Managed Care Has More Faith in the Big Pharma Model Than Big Pharma Does

That, at least, is the lesson we took from a preview of Quintiles’ new survey of biopharma executives, managed care executives and consumers released June 15. Dubbed The New Health Report, the survey includes some interesting data on different perspectives about Big Pharma business development activities.

Including this nugget: To the question, “What is the impact of large biopharma mergers on innovation?” 53% of biopharma execs said they reduce opportunities for innovation, versus only 15% who see mega-merger as improving innovation; on the other hand, 39% of managed care executives see mega-mergers as improving opportunities for innovation, versus 37% who see them reduced.

In other words, more managed care executives seem to be believe that consolidation in the Big Pharma sector will improve R&D productivity than do biopharma execs.

There’s more.

Quintiles also surveyed attitudes about other business development and structural trends in pharma, asking whether each group expects to see more partnerships, more mergers, more focus on emerging markets, and more outsourcing.

In each case, biopharma executives see doing more—in essence, painting a picture of an industry that relies on external R&D and external (ie, non-US/EU) markets. That’s no surprise, especially to readers around here.

Managed care execs, on the other had, were less likely to predict “more” of those activities. (See chart).

Put another way, they appear to have greater faith that pharma companies can deliver sufficient returns on their own and in established markets than do industry executives themselves. (Or, perhaps, they have greater skepticism about biopharma companies’ ability to follow-through on their intentions to look outside.)

Those discrepancies are interesting, but we sure don’t know what to make of them. Are biopharma companies doing a better job of putting on a brave face about R&D productivity when they talk to their customers than they are with their own employees? Or do “outsiders” with a big stake in the industry have a better read on how business development activities really play out?

What do you think? We invite your comments.

PS. There is much more in the Quintiles report on attitudes about the industry; the full report is available here.

Merck/AZ Cancer Deal: Will Intra-Big Pharma Development Deals Move Beyond the Serendipitous?

Is that a mek inhibitor, sir?

Merck and AstraZeneca are expected to announce today that they're teaming up to test a combination of two early-stage oncology candidates. The companies are billing the deal as a first-of-its-kind collaboration--and fair enough: we can't think of another time two large companies have done this kind of deal with two molecules so far from the market.

The Big Pharmas will test Merck's MK-2206 and AZ's AZD6244 (a.k.a. ARRY-886, the compound was acquired from Array Biopharma in 2003) in a Phase I safety and tolerability trial. Costs will be split evenly, the program will be steered by a joint committee, and Merck is the sponsor of the trial.

The reason so few Big Pharma-Big Pharma development deals get done is that they're very tricky; control, valuation, overlap with other, non-partnered projects--these and other things present high hurdles for two large companies to come together in even basic ways. Of course there are plenty of reasons to take a stab at such deals--several of which are outlined in this February IN VIVO piece from Bain & Co. But if these alliances aren't discouraged institutionally, they're certainly not highly sought after either. In fact this deal came about not through any lets-be-friends business development outreach program at Merck or AZ, but by chance encounter.

"This was driven by two scientists meeting at an airport security checkpoint," Merck chief strategy officer and SVP worldwide licensing and external research Merv Turner told The IN VIVO Blog.

One scientist from Merck, one from AZ, they got chatting, and presumably between removing their laptops from their cases and putting their shoes back on, the special and awkward intimacy that comes from publicly surrendering all liquids and being patted down by a stranger wearing latex gloves worked its magic. WSJ's Ron Winslow has more color on the actual conversation, which apparently included that old chestnut "Are you the mek guy?"

"Of course through competitive intelligence they had some information about what each company was up to ... and they said to one another, there’s a compelling rationale for getting these molecules together," lets get the business development groups on the case, says Turner.

That airport rendezvous was in Dublin in November 2007. That it took more than 18 months to ink a deal to conduct a combination Phase I program says as much about the complexities of oncology drug development as it does the difficulties of intra-Big Pharma dealmaking.

Merck's MK-2206 is, according to Merck and AZ, the most advanced AKT inhibitor in development. AKT acts just downstream of PI3k in that important cancer cell survival pathway (the one generating all those deals lately); Phase I data on the drug were presented at this weekend's ASCO meeting. AZ's '6244 hits mitogen-activated protein kinase 1 (mek), an actor in an important parallel signaling pathway. Like the Merck compound, '6244 is further along than its competitors; the candidate has completed several Phase II monotherapy studies and its Phase II program continues apace.

A greater understanding of cancer biology, says Turner, should drive more deals like this one, where "the potential to short circuit what could otherwise be a long and combinatorial approach to finding the right pairs" of oncology therapies "becomes quite compelling."

There are over 800 molecules in development for various cancers. "We're learning more and more about the nature of tumorogenicity and the pathways involved and therefore how to select targets and populations expressing those targets ... and as we go forward into the new mechanism-driven approaches to tumor biology the rationale for combining agents which target complementary pathways becomes more clear," explains Turner.

Of course Merck is developing its own mek inhibitor and AZ its own AKT inhibitor, there are multiple targets in each pathway, and such compounds could be useful in a variety of cancers where the companies have individual ongoing programs, all which could complicate a more extensive deal.

"When we set out on this, to try to think through all the possibilities, we soon realized that the number of branches that arise if you try to construct a decision tree of all the things that might happen in development, it just becomes overwhelming," says Turner. So the companies are starting slowly, taking a step-wise approach to collaboration that need not go beyond this Phase I program.

We decided, "let's start with the easy part, work out how we'll do these experiments together in patients in Phase I, and if that succeeds, we'll go on to the next part," he says.

If the eventual goal is some sort of fixed-dose combination the companies will eventually have to jump in with two feet, perhaps partnering on multiple compounds or even entire pathways. But that need not happen at all. "The first goal could be to have each party arrive at the marketplace [independently], with a label statement that supports use of the other agent in combination," says Turner.

A small step, but a step forward, and the kind of thing that if repeated often enough could have some meaningful impact on drug development costs and speed to market, eventually advancing the standard of care in difficult diseases.

We presume this means taking another step, beyond chance encounters in airports or the DMV or even Starbucks. "If this works as advertised," sums up Turner, "we can think of it as a template for future similar deals."

Sticker Shock May Open Innovation in Pharma

Proposals advocating “open” or “collaborative” innovation in pharma R&D are suddenly cropping up throughout the pharma industry in a variety of forums and iterations. J&J’s head of global R&D Paul Stoffels talks about it, as does GlaxoSmithKline’s Andrew Witty. Not that collaboration itself is news – business development is a mainstay of pharma strategy.

These new ideas, however, refer to collaborations in areas where pharma previously feared to tread--at the earliest stages of research, across several companies--and involve sharing of intellectual property. In the past, such ideas were unthinkable, but pharma companies are well aware their R&D models need an overhaul, if for no other reason than sticker shock: Innovator companies spend $90 billion a year on global R&D, but stand to lose $32 billion in cash flow over the next five years as key products go generic. No one expects that they’ll be able to compensate for that loss – which means less money for R&D.

Enter the management consulting firm Bain & Co., which also strongly advocates moving the industry toward more collaborative research in this article just published in the most recent issue of IN VIVO. Recently the head of Bain’s North American healthcare practice, Chuck Farkas, spoke to IN VIVO Blog about his group’s thoughts.

In one of Bain’s models, groups of companies would “pool” research and development assets within a disease area or class of compounds, sharing in some manner in the commercial success of any compounds that emerge from the collaboration. Another very different model calls for sharing IP, resources, and talent to identify the best mechanism of action to tackle a particular disease, after which each company would compete separately in the marketplace.

That latter kind of open innovation wouldn’t necessarily limit the number of companies pursuing particular molecules and therefore wouldn’t create systemic efficiency, but it could eliminate duplicate investment in early-stage work and improve productivity by enabling scientists who would normally compete to work together, Farkas explains.

Especially in the latter model, commercial execution would be paramount. Competitors would win on the merits of their science—but the balance of power would likely shift to those with the most cunning in the market. That’s what happened in the consumer goods and certain sub-sets of the IT industries, where R&D pooling became a norm.

Today’s pharmaceutical R&D model, which industry is gradually restructuring, was formed around a bubble that has burst, Farkas observes. Companies are "asking how to share more of the R&D" he says. "There is massive pressure to be far more rational in R&D.”

Bain's ideas are part of a trend, of course, at least rhetorically. In a February 13 speech at Harvard Medical School, GSK’s Witty advocated patent pooling—that is when patent owners agree to license their patents to others—and said GSK is doing just that with assets aimed at treating certain neglected tropical diseases.

The head of global R&D at J&J, Paul Stoffels, a Belgian physician, has also been writing about and speaking publicly on what he calls “open innovation,” in which pharma companies network “across internal organizational disciplines and geographies” and externally as well “to share in both the benefits and costs of innovation.”

The extent of their commitments isn’t clear, however. Witty’s remarks received considerable publicity—but GSK’s program is directed at markets that don’t generate much profit, for big pharma anyway. And J&J’s minimal efforts involve small steps in niche markets.

But Farkas and others are adamant: the pressure of driving earnings as revenues fall “will force companies to look at dramatically different R&D models." And as they do, commercial competence--itself evolving in response to external pressure--will take on a whole new meaning.--Wendy Diller

image from flickr user benlyon used under a creative commons license.

Big Pharma R&D Becomes Business Development …or at Least BD Now Runs Research

Lot of changes in business development recently.

In a management tiff, long-time Big Pharma dealmaker Tamar Howson rather unceremoniously left Bristol-Myers Squibb, where she’d been running worldwide business development, ending up at Bristol partner Lexicon Pharmaceuticals. Bayer-Schering, aiming again for top tier status, replaced veteran biz dev boss Chris Seaton with Michael Yeomans, ex-Aventis, via Biovail. A few weeks ago, Victor Hartmann, who in early 2005 had bailed on the top BD job at Novartis to take a flyer running BD at Vertex, left the biotech as unceremoniously as Howson left BMS; the IN VIVO Blog has got only hearsay reports on why, so we’ll leave well enough alone.

Look Out Below!

As far as our limited insight can tell us, none of these changes indicate much beyond the fact that grease coats the rungs of corporate ladders. But now news from Johnson & Johnson does reflect something we’ve long argued but which companies have been very slow to internalize structurally: Big Pharma R&D has become business development.

That’s why we’re so interested in the fact that J&J’s drug business has made its chief licensing honcho Tom Heyman head of discovery for the biggest R&D operation in its newly reorganized three-headed drug business. Heyman will be running discovery and early development for J&J's CNS/Internal Medicine Franchise, which incorporates its La Jolla, Pennsylvania/New Jersey and Belgian research sites.

Now, except for one fact, such a move wouldn’t be unprecedented. GlaxoSmithKline certainly gave its R&D organization a business development message when in 2006 it appointed its BD head, Moncef Slaoui, to run the R&D organization. But Slaoui at least had a research background; he's got a PhD. Heyman isn't a scientist at all: he’s a former patent attorney for Janssen.

Apparently this is just fine with Heyman’s new boss, Paul Stoffels, who most definitely is a scientist and one who understands the value of a business development--and an outsider's--perspective. Stoffels is the former Janssen researcher who turned some stagnating work at his former company, plus some new innovation, into a biotech called Virco. Virco in 2001 merged with fellow Belgian biotech Tibotec, and J&J purchased the combined company a year later, once Stoffels & Co. had proven its value, for some $320 million. Stoffels – following a J&J tradition – joined J&J, which hopes he can do what his predecessors clearly couldn’t.

And apparently one thing he wants to do is to make sure J&J’s discovery has a definite external spin. Heyman's certainly got the background to apply the spin; whether the organization accepts it -- from a non-scientist -- is another question.

R&D: Worth It Only When You Don’t Pay for It

The late Michael Sorrel, one of biotech’s most perspicacious analysts, had a few basic rules for investing, one of which was the call option. Did the biotech have not merely a lead program, which could anchor the company’s valuation, but something else the stock buyer could get for free.

Same holds true with pharma. Analysts are now so skeptical of early-stage Big Pharma R&D that they want it for free. Or at least that’s the implication of some intriguing calculations from Craig Maxwell, European equity research analyst at JP Morgan.

Maxwell summed the estimated value of the six major European pharmas based solely on their current products plus their Phase III pipelines – the “embedded value” -- and then compared it to their current share prices (see chart). The closer these values came to the share value, the less the market—theorizes Maxwell—is valuing research. And that means the less the investor is paying for R&D.

Conversely, the bigger the gap between product value and share value, the greater the value the market is putting on research. No free R&D option—and a poor deal for investors.

Best value on the European market: Novo Nordisk (products equal 104% of share price). Worst deal: GSK (products equal just 74%).

Now, you can disagree with Maxwell’s estimates of product value. Maybe he’s discounting the value of GSK’s products and inflating Novo’s. But the fact that he won’t pay for R&D—that he wants it for free, and apparently can get it—seems about as damning an indictment of the value of R&D as we’ve heard in a long time.

Can P&G Stomach the Risk Even When It's Reduced?

P&G Pharmaceuticals has been the Henny Youngman Rodney Dangerfield! of the drug industry: it couldn't get no respect. And so last year it remade itself, becoming what it calls a “search and development organization,” apparently on the model of Shire and Endo.

When it announced it was abandoning discovery, in February 2006, P&G was both admitting it couldn’t compete in research—and that it couldn’t stomach the risk. It laid off, or transferred, most of its researchers; it has spun off at least three research programs (more on that in another post); and now it’s got 45 people scouring the earth for licensable products in its chosen therapeutic areas: gastro-intestinal, musculo-skeletal and women’s health. Two key criteria: P&G only want drugs for patients that have “high involvement in their disease”; and they want products for which the development risk is “reduced.”

They’ve got some ambitious goals. To reach their growth targets, they want to launch one new product every 4-5 years – and that drug needs to become – echoing Jack Welch’s famous maxim for GE—number one or two in its category. To get to their launch target, P&G figures it will need to do 2-3 deals per year.

The question, however, is whether the kind of products that get to be #1 in their categories are also the kind of products that P&G management will be willing to pay for. It’s a challenge, admits Jeff Davis, who runs new business development. P&G has a shareholder base which demands 4-6% growth a year—that’s the kind of growth that justifies not reduced-risk research, but no-risk research, the sort that figures out how to get more or less pulp into orange juice or no-drip caps onto detergent bottles.

Moreover, while Big Pharma isn’t generally ponying up for reduced-risk development projects (in general, they still want NMEs), spec pharma is, and paying Big Pharma-sized upfronts. But P&G figures it can win these deals by emphasizing its consumer-focused marketing approach (it had an entire team of R&D, finance and marketing execs outfitted with an electronic system that, for a week, at all times of day, signaled them to react to the unpleasant gastrointestinal events of ulcerative colitis patients). And if—as this blogger believes--spec pharmas are going to be P&G’s biggest dealmaking competition, then P&G really will have an interesting advantage.

The pitch worked for Aryx Therapeutics, one of two companies with whom P&G has signed deals since its reorganization (the other is Nastech, for nasal-delivered parathyroid hormone). The Aryx drug, for GERD and gastroparesis, hit all the P&G criteria: a GI product (for GERD and gastroparesis) and risk-reduced (works like Propulsid but, apparently, avoids the drug-drug interactions which killed it). “We had three virtually identical term sheets,” says Aryx VP and COO John Varian but chose P&G because of their “focus on the consumer.”

Still, P&G is hardly burning up the dealmaking track. They’ve done two deals since their restructuring—the last in July 2006. Davis is confident that in ’07 his group will be able to get to terms sheets on 2-3 programs. There are plenty of biotechs who'll appreciate the P&G approach. But we wonder whether the Consumer King will tolerate the risk of signing them.