INDIAN PHARMA INDUSTRY CHANGING DYNAMICS_An essay by U. Shobana

The pharmaceutical industry is changing and traditional paths to innovation are no longer suitable. A drastically different reimbursement climate, the growing interest in biologic drugs (and biosimilars), the shift from blockbusters to niche medicines, and the differing needs of emerging markets all have affected the cost structure and profitability of drug manufacturers, which is in turn affecting R&D needs and capabilities. Successful pharmaceutical companies have developed innovation networks including varying external groups—from insurance companies to academic medical centers-to support the discovery, development, and commercialization of new therapies.

Traditional models
The historical innovation pathway for pharmaceutical companies has involved the development of small-molecule drugs following an "integrated model," according to Tariq Sadat, a doctoral student studying with Roslyn Russell, a professor in the School of Economics, Finance, and Marketing at RMIT University in Australia. "For many years, pharmaceutical companies leveraged organic chemistry-based research and manufacturing, and with government support for intensified R&D programs that facilitated the application of microbiology, enzymology, and biochemistry, built the capability to produce and sell prescription drugs to doctors and hospitals," he says. As a result, pharmaceutical companies became very large, highly integrated organizations with R&D, manufacturing, marketing, and distribution capabilities that were very R&D-intensive and innovative, focusing on target-based drug discovery.

            Biopharmaceutical companies have not followed this model, however. With the discovery of DNA and genetic engineering, biotechnology became a research tool for drug discovery and the development of recombinant protein drugs, with many biotechnology companies founded to commercialize biotechnology developed at universities, according to Sadat. "Lacking capital and organizational capabilities, many of these startups formed collaborations with large pharmaceuticals firms, and thus adopted a ‘collaborative model’ for their innovation," he explains. The large drug companies benefited from this collaborative approach as well, often acquiring smaller biopharmaceutical companies and achieving the development of blockbuster drugs. As a consequence, Sadat notes that they grew into the "Big Pharma" companies we know today.

Need for change
Due to the changing market dynamics of the pharmaceutical industry, however, the integrated model is no longer effective and even limited collaborations do not provide the level of innovation required today. "Competition from low-priced generics, demands from consumers and other payers, changing government policies particularly with respect to reimbursement, the needs of emerging markets, spiraling R&D costs, and declining R&D productivity are all affecting the ability of drug manufacturers to innovate and deliver value, according to Sadat.

Healthcare reforms and drug price controls are perhaps the most important factors. "Obtaining regulatory approvals for a drug used to be the biggest hurdle to market entry; today it is the reimbursement criteria set by payers combined with pricing challenges, such as Medicare discounts in the US, price caps in India, ‘value-based pricing’ in the UK, reference pricing in Germany, and price-controlled drugs in China," Sadat observes. Complicating the picture is the expected decline in demand in the US and Europe, with a concomitant increase in the global market share for emerging markets, which can be challenging for pharmaceutical companies to navigate. "Weak regulatory controls and intellectual property protection, a lack of health insurance programs, and the much reduced per capita drug spend in emerging markets all affect innovation to some degree," says Sadat. 

The fact that numerous blockbuster drugs have already or will lose patent protection by 2016 is contributing to the decline in drug spending in mature markets, although low-priced generics will benefit. Sadat also notes that specialty drugs (biologics, orphan drugs) for cancer, HIV, hepatitis C, and rare diseases are the few drug classes for which novel therapies will continue to experience strong growth.

The open innovation model
To create value under these changing market conditions, Big Pharma companies are adopting an open innovation model in which value creation is achieved by exploiting evolving scientific and technological knowledge from a vast array of sources, including academic researchers, other biotechnology and pharmaceutical companies, government institutes, independent innovation centers, consultants, and even companies in other industries. Some specific activities, according to Sadat, include mergers, acquisitions, and in-licensing deals to extend product portfolios with specialty drugs; expanding R&D, manufacturing, and sales networks in emerging markets through capital investments, joint ventures, and collaborations with local companies; partnering with generic manufacturers, particularly in emerging markets; and collaborating with insurance companies to identify treatment-responsive patients and to share the risks associated with new drug development.

The rise of the academic medical center
One type of external resource that pharmaceutical companies are increasingly turning to is academic medical centers that offer a range of support, from basic research to technology development to specialized services. Wake Forest Baptist Medical Center realized about two years ago that the approach to innovation taken by the pharmaceutical industry was changing, and that the center could position itself as a key resource by expanding its capabilities. "We wanted to be at the forefront of this emerging new trend of open innovation in the pharmaceutical industry, working closely with industry to develop and commercialize high-value products," says Eric Tomlinson, chief innovation officer and president of Wake Forest Innovation Quarter. "At Wake Forest, we’re committed to accelerating the transformation of both our own research discoveries and those of industry into viable commercial products by partnering with pharmaceutical companies to bring to the marketplace therapeutics and devices that will save lives and improve health care worldwide," he adds.

Academic medical centers such as the one at Wake Forest are attractive to industry because they have a large knowledge base and expertise, and often, established contacts already exist between faculty members and industry. What is changing is the extent of support that these centers can provide to a pharmaceutical company in terms of taking fundamental discoveries and converting them into commercial products that can benefit patients. Wake Forest has been investing heavily over the past two years to build on its extensive scholarship base in order to help companies create technologies based on that expertise, including the addition of special capabilities around advanced equipment, technologies, techniques, and innovation modes, according to Tomlinson.

"We are focused on three core areas¾scholarship, innovation, and services¾and are engaging with industry through direct faculty-company connections, through business development efforts, and through web-based interactions. We have also invested effort into developing systems to support not only easy access, but simplified arrangements, such as efficient licensing and partnership terms, so that working with Wake Forest Baptist Medical Center is as seamless as working with an internal R&D group," he adds. Keeping the legal aspects as simple as possible is critical for ensuring the success of these relationships, given the competitive nature of the pharmaceutical industry, he notes.

To date the medical center has helped develop more than 35 companies, commercialized products that bring in $1 billion in sales annually, and signed hundreds of technology licensing agreements and research contracts with industry. Many of the commercialized products are medical devices, but the Wake Forest has been receiving growing interest in its specialized preclinical services, and drug development is a large area of focus. Wake Forest currently has a wide array of novel health care products in the development pipeline and available for licensing to industry, including a series of flagellin-based vaccines, an anti-cancer agent to treat chemoresistant malignancies, and a cytotoxin that selectively kills cancer cells, to name just a few, according to Tomlinson.

Meeting patient needs

Because the mission of both the pharmaceutical industry and academic medical centers is to cure diseases and improve patient lives, Tomlinson expects growing opportunities to work with industry in numerous areas of innovation. "Our strategy of enhancing the offerings of the Wake Forest Baptist Medical Center across the three areas of scholarship, innovation, and services is the right one going forward. In fact, we expect to see growing numbers of academic medical centers taking this approach. The result will be improved innovation and development of technologies that are needed for commercialization of products that address unmet patient needs," he notes. Tomlinson also believes that academic medical centers, with their large knowledge bases and ability to convert basic findings into commercial products, will play a critical role in getting new drugs to patients.

Key to success

"The key change in today’s pharmaceutical industry is that the value of pharmaceutical innovation is no longer embodied in new drugs and new markets alone, nor is it commanded by pharmaceutical companies. Rather, the benefits of new drugs (and thus pharmaceutical innovation) are those perceived by users, and this perceived value is jointly created by pharma companies and users. In developed markets, the focus will be on high-priced specialty drugs for chronic and rare diseases, with low-priced generics preferred otherwise, while in emerging markets, large-volume, low-cost generics will dominate. Big pharma’s success with respect to innovation lies in finding ways to capture value based on these market opportunities and requires a shift from product-centric innovation towards market-centric innovation," Sadat concludes.