Externalization: is it working? The increased use of licensing and external sourcing of compounds has become a key strategy for most large pharma companies, but analysis reveals a marked discrepancy between the performance of in-licensed and self-originated compounds.
The Patent Cliff
According to EvaluatePharma, 61% of the total drug sales in 2008 was derived from patented products. This figure is set to steadily decline to just 49% by 2013, highlighting the extent to which generic products will dominate the industry.
Putting the 'patent cliff' into context, by the end of 2010 a third of all sales, equating to a staggering $216 billion will lose patent protection within the following 5 years. This is almost double the at-risk percentage in 2000. Similarly, the one-year at-risk calculation of 9% in 2010 is more than double the level of 4% that has prevailed since 2000. These figures highlight the importance of having a pharmaceutical industry that is powered by an R&D function that is able to refill company pipelines with products that patients and payers need and are willing to pay for.
Declining New Drug Approvals
The FDA website shows the steady decline in the number of drugs approved during the last 10 or more years. (2) Although biologicals are contributing to these approvals, new chemical entities (NCEs) still make up the majority and the absolute numbers of new biological entities (NBEs) approved for launch onto the market is not increasing. It remains to be seen whether this will change as a result of the industry's increased investment in NBEs, and areas such as monoclonal antibodies, vaccines and therapeutic proteins.
During the last few years, many companies have reported increases in the number of NMEs entering the early pipeline. Suggestions that this was a predictor of increases in future NDA approvals, however, have not so far been proven to be the case, with Phase III starts and the number of projects in submission showing no significant improvements according to data from CMR International, part of Thomson Reuters. (3)
Growth Through Acquisitions and Alliances
Across the pharmaceutical industry, companies have sought to bolster and strengthen their pipelines by licensing external innovation. Indeed, the increased use of licensing and external sourcing of compounds has become a key strategy for most large pharmaceutical companies, to the extent that a significant proportion of their pipelines now originate outside of in-house R&D departments. (4)
Companies are realizing that they are unable to cover all targets and disease areas internally and so are using partnerships, as well as straight acquisitions, to gain access to new opportunities. This is also proving to be a fertile area for developing new business models that aim to build mutually beneficial partnerships for early lead development; for example, the Center for External Excellence in Drug Discovery (CEEDD) at GSK.
This growing dependence on externally sourced innovation is likely to increase as the culture in R&D organizations becomes less internally focused. According to Ernst & Young's Beyond Borders Global Biotechnology Report (2008), the potential value of strategic alliances topped $27 billion in 2007 for biotech--pharma and biotech--biotech alliances. This is an increase compared with the previous year, which in itself was a record for the industry. All in all, there were eight alliance transactions with potential deal values each in excess of $1 billion, according to the report.
Similarly, many large pharmaceutical companies have acquired entire pipelines as a way of inorganically growing their development portfolios and to access expertise in new science and technologies, such as NBEs. For example, in 2007, AstraZeneca acquired MedImmune for $15.6 billion, Eisai acquired MGI Pharma for $3.9 billion and Amgen sought to bolster its pipeline by acquiring Ilypsa for $420 million and Alantos Pharmaceuticals for $300 million.
Assessing the Success of Externalization
Externalization is clearly a commonly adopted strategy in R&D, but is it working? Are in-licensed compounds more or less likely to fail when compared with self-originated drug candidates? An analysis by CMR reveals a marked discrepancy between the performance of in-licensed and self-originated compounds. Examining the success rates for a major cohort of pharmaceutical companies, CMR found that in-licensed active substances developed by major companies fail more often than self-originated compounds, in particular at Phase III and submission.
A historical analysis of the between-phase success rates for in-licensed compared to self-originated active substances for the major company cohort showed that in-licensed compounds enjoyed relatively higher success rates in early development (Figure 1). This optimistic picture, however, failed to translate into higher late development success rates, which have consistently been inferior for in-licensed versus self-originated compounds (Figure 2). In recent years, the gap in early development success rates has narrowed considerably, such that active substance origin now has little influence on this measure.
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The trends are suggestive of two potential factors: large pharmaceutical companies are becoming more effective in introducing rigour into their scouting and due diligence processes, such that the quality and potential of the in-licensing candidates is improving; or, more objective decision making in early development may be ensuring that fewer unsuitable candidates are progressed to Phase III. Whichever of these may be the case, trend analysis of late development success rates for the major cohort indicates that these potential benefits are not yet translating into improved commercialization. In fact, the probability of successful transition from Phase III to submission for in-licensed compounds has trended steadily downwards in recent years and absolute success rates remain notably less than for self-originated candidates (Figure 2).
The industry's desire to look beyond its own laboratories to access innovative science makes sense, but we suggest that the execution of externalization strategies within development has been and remains suboptimal.
In-Licensing Deals and NME Launches
Major companies need to be thorough in their due diligence and getting caught up in the race to complete a deal should not impede a thorough, objective analysis of all aspects of the assets. CMR analysed the relationship between levels of development/commercialization deal activity within 10 therapeutic areas and corresponding NME approvals. Deal start dates and NME numbers were analysed during an 8-year period (2000-2008) using a 3-year moving average (Table 1). The analysis shows deal activity increased by more than 10% in the therapeutic areas analysed. The number of NMEs launched, however, showed a constant decrease by more than 30% in the same time period.
Deal activity was further analysed by individual therapeutic area. Four therapeutic areas displayed high levels of commercial activity relative to other therapeutic areas: alimentary and metabolism, infectious diseases, oncology and neurology. The increase in the number of development/commercialization deals in each of these four therapeutic areas ranged from 6% to 22%. The number of NME launches during the same period either decreased or remained static. Other therapeutic areas (such as respiratory, cardiovascular, blood, musculoskeletal, genitourinary and dermatology) showed static numbers of deals and decreasing NME launches during 2000-2008. Across all therapeutic areas an average of 32 development/commercialization deals were required to launch one NME. The infectious diseases therapeutic area required the least number of deals per NME launch (19 deals/NME) whereas dermatology required the highest number of deals per NME launch (45 deals/NME).
The analysis suggests pharmaceutical companies have focused their business development and licensing activities in specific therapeutic areas. This tactic has been used to supplement company drug portfolios in markets with high potential. For example, indications driving deal activity within the infectious diseases therapeutic area are human immunodeficiency virus (HIV) syndrome infection and Hepatitis C virus (HCV) infection. Both of these indications have large chronically infected patient populations. The increase in deal activity, however, has not increased the number of successfully launched NMEs. Across all therapeutic areas the number of successfully launched NMEs has either declined or remained static irrespective of deal activity.
The above analysis suggests there is room for improvement when analysing licensing in a potential drug candidate. Companies need to investigate multiple areas and attributes of a drug candidate to produce a thorough assessment of a product's success at launch. CMR has identified several broad areas that should be assessed prior to any licensing decision (see sidebar). Applying these criteria when evaluating licensing opportunities will raise the proportion of successful NME launches produced from in-licensed compounds. A homogenous approach can then be developed for assessing drug candidates. Companies need to apply these decision-making criteria to in-licensed compounds with as much rigour as those for self-originated compounds.
Companies are learning from their experience in early development and are bringing the success rates for in-licensed compounds into line with the attrition rates for self-originated compounds. Large companies must continue to focus on improving due diligence and early development decision making, however, if they are to address the continuing gap in Phase III success rates and maximize their ROI in externally sourced innovation.
RELATED ARTICLE: Recommended Areas to Assess Prior to Any Licensing Decision
* Drug candidate attributes -- including mechanism of action, target, efficacy, safety, ease of use and indication spread.
* Molecule novelty -- the novelty of a molecule regarding its structure and application.
* Competitive profile -- an assessment of the drug pipeline and company competition. The potential of both ethical and generic pharmaceuticals competition.
* Market size and opportunity -- at the time of potential launch for a given candidate, the potential patient population size. This combined with a pricing assessment for a candidate and understanding of its period of exclusivity, allows an understanding of total drug sales.
* Cost to launch -- an assessment of expenditure required by a company to bring a particular compound to market. Expenditure categories that should be examined include R&D costs, operations and manufacturing costs, sales and marketing expenditure, and distribution and administration costs.
* Period of patent protection -- the period of intellectual property protection a drug candidate will have from generic competition.
* Unmet medical need -- quantification of an unmet medical need within an indication requires assessment of four key areas for a potential candidate:
* The indication profile.
* A drug candidate's clinical characteristics (efficacy, safety, side effects and ease of use).
* The competitive landscape within an indication (for example, drug pipeline).
* The market size of an indication in the form of treatable patient population.
(1.) EvaluatePharma, World Preview Report 2014, p 6 (May 2009).
(3.) CMR, 2009 Global R&D Performance Metrics Programme Executive Summary, p 4.
(4.) PAREXEL's Bio/Pharmaceutical R&D Statistical Sourcebook 2008/2009, p 79.
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