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3 F R O M C A M B R I D G E H E A LT H T E C H A D V I S O R S
KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004
C A M B R I D G E
H E A LT H T E C H
A D V I S O R S
J A N U A R Y, 2 0 0 4
Key Forces Driving the Pharmaceutical Industry into 2004 Written by Andrew F. Branca
As we enter 2004, Cambridge Healthtech Advisors takes a quantitative view of several long-term challenges with which the industry will continue to grapple in the coming year. Overcoming these challenges will be a difficult, complex, and risky journey, and we do not here purport to offer straightforward solutions. Rather, our goal with this brief is to bring additional clarity to the nature of these hurdles, and assist our clients in effectively articulating these challenges, and their responses to them, throughout their organizations.
DECLINE IN PHARMACEUTICAL R&D PRODUCTIVITY CONTINUES
The pharmaceutical industry’s skyrocketing investment in research and development—which has increased over 7-fold (in 2003 dollars) since 1980, and more than 2.5-fold in the last 10 years (see Figure 1)—continues to yield diminishing returns.
Improved marketing, rather than R&D, has bolstered recent revenues. R&D productivity, in terms
of dollars of revenue per dollar of R&D investment, has fallen by half since 1980, and by 27% since 1990. (See Figure 2.) It is notable, however, that since 1995, this measure of productivity has been essentially flat, as the industry has become more skilled at leveraging assets other than R&D to generate revenues—primarily through improved marketing techniques, such as direct-to-consumer advertising and increased detail forces.
R&D productivity has fallen by half in five years. R&D-specific return on investment has not enjoyed such a flattening out, however, and continues to plummet. R&D productivity in terms of the ratio of NCE approvals to R&D expense has fallen by 75% over the last 20 years and by more than 50% in the last five years alone. (See Figure 2.)
(3) All revenue and cost figures have been inflation-adjusted to 2003 dollars. in 2003 U.S. .BRIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004 35 (INFLATION-ADJUSTED TO 2003 DOLLARS) 30 25 20 15 10 5 0 1980 ‘81 ‘82 ‘83 ‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 YEAR 2002 U. 2004 © Cambridge Healthtech Advisors. (2) R&D costs have been offset five years earlier than revenues and approvals. PUBLICLY AVAILABLE INDUSTRY SOURCES 25 RATIO OF APPROVED NCEs TO R&D COST 5 RATIO OF APPROVED NCEs TO R&D COST RATIO OF REVENUE TO R&D COST 20 4 15 RATIO OF REVENUE TO R&D COST 3 10 2 5 1 0 1980 ‘81 ‘82 ‘83 ‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 YEAR 2002 0 Figure 2 Notes Declining Pharmaceutical R&D Productivity. Reproduction Prohibited.S.$ BILLIONS Figure 1 Increasing Pharmaceutical Investment in R&D. dollars SOURCES: CAMBRIDGE HEALTHTECH ADVISORS. 1980–2002 SOURCES: PhRMA and CAMBRIDGE HEALTHTECH ADVISORS (1) Measure of approvals is based on a three-year trailing average.
S.$ MILLIONS) 1.000 900 800 700 600 500 400 ‘86 ‘87 ‘88 1985 5.100 COST (U. TUFTS CSDD 2004 © Cambridge Healthtech Advisors.BRIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004 500 400 NCEs NEEDED TO SUSTAIN 10% ANNUAL REVENUE GROWTH # OF NCEs 300 NCE GAP 200 100 NCEs INTRODUCED/FORECAST FROM INTERNAL R&D 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YEAR Figure 3 The Pharmaceutical NCE Gap SOURCES: CAMBRIDGE HEALTHTECH ADVISORS.7% CAGR ‘99 ‘00 ‘01 ‘02 ‘03E ‘04E 2005E YEAR Figure 4 Increasing Cost of Developing a New Chemical Entity.S. INDUSTRY SOURCES 1.200 1. Reproduction Prohibited. dollars SOURCES: CAMBRIDGE HEALTHTECH ADVISORS. in 2003 U.5% CAGR ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 7. .
is that the rate of increase in the cost of bringing a drug to market has accelerated substantially in recent years. at least over the next several years. Indeed. “The FDA Seizes the Initiative: Implications of the Draft Guidance on Pharmacogenomics Data Submissions. the CAGR will have grown to 7. with a small number of highly profitable NCEs rather than a larger number of compounds with more modest potential. the number of such post-marketing commitments (PMCs) in the period 1998 through 2000 was more than 30% greater than for the previous three-year period. the industry’s NCE gap between what it needs to sustain its historical growth rates and what it can actually produce will continue to expand. (For more information on this issue. during the period from 1996 through 2005 (estimated). (See Figure 5. (See Figure 4. Pharmacogenomics and related approaches promise to allow for increasingly focused clinical trials involving fewer numbers of more biologically relevant patients. . in 2003 dollars— is widely cited throughout the industry.” Although pharma has long sought to improve their win-loss ratio. of course. During the period 1985 through 1995. however. The cost of drug development is accelerating. however. Per-patient expenses will likely increase over the next several years. (See Figure 3. 2004 © Cambridge Healthtech Advisors. is that the loss of a latestage compound in a portfolio focused primarily on blockbusters is far more damaging than would be a similar loss to a more diversified development portfolio. those costs associated with the absolute number of patients and their recruitment may decrease over time. and which can be mitigated only with difficulty—and the need for “winning” drugs to cover the costs of the “failures. If so. but the greatest increases in cost will be driven by the need to further investigate and understand the implications of additional hypotheses generated as a result of pharmacogenomic studies. There has been a substantial increase in the role of post-marketing (“Phase IV”) study commitments in the FDA approval process. the cumulative annual growth rate (CAGR) of this cost was 5. par- ticularly following the FDA’s recent push in the area of pharmacogenomics data gathering in clinical trials. Perhaps more important. and avoid the large patient populations currently needed to ensure the statistical significance of trial results. the prospects for near-term improvement are not immediately clear.”) The mere collection of such data will. constitute an additional trial expense. likely to be several years—perhaps even a decade or more—before the body of accumulated pharmacogenomic data will enable the industry to conduct such focused trials (and effectively recruit the patients needed for them) on a routine basis. Increasing use of post-marketing commitments extend trial process. driven by the need for both a greater number of patients and increased per-patient expenses. and no compelling evidence for near-term improvement. but less frequently noted. the demand for trial participants will continue to increase. of course. The estimate by Tufts that it costs in excess of $800 million to bring a new drug to market—and we estimate that today it exceeds $1 billion. please refer to Cambridge Healthtech Advisors’ November 2003 Brief. Growing demand for trial participants. THE COST AND COMPLEXITY OF CLINICAL TRIALS CONTINUE TO INCREASE Much of the cost of drug development may be attributed to the cost of capital—a factor directly tied to the long timelines inherent to the pharmaceutical business. Until then. Reproduction Prohibited.BRIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004 Growing NCE gap increasingly undermines industry valuation. The average total cost for running a complete clinical trial (Phase I through Phase III) tripled during the 1990s.5%. The increased incidence of PMCs adds a cost component to the trial process that. A key component of drug development costs that will certainly increase. until recently. is that of conducting clinical trials.) Three key drivers will continue to drive these costs: Increasing per-patient costs. had been rather rare. With the rate of NCE approvals essentially flat for the past several years.7%—a 40% acceleration in the increase of cost. It is. The corollary.) One consequence is that many large pharma are increasingly inclined to pursue the blockbuster model.) A key driver of this cost acceleration is the tremendous investment made in recent years in innovative R&D technologies—particularly the various -omics approaches—that have as yet failed to deliver a satisfactory return on investment.
within only a few years of the merger. FDA LAW JOURNAL THE VALUE OF PHARMA MERGERS REMAINS UNCERTAIN Although the pharma industry has gone through a whirlwind of consolidations over the last few years. In addition. however.S.000 2. However. Much of the cost-savings benefit is offset by increased uncertainty. $) AND NUMBER OF PATIENTS TOTAL CLINICAL TRIAL PATIENT-RELATED COSTS 45 40 TOTAL COST (U.) Moving forward. and we expect the latter to become the increasingly favored mode of pharma company aggregation. this unfortunate outcome is believed to be more likely to occur among mergers-of-equals than outright acquisitions. much. (See Figure 6.000 10 1989 1990 1991 1992 1993 1994 YEAR 1995 1996 1997 1998 1999 Figure 5 Increasing Clinical Trial Patient-Related Costs SOURCES: CAMBRIDGE HEALTHTECH ADVISORS.000 COST PER PATIENT (U. the number of NCE projects that progress to clinical development. and company B perceives the same of company A. of this theoretical benefit is offset by the uncertainty the mergers create among all levels of staff.S. it has yet to demonstrate that such mergers add long-term—or even short-term—value to the enterprise. the whole is substantially less than the sum of the parts—two weak pipelines do not add up to a single strong pipeline. and the negative impact the merger process has on efficient decision making for a period of many months.000 25 4.000 8. and perhaps superior.000 5. Strength cannot be achieved by aggregating weak pipelines. BOSTON CONSULTING GROUP.BRIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004 50 9. Reproduction Prohibited. 2004 © Cambridge Healthtech Advisors. if not all. $ MILLIONS) 7. This suggests that in at least some mergers. . many of these mergers appear to include an element of the “grass is always greener on the other side”—company A perceives that company B’s pipeline is at least complementary to its own. The most immediately realizable source of value is in the ability to eliminate duplicative functions. the total number of new molecular entities. and the total number of clinical projects in development all decline precipitously.000 NUMBER OF PATIENTS PER NDA 20 15 3.000 CLINICAL TRIAL COST PER PATIENT 35 30 6. Yet.
go off patent—and with few similarly profitable compounds ready to take their place. (See Figure 9. representing an increasingly significant share of the industry’s revenues. however. nearly 100 currently protected marketed drugs. Increasingly. it is rare that any successfully developed drug does not have a competitor following close behind. premium-priced drugs subject to generic competition as their periods of patent protection expire. representing about $70 billion in revenues. the competitive market advantage enjoyed by first-to-market drugs has been declining steadily for years.) Periods of market exclusivity compressed by fast-followers. In addition. the industry is finding many of its leading. In essence. even relatively new drugs with many years of patent protection remaining are finding their innovation advantage eroded by fast-follower compounds possessing similar capabilities.BRIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004 160 AVERAGE NUMBER OF PROJECTS IN CLINICAL DEVELOPMENT 140 RELATIVE PRODUCTIVITY (100 = PRE-MERGER) AVERAGE NUMBER OF NCE SUBMISSIONS/YEAR 120 100 80 60 AVERAGE NUMBER OF NCE PROJECTS IN DEVELOPMENT 40 Pre-merger 1 year post-merger 3 years post-merger Figure 6 Impact of Mergers on Pharmaceutical Productivity SOURCES: CAMBRIDGE HEALTHTECH ADVISORS. The leading pharmaceutical companies have adopted increasingly similar R&D strategies over the last several decades. will go off patent—and both of these numbers will double by 2010. the value of the industry’s drug portfolios is being undermined by an effective degradation of intellectual property protection at both the beginning and the end of the compound’s life cycle. and today it is not unusual for a competitor drug to be only a few months behind the leader. (See Figures 7 and 8. .) 2004 © Cambridge Healthtech Advisors. As a consequence. Drugs worth $70 billion in annual sales will lose patent protection by 2006. CENTRE WATCH PATENT EXPIRATIONS AND FAST-FOLLOWERS UNDERMINE PORTFOLIO VALUES At the end of the day. Indeed. By 2006. The next sev- eral years will see an unusually large number of compounds. Reproduction Prohibited. with the result that they are often focused on similar therapeutic areas and developing similar classes of compounds. large pharma companies sustain their activities by selling innovative drugs at premium prices.
PATENT PROTECTION 150 CUMULATIVE NUMBER OF MOLECULES LOSING 200 . IdDB Year 2003 Drug Neurontin Flovent Cipro-floxacin Procrit Lovenox Duragesic Diflucan Zocor Pravachol Zithromax Zoloft Actos Ambien Paxil Neupogen Norvasc Fosamax Effexor Risperdal Serevent Levaquin Aciphex Prevacid Cellcept Topamax Gemzar Aricept Singulair Advair Company Application(s) 2004 2005 2006 2007 2008 2009 2010 Pfizer Neuralgia/epilepsy GlaxoSmithKline Asthma Bayer Antibiotic Johnson & Johnson Anemia Aventis Antithrombotic Johnson & Johnson Chronic Pain Pfizer Antifungal Merck Cholesterol control Bristol-Myers Squibb Cholesterol control Pfizer Antibiotic Pfizer Antidepressant Lilly Diabetes (II) Sanofi-Synthelabo Insomnia GlaxoSmithKline Antidepressant Amgen Neutropenia Pfizer Hypertension Merck Osteoporosis Wyeth Antidepressant Johnson & Johnson Antipsychotic GlaxoSmithKline Asthma Johnson & Johnson Antibiotic Johnson & Johnson GERD TAP Pharmaceuticals GERD Roche Immunosuppressant Johnson & Johnson Epilepsy Lilly Chemotherapy Pfizer Alzheimer’s Disease Merck Asthma GlaxoSmithKline Asthma Figure 8 Leading Drugs Scheduled to Lose Patent Protection. Reproduction Prohibited. 2003–2010 SOURCE: CAMBRIDGE HEALTHTECH ADVISORS 2004 © Cambridge Healthtech Advisors.S. $ BILLIONS) 100 80 100 60 40 20 0 2003 2004 2005 2006 YEAR 2007 2008 2009 2010 CUMULATIVE MOLECULES LOSING PATENT PROTECTION 50 0 Figure 7 Cumulative Impact of Patent Expirations.BRIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004 180 160 140 CUMULATIVE LOST PEAK SALES CUMULATIVE LOST PEAK SALES 250 120 (U. 2003–2010 SOURCES: CAMBRIDGE HEALTHTECH ADVISORS.
Celebrex (1999) 0 . we can help clients to identify the best new technologies to bring to bear on these challenges.BRIEF: KEY FORCES DRIVING THE PHARMACEUTICAL INDUSTRY INTO 2004 14 12 10 8 6 4 2 LOPRESSOR YEARS OF EXCLUSIVITY ZANTAC VASOTEX PRAVACHOL HISMANAL ZOLOFT SPORANOX KOGENATE NORVIR VIOXX Mevacor (1987) Seldane (1985) Tagamet (1977) Diflucan (1990) Inderal (1965) Capoten (1980) Recombinate (1992) Ivirase (1995) Prozac (1988) Figure 9 Note Declining First-to-Market Advantage SOURCES: CAMBRIDGE HEALTHTECH ADVISORS. R&D leaders within major pharmas will be increasingly trying to help their companies break out of the productivity vise. It seems clear that some fundamental changes must be made to the R&D process. We hope that during the coming year. Reproduction Prohibited. and that these changes are most likely to arise from new technologies that are optimally applied. With these challenges as the backdrop to their activities in 2004. and quantify both the investment and the likely results from these new approaches. 2004 © Cambridge Healthtech Advisors. share among our clients the practices and experiences of their peers in applying these technologies. PhRMA (1) First-to-market drug aligned on x-axis. competitor drugs aligned on graph.
This report is part of the Pathways series.com Sales Contact John W. Clients and research participants may contact Andrew at their convenience at: Office: Cell: Email: 617-630-1375 617-838-1438 abranca@chadvisors. For additional copies of this Brief. decision support. Our advisory services offer primary research. clients may contact John at: Office: Cell: Email: 617. Analyst Contact Andrew F. and technologies affecting drug discovery and development. which helps leaders in pharmaceutical research develop effective strategies. Branca is Vice President and Senior Analyst at Cambridge Healthtech Advisors. 2004 © Cambridge Healthtech Advisors CHA CAMBRIDGE HEALTHTECH ADVISORS . consulting. regulatory issues.ABOUT CAMBRIDGE HEALTHTECH ADVISORS Cambridge Healthtech Advisors is the premier membership organization for leaders in the pharmaceutical and biotech industries who need insight into the latest management techniques. Talalas is Senior Vice President. and private member events to help clients make the most of their efforts in pharmaceutical research. Sales and Marketing at Cambridge Healthtech Advisors.com This Brief was produced as part of the Pathways advisory service from Cambridge Healthtech Advisors.630 -1386 617-905 -2800 jtalalas@chadvisors.
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