Future of research-based pharma industry

Though large drug companies have designed themselves around the promotion of blockbuster products for widespread ailments, many of those products are losing patent protection and being replaced by cheap generics, says Dr Krishan Maggon

In 2003, for the first time in history, a biological product erythropoietin crossed $10 billion dollar sales in a year. Since the drug is marketed under different brand names by different companies Amgen and Johnson & Johnson ($4 billion each), Roche ($1 billion), Japan ($1 billion), it has not been listed as the best selling drug.

The EPO molecule may be the first one to reach $15 billion annual sales in the next few years if the trend continues. Lipitor may reach the $10 billion annual sales in 2004. The number of blockbuster drugs reaching the 5, 3, 2 and 1 billion dollar sales figures was the highest in the year 2003. However, the surging number of blockbuster drugs barely concealed the slow growth in the total pharmaceutical sales ($450 billion in 2003) and generics were increasing their share of the market.

The research-based pharmaceutical industry had “AnnŠe Horibilis” in 2002 and 2003 resulting from rising R&D costs, declining R&D productivity, patent expirations, political pressures to lower drug costs, onslaught of the generics, drug withdrawals, product injury litigation, activists pressure to shift R&D resources to tropical and neglected diseases, and Medicare and generic reform bills in USA.

The WTO negotiations over TRIPs, court case in South Africa over prices of AIDS drugs and high prices of new drugs, the research-based pharmaceutical industry powerful lobby lost the PR battle. Although medicines account for only 10 per cent of the total health care costs in Europe and Japan and 15 per cent in USA, the big pharma has been vilified as a major source of rising health costs. For the first time since the past two decades the price multiples or PE ratio of innovative pharma was converging with that of generic companies like Forrest and Teva. It is ironic the industry that took pride in development of new drugs to combat human diseases is now compared to big tobacco and big oil.

Market data and R&D productivity

Prescription drugs accounted for $155 billion in the United States in 2002, and for about one-sixth of the increase in health spending. Drug costs have become a potent political issue and account for 23 per cent of what Americans spent on health care out of their own pockets. Out-of-pocket spending on prescription drugs rose to $48.6 billion in 2002.

The PhRMA member companies spent $32 billion on R&D in 2002 and 200 billion during the past decade. During the past decade FDA approved 363 new drugs, biological and vaccines. Declining R&D productivity — only one compound now reaches the market for every 13 discovered and placed in pre-clinical trials, compared to one for every eight between 1995 and 2000. Pfizer spent $7.1 billion in 2003 on R&D on 160 projects in development, 80 are NCEs and 80 line extensions and 400 in discovery research. GSK with a budget of $4 billion in 2003, has 147 projects in clinical development, include 82 new chemical entities (NCEs), 45 product line extensions (PLEs), and 20 vaccines.

The pipeline is maturing as projects move into later stages of development; 98 are now in clinical phases II and III/registration. In general, of the NCEs, only about 30 per cent are truly innovative, the rest are me-too NCEs. About 30-40 per cent of the projects of big pharma are licensed in from other sources. According to Bain’s analysis, for every 13 drugs that start out in animal testing, only one now makes it to market. That figure is down from one in eight during the 1995-2000 period.

The Bain consultants say drug companies are earning only a 5 per cent return on their investment in finding new drugs, below levels typically demanded by equities investors. Licensing products from other companies, which was a profitable strategy until recently, is now bringing only a 6 per cent return on investment. Large drug companies have designed themselves around the promotion of blockbuster products for widespread ailments such as heartburn, high cholesterol and depression. But many of those products are losing patent protection and being replaced by cheap generics.

Drug approvals

In 2003 the FDA, approved 72 new drug applications (NDAs), compared with 78 in 2002 and 66 in 2001 and the agency approved 22 Biological License Applications (BLAs) in 2003, one more than in 2002 and six more than in 2001. FDA also approved 362 generic drugs in 2003, compared with 384 in 2002. In 2003, the F

DA approved 21 New Molecular Entities (NMEs) with active ingredients never before marketed in the United States. This number of NME approvals is up from the calendar year 2002 total of 17.

Priority approvals increased from 2002, there were 14 priority NDAs and nine priority NMEs, compared to 11 and 7 in 2002, respectively. In total, FDA approved 466 new and generic drugs and biological products, many of which represent significant therapeutic advances. As of the end of 2003, FDA had approved fifteen antibody products for use in the US.

In the past five years, at least six or seven products a year, each with peak sales potential of more than $1 billion annually, were terminated in late-stage Phase III development or at the NDA filing stage, resulting in market value loss of tens of

billion dollars of affected companies. All big pharma companies like Merck, Lilly, BMS, GSK and Novartis had their share of phase III failures, regulatory delays, and requirement for additional data or even NDA rejections. During the past five years, 11 drugs with peak sales potential of a combined $11 billion a year were withdrawn from the market for safety reasons, some of which had received fast-track priority approval. The resulting product injury litigation cost for just one of the withdrawn drug may run into $15 billion. According to a Lehman Brothers 2003 report, the US patents on 35 drugs with global sales totalling more than $82 billion will expire in the next five years, resulting in the loss of 25 per cent (best case) to 40 per cent (worst case) of the current US pharmaceutical market to generics. This has sent cheers to the generic drug industry in India and China.

(To be concluded)

The writer is Pharma R&D Advisor, Geneva, Switzerland. Email: maggonk@lycos.com