Pharma Industry

A “stealth pharma,” according to the folks at Pharmaceutical Executive, is any drug company that’s not a Big Pharma. In other words, it’s grab-bag of outfits that includes everything from specialty pharmas hawking retread drugs to biotechs to generics makers.

Which, of course, makes them difficult to characterize. So it’s fascinating to see Bill Trombetta, a professor of pharmaceutical marketing at St. Joseph’s University who I believe is also on PharmExec’s advisory board, give it a shot. For the second year running, Trombetta offers a quantitative look at how 12 stealth pharmas stack up according to a variety of performance metrics, some of which yield some interesting results.

Since Trombetta’s not trying to be comprehensive, he’s free to offer a sort of impressionistic snapshot of this part of the industry, starting with the 12 companies he chose to examine — a list that runs the gamut from comparative giants like Gilead Sciences and Novo Nordisk to mid-sized pharmas like Allergan and generics makers such as Mylan and Teva.

Anyone interested in this sort of thing should probably read the whole article, but here are some of Trombetta’s  highlights:

• When measured by “enterprise value to sales” — effectively a proxy for expected future value, normalized by revenues — the biotechs Celgene and Gilead vastly outpace not only their “stealth pharma” competitors, but also biotech giants Genentech and Biogen Idec and the rest of Big Pharma.
• Celgene and Gilead also posted stellar revenue growth, although generics-makers Barr and Teva did also.
• In terms of profits-to-assets — or, in more common terms, return on assets — Gilead topped the heap, substantially ahead of No. 2 Novo Nordisk.

All told, Trombetta concludes, AIDS-drug maker Gilead is “the best-kept secret in the industry.” Which makes it all the more curious that PharmExec managed to snub Gilead’s under-45 executives in its recent future-leaders-of-pharma feature.

Given the challenges facing Big Pharma — expiring patents, waning drug pipelines, the imploding blockbuster model, and increasing political pressure on its marketing practices — it’s hard not to wonder sometimes just who in their right minds would want to lead its giant but fragile companies over the next decade or two.

Pharmaceutical Executive has an answer in its recent feature “45 Under 45: The Change Generation,” which purports to identify pharma/biotech executives “most likely to be lightning-struck” as “emerging pharma leaders.” The leading example — although not one of the 45 himself, oddly enough — is 44-year-old Andrew Witty, the recently minted CEO of GlaxoSmithKline (who PharmExec still can’t help but gush over as “articulate, inspiring and witty,” although it attributes those observations to unnamed “people at Glaxo”).

Of course, it’s too early to know whether Witty or any of these 45 other men and women will be “lightning-struck” — much less whether that might turn well or not. (Schering-Plough CEO Fred Hassan has indeed looked a little electrically charged recently, though not in a good way.) But it’s an interesting list nonetheless, not least because only 12 of the 45 hail from biotech — and that’s by a generous count. Given the conventional wisdom that the future of the drug industry lies with innovative, biology-focused companies, that seems an odd choice at best.

Pharmalot’s Ed Silverman has already noted that neither Lilly nor Schering are represented on the list, but they’re not the only major companies who lack up-and-comers by PharmExec’s reckoning: Execs at Bayer, Amgen and Gilead Sciences all failed to make the cut as well. (Gilead is another unusual omission, since it’s on the verge of displacing Amgen as the world’s second-largest biotech by market cap — surely someone’s got game down in Foster City.) By contrast, J&J, Merck, Glaxo, Genentech, Novartis, Shire — not to mention much smaller outfits such as Ovation and Cubist – must be brimming with talent, given their multiple appearances on the list. (Merck alone takes five slots, raising the question of exactly what all those sharp mid-level executives have been up to recently.)

For more insight, check out PharmExec’s crack 24-member judging panel. More than half hang their hats at consulting or PR firms, who of course have no reason whatsoever to curry favor with potential clients. Of the nine members who actually work in the industry, three just happen to hail from… Glaxo, Shire and Ovation.

Image by Flickr user Phil Scoville, CC 2.0

So Pfizer apparently won’t be playing the spoiler in the Daiichi-Ranbaxy merger after all. Instead, CEO Jeff Kindler cut a deal with the Indian generics maker that will delay the introduction of generic Lipitor by about 20 months.

Ranbaxy is now spared the cost and uncertainty involved in continuing to batter down Pfizer’s patent defenses, while Pfizer is guaranteed an additional $10 billion to $15 billion in brand-name Lipitor revenue from March 2010 through Nov. 2011. Pfizer even has the gall to term the agreement “pro-patient, pro-competition and pro-intellectual property,” which might be true in some alternate universe where Lipitor costs don’t count against individuals’ Medicare coverage limits and insurance deductibles and where essentially agreeing not to compete counts as competition.

The meat of the agreement is here:

The Lipitor patents involved in this agreement are the basic compound patent, which expires in the United States in 2010; the enantiomer patent, which expires in the United States in 2011; as well as various process and crystalline form patents, which expire in 2016 and 2017; and the combination patent for Caduet, which expires in 2018.

Without getting too deep into the details here, the compound patent — which covers what is technically known as the “composition of matter” for Lipitor — is the real prize here, and it expires in March 2010, when Ranbaxy initially planned to launch its generic.. The process and enantiomer patents are essentially smokescreens, since generic companies have lots of ways of getting around them, although doing so requires hauling wheelbarrows of cash to the lawyers. (Oddly enough, according to Ranbaxy, the deal doesn’t settle the Lipitor cases in five nations — Finland, Spain, Portugal, Denmark and Romania. It’s unclear why.)

The agreement is definitely good for Pfizer, which among other things may now be able to quiet speculation that it’s going to have to cut its dividend, at least for a while. And it’s good for Daiichi, which now won’t have to bankroll the patent fight for Ranbaxy. But for everyone else, it’s much more of a mixed bag.

(Hat tip: Pharmalot )

Further reading:

• Ranbaxy statement
• WSJ Health Blog

The saga of Avastin and Lucentis — two Genentech drugs used to treat a blinding condition called age-related macular degeneration, even though one is about 50 times cheaper than the other — is one of those stories that just gets better the longer it goes on.

A quick recap: Avastin, a cancer drug, is biochemically very similar to Lucentis, which Genentech specifically developed to treat AMD. Several years ago, before Lucentis was approved, some enterprising retinal specialists realized that Avastin might work against AMD as well — which it seems to, although it hasn’t yet completed a formal trial. The catch: Because cancer patients take large doses of Avastin, the amount needed for injections into the eyes of AMD patients is tiny, and thus dirt cheap.

Avastin apparently now holds roughly half the market for AMD treatment, even though it isn’t approved for such use. Cue corporate panic at Genentech, which last year announced plans to end shipments of Avastin to “compounding pharmacies” that divided large vials of Avastin into filled syringes that could be used in eye treatment. Although it later backed off somewhat, Genentech continued to insist that it was acting in the best interest of patients, even noting that it had destroyed four lots of Avastin because FDA inspectors didn’t think it met quality standards for use in the eye.

Today, though, leaks from Sen. Herb Kohl’s office suggest that Genentech was lying through its teeth when it offered that explanation. From Pharmalot (emphasis added):

As a result, Herb Kohl, the Wisconsin Democrat who chairs the Special Senate Committee on the Aging, began investigating the cost to Medicare if Avastin usage was restricted. In an FDA letter sent to his staff, the agency writes inspectors “identified deficient practices and the lack of of effective processes to know what was in those four lots. Consequently, the agency recommended that those lots should be considered unfit for use for any indication.”

The letter was referred to in a memo written by Kohl’s staff about the Avastin controversy. The memo, which we have reviewed, also notes that a separate issue concerning the FDA inspection involved “levels of glass particulates in the Avastin lots in question (which) were a central issue in the ultimate decision to destroy those particular lots or vats of the product.”

Another internal agency e-mail from a high-level FDA eye expert stated explicitly that “Genentech has found a way to blame FDA for their decision to limit the distribution of Avastin. The manufacturing problem at their facility that resulted in glass in their product would be an issue for either the on label oncology indications or the off label ophthalmology indications,” the senior FDA official wrote to his colleagues, according to the memo.

Genentech, of course, denies the FDA’s version of events and says it believes the lots in question would have been fine for use in cancer treatment. Meanwhile, the company has declined to participate in a major head-to-head trial of Avastin and Lucentis funded by the National Eye Institute, even though the company commonly donates drugs for studies it wants to see carried out.

Looked at one way,  it’s a no-brainer that a company would want to continue selling its high-priced product as long as it can, and in that sense Genentech’s actions are perfectly understandable.  But the company wants us to think it aspires to something more — its Web site, for instance, still commits it to “the best interests of patients [and] the medical profession,” in addition to those of its employees and shareholders. How, exactly, throwing up roadblocks to a potentially affordable treatment for a horrible blinding disease of the elderly does either of those things is beyond me.

Further reading: The WSJ Health Blog also has a lengthy post on the subject.

Much as I suspected when I first wrote about Pfizer’s attempts to minimize potentially serious neurological side effects of its smoking-cessation drug Chantix, the drugmaker’s stonewalling tactics have simply made a bad situation worse. To wit:

• John Spangler, director of Tobacco Intervention Programs at Wake Forest University, told ABC News that Pfizer and the FDA ignored concerns about possible Chantix side effects that he raised more than a year ago. Central to Spangler’s case is a 251 patient study that declared Chantix is safe to take for up to a year, which the doctor says was too small (”underpowered,” in industry lingo) to support that assertion. Hat tip: Pharmalot.
• Also via Pharmalot, Pfizer sales reps have apparently been playing down Chantix side effects since February — right about the time the FDA issued a formal warning that the drug might cause “serious neuropsychiatric symptoms.” See the chart at right (click for a larger version), which Pharmalot’s Ed Silverman dug out of ImpactRx, a market-research firm that tracks the drug industry.
• While this incident doesn’t appear to involve Pfizer directly, it still relates to the delay in publicizing warnings about Chantix. A Washington Times/ABC News investigation reports that soldiers with post-traumatic stress disorder taking Chantix as part of a trial at the Department of Veterans Affairs weren’t alerted about possible mental-health side effects for three months — and then only after an Army sharpshooter in the trial suffered a psychotic episode that ended in a confrontation with local police. Hat tip: Pharmagossip.

It’s all enough to make you wonder what the drug industry would look like if its leading companies took side-effect reports more seriously at an earlier stage, even at the risk of a temporary setback in sales. Not only would it be good corporate citizenship, it might go a long way toward restoring the industry’s reputation and even enhancing the credibility of its marketing.

Don’t hold your breath.

Further reading: Pfizer Spins, And Spins Some More on Chantix

Chances are good that if you’re a drug-industry scientist, you already know Derek Lowe’s blog In the Pipeline, which often as not focuses on the complexities of chemical synthesis and research management. Even though he works at a lab bench, Lowe also has an excellent sense of what makes  pharmaceutical behemoths tick from a business perspective, and offers up an insider perspective that’s still exceptionally rare in this industry.

So I’d like to highlight Lowe’s recent series of posts on GlaxoSmithKline’s convulsive restructuring, in which the drug giant laid off as much as 40 percent of its research staff in some locations as a result of the fallout over the company’s troubled diabetes drug Avandia. Last week, Lowe offered the following observations as the axe fell.

On how research teams — and companies as a whole — see themselves versus competitors:

[O]n a company-wide level, it’s hard not to think of everyone else as being at least a little more competent than your own shop is. That’s because you see the inevitable bozo mistakes of your own workplace up close, whereas you don’t get such good seats for the ones happening elsewhere. And the side that all drug companies show to their competition is a bristling pile of patents and confident press releases about their mighty drug pipelines. You know, looking at your own company’s public face, how much of it is real and how much is bravado or wishful thinking. But it’s hard to keep in mind that the same goes for everyone else, too.

On the implications of Glaxo’s declaration that it will turn elsewhere for new drug ideas:

Doesn’t a statement that you’re going to emphasize external research rather than internal stand as an indictment of upper management? After all, who set the priorities and funded the programs? They surely won’t let individual project leaders or area heads explain lack of progress as “just one of those things, you know how it goes”, so how to explain what is apparently a catastrophic lack of progress across the board? And what does this say about the whole “Centers of Excellence” framework for drug discovery, erected some years ago at great cost of time and money?

And on how Glaxo may well have a point about research productivity:

What I’m about to say feels strange to me, because I’m a scientist through-and-through, and I’ve done my share of complaining about ridiculous business attitudes. For that matter, I’ve found myself laid off though what I thought was a mistaken site closure. But all that said, there’s a case to be made that GSK partly got themselves into this fix by letting the scientists free to do science. That’s how I see, for example, the huge effort the company had for years in nuclear receptors. A massive amount of fundamental work was done, but (because it’s such a horrendously difficult area) little or nothing ever came out the far end to make anyone any money. I’m willing to be corrected on those points, but that’s how I see it now.

And it’s not like the company’s productivity has been one of the wonders of the world overall. One correspondent, an ex-GSK researcher, pointed out to me in an e-mail that one of the sites hit hard this week had taken one drug to market in twenty-five years. Some of that is surely bad luck, but that explanation can only take you so far.

Last last week, reports out of India suggested that Pfizer might make a hostile bid for generic-drug maker Ranbaxy Laboratories, which last week agreed to sell itself to Japan’s Daiichi Sankyo for roughly $4 billion.

Pfizer may or may not actually try to bust up the Daiichi-Ranbaxy merger — it’s so far declined to comment. But if Pfizer does go down this path, it’ll be a fairly clear sign of desperation.

There are only two reasons for Pfizer to make a play for Ranbaxy, one sort-of-convincing and the other not at all. The first would be to bolster its own generics business, which is a new frontier of sorts for major drugmakers — in part because these companies can use their own generic products to delay the entry of other competitors to name-brand drugs that are coming off patent. The delay is only about six months, but that can amount to a big pile of green where blockbuster drugs are concerned.

Given that Pfizer would need to pay a significant premium over Daiichi’s bid to actually win over Ranbaxy — which could easily amount to another billion dollars or so — it’s not at all clear that it makes that much sense, given that Pfizer could probably buy another generic drugmaker, or even bolster its existing in-house generic unit, far more cheaply.

Which leads us to reason number two — the fact that Ranbaxy is challenging the patents of Pfizer’s blockbuster cholesterol drug Lipitor and plans to launch a generic U.S. version in early 2010. Ranbaxy, in fact, won  six-month market exclusivity for its generic version of Lipitor, so if Pfizer were to acquire the company, it could conceivably hold onto most of its Lipitor sales for another 180 days.

The problem here is twofold. First, with Lipitor sales running at about $10 billion a year, Pfizer would almost certainly have to spend more to acquire Ranbaxy than it could save. (After the first six months, other generics enter the market, and the high-margin days for a drug like Lipitor are over.) Second, it could alienate Ranbaxy’s management in the process, which would devalue the company’s usefulness either as a generics maker or as a gateway to the Indian market.

True, Pfizer has been down this path before, as in 1999 when it launched a hostile bid for Warner-Lambert to keep it out of the hands of what is now Wyeth. Warner-Lambert held Lipitor at the time, and while Pfizer had to pay an additional $20 billion for its prize, the drug turned out to be worth it. Warner-Lambert’s management was essentially beside the point.

Now, of course, the potential upside for Pfizer is much smaller, and the risk of damaging its target much greater, than it was in 1999. If Pfizer can’t see the difference, then “desperation” may be too kind a word by half.

Japanese drugmakers are anxious to expand their presence in global pharma/biotech markets where they’ve long been largely shut out — and the strong yen is making it cheaper for them to basically buy their way in. Interestingly enough, some of these deals are bypassing the U.S. altogether.

Unanswered is whether these deals will come close to achieving the twin goals of reviving ailing drug pipelines at Japan’s major drug companies and bolstering their international presence. I’m not sure I’d bet on it.

Yesterday, for instance, Daiichi Sankyo bought a majority stake in Ranbaxy Laboratories, India’s largest maker of generic drugs, for as much as $4.6 billion. The deal is unusual because it combines a name-brand drugmaker, albeit one with limited global exposure, and a big generics maker that tends to market to developing nations. Such corporate marriages aren’t unheard of — Novartis has been able to make a big push into generics thanks to its Sandoz generics unit — but despite pharma’s growing interest in generics, they’re still rare.

Ranbaxy is the largest acquisition to date for Daiichi, which itself came into existence in a 2005 merger between Daiichi Pharmaceuticals and Sankyo, two almost century-old Japanese pharmaceutical companies. Daiichi remains something of a global midget, however, as almost 70 percent of its ¥880.1 billion ($8.1 billion) annual sales are domestic. As part of the deal, Daiichi will also acquire minority stakes in several other Indian drugmakers, including Zenotech Laboratories, Jupiter Bioscience, Kribs Biochemical and Orchid Pharma.

Several other Japanese pharmas have also stepped up their dealmaking recently. Takeda Pharmaceutical plunked down $8.8 billion for the U.S. biotech Millennium Pharmaceuticals in April, and last month went on to sign a development deal with the RNA-interference biotech Alnylam Pharmaceuticals that could ultimately be worth up to $1 billion. Eisai spent $3.9 billion to snap up the specialty pharmaceutical MGI Pharma last December.

Like most acquisitions, however, the Japanese buying spree may well be rooted more in optimism than solid business sense. Most Japanese pharmas are still relatively new to global business, following decades in which they remained focused on their sheltered domestic market. While some have been successful in discovering new drugs, few have actually built up much in the way of international operations, and their record of success with overseas acquisitions remains spotty.

In fact, while Daiichi is spinning the Ranbaxy deal as a global expansion, its greatest benefits may lie in Japan itself, where the purchase could help the company essentially create a domestic market for generic drugs, which currently account for only five percent of drug sales there:

In a bid to slash its costs, Japan’s health ministry is attempting to persuade both doctors and patients that generic drugs are just as good as their branded equivalents but has so far met with failure.

Even changing the prescription forms to make generic drugs the default recommendation of doctors has been unsuccessful - a government target that 30 per cent of the Japanese drug market should be occupied by generics by 2010 has looked increasingly implausible.

Part of the problem, say government officials, is that generic drug companies in Japan are small and doctors do not trust them.

Japanese flag via Wikimedia Commons

Last week, Pfizer held its promised “media roundtable” to address a rising chorus of concern about its anti-smoking drug Chantix. Reports from Pharmalot and the WSJ Health Blog suggest that Pfizer and its spokespeople offered exactly the kind of circle-the-wagons defense I’d predicted. From the WSJ blog, Pfizer’s main talking points included:

1. Smoking is a serious health problem that kills people.
2. Most of the adverse events that have been reported recently are already in the Chantix label.
3. Smokers who are trying to quit can be depressed and irritable.
4. Paying close attention to adverse-event reports helps the FDA and Pfizer enhance drug safety.

No complaints about point one, and even three and four are largely unobjectionable, if somewhat beside the point in the current situation. Point two, however, comes pretty close to being outright misleading, for two reasons.

First, even if alleged Chantix side effects such as suicidal or violent inclinations, psychosis, hallucinations and paranoia are mentioned in the drug’s official warnings, the sheer number of recent reports over the space of 19 months — while small compared to the number of people taking the drug — is still large enough to warrant concern. Second, of course, is the fact that many reported adverse events aren’t included in the drug’s label, such as accidents and injuries, distorted vision, and seizures or muscle spasms.

Of course, even large numbers of self-reported side effects don’t prove that Chantix is responsible for some, or even any, of them. That’s what further study is for, and to its credit, Pfizer is doing just that. (Whether it would be doing so expeditiously in the absence of public outcry is another question entirely.)

Still, it’s easy to see where Pfizer’s interests really lie in the controversy. Look again at point three, which academic researcher David Gonzalez offered as a kind-of, sort-of explanation for some of the neuropsychiatric effects that have been reported with Chantix. Pfizer, it turns out, excluded smokers with mental problems from its original studies, and for the justifiable reason that it didn’t want pre-existing issues to obscure the drug’s potential benefits in healthy people.

Given that fact, however, it’s wholly unreasonable for the drugmaker to insist now that Chantix remains safe for people with mental issues, as Pfizer’s senior medical director Martina Flammer does. A clearer indication that Pfizer is more concerned about minimizing the threat to its moneymaker than about the possible health of its customers would be difficult to imagine.

Moody’s has never been the most cheerful of outfits — somehow its name seems particularly fitting — and its latest missive to the drug industry is perfectly in keeping with its dour, green-eyeshade image. In short, pharmaceutical makers need to brace themselves, because their credit problems are only going to get worse, according to the rating agency.

I haven’t been able to find the agency’s semiannual report on the drug industry online, but according to Thomson Financial, Moody’s says that the outlook for the industry is going to keep getting darker thanks to looming patent expirations on best-selling drugs (and subsequent generic competition), low research productivity and scarce new-drug approvals, and the likelihood that any healthcare reform enacted in the next few years will undercut current business models.

The WSJ Health Blog weighs in with another disquieting tidbit from the report:

The adjusted debt level for the nine biggest companies in the sector rose to $94 billion at the end of ‘07 from $75 billion at the end of ‘06, Moody’s says. Among the debt drivers cited by the report: Schering-Plough’s Organon acquisition, J&J’s higher level of share repurchases, Pfizer’s big share repurchases and high dividend and Genentech’s Tanox acquisition

The companies still have plenty of cash and investments, but a lot more of that cash is being held offshore. At the end of ‘06, the companies held $58 billion in the U.S. and $27 billion offshore; a year later, that had basically flipped, with $29 billion in the U.S. and $63 billion offshore.

Cash held in overseas subsidiaries is a problem for Moody’s because it’s not earmarked for debt service, apparently.

Moody’s didn’t immediately issue any further pharma downgrades, although last September it lowered the industry’s overall credit rating to “negative” from “stable.” Since then, the agency has downgraded two companies — Amgen and Mylan — and seems likely to follow suit  with others before too long. Another cheery note: Moody’s thinks the outlook may not improve until the current wave of patent expirations passes, possibly not until 2012.