Industry outlook 2006: converging challenges & opportunities in today's pharmaceutical industry.
Improving Trust Amidst Increasing Regulation and Price Pressure
Regaining public acceptance amidst increased regulatory scrutiny comes down to an overriding imperative about trust, transparency and perception. In 2006, pharmaceutical companies will need to devote additional time, people and money to address safety and transparency issues and educate the government and consumers about their compliance efforts and pricing.
From a pricing perspective, the biggest regulatory challenge facing U.S. drug companies is global and domestic price controls or pressures. According to the Commerce Department, foreign drug price controls cost U.S. pharmaceutical companies $18-$27 billion per year globally. On the domestic front, 2006 brings new pricing requirements mandated by the Medicare Modernization Act of 2003 (MMA). For example, dual eligibility requirements will change rebating and pricing models for certain drugs. Also, the Act establishes specific Medicare regions, and pharmaceutical companies will now have to negotiate drug prices with each PDP and MA region and model the impact.
Additionally, regulatory organizations are soon expected to require economic as well as scientific data around pricing. First-mover companies that embed the economic justification of price and its cost benefit in the development and filing process will have the ability to maintain or gain price premiums.
Managing Expiring Patents And The Competition From Generics
There are a large number of drugs coming off patent in the next two to four years. Analysts estimate that the pharmaceutical industry could lose $35 billion to $50 billion in product sales to generics during this timeframe--a huge loss of dollars that drive research & development and earnings results. The existing product pipeline is estimated to only account for annual sales growth of about 5.5 percent, even after adjustments for an aging population and expansion into new markets. This leaves an anticipated gap between market expectations and reality.
What can the industry do to maximize the value of its pipelines? First, companies need to embrace R&D in areas such as specialty products for smaller populations and biologics that are better positioned for price, particularly in the new world of the Medicare Modernization Act. The industry's current R&D yield and mix is neither optimal nor sustainable, as the top 50 pharma companies have produced less than one New Chemical Entity (NCE) since 1998, despite increasing R&D investments.
Second, pharmaceutical companies need to look to additional partnering, licensing, mergers and acquisitions as a way to fill their product pipelines and to minimize capacity challenges created by the industry's recent low productivity. Organizations must also be open to creating flexible and innovative deal structures, particularly when partnering with smaller biotech companies or organizations outside of the United States.
Evolving Drug Development From Blockbusters To Specialty Products
Large pharmaceutical companies that continue to rely on a 30-year-old investment and commercialization model that hinges on blockbuster brands will face considerable challenges in the coming years. Almost 75 percent of NCEs entering the market are specialty products or biologics generally produced by smaller biotech and large-molecule companies. While a few products are coming from the big pharma pipeline, the more nimble biotech model has proven particularly effective to date in yielding NCEs. Big pharma will be challenged with evolving from its blockbuster model to delivering returns through the development of a portfolio of smaller products either internally or through biotech relationships.
Companies that can diversify, yet focus, their opportunities by developing and marketing these specialty products will be better positioned for price, regulatory and marketplace dynamics. Also, the new 2006 Medicare pricing models may favor a specialty product that is a more unique patient option or that focuses on previously untreated conditions.
Leveraging Technology To Enhance New Product Development
The pharmaceutical industry needs to better leverage technology to enhance innovation in product development. Currently, the process is very lengthy, labor-intensive and highly regulated. Many drug companies are hampered by legacy IT systems and multiple, disparate data sources that are resident internally and externally, and the industry has been slow to adopt electronic technologies that can improve the way it implements clinical trials and other stages in the manufacturing process. Leveraging Electronic Data Capture, remote type monitoring and management, computer modeling of clinical side effects, and other technologies will bring significant savings and speed to drug discovery and development.
Focused strategies around the consolidation of information and processes will go hand-in-hand with the industry's increased use of genomics, nanotechnology, and other platforms and technologies around personalized medicine.
Redefining the Role Of The Sales Representative
An ongoing issue is the ROI of the pharmaceutical industry's costly "saturation" sales force and promotion model. As PhRMA and OIG Guidelines, as well the Anti-kickback Statute, shut down most channels for pharmaceutical sales reps to increase time with physicians, the industry's challenge is to find a more efficient way to target and deploy resources against physicians, particularly in an education mode. One solution that ties closely to the evolution of specialty products is to establish more specialty care sales forces, which focus on one target market and are usually smaller and less expensive than a blockbuster drug's sales force. Additional cost-effective sales and promotional alternatives are direct-to-consumer advertising, e-retailing, seminars, peer-to-peer education and patient-centered education.
Expect the industry to be slow to change current sales practices. It will be difficult for these organizations--especially those focused on blockbusters--to adopt a new model. However, the flexibility to re-deploy this spending to R&D could define future market leaders.
Maximizing the Potential of Emerging Global Markets
By the year 2020, it's projected that the greatest mass of individuals needing health care will be in Eastern Europe, the Pacific Rim and Africa. U.S. pharmaceutical companies must address global markets for continued growth. Fortunately, conducting business in emerging economies, particularly India and China, offers tremendous opportunities and benefits including less expensive clinical trials, easier access to drug-naive patients, potential for in-country drug discovery and development, a cost-effective population to staff drug manufacturing facilities, and a huge consumer/patient population.
However, the opportunities presented by an expanding global market are certainly tempered by challenges. U.S. drug companies will have to develop a business model that can be profitable and caring in these developing nations, as Western pricing models probably won't hold. Also, the protection of intellectual property is a big concern and while emerging countries are starting to honor IP rights, enforcement is a different issue.
Companies Must Respond To Survive
U.S. pharmaceutical companies must address each of these industry challenges if they are to prosper into the next decade. Those that can leverage technology and adapt their discovery, development and sales processes to support a diverse product portfolio and emerging global markets will realize financial gains and continued growth Also, by improving product and price transparency, companies can improve their public reputation.
Perhaps the biggest challenge for the pharmaceutical industry is its ability to transform the culture of its workforce. Companies will need to implement a change management project of unsurpassed magnitude or risk continued price erosion, increasing governmental regulations, consolidations, and public skepticism An evolutionary solution won't get the industry where it needs to be Widespread change will require a significant disruption in business models, as well as the integration of knowledge, technologies and processes from many different sources.
2006 Looks Good For Teva and Neurocrine Biosciences
By David Woodburn
In a year when multiple blockbuster drugs lose their U.S. patent protection, Teva, with the IVAX acquisition under its belt, will enjoy six months of being the exclusive generic marketer (along with an authorized generic, of course) of at least four compounds: pravastatin (Pravachol), finasteride (Proscar), sertraline (Zoloft), and venlafaxine (Effexor).
Acquiring IVAX expands Teva's geographic reach (new territory mainly in Latin America, but also Europe) and also brings it expertise in respiratory products, both generic and proprietary. The earnings accretion that comes as a result of the deal, which we see occurring in 2006 even with no synergies, is like the icing on the cake.
What we also like about the IVAX acquisition is that it should increase Teva's proprietary products business, which we see as increasing the visibility and stability of earnings, at least in the U.S. While U.S. proprietary product sales made up only an estimated 15% of U.S. revenues for the two companies in 2005, we forecast that proprietary products would represent over 22% of U.S. sales in 2008.
Don't Get Caught Napping On Neurocrine Biosciences.
Neurocrine Biosciences is one of two companies that we cover that should benefit from entry into the growing market for prescription drugs for treatment of insomnia. The other company is Sepracor Inc., with its Lunesta. We see revenues for both companies increasing dramatically over the next few years, even though indiplon will most likely be the fourth new entrant into the insomnia space after the launches of Sepracor's Lunesta, Takeda Pharmaceutical's Rozerem, and Sanofi-Aventis Group's Ambien CR in 2005. Sepracor will market Lunesta on its own, but Neurocrine's drug will be marketed by Pfizer, and Pfizer will be responsible for marketing and promotional expenses in this market, where consumer advertising costs can top $200 million in the first year of launch.
Even with a great future ahead of the company, we would not be surprised if the stock sees some volatility before the FDA potential approval dates of February 15 and March 26, only because of the importance of indiplon to the company. Besides indiplon, however, Neurocrine has several other compounds entering late-stage development for conditions that include multiple sclerosis, type 1 diabetes, endometriosis, and benign prostatic hyperplasia, among others. It seems that little of current valuation is attributed to these compounds, so if new clinical data on any of these (expected throughout 2006) is positive, valuation could take a step up.
David Woodburn covers Barr Pharmaceuticals, IVAX Corp., Mylan Laboratories, Neurocrine Biosciences, Sepracor Inc., Teva Pharmaceuticals Industries, and Watson Pharmaceuticals for Prudential Equity Group.
Pharmaceutical Processing has been given permission from Prudential Equity Group to reprint their analysts' thoughts and forecasts for 2006. These reports, which cover every major industry and market, are published annually in their Fearless Forecast. This is an excerpt from their Specialty Pharmaceuticals article.
John Rhodes is U.S. & Global Managing Partner, Life Sciences, for the Life Sciences & Health Care Practice of Deloitte & Touche USA LLP. He can be reached at: firstname.lastname@example.org
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|Author:||Rhodes, John D.|
|Article Type:||Cover Story|
|Date:||Jan 1, 2006|
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