In search of the perfect formula

PHARMACEUTICALS:The pharma sector is hugely important to Ireland - many of the top US pharma businesses are based here and it is the top exporter - but does it have a future if no block-buster drug is developed?

IF INNOVATION IS king, then the pharmaceutical sector is one of the kingmakers. It boasts cutting-edge scientific discoveries, global economic clout and a societal role that leaves many other sectors in the shade. Society spends considerable time and energy ensuring that people live better quality lives for longer – even if no one has quite figured out how we are going to pay for it.

Whether it is to find breakthrough treatments for distressing childhood afflictions, addressing some of the most common terminal ailments in adult life or ensuring we retain our mental and physical faculties as we age, there is huge demand to develop new or improved therapies.

In terms of economics and innovation, the pharma sector invests massively in discovering new drugs or adapting existing ones to new conditions in order to meet this demand.

The costs are high, even more so in recent years when the emphasis has moved to biopharma in an attempt to address conditions previously resistant to treatment, especially in the areas of neurology and oncology.

As with all innovation, developing new drugs carries risk. Effective treatments can all too often have adverse side effects. Rigorous testing is required even before human trials can begin.

Eventual human trials are themselves monitored intensely under the scrutiny of regulators such as the Food and Drug Administration in the US and the European Medicines Agency.

Safety is the primary issue, even ahead of efficacy. A drug that only marginally improves outcomes for a particular condition may get a hearing from regulators, especially if it is shown to have fewer or less damaging side effects than therapies already on the market. A drug that fails to prove it is safe is doomed regardless of efficacy.

Of course, all drugs have side effects and some element of risk remains. Then regulators assess the risk-reward balance.

Elan’s Tysabri, for instance, was considered to have such potential for people suffering from multiple sclerosis that it was returned to the market even after it emerged that a small number of people could contract a potentially fatal brain disease. Its use has accelerated study of the brain condition which, as a result, is now fatal less often fatal. It is now also better understood.

For all these reasons, pharma is largely held in high regard. New breakthroughs are hailed both by patients and by investors, who know the rewards for success can be high.

Blockbuster drugs can yield billions of dollars. Pfizer’s cholesterol-lowering drug Lipitor – still the world’s top selling prescription drug despite coming close to the expiry of its patent – had sales of $13.3 billion (€9.5 billion) worldwide last year. Healthcare consultancy IMS says global pharmaceutical sales topped $837 billion in 2009. By next year, it forecasts this will rise to $880 billion.

For all its feelgood image, pharmaceutical groups are businesses. Their products may help to save lives but profit is the ultimate motive.

There’s nothing wrong in that. Without the prospect of reward, investors in these companies – many of them publicly listed – would have no incentive to finance the initial research and development stages. Not all research-based companies succeed and therefore the risk premium required is higher than it might be for more stable businesses.

Timemagazine reported in 2004 that the net return for top pharma companies in the Fortune 500– at 17 per cent – ranked way above that of other sectors, where the average was about 3 per cent.

Companies claim the cost of new drugs to the consumer is necessarily high because research and development is so expensive. However, marketing is also a key component of the cost base. In fact, an analysis of the top pharma firms throws up some surprising outcomes. Filings with the Securities and Exchange Commission in the US show that sales of prescription drugs at Pfizer, the world’s largest pharma group, were $45.4 billion last year. Research and development costs, which are broken out by companies in their annual financial statements, came to $7.85 billion.

Assessing marketing costs is not so easy as companies do not break these out in detail. However, they are obliged to file figures for the cost of selling, general and administrative functions (SGA). Pfizer says in its annual filing that this category (which it calls sales, information and administration – SIA) accounts for “marketing, advertising, shipping, handling, IT and associated employee compensation”. Marketing and advertising in the broad sense are considered by the industry to be the main components of this category. In Pfizer’s case, last year, SIA accounted for costs of $14.88 billion.

To put it in context, this amounts to just shy of 30 per cent of revenue compared to RD costs of below 16 per cent.

Running through 2009 filings for other top firms such as Sanofi-Aventis, Novartis, Glaxosmithkline, Roche, AstraZeneca, Merck, Johnson Johnson and Eli Lilly, the picture is broadly the same. The spend on RD at big pharma tends to be about 50-60 per cent lower than on marketing and associated costs.

To be fair, the picture is not uniform. Smaller, earlier stage pharma businesses tend to have a higher ratio of RD costs to SGA expenses.

Even Elan, which has its own blockbuster drug in Tysabri, reported RD costs of $293.6 million, a figure that exceeded its SGA of $268.2 million, in its pursuit of a therapy for Alzheimer’s disease.

Another factor skewing the figures is the modern design of the top end of the pharma market. The major pharma companies have been struggling to deliver from their research pipeline. The imminent expiry of patents on key drugs that have made them into behemoths is forcing them to find replacement income quickly. For many, the chosen path is by acquisition.

Consolidation has been a watchword in the sector over the past couple of years – and not just involving smaller companies. In 2009, according to IMS, there were 29 mergers or acquisitions in the sector worth a total of $126.5 billion. This compares with 48 deals the previous year with a value of $51.1 billion.

Among the megadeals of recent times are Pfizer’s purchase of Wyeth – a major player in its own right – Schering-Plough’s reverse merger with Merck and Swiss group Roche’s move for Genentech.

Rather than developing their own pipeline, they are acquiring companies that have successfully developed new therapies or show good prospects of doing so. While this will reduce the RD expenditure of big companies, they will still have the burden of marketing and selling the drugs.

Companies are also looking to new markets for existing drugs, which carries its own costs. IMS data indicates that the areas of highest growth last year in the sector were Asia, Africa and Australia which together saw a 15 per cent increase in sales and Latin America, where sales increased by 12.7 per cent.

The $154 billion market in these two regions is still a long way shy of the $264 billion pharma sector sales in Europe to say nothing of the $324 billion market for prescription drugs in North America but growth in these latter regions is a more sedate 7 per cent and 1.9 per cent respectively.

Selling into emerging markets brings its own challenges and big pharma has been criticised for curtailing access to medicines in the developing world. The Access to Medicine Foundation says there has been much progress in improving access to drugs, vaccines and diagnostic tests in some of the world’s poorest countries. There have also been advances in funding mechanisms with pharma showing “increasing attention to both the need and the business opportunities” in these regions.

However, it warns that neglected tropical diseases continue to cause a “significant health burden” and points to “limited” research to develop treatments.

Its 2010 index, ranking the performance of 20 big pharma companies alongside seven of the largest generic firms, hails Glaxosmith-Kline as the most proactive in providing access to medicine in these countries, followed by Merck, Novartis and Gilead Sciences.

European firms are still seen as more responsive to the needs of the developing world but US companies are catching up, with Pfizer and Gilead both improving their performance markedly in recent years, according to the foundation.

For Ireland, pharmaceuticals is our most important sector in terms of exports. Apart from Elan, Irish-based Warner Chilcott and Shire are players on the international stage and companies such as Amarin and Merrion Pharma are active at the development stage.

With new drugs costing as much as $1 billion to develop, according to industry consultants Bain, can we really back ourselves as innovators in the sector, where the number of truly new drugs globally in any given year is less than 30? Or are we more likely to succeed in niche markets, such as drug delivery where we have a solid track record, or reformulating old drugs for new therapies?

The first multinationals into Ireland saw it largely as a source of cheap labour for basic bulk ingredient manufacture, with an attractive corporation tax regime. Much has changed in the intervening years.

Ireland is now the European base for many of the top US pharma businesses and, as our cost competitiveness has been eroded to be offset by our growing experience with the sector, Irish units of multinationals are involved in more valueadded work.

Dave Shanahan, the head of life sciences at IDA Ireland, sees plenty of opportunity for Ireland across the range of pharma – in both traditional small molecule and the more recent large molecule biologics – and sees no reason why Ireland cannot continue to battle for investment on many fronts.

“Ireland is seen as a world leader in several areas of small molecule development,” he says, though he cautions that there is a need for greater co-operation between institutions, academic and otherwise, across the State if we are to fulfil our potential. “If we invest in the right areas, we can suck in a lot more activity than we have had to date,” he says.

He points out that a lot of innovation is iterative. “Most of this will not happen in a big bang fashion; it will be step by step.

“We need to push for new product development mandates, “ he says, arguing that the key is to leverage our expertise and track record to develop new drugs for the clinical trial stage. Being in at the beginning places the State in a better position to fight for the eventual production of drugs that make it successfully through to market.