Pharma must adapt to changing market dynamics in 2008

Increased focus on safety is keeping drug approval rate low
Faced with growing challenges in the major markets, Pharma are adopting a range of strategies designed to reduce costs and maximize efficiencies. With growing competition from generics and thin late-stage pipelines, drug lifecycle management strategies are gaining prominence. In the face of a slow down in the major markets, Pharma is exploring a variety of new opportunities to sustain historic growth rates, says Datamonitor senior pharmaceutical analyst Alistair Sinclair.

“These include M&A and licensing used to gain access to new drug candidates, increased presence in the emerging markets and capitalizing on the growing role of patients as consumers.”

From year to year, fewer and fewer drugs are gaining FDA approval. One factor responsible for the decreasing number of novel drugs approved each year is the increasing pressure that the pharmaceutical industry is facing over drug safety. This has been fuelled by several recent high-profile drug withdrawals and black-box warnings.

Following the controversy with Vioxx in 2004, US legislators were prompted to significantly expand the FDA's authority by passing the FDA Amendments Act of 2007. Although it is not yet certain to what extent the FDA will use its new powers, this crucial legislation changes the balance of power between Pharma and the FDA, giving the agency greater powers to impose additional safety studies both prior to and post-approval, according to Datamonitor senior pharmaceutical analyst Dr. Tijana Ignjatovic.

“Thus, it has the potential to increase development costs, reduce market penetration and impact approval rates. However, the new FDA power to demand post-marketing studies may actually be beneficial for certain drugs that would not be approved otherwise,” she says.

Concomitantly, in recent years the duration of clinical trials has increased so that, despite swifter approval times, the duration between the start of Phase I clinical trials and approval is becoming longer. Consequently, at the same time that emphasis on cost-containment is mounting, Pharma is facing increasingly expensive drug development, now estimated to be in the region of $800million to $1bn per drug.

As such, for each day that a drug's launch is delayed – be that through longer clinical trials or regulatory non-approval leading to additional clinical development – it can cost the manufacturer up to $23m in lost sales in the US alone, and approximately $37,000 per day in additional development costs. It is therefore vital that companies ensure that sufficient safety and efficacy data are attained before regulatory submission so as not to delay or jeopardize its drug launch, which will further impact the declining return on investment (ROI) already facing the industry.

The failure to secure regulatory approval in the US therefore not only prevents a drug launching in the most lucrative global market, but also prejudices launch in markets that reference the FDA for drug approvals, such as Canada and Mexico, Dr. Ignjatovic says. “Gaining a timely and first time approval in the US has therefore never been more important for pharma companies than it is today.”

Cost-saving drives continued M&A growth

The level of M&A in the pharma market continues to rise, with the number of deals made in 2007 increasing over the previous year. With Eisai completing its acquisition of MGI Pharma in January 2008 for $3.9bn, the M&A trend is forecast to continue throughout 2008.

The primary factor driving this increase in consolidation and the continued growth in the number of licensing deals is the fact that the output from the internal R&D process in Big Pharma is decreasing. This is because companies face ever-harsher P&R and regulatory pressures, hampered further by the imminent patent expiry of countless blockbuster and other high-value products. As a result, from 2007 to 2012, the top 50 pharma companies (based on 2007 sales) are facing patent expiries on $115bn worth of drugs.

Consequently, in cost-conscious times with deal values rocketing, licensing and M&A deals will increasingly become a strategy that fewer players will be able to adopt. Companies that traditionally have opted to enter M&A or licensing deals to solve internal pipeline issues will instead have to turn to more radical strategies, such as readdressing internal R&D processes, Mr. Sinclair says. “However, while M&A may only offer short-term solutions, the economies of scale attained through such moves are limited.

“Therefore, those pharma companies forced to take alternative measures – such as reassessing their R&D model – may ultimately reap greater rewards in the long run,” he says.

Pharma streamlines workforces

An ongoing trend in Pharma has been the vast number of job cuts across the industry in an effort to cut costs, in response to disappointing financial results driven by the patent expiries of key products and resulting generic erosion. Price pressure and low reimbursement rates, which are impacting company revenues, are set to continue in 2008.

Historically, large in-house sales force teams were used to create and maintain share of voice in the market, but the industry is now increasingly moving towards outsourcing strategies as part of its growing cost-saving initiatives. This strategy not only saves money but provides a more flexible approach to manufacturing and selling a drug throughout its lifecycle, by allowing companies to increase and decrease the size of its sales force in accordance with demand. This strategy also allows companies to use their existing sales force in a more targeted way, building added-value into their key brand franchises.

Pfizer first announced job cuts in 2005 to be phased in over three years following patent expiries and the onslaught of cheap generics. Then in late 2007, Pfizer announced 2,200 job cuts in its sales and marketing departments. This move signified the opening of the flood gates for other pharma companies to follow suit. Manufacturing job cuts were also announced by Abbott and GlaxoSmithKline, among others, with the trend set to continue throughout 2008 as more companies streamline their workforces in an effort to contain costs for the lean years ahead. Sales and marketing departments will consequently have to adjust and adapt new strategies if they are to maintain performance, Mr. Sinclair says.

“One option that Pharma has begun to explore has been communicating with consumers through new media technology, with e-detailing, social media strategies and the utilization of podcasts set to become more common place in the evolving pharmaceutical market,” he says.