Branded pharma looks to biotech, diversified pipeline
Times are changing, and those changes can be seen in the branded drug industry. According to industry experts, pharmaceutical companies are rethinking their tactics, as they are faced with fewer opportunities for blockbuster drugs and ongoing patent losses, as well as having witnessed the withdrawal from the market of Vioxx in 2004 and the end of clinical trials for Pfizer’s torcetrapib last year.
Blockbuster drugs used to be the way forward. According to a report, “The Demise of the Blockbuster,” in the New England Journal of Medicine, a typical branded drug in the 1970s enjoyed 10.2 years of market exclusivity, but by the late 1990s, that had dwindled to 1.2 years. This massive decrease mostly is due to two factors: 1) As drug companies’ research and development improves, it’s rare that only one company brings out a drug to treat a specific problem; and 2) the proliferation of generics on the market.
In response to the changing market, said study author David Miller, big pharma is taking a different tact: Rather than bringing out more blockbuster drugs, it is developing more specialized and biotech products.
“New products drive the industry, so the companies with the diversified portfolios, and those that are acquiring, are doing well. Those that don’t do well are the companies relying on one drug,” said Jason Napodano, senior biotech analyst with Zacks Equity Research.
According to IMS Health, specialized products contributed 62 percent of the market’s total growth last year, compared with just 35 percent in 2000. Among the high-potential product launches in this category were: Merck’s Gardasil, the first vaccine to prevent cervical cancer; Januvia, the first-in-class oral for type 2 diabetes, also from Merck; and Sutent from Pfizer for renal cancer.
These specialized and biotech drugs serve a much smaller customer base—usually thousands of people as opposed to millions. Because of this, the pharmaceutical companies recoup their monies by charging more for these drugs.
The problem with blockbuster drugs, according to Mark Merritt, president and chief executive officer of the Pharmaceutical Care Management Association, is that a pharmaceutical company may pour its money into one, but never see it approved. “But with specialized drugs, you don’t need to dominate completely the American or global marketplace. So, you have a better success rate.”
The numbers bear Merritt out. IMS estimates that U.S. sales of biologics rose 20 percent to $40.3 billion in the past year, and PCMA shows that annual sales of biologics will reach $90 billion by 2009.
Oncology drugs are largely driving this industry, since biologic products show promise in this arena, as well as such inflammatory diseases as rheumatoid arthritis and psoriasis. According to IMS, sales of oncology drugs hit $34.6 billion in sales in 2006, up 20.5 percent, the biggest growth among the top 10 therapeutic classes.
|2.||Proton pump inhibitors||13.6||12.9|
|7.||Antineo monoclonal antib||5.8||4.0|
|8.||Angiotensin II antagonist||5.7||5.0|
Growth and change in the biotech industry also is stimulating the growth. The industry remains fragmented and dominated by two players: Genentech and Amgen. According to Napodano, there also are a handful of mid-sized biotech companies, and 200 to 300 smaller ones.
“The goal of these [smaller] companies is to develop a product, take it as far as they can [and] then get acquired,” he said. “They probably don’t have the sales force or the manufacturing ability [to do more].”
Because of this, Napodano foresees a lot of merger and acquisition activity in the biotech field in the years to come. This year alone, two large pharmaceutical companies have bought out smaller biotechs. AstraZeneca acquired MedImmune for $15.2 billion this spring, and Eli Lilly paid $2.1 billion for Icos, the largest publicly traded biotechnology company in the Seattle area and the developer of the erectile dysfunction drug Cialis.
The future looks brighter for biotech drugs than pharmaceuticals, said Napodano, because the expirations of their patents have not yet begun to hit the industry, and probably won’t for at least 10 years.
In the meantime, the branded drug industry has other problems to deal with and generic drugs remain a sharp thorn in the side of big pharma.
IMS figures show that in 2006, patent protection was lost on products with sales of more than $18 billion in seven key markets—including the United States, where more than $14 billion of these sales originate.
Because of this, generic drugs saw sales increase 22.4 percent, and generics constituted more than half of the volume of pharmaceutical products sold in seven key world markets, according to IMS. This was especially stark for certain drug classes, including proton pump inhibitors, antihistamines, platelet aggregation inhibitors and antidepressants.
Despite this, the overall picture is healthy. The North American drug market rebounded in sales growth to 8.3 percent—up from 5.4 percent in 2005, fueled by an increase in prescribing volume due to Medicare Part D and the growth of specialty products.
The aging population, fighting to keep itself healthy, also is contributing to this growth.
The increasing number of baby boomers have growing demands—not only looking for drugs to cure, but to prevent them from getting diseases or ailments. They also have the money to afford them.
“People are relying less and less on surgical interventions and more on chemical interventions to keep them out of surgery,” said PCMA’s Merritt. “I think health care is moving toward paying for drugs at the front end, rather than after an emergency.”
And as people look more to medicine to keep them healthy, they are learning more so that they can make better decisions. Consumers are educating themselves on, among other things, the differences—which are largely financial—between generic and branded drugs. Payers are helping patients gain this knowledge, educating them through targeting mailings.
“We are seeing a critical shift in power in health care to emerging stakeholders—most notably, patients who are becoming savvy co-managers of their own health,” said Murray Aitken, senior vice president of corporate strategy for IMS. “Because they are both consumers and ultimate payers, they are gaining the power to compel regulatory approvals, influence market access decisions and sway prescribing behavior.”
Grocer sings new tune in community involvement
Meijer is taking another step in community relations, to the tune of promoting and selling CDs of local musicians.
The Michigan-based 176-unit grocery chain launched the Outside the Mainstream promotion in February with a solo CD from Josh Davis, a singer from Lansing, Mich., whose Fool Rooster CD was recognized by Performing Songwriter magazine for its lyric.
Each month, the chain is featuring a new performer in its circulars, which are sent weekly to 7 million households in Ohio, Michigan, Illinois, Indiana and Kentucky, according to company vice president of public affairs Stacie Behler. Meijer purchases 1,000 of the artist’s CDs and offers them for sale in all the chain’s stores for $7.49.
“The goal of the program is to bring some of the talent that we find in our own backyards to a wider audience than they can normally reach by themselves,” Behler said. “And by supporting this with a low price and a feature in our circular, hopefully it will lead people to gamble on the purchase of music that is worthy of discovery.”
Meijer, according to Behler, is trying to create regional loyalty to its stores by promoting local talent.
CDs chosen for promotion, according to the chain, must have a UPC and be professionally duplicated. Submitted CDs are sorted according to state and chosen on the basis of whatever state will be featured that month and how different the music is from the previous month.
Featured in April is Michigan-based Potato Moon with its CD “The Life of The Lonely Jones.”
CVS wins Caremark battles
WOONSOCKET, R.I. —The battle for Caremark Rx has finally come to an end. And, to the dismay of Express Scripts, CVS has emerged the winner, creating a $75 billion pharmacy benefit management powerhouse that is likely to serve as a benchmark for additional mergers within the industry.
“CVS/Caremark will offer end-to-end services, from plan design to prescription fulfillment, as well as the opportunity to improve clinical outcomes, which will result in better control over health care costs for employers and plan providers,” stated Tom Ryan, president and chief executive officer of CVS/Caremark, late last month when the deal closed. “The company will improve the delivery of pharmacy services and health care decision-making, enabling consumers to benefit from unparalleled access, greater convenience and more choice.”
With the close of the transaction—ultimately valued at $27 billion—CVS/Caremark has moved into a strong, competitive position. The combined company will be No. 1 in pharmacy sales, PBM-managed lives, specialty pharmacy sales and retail-based health clinics. It will be No. 2 in mail services.
That adds up to a lot of extra leverage for the retail health care juggernaut with suppliers, as well as insurers and payers.
In terms of synergies, CVS expects to realize between $800 million to $1 billion in revenue synergies in 2008, and significantly more thereafter. The company expects about $500 million in cost savings, largely related to better purchasing.
“We would like to note that every deal that both CVS and Caremark have done historically has yielded synergies significantly in excess of original guidance,” stated Citigroup analyst Deborah Weinswig in a recent research note. “We believe this deal will be no exception.”
Charles Boorady, also of Citigroup, believes that if the company achieves cost savings from the drug-procurement process, it likely will come from a combination of the following: manufacturers accepting the lower price or offering greater rebates, the wholesalers and distributors accepting lower prices and manufacturers bypassing the wholesalers and selling directly to the combined CVS/Caremark entity.
While many industry observers view the merger as a boon for the companies, it undoubtedly will have major implications on the industry, in general, as vertical integration is a new paradigm that—if successful—could clear the way for more mergers moving forward, with Medco and Express Scripts likely being the next targets.
“The fragmentation in the past may be the reason why vertical integration did not work, but the sheer scale of the CVS/Caremark company may be able to make it work,” Boorady said. “The only test will be whether customers buy into the concept or the concerns over the perceived channel conflict will outweigh it.”
Either way, Boorady sees it as a win-win for rival PBMs. “I see Medco and Express Scripts winning either way. If this integration works, they are likely to be the ones that are acquired next. If it doesn’t work then they could stand to gain customers that prefer a standalone [PBM] instead of a vertically integrated model.”
Another issue such a deal brings to the forefront is network restriction. If customers are willing to restrict the retail pharmacy so that employees can get their prescriptions filled at a single chain, or just a few chains in the market, then it will make the synergy from a vertical integration more obvious, according to Boorady.
However, this has been a concern for several years and has yet to materialize.
“I think most employers have concluded, and will continue to conclude, that the sheer hassle factor that you are putting on your employees by making them go to a CVS instead of a Walgreens, or vice versa, isn’t really worth what little savings you can get relative to other things you can do that present less of a hassle to the employee but can save a lot more money,” Boorady said.
However, prior to the deal, CVS Pharmacare controlled a provider network of more than 56,000 retail pharmacies. Meanwhile, Caremark’s network numbered more than 60,000 retail pharmacies, so it is unlikely that the combined company, post-merger, would suddenly pull back the size of its network—particularly, if the end goal is to remain attractive to insurers and payers and competitive with stand-alone PBMs.
According to William Blair & Co. analyst Mark Miller, the combined company is facing its first big test as it expects an announcement on the large Federal Employee Program contract—currently up for negotiation—as early as May. Three years ago, Caremark won this contract from Medco and it is likely that the two PBMs, among others, will bid for this business aggressively.
“While there are many moving parts to these types of negotiations, this will be the first big test for the new CVS/Caremark, and may provide some incremental perspective on the current state of the competitive environment,” Miller stated in a research note.
In related news, CVS/Caremark has announced the members of the company’s board of directors. As previously disclosed, the 14-member board was evenly split among designees from CVS and Caremark.
Former Caremark chairman and chief executive officer Mac Crawford has been elected chairman of the board of the combined company. Ryan will continue to serve as president and chief executive officer.
The following individuals named to the board from CVS are:
Ryan, president and chief executive officer of CVS/Caremark Corp.
David W. Dorman, senior advisor and partner, Warburg Pincus LLC.
Marian L. Heard, president and chief executive officer, Oxen Hill Partners.
William H. Joyce, chairman and chief executive officer, Nalco Co.
Terrence Murray, former chairman and chief executive officer, FleetBoston Financial Corp.
Sheli Z. Rosenberg, former vice chairman, president and chief executive officer, Equity Group Investments LLC.
Richard J. Swift, former chairman, president and chief executive officer, Foster Wheeler Ltd.
The following individuals named to the board from Caremark are:
Mac Crawford, chairman of CVS/Caremark Corp.
Edwin M. Banks, founder, Washington Corner Capital Management LLC.
C. David Brown II, chairman, Broad and Cassel.
Kristen E. Gibney Williams, former executive of Caremark’s Prescription Benefits Management division.
Roger L. Headrick, managing general partner, HMCH Ventures; president and chief executive officer, ProtaTek International
Jean-Pierre Millon, former president and chief executive officer, PCS Health Systems
C.A. Lance Piccolo, chief executive officer of HealthPic Consultants