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European Biopharmaceutical Review

A Banner Year for Biopharma

By all accounts, 2014 was a record year for biopharma. A number of new drugs were approved – 82 EMA recommendations (including generics), 41 FDA new molecular entities (NMEs) and 46 drug launches in the developed world. And 2015 is also on track to rack up impressive gains: as of early August, 21 NMEs have been approved. This is welcome news after almost two decades of disappointing pipeline progress, with the cost of drug development increasing exponentially and the annual number of NMEs not keeping pace.

On top of this, annual industry sales have exceeded $1 trillion and innovative drugs have continued to command high prices. Almost 40% of FDA approvals last year were for rare and orphan indications. In this market segment, competition is limited; fast-track review is the norm and annual costs of around $100,000 are not unusual.

Markets and Capital

2014 saw a large number of initial public offerings (IPOs) – 63 valued at $104 billion in total. Thus far in 2015, almost twice as much has been raised in public and private offerings as in the corresponding period a year ago. But while the tide continues unabated, some industry observers caution that this bubble could be about to burst. They assert that revenues may be unsustainable following payer pushback on high drug prices, the rise of biosimilars and volatility in capital markets. Nonetheless, biotechnology IPOs have been spurred on by rising financial markets and relatively high valuations. In 2014, biotech stocks climbed more than 27% and the NASDAQ Biotechnology Index rose 36% – continuing its torrid pace in 2015. Despite the recent market correction and growing global economic concerns, biotech stock indices are still up by more than 28% compared to last year.

Relatively cheap capital by historical standards has led to a record number of mergers and acquisitions (M&As) within the industry. In 2014, 182 deals totalled $122 billion. The combination of available capital and exit strategies means that many experienced biotech executives are trying their hand at multiple ventures, and the continual deal fl ow is fostering the growth and success of more start-ups.

Furthermore, acquisitions and dealmaking are often tied to positive clinical news. For example, in a recent surprise deal, Sprout Pharmaceuticals was acquired just one day after FDA approval of Flibanserin (the ‘pink pill’). This was a particularly shrewd deal, since the drug acts on brain pathways and will likely be prescribed off-label for men as well as women – doubling the potential market opportunity.

Drug Pipelines

The staggering amount of drug approvals became the iconic story of 2014, and analysing the numbers provides a glimpse into the changing face of pharmaceutical development.

'Fail early, fail fast, fail cheap' is the new industry mantra. Programmes with low potential are terminated early in the development process before they enter the more costly clinical phases. Viewed another way, de-risking of pipeline candidates has been so thorough that clinical development – although uncertain – is a much more favourable value proposition than in the past. Only a quarter of drugs fail in Phase 2 and just 10-15% fail in Phase 3. As a result, there has been a decrease in development time by 20% – with a reduction from 12 to 10 years on average.

In 2014, the provenance of almost a third of the NMEs approved was through in-licensing or acquisition.

Notably, in-licensed candidates have achieved a threefold better clinical success rate than internal candidates. Most of the large biopharma players have subsequently announced plans to externalise up to 50% of their discovery and development pipelines to cut costs. Reaching this target leverages collaboration with start-up companies and university researchers.

Rare diseases have proven to be a highly profitable area as the sector is more resistant to knock-off competition due to its smaller market size. Targeting niche conditions opens up opportunities for development because, in many instances, there is a known pathway or genetic basis for the indication. In addition, clinical trials may be smaller and more focused with clear endpoints, thus less expensive to conduct overall. Many regulatory regimes also provide a favourable approval process and exclusivity period. On the flip side, pricing strategy of innovative therapies is becoming more challenging.

Emerging Headwinds

In mid- to late-2015, global economic turmoil and broad financial market volatility have given pause to the robustness of the economy and near term prospects for many industries. In biopharma, the perennial issues remain, augmented by concerns over hospital consolidations, competition from biosimilars, pricing, industry restructuring and globalisation.

Patent Expiry and Biosimilars
The annual revenue of drugs whose patents will expire in 2015 is estimated to total $44 billion, which is slightly higher than the average for the past decade but, this time, the drop in revenue will be somewhat mitigated. This is because many of the drugs going off-patent are advanced biologics. Biosimilars may experience a hard time breaking into the established markets of the products they seek to substitute.

Moreover, the jury is still out on interchangeability. This will be resolved in time with collective experience. In both Europe and the US, regulators are looking at guidelines to deal with the problem of naming biosimilars. Should the biosimilar have the same name as the innovator drug, or should it be substantially different? The result will affect drug interchangeability, the level of success, and the collateral revenue impact associated with future biosimilar product introductions.

Pricing Pressure and Payer Push-Back

There has been a significant change in drug development strategy – moving away from blockbusters towards rare diseases and orphan indications. The past year has seen the introduction of new innovator drugs that are transformative in their effectiveness against under-served medical needs. However, innovators seeking to capitalise on these opportunities must recover their development costs from a modest patient base. At the same time, patients, governments and payers have globally voiced their collective concern over prices. On both sides of the Atlantic, the word most often heard is ‘unsustainable’.

The price of drugs is more visible than other healthcare costs; in many instances, it is directly borne by the patient. From the payers' perspective, there is a desire to control costs while rewarding innovation and risk-taking with adequate returns. Therefore, drug developers are increasingly concerned with reimbursement strategy as an element of overall product development of new high-end innovator drugs. Nonetheless, as is often the case, the newest, highest priced drugs will require greater medical justification, particularly when alternatives exist. It is increasingly important to focus on value.

Restructuring and Job Cuts

2014 layoffs by the top 10 pharma companies were less than half that of the previous year. Overall, for the past five years, the average number of jobs lost has hovered in the 30,000 to 40,000 range. This can be attributed to three factors: cuts in R&D due to a transition to external partners and in-licensing; trimming of sales forces in line with the decline in the number of accessible prescribers; and redundancies due to M&As.

A number of major biopharma firms have set up their own research activities to synergise with regional biotech hubs, such as Boston, US, which has become a global mecca for drug discovery and research. In this way, they have become part of the local biotech ecosystem comprised of key scientists and medical centres. These regional economic clusters are characterised by high concentrations of industry and academic activity, easy access to capital, and large pools of manpower and start-up enterprises, as well as legal and other support.

The market for pharmaceutical drugs is growing more rapidly in developing countries than in the West. In particular, China is expected to become the number two market – after the US – within five years. Here, most of the chronic indications affecting the population are, with some key exceptions, the same as those of the developed world. Companies looking to penetrate these markets must establish indigenous business operations, such as production and R&D facilities, and there remains the continuing challenge of protecting intellectual property and maintaining a level playing field with in-country competitors. In China, a large home market that is growing at more than twice the rate of GDP is a good base for global ambitions. But for local Chinese pharma businesses to achieve global reach, they will require a value proposition based on innovative new drugs, quality, branding and competitive scale. The opportunities are also great for Western firms to do business in China, utilising the country as a new market for their products and as a manufacturing source. Moreover, many Chinese companies are looking for Western drugs to license. However, a slowdown in the Chinese economy, retreat of capital markets, and the chilling effect of the anti-corruption campaign have had a major impact on the sales and business planning of Western firms.

A Bright Future

2014 was a superlative year for pharma. New records across the board in approvals, sales, deals, public offerings and scientific breakthroughs have renewed confidence that the best is yet to come. Innovation continues unabated as the industry adapts successfully to the changing business environment and new opportunities it presents.

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Emile Bellott is an industry consultant and member of the EBR Industry Advisory Board, with over 25 years of experience in drug discovery, development and pharmaceutical outsourcing.
Emile Bellott
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