitated to rise to the occasion in a quest to deliver innovative, quality care that benefits everyone. Rewiring organizations for speed and efficiency, adapting to an ecosystem model, and scaling innovations to deliver meaningful changes are only some of the ways that helping both healthcare players and patients is possible.

Emily Clark is an associate partner in the Stamford office. Shubham Singhal , a senior partner in McKinsey’s Detroit office, is the global leader of the Healthcare, Public Sector and Social Sector practices. Kyle Weber is a partner in the Chicago office.

The authors would like to thank Ismail Aijazuddin, Naman Bansal, Zachary Greenberg, Rob May, Neha Patel, and Alex Sozdatelev for their contributions to this article.

This article was edited by Elizabeth Newman, an executive editor in the Chicago office.

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pharma business model

Understanding The New Pharma Business Model

pharma business model

This post examines the major changes within Pharma industry and the impact of these changes on the Pharma business model. To understand the new ways of doing business by the Big Pharma, we have compared the marketing spend over R&D, market making strategies of Big Pharma and the rising litigations therefor.

Big Pharma Spends Double On Marketing Than R&D

A Recent spate of news on increasing health care frauds and the hefty fines paid by the Pharma companies despite stringent regulations is pointing towards a new reality- Pharma business model has changed.

Once driven by finding innovative cures for illness and making profits by treating the patients has now been attuned to that of a consumer goods company- building brands and creating needs for these brands to make profits. It is thus not surprising to find that Pharma companies spend around two times more on sales and marketing than Research and Development.

pharma business model

Understanding Changing Pharma Business And The Marketing Geniuses of Pharma Companies

Pharma companies like any other business are here to make money. Pharma companies make money by discovering and marketing the medications . These medications before hitting the market need to undergo lengthy and expensive clinical trials to prove their safety and effectiveness over existing alternatives (if any). Once approved, these medicationsare then launched in the market for a specific use that too for a limited time. This whole process of discovering, manufacturing and marketing the medication makes the business expensive and risky.

To improve return on investment and minimize the uncertainty, Pharma companies like  AptarPharma a nasal spray manufacturer turn to their marketing geniuses. Marketing true to its nature works on

  • Creating the need (creating a disease)
  • Building the brand (building the loyal customers)

Pharma companies by regulation are prohibited to directly sell the medications to patients. Pharma companies need to get the prescriptions by convincing the  Providers (Physicians). Pharma marketers use both direct and indirect marketing tools to create the need and build the brand.

Most of these channels that look disjointed essentially use a very simplistic and coherent approach. Convince the providers to “prescribe a perceived to be a superior product to the disease educated patients”.

pharma business model

Creating A Disease To Improve Profits

Pharma Companies have long been accused of indulging in Disease Mongering- trying to convince healthy people that they are sick, or slightly unwell people that they are very ill. All that higher direct marketing spend is aimed towards the fears and insecurities of patients and educating the providers to cater to those insecurities. By creating the diseases and offering their medication as the only available treatment, these companies make huge profits . Pharma companies are also not afraid of indulging in off-label promotion of their medication (promotion of the medication for an unapproved disease). Following chart shows the major healthcare frauds.

Major violations that are common across these frauds are:

1)Off-label Promotion 2)Kickbacks 3)False safety data 4) Medicare fraud.

Building A Brand

Pharma Companies define a Mega Brand as a medication with the annual sale of more than $ 1billion. Pharma companies have mastered various product launch strategies to build the next billion dollar brand . Some of these strategies include: 1) Involving key opinion leaders in the clinical trials 2) Deigning the trials based on payers needs 3) Educating providers on new disease and usage under the garb of continuing medical education 4) Working with the healthcare organisations to create disease protocols 5) Providing grants to healthcare advocacy groups 6) Educating the general population on why they should get themselves treated for the advertised disease.

New Reality Requires New Understanding Of The Pharma Business Model

Despite having a stringent framework and competent regulatory body, pharma led healthcare frauds are rising. In FY 2014, the Department of Justice (DOJ) opened 924 new criminal health care fraud investigations. Major pharma companies involved in these cases were:

pharma business model

  • J&J for marketing the antipsychotic medication Risperdal off-label to control behavioral disturbances in non-schizophrenic dementia patients at a time when the medication was approved only to treat schizophrenia.
  • Endo Pharmaceuticals for marketing of Lidoderm for low back pain, diabetic neuropathy, and carpal tunnel syndrome, uses not approved by the FDA
  • Teva Pharmaceuticals for paying kickbacks to a Chicago psychiatrist
  • Astellas Pharma for off-label promoting Mycamine to treat pediatric patients
  • Shire Pharma for promoting Adderall XR, Vyvanse and Daytrana  and Pentasa and Lialda without clinical data and making false and misleading statements about the efficacy

Is it time to stop questioning the higher spend on marketing by pharma companies but to understand the impact of this accelerated return on investment in our lives?

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Non-Rating Action Commentary

Pharma Business Model Questioned in Vaccine Debate

Fri 05 Nov, 2021 - 12:43 PM ET

Related Fitch Ratings Content: Spotlight: Pharma Innovation and Covid-19 Vaccines Fitch Ratings-London-05 November 2021: The pandemic has raised questions about fundamental aspects of the pharmaceutical (pharma) industry's economic innovation model, particularly the balance between research incentives and accessibility of vaccines. The debate around the value of patent protection versus that of tiered, affordable pricing crystallises broader value-based healthcare arguments, Fitch Ratings says in a new report. The rapid and successful development of Covid-19 vaccines has highlighted the industry's strong innovation capabilities and increasing collaboration around research and manufacturing. However, Fitch believes it has also highlighted issues around access and affordability to pharma innovation, as supply shortages trigger debate about the equitable global distribution of vaccines. Fitch estimates that vaccine supply shortages will abate from 2Q22, shifting the focus in the global vaccination effort to the efficient delivery and administration of vaccines in weaker emerging-market healthcare systems. The Outlooks of two leading Fitch-rated manufacturers, Pfizer Inc. (A/Stable) and AstraZeneca PLC (BBB+/Stable), will be influenced by how these companies incorporate continued vaccine efforts into their different economic models. In "Spotlight: Pharma Innovation and Covid-19 Vaccines", Fitch explores the state of the vaccination campaign; value-based pricing models for pharma innovation; the importance of patent protection to incentivise innovation; access models for drugs through tiered pricing and supra-national coordination; the lessons learned during the pandemic, how these shape Fitch's outlook for affected issuers and the industry; and how Fitch reflects the various economic models for Covid-19 vaccines in its ratings. Contact: Frank Orthbandt Senior Director, Corporates +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Xavier Taule Flores Associate Director +34 93402 9513 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: [email protected] Additional information is available on www.fitchratings.com All Fitch Ratings (Fitch) credit ratings are subject to certain limitations and disclaimers. Please read these limitations and disclaimers by following this link: https://www.fitchratings.com/understandingcreditratings . In addition, the following https://www.fitchratings.com/rating-definitions-document details Fitch's rating definitions for each rating scale and rating categories, including definitions relating to default. Published ratings, criteria, and methodologies are available from this site at all times. 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pharma business model

Pharmaceutical Companies Business Model

A Pharmaceutical or drug company is a part of the healthcare sector and involved in a commercial licensed business of research & development, manufacturing, marketing, and distributing drugs and medications. Different laws and regulations are imposed on the pharmaceutical companies related to patent, drug testing and marketing, drug safety, pricing and quality of drugs, etc. The pharmaceutical industry includes both private and public pharmaceutical companies that play an important role in vaccine and medication development for the purpose of preventing and reducing diseases. Enhancing quality of life by making a significant contribution in innovative research and active engagement in technological advancements so that the complex healthcare demands of people can be fulfilled; also comes under the portfolio of Pharmaceutical companies. The main aim of the industry is to make sure the availability of drugs for maintaining health by preventing and curing infectious diseases that affect a large population. The pharmaceutical companies are further classified into subcategories based upon their functioning i.e. biotechnology companies, drug manufacturing companies, and the wholesale & distribution companies that are responsible for handling the produced products. As per IBEF (India Brand Equity Foundation), India is considered as the largest providers in generic drugs category all over the world. The Pharmaceutical companies of India supply various vaccines i.e. more than 50% of global demand. Recently, on the demand of International countries that are most affected countries due to Covid-19 such as U.S., Russia, Sri Lanka, etc; India has supplied Hydroxychloroquine tablets to these countries for the treatment of the disease as India is one of the largest producers of these tablets all around the world.

A Brief Background

The history of Pharmaceutical companies and the use of drugs or medicines are quite old from the Medieval Ages where the records are found of people making use of herbs and other plants for healing. We can trace the concept of the modern pharmaceutical industry by the discovery of penicillin and insulin drugs in the 20 th century. Different developed countries, especially European countries, started manufacturing these drugs on a mass production basis. Arabian Pharmacists of Baghdad opened the first drugstore in 754. Lots of drugstores in North America and Europe were converted or developed into big pharmaceutical companies in the 19 th century. 19 th and 20 th centuries became a witness for the discovery of major pharmaceutical companies that exist today.

Business Model of Pharmaceutical Companies

A business model can be viewed as a framework that considers the technological characteristics and potentials of the company as inputs which are built on key resources, key partners and key activities of the company; and further converts these inputs into valuable economic output through the customer relationship, target customer segments, and key distribution channels by means of product or service offering i.e. value proposition. Before going into the detail of each element of the business Model of Pharmaceutical companies, let’s understand first different business segments of Pharmaceutical companies and how they work:

Pharmaceutical Companies- Business Segments

1) API (Active Pharmaceutical Ingredient): To understand the business model of pharmaceutical companies, it is worth taking an idea of the important ingredient in the Pharma industry i.e. API which is considered as the main active ingredient in the drug or medicine to cure diseases. The raw material that is being used to produce medicines, also termed as bulk drugs or API. Various pharmaceutical companies are there that are specialists in producing only APIs. These companies either purchase or produce intermediates themselves for making the final API. Further, these companies sell APIs to different formulation companies for producing final medical drug/medicine. One of such API pharmaceutical companies is Lupin Pharma.

2) Formulations: The term pharmaceutical formulation refers to the process of producing the final medical drug or medicine by combining various chemical substances, including the APIs. In the process of medicine manufacturing, formulations are the end result or product and are available in the form of capsules, tablets, syrups, or injectables.

The pharmaceutical companies indulge in manufacturing of formulations are considered as formulation pharma companies like Dr. Reddy’s Laboratories. Pharmaceutical formulations are of two types i.e.

  • Oral formulation: This is related to the formulation of drugs like capsules, tablets, etc. that can be delivered by the mouth.
  • Topical medication forms : i.e. creams, gel, powder, paste, ointment, etc.

3) CRAMS (Contract Research and Manufacturing): CRAMS stands for Contract Research and Manufacturing service which is considered as a process by which pharmaceutical companies outsource their research services or activities related to product manufacturing to the companies which offer        low- cost services. Basically, two main activities i.e. Contract Research and Contract Manufacturing come under CRAMS. Pharmaceutical and Biotechnology companies that need extensive Research & Development and manufacturing facilities at large-scale, use CRAMS. This segment of the Pharmaceutical and Biotech industry is also growing at a fast rate. Most of the pharma companies are increasing their outsourcing activities due to the extreme pressure of maintaining fixed costs.

4)  Export/Import Business segment: The Pharmaceutical sector of India is considered as the largest supplier of generic medicines to the developed countries and these medicines are cost-effective too. India exports drugs/ medicines over 200 countries around the globe and the U.S. is the key market for exports. India has witnessed US $19.14 billion pharmaceutical exports in FY19 and US $13.69 exports were there up to January 2020. The exports of pharmaceutical companies consist of drug formulations, bulk drugs, biological, surgical, intermediates, Ayush & herbal products, etc.

  5)  Pipelines in Biotech Companies: Pipeline in pharmaceutical companies, especially in biotech companies refers to the different phases of clinical trials of drug medicine. In the pharmaceutical sector, this term is often used while defining and evaluating the activities, R&D (Research & Development) progress, measuring success, and growth potential for biotechnology pharmaceutical companies. When the status of a drug is considered in the pipeline; it means different clinical trial stages in which it is undergoing or have to undergo before getting approval for final use in the market. So, we can say that different drug medicines that are into clinical trial phases and seeking approval of USFDA (U.S. Food and Drug Administration Authority) are considered as pipeline drugs.

The various stages of a drug clinical trial are as under:

6) Biotech: Pharmaceutical companies are inter-linked with biotechnology companies in terms of obtaining licenses from them for the manufacturing of patented products. Different segments of the Biotechnology sector of India are Bio-Agriculture, Bio-Pharmaceutical, Bio-Services, Bio-Informatics, and Bio-Industrial. Biopharmaceutical products which are mostly pharmaceuticals, also referred to as biological medical product which is a pharmaceutical drug product, manufactured and extracted from biological sources.  This includes allergenic, vaccines, tissues, living medicines that are being used for cell therapy, etc.

7 )  Drug marketing: One of the important business segments of Pharmaceutical companies is marketing. Pharmaceutical companies enhance their market reach with the support of marketing companies or in-house marketing team. Drug marketing companies facilitate these companies by selling their products where pharmaceutical manufacturing companies are not able to sell products in a particular area or region due to the absence of necessary license or marketing network. Now, after gaining insights into the business segments of Pharmaceutical companies, let’s review the different current and emerging business models of the companies:

Current Business Models of Pharmaceutical Companies

A) Block Business Model

In traditional terms, the pharmaceutical industry’s current business model is made around the blockbuster drugs and is referred to as the Blockbuster business model. The mass market is the main target of this business model with an expectation to bring revenue from high sales. Any drug that generates annual sales of over US$1 billion then it is said as a blockbuster. The main uses of these drugs are for the treatment of common medical issues such as diabetes, asthma, high blood pressure, cancer, and high cholesterol, etc. The blockbuster business model of pharmaceutical companies is related to investing a significant budget into in-house R&D (Research & Development) activities, to search different dead-end projects with the hope of turning a few of them into the successful blockbusters that generate high returns.

Blockbuster business Model Canvas of Pharmaceutical Companies

Different elements mentioned in the above Blockbuster business model canvas of Pharmaceutical Companies are as under:  

1. Value Proposition

  • The new blockbuster drug offering is one of the main value propositions provided by pharmaceutical companies through which value is created for customers by invented drug usage. Also, delivery of the offering is through drug innovation. Despite starting from the comparatively higher price in the market, the price level of the blockbuster drug soon gets reduce.
  • Pharmaceutical companies that are using blockbuster business model cater to a wide range of customers i.e. mass market.
  • Drugs are developed by aiming at both innovation and quality. Pharmaceutical companies devote a reasonable part of their revenue to R&D activities in order to provide unique and new products based on technological innovation.
  • The product portfolio of big pharmaceutical companies is also diverse as they deliver products and medications to a broad range of customers.
  • Big pharmaceutical companies serve customers in various international countries too.

2. Customer Segments

The target customers of pharmaceutical companies under the blockbuster business model are mainly doctors and patients as the companies cover a mass market. Moreover, various health institutions like hospitals, clinics, pharmacies, etc. also come under customer segment portfolio.

3. Key Partners

Pharmaceutical companies generally have the following key partners:

  • Channel partners include distributors or sales agents for the purpose of expanding market reach and in-house sales.
  • CSR or Corporate Social Responsibility partners comprise of NGOs or non-profit organizations for collaboration on social projects.
  • Strategic alliance partners consist of different technology-driven and other pharmaceutical companies and pharmaceutical companies have partnerships with these on shared resources or joint venture projects.
  • Merger & acquisition partnership is the strategy adopted by Pharmaceutical companies to expand their reach in emerging markets, maintaining market share by participation in generics, strengthening growth in markets that are matured, etc.

4. Key Activities

Pharmaceutical companies that operate on Blockbuster business model have various key activities such as Research & Development with the companies rather than outsourcing, Development and production or manufacturing of various drugs/ medicines and healthcare products, Testing of drugs, marketing and distribution of drugs to appropriate customer segments using various marketing and distribution channels, and managing internal personnel, production, costing, etc.

  5. Key Resources

The main resources of pharmaceutical companies include research & development platform, technology (Artificial intelligence and Machine learning), technical and non-technical staff, intellectual property, generic capabilities (use of today’s drug innovation for future innovations i.e. both production and innovation), etc.

6. Channels

Various medium or channels of pharmaceutical companies include:

  • Website of these companies using which information is provided to different customers related to their products, business activities.
  • Sales and marketing personnel plays a key role in making sales and conducting marketing activities of pharmaceutical companies. These sales and marketing team can be segment-wise or geographic region-wise depending upon the market approach of companies.
  • Pharmacies and Distribution networks are also key channels of pharmaceutical companies to sell consumer products.

7. Customer Relationship

  Pharmaceutical companies enhance and maintain their customer relationship by providing various customer assistance and customer support facilities such as :

  • Customer service support of 24/7 to handle any query or issue of customers
  • CRM (Customer relationship management) for better customer service
  • Sales team through which customers can interact directly and also, contact numbers, email IDs to facilitate customers to stay in touch with concerned departments of pharmaceutical companies so that they can get real-time assistance from their sales representatives.
  • Online presence through social media and website is there for providing any online information, and FAQs (frequently asked questions). Using social media accounts of pharmaceutical companies i.e. on Facebook, Youtube, Linkedin, Twitter, etc. customers can interact with them directly.
  • Pharmaceutical companies also enhance customer relations by creating the awareness of their brand through various print and digital medium, and also, build trust by making an effort to provide better products and services.

8. Revenue Streams

  The revenue model of pharmaceutical companies is clubbed in the below chart:

  •   Sale of products & services: The main source of revenue of Pharmaceutical companies is through the development and sale of drugs or medicines to different customers in the mass market. Generic drugs, different bulk drugs like antibiotics, steroids, vitamins, along with herbal and biological products, drug formulations, etc. play a significant role in revenue generation of pharma companies. Net profit (in billion Indian rupees) of renowned pharmaceutical companies as of April 2020 in India is shown in the below chart. This profit also includes the revenue earned from the sale of products of these companies.

  Net Profit of Leading Indian Pharmaceutical Companies

As of April 2020

  *(Information Source: Statista.com)

  •   Patents: Another important money or profit earning source of pharmaceutical companies is the patent that provides incentives for companies to research and development of innovative and new pharmaceutical drugs. The patent refers to a product’s property right, and in terms of pharmaceutical companies, it is considered as a chemical formula that any rival pharmaceutical company may not copy. A patent gives a guarantee to investors that their product will remain as the only product of its exact type in the market for long years i.e. 20 years. Patents are highly important to pharmaceutical companies due to the great possibility of guaranteed profit. The patent system facilitates companies to gain profit from patents by the mean of restricting any other competitor to market and sell a similar kind of prescription drug or medicine. Also, pharmaceutical companies can fix the high price/cost of their products because of having somewhat monopoly on their drug and absence of any competitive forces in the market that usually are responsible for bringing prices down.
  • Research and Development (R&D): One revenue resource of pharmaceutical companies is the R&D factor that has a great significance in the pharma industry because revenue’s major share depends upon research and development. A huge budget is generally allocated to invest in R&D activities by pharmaceutical companies to ensure future profit once a new formulation research process is completed. R&D returns on the private pharma sector are quite attractive as well and very based upon drug type. The companies having the capability of advanced R&D tend to be considered as the most profitable as through their R&D, drugs that have the potential to be highly profitable, can be patented.
  •   Strategic alliances: Pharmaceutical companies also earn a small portion of their revenue from different strategic alliance agreements through which products of third-parties are co-promoted by them

9) Cost Structure

Pharmaceutical companies bear different expenses in the development and sale of products & services such as:

  • Research & Development cost: R&D is considered as one of the crucial ROI (Return on investment) function of Pharmaceutical companies and so they spend heavily on R&D activities. The study reveals that pharmaceutical companies spend roughly 17% share of their revenues on R&D activities. As per statistics, most big pharma firms have spent around 20% on R&D last year i.e. 2019. The reason behind such a big investment in R&D is that in the process of new drug discovery, it undergoes various testing stages before selling them in the market which is both costly and time-consuming. Also, it costs millions to discover and develop an effective and innovative new drug.
  • Manufacturing cost: Another major segment of costing of pharmaceutical companies are expenses involved in the manufacturing process of drugs in different stages i.e. production including the cost of raw material, quality control, quality assurance, regulatory approval, packaging, warehousing, etc.
  • Apart from the above two, other cost includes sales & marketing expenses, partnership management, general and administrative expenses comprises of the salaries and benefits to staff, etc.
  • B) DEFRAGMENTED BUSINESS MODEL:
  • Defragmented business model has a much wider verity of value propositions as it focuses on a particular segment of the drug pipeline. The value proposition attributes in this model depend on the offerings of pharmaceutical companies and a niche market is the center focus of value proposition. This niche market can be a particular category of patients who are suffering from a common disease or pharmaceutical companies that are into the outsourcing business of drug manufacturing, etc. So, the value proposition of the Defragmented business model consists of offerings based upon the niche market and products of high-quality and comparatively low-cost.
  • Customer segments include B2B or B2C customers and pharmaceutical companies focus on niche market segments.
  • Customer relationship in the Defragmented business model is more personalized that provides pharmaceutical companies to obtain active feedback from customers. Also, through participation in the collaboration process with customers for the purpose of quality improvement in value proposition; companies are able to strengthen customer relations.
  • Key resources include both tangible resources such as technology, plants, and Intangible resources like Intellectual capital. Moreover, the staff of pharmaceutical companies is also main resources.
  • Key partners can be other pharmaceutical companies and partnership purpose can be customer acquisition, acquisition of knowledge, outsource certain activities, and risk-sharing.
  • Key channels are direct and indirect distribution channels.
  • The key activities of the model focus on core capabilities such as capabilities related to gain a competitive advantage. Non-core capabilities are outsourced and internal sourcing is there for capabilities that are required for delivering value proposition. Also, pharmaceutical companies who use this model, participate in the business networks for reducing uncertainty and risks.
  • The cost structure of pharmaceutical companies in the defragment model is related to the utilization of core capabilities. Both fixed and variable costs are part of it. The revenue is earned through the manufacturing of drugs.

Emerging Business Model of Pharmaceutical Companies

The pharmaceutical companies working on the Blockbuster business model are facing the biggest challenge i.e. expiry of the patent of the blockbuster drugs and a great expansion of generic drugs. Apart from the expiry of patent, other challenges in front of these companies are of deficiency of new product innovations and high cost-margins. This resulted in the diversification of innovative drug manufacturing companies into generic drug manufacturing. The current blockbuster business model of pharmaceutical companies is moving slowly into a focused and lean type business model which is made of small and local R&D clusters. Wherein, the earlier blockbuster business model is focused on more diversified global R&D clusters. So future pharmaceutical companies demand more specialized and defragmented business model with a focus on core capabilities to sustain long-term growth.

The future of the pharmaceutical industry seeks improvement in R&D productivity, cost reduction, to grasp the opportunities of emerging economies, etc. The futuristic approach will even look forward of the collaboration of large pharmaceutical companies with others for the development of more economical and effective new medicines, support patients for health management, and for ensuring the true impact of products and services offered by them. Mainly, 2 emerging business model i.e. Federated and Fully Diversified will support in future prospects of Pharmaceutical companies.

Let’s have a look at these emerging Business models of Pharmaceutical companies:

A) Federated Business Model:

The federated approach includes network creation of separate identities by the companies that consist of a common platform of supporting infrastructure. The different participant companies have a common goal like managing outcomes in the available population of patients. Companies are interdependent with each other as they share data, funds, back-office services, and patient access. This model facilitates a framework for developing a product’s integrated packages and so, it diversifies beyond the core offering of a pharmaceutical company. Each participant in this model is enabled to make a particular segment of expertise, to have a competitive advantage as an outcome of expertise, and to sell its offerings i.e. products or skills, by transferring those activities that are better disbursed by other partner firms of the federation. The federated business model is further categorized into two categories i.e.:

1.a) Federated model’s virtual variant

  In this type of federated business model, the pharmaceutical companies outsource almost all of its operations and the company reflects as a management hub that coordinates the various activities of partners. Several large pharmaceutical companies are already working on this model up to some extent. These pharmaceutical companies acquire external contractors to fulfill their own resources. By outsourcing various activities i.e. manufacturing, marketing & promotional activities, R&D, etc. to 3 rd parties, they can take advantage of specialist skills, wider scope of opportunities, and market access. Doing so, these companies can further focus on other value-addition activities like business development, project management, management of intellectual property, regulatory affairs, etc.

1.b) Federated model’s venture variant

This vertical of federated business model demands an investment in a portfolio of pharmaceutical companies and in return to have a share of capital growth or the intellectual assets, instead of outsourcing specific activities.  Pharmaceutical companies can focus on investing in a specific therapeutic segment or divide them into a number of activities or areas for risk minimization. Once the investment period ends, either the generated intellectual property might be claimed or to give to a 3 rd party via out-licensing. As an alternate, the intellectual property might be retained and commercialized by the original companies and its ROI (Return on Investment) is paid to sponsoring companies.  Different big pharmaceutical companies like Pfizer, Novartis, etc. have venture capital funds at the corporate level.

1.B) The fully diversified model

  In this business model, Pharmaceutical companies expand their horizon from their core capabilities or core business into different related products or services like generics, health management, diagnostics, etc.  This facilitates companies in reducing their dependability on Blockbuster medicines.

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Teva Pharm to stay as unified drugmaker, sees big interest in API business, says CEO

Richard Francis, Chief Executive of Teva Pharmaceutical Industries, looks on during a press conference at the company headquarters in Tel Aviv

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Icahn Enterprises on Wednesday warned of a sequential decline in its indicative net asset value in the fourth quarter, sending shares of the investment firm, which named insider Andrew Teno as its CEO, down 11%.

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Phar­ma's bro­ken busi­ness mod­el: An in­dus­try on the brink of ter­mi­nal de­cline

Kelvin stott.

Biotech Voices is a collection of exclusive opinion editorials from some of the leading voices in biopharma on the biggest industry questions today. Think you have a voice that should be heard? Reach out to Amber Tong.

Biotech  Voic­es  is a con­tributed ar­ti­cle from se­lect End­points  News  read­ers. Com­men­ta­tor Kelvin Stott reg­u­lar­ly blogs about the ROI in phar­ma. You can read more from him here .

Like many in­dus­tries, phar­ma’s busi­ness mod­el fun­da­men­tal­ly de­pends on pro­duc­tive in­no­va­tion to cre­ate val­ue by de­liv­er­ing greater cus­tomer ben­e­fits. Fur­ther, sus­tain­able growth and val­ue cre­ation de­pend on steady R&D pro­duc­tiv­i­ty with a pos­i­tive ROI in or­der to dri­ve fu­ture rev­enues that can be rein­vest­ed back in­to R&D. In re­cent years, how­ev­er, it has be­come clear that phar­ma has a se­ri­ous prob­lem with de­clin­ing R&D pro­duc­tiv­i­ty.

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The West Is Sabotaging a Global Pandemic Treaty

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International talks aimed at creating a treaty to prevent another COVID-19 catastrophe are nearing collapse. This impasse is due to the refusal of countries such as the US, Canada, and Germany to compromise on Big Pharma’s intellectual property rights.

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A representative of the World Health Organization, under whose auspices a global pandemic treaty is currently being negotiated, trains health workers on October 3, 2014, in Monrovia, Liberia. (John Moore / Getty Images)

Virologists, epidemiologists, and public health experts are unanimous in their opinion that humanity got off relatively lightly with the COVID-19 pandemic. Despite five million reported as killed directly by the virus, and around 15 million excess deaths in total according to the World Health Organization (WHO), most people who were infected have recovered. SARS-CoV2 turned out not to be the civilization-threatening virus or bacteria that they had been expecting and preparing for. It wasn’t the “ Big One .”

It is a certainty that there will be other pandemics. The emergence of novel infectious diseases is a condition of living on the planet. Their rapid spread across borders is a condition of modernity — of the extent of trade, travel, high-speed transport, and migration that it affords us. In the fourteenth century, it took over a decade for the bubonic plague to spread along the Silk Road from southwestern China to Italy. Today, pathogens can catch a lift on a holidaymaker flying home and cross the world in a single afternoon. Deforestation significantly exacerbates the threat, but even a world with much more extensive forest protection would not be able to avoid outbreaks.

Perhaps with the next pandemic, we will get lucky once more. The chance in any given year of another outbreak with a similar impact to COVID-19 is one in fifty, according to a 2021 assessment . The lifetime probability of anyone reading this essay experiencing another pandemic on such a scale is 38 percent.

However, at some point, a much more serious pathogen — one, say, with the infectiousness of measles combined with the lethality of Ebola, where some two-thirds of those infected die — could emerge through spillover, accident, or design.

It is this ever-present threat, with fresh experience of the world’s catastrophic response to COVID-19 to learn from, that has driven the nations of the world to craft a new, global pandemic treaty. As Charles Michel, the outgoing president of the European Council and an early supporter of a treaty, wrote in 2021, outlining the rationale for building a new global system: “No single government or institution can address the threat of future pandemics alone.”

The aim is a pact that is legally binding under international law to enhance 1) the prevention of pandemics, 2) our preparedness ahead of their emergence, and 3) the response when they do emerge.

As everyone is weary from the last pandemic, and as wars in Ukraine and Gaza dominate the news, it is understandable that the pandemic treaty negotiations are not hitting the front pages. For the most part, coverage has been limited to the specialist press such as the British Medical Journal . The next round of talks starts February 19 in Geneva, but there will be no traveling circus of thousands of reporters, NGOs, and protesters like there is at United Nations (UN) climate negotiations — although there certainly are lobbyists.

With little light being shone on the talks, the negotiators from Western powers have quietly backed away from any notion of equity between developed and developing nations, in service of the protection of the intellectual property (IP) rights of pharmaceutical firms. Efforts toward even beginning a conversation about the substantial financing necessary for pandemic preparedness, including funding monitoring and sharing of information on pathogens, have also come to naught.

Diplomats speaking off the record say that in any similar negotiations, such as over commitments at UN climate summits, there is usually at least some movement from all sides, creeping toward compromise, but diplomats from the Global North are not budging at all. As there are only two negotiating sessions left before the proposed treaty is scheduled to be presented for consideration by the World Health Assembly — the decision-making body of the WHO — some of these same diplomats fret that without any movement, the talks could collapse entirely.

Atop the diplomatic shenanigans, according to human rights organizations such as Human Rights Watch, few if any safeguards of civil liberties have been incorporated, despite the repeated violations of human rights and civil libertarian norms during the COVID-19 pandemic by multiple governments, both authoritarian and ostensibly democratic.

“Without clear and binding commitments to human rights law and standards leading up to and during public health emergencies, the [COVID-19] crisis gave way to a ripple effect of human rights violations and abuses,” the New York City–based international rights group has reminded in a statement on the treaty negotiations. “Governments enforced lockdowns, quarantines, and other restrictions in ways that often were disproportionate to the public health threat and undermined human rights. In some cases, governments weaponized public health measures to discriminate against marginalized groups and target activists and opponents.”

And even if some sort of agreement is reached at the eleventh hour, public health officials at the few international bodies cobbled together during COVID-19 to shave off the sharp edges of lack of access to vaccines in the Global South warn that there is no enforcement mechanism. Without enforcement, they say, the whole endeavor is merely an exercise in symbolism .

Access and Benefit, Quid Pro Quo

In the talks, there are many lines of disagreement between developed and developing nations, but the main point of contention lies with the quid pro quo at the heart of the negotiating text — the proposed access-and-benefit mechanism, formally titled the WHO Pathogen Access and Benefit-Sharing System (WHO PABS System).

Better monitoring of spillover from animal reservoirs of novel pathogens is essential to pandemic prevention. This requires increased laboratory and surveillance capacity, including innovative tools for data collection and predictive analytics in all countries, but especially in developing nations where such capacity is severely limited — and where there is the highest risk of zoonotic spillovers .

For monitoring to work at a global level, it has to be adequately funded and, crucially, coupled with sharing of data that is produced via the monitoring, as well as collaboration among research centers worldwide. Knowledge sharing is essential for rapid genetic sequencing of pathogens and then, for pharmaceutical firms, production of vaccines and therapeutics.

Such knowledge sharing does come with risks, however: potential closure of travel to and from countries that have identified and shared information about domestic outbreaks, along with constraints on or even the collapse of trade. Such economic threats are most grave for those least able to suffer such interruptions: the least developed countries.

And so, in return for Global South knowledge sharing, the Global North is supposed to commit to help finance monitoring in these poorer regions, and to provide universal access to the medical fruits of such monitoring: vaccines and therapeutics.

During the COVID-19 pandemic, global supply chains, including of precursors to vaccine and therapeutics production, were stretched to breaking. Until governments in key countries, particularly the United States with the liberal application of the Korean War–era Defense Production Act , took many distribution decisions out of the hands of the private sector, essential materials were sent to the highest bidder, not the location most in need. Even within wealthier nations, locations less able to outbid competitors regularly experienced inadequate delivery of personal protective equipment (PPE), ventilators, medical refrigerators, and other key supplies. It was a deadly example of the “alignment problem” of markets: what is profitable is not always what is beneficial.

Next time, ample stockpiling, global coordination of distribution, and the ability to rapidly deploy skilled medical teams where appropriate should all be core to the treaty. But for it to work in service of everyone’s interest, all this activity has to be carried out based on need rather than profit, and also given substantial, ongoing, guaranteed funding.

The WHO cannot be going cap in hand every year to its funders. This is not just a problem of capacity. Underfunding also undermines monitoring: a cash-strapped WHO is less able to critique a funder such as China, the United States, or the European Union when they are not pulling their weight, failing to share data or issue alerts, or engaging in risky, bioinsecure activities. The same conflict of interest undermines distribution and other response activities. The WHO can’t bite the hand that feeds it.

Alongside the treaty process, and in recognition of lack of pandemic capacity particularly in the Global South, the G20 in 2022 launched the Pandemic Fund under the aegis of the World Bank, with technical staff seconded from the WHO. Last year, the fund awarded its first round of grants, totaling $338 million, a piddling sum. The fund itself says that “ substantially more ” is required. Billionaire Bill Gates, who has made pandemic prevention one of his key areas of focus of his philanthropy, last year said what he terms a “Global Epidemic Response Mobilization” team, managed by the WHO, would cost the world $1 billion per year — although he is also opposed to raising taxes on the wealthy and corporations, which is necessary for governments to source such funds.

If developed nations are willing to sign off on the access-and-benefit concept, the system would be modeled on the WHO’s preparedness framework for influenza but would apply to all viruses and bacteria with pandemic potential. Under the influenza preparedness framework, all countries share samples of flu viruses. The samples are then used by pharmaceutical firms to manufacture vaccines. In return for the data sharing, the firms pay into a central fund that is used for the monitoring and other prevention, preparedness, and response activities, including the development of medical countermeasures such as vaccines.

Concretely, in the negotiating text, in the event of another pandemic, the PABS System would see 20 percent of the production of medical countermeasures donated to the WHO to be distributed on the basis of need. Civil society development and public health organizations have, understandably, criticized this as woefully insufficient. A fifth of resources distributed on the basis of need is four-fifths too few.

Moreover, when COVID-19 hit, developing countries freely shared sampling data on the expectation of receiving the benefits of such sharing under existing frameworks, but never did.

But for pharmaceutical companies, even 20 percent is too much. In response to the release of the negotiating text last October, the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA) denounced it. In addition to the proposed PABS system, IFPMA opposes the inclusion of temporary intellectual property waivers, which would allow developing nations to manufacture vaccines and therapeutics in order to overcome the hoarding and “vaccine apartheid” experienced during COVID-19.

In response to the initial negotiating text, the IFPMA argued that if it were adopted as is, it would have a “chilling effect on the innovation pipeline for medical countermeasures,” thus leaving us worse off than we are currently, and so “the world would be better served with no agreement.”

The United States, the UK, the EU, Canada, and Switzerland — home to many of the largest pharmaceutical firms — have backed the IFPMA position and oppose the access-and-benefit mechanism. Germany’s Social Democratic Party (SPD)–led coalition government, in particular, is in Big Pharma’s corner.

“For countries like Germany and most European countries, it is clear that such an agreement will not fly if there is a major limitation on intellectual property rights,” Germany’s SPD health minister, Karl Lauterbach — himself a physician and epidemiologist — told the World Health Summit last October .

But most of the medical countermeasures, particularly the vaccines, were primarily the product of research performed in publicly funded university laboratories, and the story of their rapid rollout is for the most part one of the governments derisking private-sector manufacturing via billions in direct subsidies and advance-purchase agreements. It was socialism of a sort — certainly economic planning rather than markets — that delivered the vaccine .

This was necessary because until the pandemic, for about four decades, Big Pharma had largely gotten out of the business of vaccine research, development, and production for the same reasons they got out of developing new classes of antibiotics (and still are out of the game): it’s insufficiently profitable. You might think that delivering billions of shots during a pandemic is mighty profitable, and you wouldn’t be wrong. But in the early days of the COVID-19 pandemic, it was not clear whether this was indeed the big one, or whether it would just fizzle out like SARS or MERS had. If the firms invested in production only for SARS-CoV2 to turn out like these earlier scares, they would lose billions. The state had to step in to derisk vaccine production via subsidies and advance-purchase agreements.

Another of the thorniest issues within the treaty negotiating text is a proposed requirement that any firms that received public financing for their work would have to waive or reduce their royalties.

Pushing back against the stance of the IFPMA and these Global North governments, the People’s Vaccine Alliance , a coalition of over one hundred development and health NGOs, trade unions, and human rights campaign groups, notes that during the COVID-19 pandemic, the twenty biggest pharmaceutical giants spent almost as much on payouts to shareholders and executives as they did on research and development. Between 2020 and 2022, these firms spent $377.6 billion on such largesse and $414.6 billion on R&D. The People’s Vaccine Alliance argues that this is proof that IP waivers and the access-and-benefit mechanism would not dent these businesses or harm innovation.

A clear case of corporate greed and Big Pharma’s capture of the diplomatic force of Western governments, it would appear.

Threatening Pharma’s Business Model

In fact, the question of intellectual property shows how a critique of corporate greed is insufficient. We need to consider the limitations of market incentives more broadly, and the challenges of global enforcement and the democratic governance of that enforcement. When we do, we can explain how the Biden administration and Trudeau government, for example, can simultaneously be fighting pharmaceutical companies over lower drug prices domestically and taking these same firms’ side overseas.

The People’s Vaccine Alliance is not wrong that pharmaceutical firms would indeed be able to easily swallow the loss of profits from temporary IP waivers and the fees paid into an access-and-benefits fund without any threat to the viability of their businesses or even to sufficient funds for innovation. It’s not the hit of slightly lower profits that motivates either the firms or the governments backing their position.

The crux is instead the threat to pharmaceutical intellectual property, and indeed to IP across all sectors.

Lower domestic drug prices only mean slightly lower profits, while IP waivers, even temporary ones, threaten the very business model of pharmaceutical firms. If the precedent is set that human lives trump intellectual property rights in an emergency, why do human lives not trump IP rights at other times?

And yet, while a great deal of medical innovation does occur at publicly funded universities, in government labs, or via nonprofit medical charities, the private sector does engage in innovative work as well. These firms and their diplomatic avatars are not lying when they say that they need to be compensated for this work.

So the problem posed is not merely one of corporate greed but that the market incentives are not aligned with what is in the best interest of society. It’s identical to the famous “artificial intelligence alignment problem .”

This alignment problem also exists across the private provision of healthcare more broadly: liberalism’s recognition of a right to life and its recognition of a right to private property are in conflict. The Gordian Knot is cut in most developed countries by variations on the theme of public health insurance or, as in the UK, direct public ownership of healthcare provision. Although Britain’s National Health Service has been eroded over the decades by wave after wave of “internal market” wheezes, corporate outsourcing, and partial privatization, it remains the case that the principle of a nationalized healthcare system resolves the conflict between need and profit incentive: the provider is compensated for their work not by profits but instead via taxation, or other forms of cooperative pooling of resources.

The resolution of the irreconcilable conflict between the right to protection from pandemics and pharmaceutical intellectual property rights is for there to be similar public provision of pharmaceutical research, development, production, and distribution. Allocation of resources would be based on medical need rather than on profit. Nationalization of the pharmaceutical sector, or, at a minimum, a significant public option: publicly owned pharmaceutical firms alongside the continued existence of private ones.

But here we run into the wall of global governance, financing, enforcement, and, in turn, democratic accountability. Which country is to perform the nationalization, or set up of public-option pharma firms? Are America and Switzerland to nationalize their pharmaceutical sectors on behalf of the world?

This also goes for other aspects of pandemic countermeasures beyond therapeutics, from production of medical refrigerators to ventilators and oxygen tanks. And how do those in other nations on the receiving end of these public pharma firms hold their governors to account? There is only a domestic, not international, mechanism of democratic accountability.

Another Toothless Treaty

This challenge of global governance, enforcement, and accountability is the second major sticking point of the pandemic treaty negotiations, even in the absence of any grand vision of a global publicly owned pharmaceutical service. Lack of enforcement capability also affects coordination of pandemic countermeasure stockpiles, the deployment of international medical response teams, monitoring, and data sharing.

Even if the Global North were to agree on all points regarding intellectual property and all the rest, without robust enforcement, this becomes just deckchair rearrangement on an infectious Titanic.

The existing International Health Regulations — which date back to 1969 and were last revised in 2005 — are already legally binding. Yet this did nothing to prevent hoarding of vaccines and other pandemic countermeasures during COVID-19. The regulations also stipulate that in return for sharing genetic information, countries are not to be slapped with travel or trade restrictions, yet this legal requirement was one of the first of many to be ignored in 2020.

At a time when Israel continues to ignore the orders of the International Court of Justice — killing 1864 Palestinians since its ruling against Benjamin Netanyahu’s war machine, according to Euro-Med Human Rights Monitor — it should be clear more than ever how the text of a document is meaningless in the absence of a sovereign entity capable of its enforcement.

Proposals for a decision-making body comprising a conference of the parties (“COP”) to the treaty, with a secretariat (a team of civil servants tasked with carrying out the decisions of the conference) under the aegis of the World Health Organization have been included in the negotiating text, although it is far from clear that negotiators will agree to this. The structure is modeled on the UN Framework Convention on Climate Change (UNFCCC) summits, also formally termed COPs, in which all nations receive an equal vote.

After decades of slow-moving UN climate summits dependent on consensus among almost two hundred countries, the challenge such a model poses to rapid pandemic response should immediately be obvious.

Even more importantly, the UNFCCC/COP process is not democratic. Luxembourg, with its population of 650,000, and India, with 1.4 billion, both have the same voice. There is no majority rule. No parties with different ideas about how to respond to climate change compete for voters at any stage. So if a majority in the world disagrees with a policy or action of the pandemic treaty secretariat or COP or WHO, there is no mechanism for that majority to depose them and install others who would carry out their will.

And is there any expectation that the requests of a pandemic treaty secretariat made to a particular government would be respected any more than the much more freighted orders of an International Court of Justice?

Lack of democracy is the flip side of the enforcement coin. Enforcement, of course, is illegitimate without democratic accountability. As farmer protests break out against climate policies in country after country in the European Union, the rallying cry is that no one ever voted for this. Regardless of where one falls on the correctness of EU climate and agriculture rules, the farmers are not wrong about the EU’s democratic deficit .

Over and over again, in recognition of the need for policy to cross borders in a number of areas, from climate to trade to war crimes, elites have opted for undemocratic intergovernmentalism — treaty making — that they see as more politically feasible than proposing the construction of a higher level of democratic assembly. And this is being repeated now for the most urgent policy area there can be, pandemics — already far more deadly than climate change.

The head of the WHO, Tedros Adhanom Ghebreyesus, has complained that movement in the pandemic treaty talks has been further slowed down by what he called “a torrent of fake news, lies, and conspiracy theories.” He was almost certainly referring to the right-wing Heritage Foundation’s declaration that the pandemic treaty threatens US sovereignty, or one of the few news articles on the negotiations to make headlines in a major newspaper, a May 2023 report by Britain’s Daily Telegraph quoting Conservative UK ministers worried that the proposed treaty would allow the WHO to impose lockdowns and vaccine passports, or force the country to spend 5 percent of its health budget on pandemic preparedness.

Tory MP Danny Kruger told the paper: “Coordination and cooperation in a public health emergency is sensible but ceding control over health budgets and critical decision-making in a pandemic to an unelected international organisation seems profoundly at odds with national autonomy and democratic accountability.”

As with the EU farmer protests, the Tory’s critique here — and even that of the Heritage Foundation — is not entirely wrong. The WHO or a pandemic treaty secretariat would indeed be unelected. It is not right that such a body could impose its will over elected national parliaments.

This is a sovereignty paradox that the organs of intergovernmental treaties across so many policy areas face — from the WHO and the World Trade Organization, through the European Commission and the International Monetary Fund, to the International Court of Justice and the UNFCCC. As a result of the manifest democratic deficits of the organs of intergovernmental treaties, there is a reluctance to cede too many powers to them. At the same time, with some modest amount of power, these organs can be quite useful to those same politicians who might want to impose a policy but know that it does not enjoy domestic majority support. If there is consensus for the politician’s preferred policy at the international forum, they can then return to their electorate and say that there was nothing they could do; their hands were tied.

This intergovernmentalist halfway house leaves such bodies both with too much sovereignty and not enough: any decision-making power they have, no matter how limited, is democratically illegitimate, but they also need much greater power to make policy effective.

So let us make global decision-making democratic. Let us establish a global popular sovereign.

To be sure, this is a mammoth ask and extremely unlikely any time in the near future. For now, the priority has to be pushing Western governments to back a treaty text that rejects inegalitarian and irrational market imperatives, even if there is no global democratic sovereign yet capable of enforcing it.

But all around us, we are confronted with so many cross-border phenomena that have to be tackled at the global level — from pandemics and climate change, through trade and migration, to human rights and war crimes. And the number of such issues is only growing. Governance of near-Earth asteroids, orbital debris, seabed mining, geoengineering, and artificial intelligence are just the latest to have emerged. There will be many more.

We are living in the decades where the conversation about planetary governance, about global democracy, must at least begin.

India's Glenmark Pharma could see better operating margins, says HSBC; hikes PT

** HSBC Global Research expects co's operating margins and working capital to improve after it overhauled distribution model for its India formulations business in Q3

** Lower R&D spending for its unit Ichnos, recovery in India formulations with better inventory management, start of supply at U.S.-based Monroe plant in FY25e and pick-up in sales for its Ryaltris nasal spray brand are margin drivers - HSBC

** HSBC expects 2% expansion in co's core FY25e EBITDA margins

** Upgrades co to "buy" from "hold" and raises TP to 1,100 rupees from 960 rupees

** Revised TP implies 27.5% upside over last close

** Mean rating of 12 analysts is "hold", median PT is 818 rupees - LSEG data

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  26. India's Glenmark Pharma could see better operating ...

    ** HSBC Global Research expects co's operating margins and working capital to improve after it overhauled distribution model for its India formulations business in Q3 ** Lower R&D spending for its unit Ichnos, recovery in India formulations with better inventory management, start of supply at U.S.-based Monroe plant in FY25e and pick-up in ...