David Craik 4 Apr 2019 01:20pm

Taking their medicine

Pharmaceutical companies are facing a cocktail of challenges from pricing and competition to stretched budgets

Taking their medicine 630
Caption: Image from Getty Images

But, finds David Craik, they are responding through restructuring, embracing innovative research and employing technology, including 3D printing and artificial intelligence, that promises to cure their ills and ours.

The first weeks of this year saw global pharmaceutical companies release their annual financial reports, and among the blizzard of figures and corporate phrases, there were clear indicators of how pharma improves the lives of millions of people suffering from debilitating conditions.

In Roche’s annual results it pointed to new multiple sclerosis medicine Ocrevus, which has been used to treat 80,000 people and, the company says, is “the most successful new product launch in our history”. Novartis praised the impact of new cancer drug Lutathera, while Pfizer heralded new treatments for lower back pain and sickle cell disease.

It was ever thus, says Tim Opler, partner at life sciences-focused investment bank Torreya. “The pharmaceuticals sector has been enormously successful going back to the 1700s,” he says. “The last 50 years especially have seen a massive acceleration of innovation with human life spans dramatically lengthened.

This, however, creates a fundamental challenge for the industry – the pace of innovation has been so fast it has gone beyond the ability of society to pay for it. Every time we cure a disease, people live longer and are more likely to get additional problems. This creates more demand on the system.” Such challenges were seen in the early results.

Despite strong US sales, Roche saw demand in Europe slip 7% and in Japan by 1%. The European dip followed competition from biosimilars, “copycat” drugs which usually come on to the market at a lower price when the original large pharmaceutical’s patent expires. The Japanese decrease came off the back of a 1.45% government drugs price cut as the rising cost of an ageing population strains its national health budget.

Pfizer’s sales rose 2%, held back by global biosimilar and generic competition. It expects to take a $2.6bn hit as a result of competition for products losing patent protection in 2019. Pfizer also highlighted US price challenges and indeed the sector has faced mounting social and political pressure to curb rises.

The issue was complicated in 2015 when US firm Turing Pharmaceuticals increased the price of its Daraprim drug (the primary treatment option for toxoplasmosis) by over 5,000%. Former US presidential candidate Hillary Clinton called for new consumer protection on excessive drug pricing. The baton was then taken up by President Trump, who, in a series of tweets, lambasted proposed price rises on around 100 Pfizer products last summer.

He said drug firms “should be ashamed” and created the American Patients First scheme, which aims to lower prices through stoking more competition. Pfizer paused its planned price hikes with other big drugmakers following suit. But in January 2019 it announced it would continue to hike prices on more than 40 drugs.

“The US has always been the dominant pharmaceuticals market, holding 40% share, and their drugs prices have often been twice those seen in Europe,” says Jo Pisani, PwC partner and leader of its UK Pharma and Life Sciences Consulting Practice. “President Trump has been very forthright in condemning what he sees as ‘rip-off drug prices’.

This has been brought into sharp focus by price gouging antics. These bad apples have tainted the reputation of the industry and led to companies cutting prices.” This squeeze has also been driven by value-based pricing that aims to reward companies based on real-life health outcomes. “Gone are the days when if you brought an innovative product to market you could expect a higher price,” Pisani states.

“Now with success-based contracts, when you launch a product you have got to show that it will make a difference to individuals and the health economy. If you can’t prove the efficacy of the drug, then you won’t get paid.” Obtaining that proof can be difficult.

“With clinical trials there are a lot of certainties because they are done in controlled environments. In real life a patient may have other medical issues or forget to take their drugs, which could diminish the outcome,” Pisani says. “There are also issues around getting patient data to prove efficacy.” She believes this and other stressors such as rising obesity and higher patient expectations of quality of life will lead to continued pricing pressure. “Healthcare budgets are getting squeezed and drugs are an easy target to reduce costs.”

Haseeb Ahmad, managing director UK, Ireland & Nordica at Novartis, is calling for the NHS to better recognise pharma’s contribution. “We would like to see the NHS and UK government recognise value – the all-round benefits that medicines offer to patients and society. We believe our medicines should be assessed across four pillars of value – clinical, which means survival; patient quality of life; societal, such as returning to work; and system, meaning reduction of hospitalisation,” he says.

Novartis is particularly concerned about the NHS asking patients with wet age-related macular degeneration to accept an unlicensed medicine to treat their condition when there are “two licensed alternatives”. A High Court ruling last year said such a move was lawful. But, Ahmad claims, “it is purely to save money and is not in a patients’ best interests”.

On top of growing generics competition and more people self-medicating, other challenges highlighted by PwC include an increase in the instances of chronic diseases, and healthcare policymakers and payers mandating what doctors can prescribe. Further reputational hits, such as the lawsuits against Purdue Pharmaceuticals for allegedly driving the US opioid epidemic, and Brexit have also caused headaches.

“The UK has been the preferred home for Japanese or US pharma firms to locate their European HQ, but the mechanics of having to move drug product licences out of the UK and into the EU has led to foreign direct investment being diverted into other territories,” says Pisani. “However, the negative impact of Brexit has been countered somewhat by the UK’s Industrial Strategy, which seeks to nurture pharma. The UK government wants to increase the number of clinical trials by 50% by seeking to invest and support the development of digital patient data and biotech innovation. We are particularly seeing lots of money going into oncology and central nervous conditions.”

This is despite increased regulations from the US Food and Drug Administration (FDA) and European Medicines Agency aimed at improving the safety by reducing adverse reactions, for example, and the environmental impact of new drug development. It is clear that such regulations – and the drive to develop niche therapeutic areas in oncology and neurology – are having an impact on R&D productivity.

According to Mike Standing, head of healthcare and life sciences for EMEA at Deloitte, industry R&D returns have dropped from 10.1% in 2010 to 1.9% in 2018. Forecast peak sales per asset have also halved since 2010 to $407m. Standing says traditional ways of working need to change. He recommends pharma companies invest in innovation hubs to gain access to talent and ideas, establish partnership models with incubators, entrepreneurs and tech companies, develop digital and analytical skills and automate more tasks through using robots. Pharma is responding to the challenges through restructuring business models, cost-cutting, acquisition and innovation.

“We’re seeing cost-cutting and streamlining layers of management,” says Helal Miah, investment research analyst at The Share Centre. Novartis is cutting around 2,000 jobs by 2022 including the closure of a manufacturing factory in Grimsby as it switches from high-volume products to focus on “higher value specialised and personalised medicines and increase profit margins”.

Pfizer is splitting into three separate businesses. A science-based innovative medicines arm, to allow for “better focus and customer centricity”; an off-patent branded and generic division for established medicines; and a consumer healthcare business. It described the growth fundamentals of innovative medicines as strong, due to an “ageing population leading to increasing demand”.

The established arm would benefit, it believes, from having “distinct and full-dedicated manufacturing” and growing emerging market demand. With consumer healthcare it is combining its arm with GSK in a $12.7bn deal. GSK will own two-thirds of the business, which it intends to spin-off and list on the London Stock Exchange within three years.

It will be the global leader in over-the-counter products with a market share of 7.3% and boast annual costs savings of £0.5bn by 2022. GSK, which recently offloaded its nutrition business containing Horlicks to Unilever, plans to invest in more R&D for prescription medicines and vaccines. There is a similar tale at Bayer. In 2019 it intends to sell its foot care business Dr Scholl’s, cut 12,000 jobs and consolidate production in the US. It hopes to invest more in pharma, accelerate access to future technologies and make annual savings of $3bn from 2022.

Pharmaceutical companies are also involved in M&A strategies. Japanese group Takeda’s £46bn takeover of Shire is to grab hold of its valuable rare disease portfolio. Novartis has teamed up with Oxford University’s Big Data Institute to use artificial intelligence (AI) and Big Data to improve understanding of patients’ needs, and GSK has bought cancer specialist Tesaro and partnered with genetic profiling firm 23andme. Miah has mixed feelings about the moves. He says revenues, which have been squeezed by generics, could be revitalised, but urges pharma firms to have a sensible acquisition strategy.

“About five years ago, big pharma realised that generics were a major threat and began to invest in new drugs, and we are beginning to see the fruits of that coming through,” he says. “Companies are acquiring to expand their portfolios but there are concerns that there is desperation in the air, and they are overpaying.”

Ana Nicholls, industry operations director at The Economist Intelligence Unit, is more confident that these moves will boost pharma’s R&D returns. “More FDA approvals are from single focus, smaller pharma rather than big firms,” she says. “In the US it is leading to big pharma snapping up smaller, innovative firms at an early stage. They do the selling and marketing rather than the innovating. In Europe and Japan, they tend to wait until a smaller firm has moved through the development phases. We will see more personalisation and use of AI and machine learning to help in areas such as screening patient and drug research and helping development become quicker and cheaper.”

Ahmad says Novartis will have launched “potentially 10 blockbusters by 2020” including Zolgensma, a gene therapy for spinal muscular atrophy. Pisani believes more developments will emerge industry wide: “Finally, pharma is embracing digital. They are interested in getting data acquisition from patients through devices such as apps or insulin pumps. This will help further innovation and prove the value and efficacy of products.”

One such innovative pharma firm is Fab Rx, which is focused on 3D printing technologies to manufacture personalised medicines. “We aim to make medicines with the right dose for each patient, meeting their individual requirement,” says Dr Alvaro Goyanes, development director.

“Big pharma companies are sometimes reluctant to make big changes, and 3D printing could be a paradigm change in how medicines are manufactured. We have research projects with some of the biggest pharmaceutical companies, specially evaluating their proprietary drugs to prepare new 3D printing personalised medicines.”

Opler believes it is another indicator of the good pharma can do. “We can segment patients using biomarkers and give more targeted medicines. It can extend a cancer patient’s life expectation from six months to 10 years. Pharma’s supply chain will need to evolve and respond to the ‘Uberisation’ of healthcare – including through Amazon – and get people drugs in real time,” he says. “We forecast this innovation will help triple the sector’s size by 2060. We will be able to do better in getting the right drugs to the right patients at the right time.