Challenging times are these for Pharma
Datamonitor

[Under price pressure from cheapskate governments wanting something for nothing, and the PC brigade without two neurones between them, the pharmaceutical industry, once one of the most successful industries and payers of tax, is in the process of moving research and development and manufacturing to third world countries.  A spectacular own goal for governments who still don't believe that you only get what you pay for.  The following item by Datamonitor warrants close reading by all. Ed]

London Wednesday March 21 2007- With declining returns from drug development pipelines, generic erosion of drug market shares encouraged by governmental cost-containment measures, and an increasing level of growth dependent upon M&A activity, it is a very challenging time to be in the drug manufacturing business. However, with every dark cloud comes a silver lining: with the increasing levels of M&A and licensing activity, ‘big pharma’ is able to get access to novel drugs without necessarily all the cost and risk involved with development. Offshoring and outsourcing in emerging markets will significantly reduce Pharma development and manufacturing costs. However, the introduction of biosimilars is set to make sizable dents in the branded biologics market from 2007 onwards, according to a new report* from independent market analyst Datamonitor (DTM.L).

Biosimilar launches set to improve cost containment in biologics market
Healthcare expenditure in most developed countries has been increasing steadily in recent years, driven by an aging population, the higher cost of some therapies and the increase in the number of patients being diagnosed with and treated for diseases than in the past. In some countries the rise in healthcare spending is threatening the very existence of the healthcare systems. In Italy, for example, it is forecast that if the growth in healthcare expenditure continues at the same rate, Italy’s public spending on healthcare would be €1.3 trillion (~$1.6 trillion) by 2050 - over half of the country’s forecasted GDP**. Consequently, governments and healthcare providers have been implementing methods of cutting spending.

One of the main cost-containment measures being implemented by governments and healthcare providers is the promotion of the use of generic products, Datamonitor healthcare strategy senior analyst Alistair Sinclair says. "These include allowing pharmacists to substitute branded drugs for generics, increasing patient co-payments for branded drugs while waiving them for generics, and imposing generic prescribing and dispensing targets on physicians and pharmacists, respectively."

In 2006, the drive for greater cost savings by healthcare providers is also increasing the focus on developing the biosimilar market. With a regulatory approval pathway in place in Europe and substantial guidelines to support biosimilar development, two biosimilars were launched in 2006 in Europe: Sandoz’s Omnitrope and BioPartners’ Valtropin, both of which are human growth hormones (HGHs). In the US, Sandoz has also launched Omnitrope, however, unlike in the EU, the US FDA has not established a specific biosimilars regulatory pathway. Consequently, at present the biosimilars regulatory environment in Europe is considerably more advanced than in the US.

Nevertheless, in October 2006, a bill was created to allow the US Secretary of the Health and Human Services (HHS) to approve abbreviated applications for biosimilars that are ‘comparable’ to the innovator drug. However, the heavily pro-biosimilar bill is unlikely to pass through Congress without significant modification. Therefore, at least in the short term, such biosimilars are unlikely to launch in the US.

The debate surrounding the approval and regulatory process however his continued into 2007, with renewed support for the speedy introduction of biosimilars in order to slash astronomical healthcare costs. "Consequently", Sinclair says, "2007 could be a watershed year for biosimilars in the US."

Inorganic growth through M&A set to continue throughout 2007 and beyond
The pharmaceutical market is an increasingly challenging operating environment, with companies facing declining productivity in their R&D and sales functions, combined with increasingly cost-conscious customers in the form of governments and third-party payers. As a result, companies are turning to a range of strategies in order to improve sales and profit growth. Of these, inorganic growth has been used to provide growth through acquisition (products, divisions or entire companies), cooperative agreements with other companies (including distribution and co-marketing agreements), and in-licensing agreements. This allows branded pharmaceutical companies to expand their geographical presence, while enhancing the strength and breadth of their pipelines. The key M&A deals of 2006 were: Bayer’s acquisition of Schering AG for $21.6 billion; Merck KGaA’s surprise acquisition of Swiss biotech company, Serono for $13.3 billion; and Teva’s completion of its $7.4 billion acquisition of IVAX in January 2006.

The first significant acquisition of 2007, announced in March was Schering-Plough decision to buy AKZO Nobel’s healthcare division (Organon) for $14 billion. As such, Schering-Plough stands to gain access to one of the strongest women’s health portfolios in the industry, and a CNS franchise that boasts a potential blockbuster in asenapine, Sinclair says. "Furthermore, with a sizable injection of capital at its disposal, the deal has opened the door for AKZO Nobel to conduct significant M&A driven-growth of its own, with strategically-motivated acquisitions in chemicals a likely scenario."

Datamonitor expects that M&A deals will continue throughout 2007 at a similar level of intensity to that seen in recent years, with a focus primarily upon continued mid-Pharma, biotech and generic mergers. Consolidation at the top of the pharmaceutical industry will subside.

Increased globalization in pharmaceutical and biotech markets in 2006 set to continue
With the globalization of the pharmaceutical and biotech markets, manufacturers are increasingly outsourcing and offshoring a range of drug development functionalities. These include numerous stages of drug development, as well as manufacturing active pharmaceutical ingredients (APIs), and intermediate and final stage drugs.

In offshoring these functionalities, drug developers are turning to the emerging markets, particularly India and China. These strategies alleviate the pressures of rising costs of drug development, competition for participants and clinical trial investigators, brand revenue erosion due to generics and cost-containment issues driving down prices.

As part of the commitment to using offshoring to reduce costs, western pharmaceutical manufacturers are continuing to invest in China and India, setting up wholly owned R&D subsidiaries, while also beginning to directly acquire drug companies in these countries, exemplified by Mylan’s acquisition of Indian-based Matrix Labs.

While Pharma revenue growth in the seven major pharmaceutical markets has begun to slow, with five percent annual growth in 2004–05, growth in the BRIC (Brazil, Russia, India and China) markets was significantly higher at 22%. Consequently, in addition to acting as key sights for off-shoring drug development and manufacturing, India and China are increasingly becoming key targets for Western companies aiming to expand their global pharmaceutical revenues, Sinclair says. "Leading Western manufacturers in China, including AstraZeneca and Novo Nordisk are continuing to expand their Chinese-based operations to take advantage of China’s growing pharmaceutical market."

In India, the country’s largest pharmaceutical company, GlaxoSmithKline, announced in September 2006 that it is gearing up for a major realignment in its business, with aims to triple its domestic growth in the next few years (1).

"The rapid growth of these emerging markets is fueled by the rapid economic expansion, increasing healthcare spend, improved intellectual property (IP) protection and the huge populations," Sinclair says.

Datamonitor’s report The Pharmaceutical Industry: Key trends and strategic issues shaping the industry review of the key events and trends shaping the pharmaceutical industry during 2006, with analysis of the future impact on the global pharmaceutical market in 2007 and beyond.

(3/4/07)