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European Biopharmaceutical Review

The Rising Tide of Biotech

Emile Bellott, a consultant in drug development, discusses the rationale behind the growing contribution of biological sales in the global pharmaceutical/biotech industry, in the context of international trends and competitive pressures

Within the opening decade of the 21st century, biological products as therapeutics have taken their place in the ranks of the top 10 global pharmaceutical drugs. Over the next five years, they are poised to account for a quarter of global pharma sales and dominate the top 10 rankings. The stellar rise and the continuing prospects for aboveaverage growth of this industry segment can be attributed to the synchronicity of forces in the competitive market, and scientific and regulatory environments. At the same time, the distinction between pharma and biotech businesses is becoming increasingly blurred by pharma’s build out of biotech-focused business units, either organically or by mergers and acquisitions (M&A). In fact, today, all the major pharmaceutical manufacturers are pursuing biotech products in a new race to preserve their global competitiveness and improve sales and profitability.

THE EVOLUTION OF BIOLOGICS

The global character of the pharma/biotech industry is the overarching feature that defines the larger enterprises in the new millennium. Industry players are adapting their business models to the longer-term trends that are apparent in the macro-business environment. The global market for therapeutic drugs has continued to grow in recent years and is expected to approach $880 billion in 2010, with biotech drugs approaching $100 billion. This growth has been accompanied by a significant redeployment of resources and manpower to address the emerging face of new opportunities, market pressures and competitive threats – both in geography and product-mix.

Among the important trends of the new decade, the rising tide of biologics represents the most significant change in the overall product portfolios of the industry, especially the large pharma and biotech enterprises. Creating and marketing biologics presents a clear competitive opportunity for the major industry players as they jostle for a position within the global therapeutic drug marketplace.

Although pipeline productivity continues to be a serious concern, as it has been for the past 20 years, the enormous economic burden of healthcare provision on a global scale – and the consequent pressure on pricing and profit margins – is providing an incentive for the industry to seek out new market segments with more robust competitive and proprietary advantage; barriers to entry; higher profitability; and anticipated greater growth opportunities.

Other elements of the global environment driving these changes include:

  • Advances in basic science
  • Economics of drug development
  • The intellectual property landscape
  • Aggressive generic competition in small molecule therapeutics
  • Regulatory climate
  • Cost-containment pressure on healthcare provision
  • Growth segments in global and emerging markets

Each of these factors has undergone significant evolution in the past few years. The coincidence of these changes have favoured the rapid rise of biologicals as a segment of the therapeutic drug marketplace. This article presents an overview and analysis of the factors at work in the commercial advance of biologics as therapeutic drugs.

BIOLOGICS: A SOURCE OF COMPETITIVE OPPORTUNITY

In the summer of 2009, the ascendancy of biotech drugs was reported widely (1). The headlines emphasised that small molecule drugs, long dominating the ‘top 10’ in pharmaceutical sales, accounted for just five out of 10 in 2008. They would be displaced in the future by the wave of topselling biologics (seven out of 10) by 2014. This projected eclipse of small molecule drugs is a visible indicator of the important sea change taking place in the industry. Within the same timeframe however, small molecule drugs are still expected to claim over half of the top 100 prescription drugs and retain over 75 per cent of total prescription drug revenues worldwide.

In the past decade, the global pharma industry has faced competitive pressures, such as stalled pipeline productivity, patent expiries, increasing use of generic copies of small molecule drugs, and pricing constraints imposed by economic conditions and healthcare payers. While all observers believe the advent of government-imposed healthcare reforms will affect the industry in major ways, it may be another decade before the full ramifications are felt. These challenges notwithstanding, the global market for therapeutic drugs is estimated to continue growing at an average rate of five to eight per cent over the next five years, reaching total sales of $1.1 trillion (2). Industry observers and investors think of the pharma/biotech sector as relatively recession-proof, characterised by high R&D costs, high margins and long product development timelines.

Buried within these top level numbers, the projected growth of drug sales in the US, which accounts for approximately half of global sales, will be much slower – in the four to five per cent range. This is due to the high penetration of lower-margin traditional generic drugs, as well as the pressure of unsustainably high healthcare costs as a percentage of GDP. Sales in the emerging markets (Brazil, Russia, India, China [BRIC], Turkey, Korea, and Mexico) are forecast to grow at approximately 15 per cent per annum; the annual growth rate growth in China alone may exceed 20 per cent.

In 2009, the developed world (US, EU and Japan) accounted for approximately 75 per cent of global drug sales, and for the intermediate future the US will remain the single largest market, making up almost half of this percentage.

Most analysts anticipate that the demand for pharmaceuticals and healthcare will continue to grow due to general economic advances, changing demographics, and penetration of developing markets. Increasing market growth (particularly in the BRIC countries) will offset the impact of patent expiries ($142 billion in next five years), cuts in payer prices and mandated use of generic drugs.

For the smaller and emerging companies, a competitive approach is, and will continue to be, a niche strategy, emphasising innovative therapeutics, first-in-class/or best-in-class, or game-changing therapeutic approaches (3). To the larger integrated pharmaceutical companies – with their higher fixed base, global marketing and manufacturing capabilities – competing in the global environment means recognising and exploiting the sources of competitive advantage, and their unique capabilities, to grow and prosper (4).

HARNESSING THE COMPETITIVE ADVANTAGE OF BIOLOGICAL DRUGS

Large pharmaceutical companies have in the past placed an emphasis on the development of blockbuster drug products. As more drugs fall off patent and with the uncertainties of healthcare reform and product pricing, the whole industry is re-evaluating its competitive posture. There is a trend towards emerging growth markets, niche products, externalisation of research pipelines, and most significantly, an increased emphasis on the development of biological therapeutics (5).

All of the major pharmaceutical companies have made significant strategic commitments to the biotech area, either by building up their own capability, or through M&A (for example the megamergers: Lilly-Imclone, AstraZeneca-CAT, AstraZeneca- Medimmune, Merck-GlycoFi, Merck- Sirna, Novartis-Chiron, Roche-Genentech, Pfizer-Wyeth, and a host of medium and smaller deals). This move towards biotech is attributed to the higher market growth of biotech drugs, higher revenue potential, seven per cent lower-thanaverage cost of drug development, 30 per cent higher success rate in clinical development and regulatory barriers to generic copies (6).

Biotech drugs, with global annual sales approaching $100 billion, are expected to grow two to three times faster than the pharmaceutical market as a whole (7). Analysts predict that there will be $50 billion in patent expiries of biotech drugs by 2015, and 90 per cent of today’s biotech drugs will be off-patent by 2020 (8).

Sensing the market opportunities presented by regulatory changes – scientific advances and patent expiries – the larger global enterprises have announced programmes to produce either innovative drugs, biosimilars or follow-on biologics in all the major classes. Presently, biotech drugs representing over $10 billion in sales are facing the prospect of copy-cat competition from programmes in industry pipelines. Reflecting the constrained capital environment for emerging companies, nascent biotech ventures are placing their emphasis on ‘first-in-class’, ‘best-in-class’, and ‘game-changing’ therapies. This profile mirrors the expressed preferences of capital sources (9).

Important characteristics of biotech drugs

 

Economics of development

Biotech drugs are slightly cheaper to develop and have a higher clinical success rate than small molecule drugs and have a slightly longer development timeline. Uncertainty in regulatory approval pathway for biosimilars has been partially improved by legislation in the US, although the FDA still has to address implementation and rule-making. Innovator products in the US have achieved some legislative relief through an extended exclusivity period versus copycats under some circumstances.

Revenue potential

Antibody drugs average annual per patient cost on the order of $10,000. In the US, existing biotech drugs have gained an extended exclusivity period versus market entry of new biosimilars. Due to the cost and proprietary nature of biosimilars and followon biologics, less significant discounting is anticipated (compared to the typical discounts of up to 90 per cent in the smallmolecule generic market). Scientific, IP and regulatory barriers to competition provide a longer tail to the expected revenue stream.

Marketing

Biosimilars’ benefits and side effects will differ slightly from the original drug and thus will not be an exact substitute. Each one will have different prescribing guidelines. This provides an opportunity for branding and possible companion diagnostics. For biosimilars and follow-on biologics there is the opportunity to follow a proven path to the market, but with enhanced product claims.

Manufacturing

Biotech drugs are produced in living organisms (animals, bacteria or yeast). Unlike small molecules, they cannot be copied exactly. Each step in the manufacturing chain forms an important element in the IP. Scientific Biotech drugs have Potentially better specificity than many small-molecule drugs. The opportunity to service targets that are not ‘druggable’ by conventional approaches. Addressing immunogenicity in this class opens up new proprietary business opportunities.

Regulatory

Clinical work is required, even for biosimilars, to demonstrate safety, purity and potency. At best, is a more demanding procedure than for small molecule generics. Recent legislation has established a biosimilars path in the US, but FDA is still working out the details.

Intellectual property

The drug and the process to make it are inextricably intertwined. There are multiple opportunities and pitfalls in IP. Strong biotech IP becomes a multi-layered barrier to entry.

Enterprise strategies

Larger industry players with the economic, legal and regulatory resources will be able to compete in all segments of the biotech drug industry: innovation-driven (new drug), biosimilars (copy-cat), and follow-on biologics (new drug/same therapeutic area). The choice of strategy is inextricably intertwined with the science, company resources, and the IP and regulatory landscapes. Emerging enterprises and start-ups are more likely to pursue product development strategies emphasising breakthrough improvements or first-in-class products. These approaches are aimed to maximise the likelihood of a successful exit strategy through partnering or M&A.

COMPETING WITH BIOTECH DRUGS

The particular characteristics and means of manufacture of ‘large molecule’ biotech drugs influences the regulatory landscape for approval of biologics, the foundation of IP positions in the industry, and provides formidable barriers to entry. Biopharmaceuticals, mainly large protein molecules, are produced commercially in living organisms – animals, cells, bacteria, and yeast. This method of production is in contrast to that of small molecule drugs, which are produced by chemical synthesis.

Two consequences of the biotech approach are significantly different from traditional drugs and exert a direct and vital impact on the commercial life of the resulting products:

The precise molecular structure of the drug is dependent on the organism and processes used to make it

There are opportunities to patent processes, utility and aspects of man-made constructs that are essential to the procedure. The IP created for each link in the chain provides a strong barrier to entry for competing products. Approval for a new biological drug carries costs that are on the same order of magnitude as traditional small-molecule drugs, but the resulting robust IP position thus created fends off ‘generic’ competitors – copycat ‘biosimilar’ products. The intense legal framework comprised of a strong web of process and utility patents would suggest that development of biosimilars will most likely arise from a handful of large, established players that have the resources to mount such a challenge.

Alternative processes and organisms yield products that are not precisely identical to the original innovator product

In the regulatory regime, this means that a ‘biosimilar’ drug is not an exact copy (as it is in the case of small molecule generics), and thus requires a significant level of clinical validation before regulatory approval. Benefits and side effects will also be different. Approving a biosimilar drug is estimated to cost as much as 50 times the cost of approving a smallmolecule generic drug, and in some cases, approaching the cost of approving a unique new drug. A biosimilar drug is unlikely to be approved as a direct substitute and will likely have unique patient prescribing guidelines (7). This latter point opens up opportunities for product differentiation and companion diagnostics.

From a commercial perspective this suggests that biosimilar drugs, unlike small molecule generics, could compete effectively as branded products against their original innovator-drug counterparts, while not sinking to a dramatically discounted price point, as is the case with traditional generics.

EYES ON THE PRIZE

Aside from the favourable economic aspects of biotech drugs discussed above, these products open therapeutic approaches to underserved medical conditions and targets and pathways that may not be druggable by traditional means. They offer means to treat serious auto-immune disorders, arthritis and cancer.

The large upside, and the contemporaneous development of a biosimilars regulatory pathway by the FDA, has attracted many generics makers to develop biosimilar drugs (8). Both innovative and biosimilar programmes have been announced by large pharma companies like Merck, Pfizer, Astra- Zeneca, and large generics makers Sandoz (Novartis), TEVA, Hospira and Stada.

CONCLUSION

The biotech drugs category will continue to grow in relative importance. Sales will steadily increase due to the number of rare and serious disorders and chronic conditions that can be addressed by these therapies. Many conditions like cancer and arthritis, where biotech drugs have an important role to play, are correlated with the aging population cohort. Continuing scientific understanding of disease aetiology open up new growth opportunities in therapeutics driven by population demographics.

Revenue opportunities of biotech drugs are expanded by the relatively high price of these therapies and the longer marketing tail. The intertwined technical nature of drug design and production tend to discourage easy entry of classic generic competition. Biosimilar ‘copies’ that are introduced to the market will be able to compete without the severe discounting that characterises small-molecule generics, because of the relatively high expense of gaining approval and navigating the IP and legal landscape.

The annual cost per patient of biotech drug therapies is very high in comparison to small molecule therapeutics. Sales of these expensive therapies will grow most rapidly in markets of the developed world, where per capita GDP and systems of healthcare provision can support the costs.

Small and emerging biotech competitors will emphasise a niche strategy, such as underserved market segments or drugs that offer a significant advantage; a unique or superior profile, or formulations and properties that significantly improve patient compliance with dosing regimens.

References

  1. Biotech Set to Dominate Drug Industry Growth, Evaluate Pharma, 17 June 2009
  2. The Burrill Report, Global Pharma Sales Steadily Growing, Despite Rise of Generics, Seeking Alpha, 26 April 2010
  3. VC Outlook-Bio Conference, 9 March 2010
  4. Bellott E, Global environments, Navigating the Perfect Storm, European Biopharmaceutical Review: pp28-35, 2008
  5. Jack A, Big Pharma Aims for Reinvention, Financial Times Online, 12 May 2010
  6. DiMasi JA, Measuring Trends in the Development of New Drugs: Time, Costs, Risks and Returns, Tufts Center for the Study of Drug Development, 19 March 2007
  7. Burger L, Battle Over Biosimilar Drugs is Only For The Brave, Reuters, 2 July 2010
  8. A Race to Develop Better-Performing Biopharmaceuticals, The Wall Street Journal, 10 August 2010
  9. 30th Annual Canaccord-Genuity Growth Conference, Boston, 9 August 2010

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Emile Bellott is a private consultant in drug development, based in the Boston area. With more than 25 years of industry experience, his pharmaceutical activities have focused on drug discovery and development, synthesis and design of small molecule therapeutics, and informatics and structural biology. He served as VP of Operations, was the co-founder of two development-stage biotech companies, and founder of a life-science software company. His operational experience spans medical devices, pharmaceutical development and chemistry outsourcing. He earned a PhD in Physical Organic Chemistry from Harvard and a MBA from the Harvard Business School.
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