Great expectations

With the soaring costs of bringing a drug to market blowing holes in big pharma’s profits, NGP looks at how AstraZeneca’s David Brennan, GlaxoSmithKline’s Jean-Pierre Garnier and Schering-Plough’s Fred Hassan are striving to strengthen the R&D pipeline.

Big pharma is all too aware of the rocketing costs of R&D, especially if a drug falls at the last hurdle in testing. However, the industry is also waking up to the reality that many of its money-spinning blockbuster drugs are soon to come off patent, with rivals poised to pounce with generic alternatives. Add to the mix fears over drug safety, compliance issues, scrutiny over market practices and it sheds some light on why, for the first time in almost ten years, the global pharma market failed to deliver double-digit growth 2004. Noises coming out of the industry indicate that improving R&D productivity is top of the agenda for big pharma bosses.

JP Garnier, CEO of GlaxoSmithKline (GSK), has witnessed first hand the cost of R&D during his 30 years within the industry: “Bringing a drug to market has seen a colossal rise from a couple of decades ago.”

How? “R&D swallows up most of this expenditure,” said Garnier, who believes this is borne out in the figures. “In 1980 the industry spent €2 billion in R&D and gained approval for about 30 new products. Twenty years later the industry spent €22.5 billion and gained approval for about 30 products.” On top of this, clinical trials used to cost around €1800 per patient in the early 1980s, compared with €15,500 nowadays. It is statistics like these that have got industry analysts asking whether the age of the blockbuster is dead.

“Clinical trials [in the West] have become an extremely expensive proposition,” Garnier explained at a recent conference. “When you move a trial from the US to Poland or India you go from about €15,500 per patient down to about €1800 to €2500 – huge savings. I’m not saying I won’t do clinical trials in Europe or the US anymore, but I don’t have to do all of them there.”

The elephant in the room

AstraZeneca, Europe’s third largest drug maker, is a case in point of a manufacturer with lucrative patents running out on its best selling products. CEO David Brennan has vowed to make it his priority to strengthen the company’s weak product pipeline in order to address this issue.

2006 was a difficult year for the pharmaceutical giant in terms of drug development, culminating in the announcement that its potential blockbuster for treating stroke patients had to be pulled at Phase III of clinical trials. NXY-059, which fared no better than a placebo during testing, was predicted to generate more than €2.5 billion in sales.

This bombshell for shareholders followed a series of unsuccessful trials, which included the blood thinner Exanta and lung cancer drug Iressa. Brennan described the latest setback as “disappointing”. The failure of NXY-059, thought to have cost AztraZeneca around €10.5 million, overshadowed strong third quarter results. Earnings rose by 34 percent – beating analysts’ expectations – while sales were up by 11 percent.

“For the third quarter we have produced a strong set of results, and have increased the financial targets for the full year,” said Brennan. “I remain committed to maintaining this operating and financial momentum and to strengthen the pipeline.”

Clean the pipes

Commenting on the company’s pipeline, Brennan said: “There are three elements to our strategy to strengthen the pipeline: improve the productivity of our in-house discovery and development efforts; aggressively pursue promising products and technologies from external sources; and, beginning with our offer for Cambridge Antibody Technology, build a major international presence in the research and development of biological therapeutics to complement our small molecule capabilities.”

On the back of the latest drug trial disappointment the Anglo-Swedish group is being urged by its major shareholders to inject around €3 billion in order to stave off generic rivals. Calls are also being made for Brennan to look to purchase drugs being produced outside company by acquiring a smaller company. AstraZeneca now has just one product, a cardiovascular drug in the pipeline, which could start generating sales by the end of the decade. It’s biggest selling drug Nexium, prescribed for heartburn, could be the next big earner in the drug maker’s stable to suffer at the hands of cheaper generic alternatives.

While Brennan is confident that Nexium, which racked up €3.5 billion worth of sales last year, will keep the company ticking over but question marks hang over whether they can underpin future earnings growth.

“We know what it will take to continue to deliver a strong performance over the next five years,” Brennan said. “While new products will play a role, many of the ingredients for continuing our momentum can be found in our current product range. Effective lifecycle management and commercial excellence in support of key growth products such as Symbicort, Crestor and Seroquel should continue to drive top line growth. This will give us the potential to grow sales in line with projected market growth and, in conjunction with continued cost discipline, the delivery of earnings growth ahead of sales is within our reach.”

Brennan, who took up the top job in January of last year, knows he will have to demonstrate his mettle and leadership in the next 12 months to drive this ship through the storm and keep shareholders satisfied.

R&D: the money pit?

Schering-Plough Chairman and CEO Fred Hassan is also feeling the pinch in terms of drug discovery costs, believing they threaten to undermine the industry’s business model.

“The total cost to bring a molecule from the lab to the patients is as much as €1 billion. When you lose products in Phase II or Phase III or pre-registration, the cost is enormous. You may be several hundred million euros down at that point.” Hassan continues: “That explains why the business model is under threat: the ability to devise new molecules through R&D and bring them to market is not keeping up with what’s being lost to generic manufacturers on the other end. This situation requires new thinking, new urgency, new capabilities.”

So what is Schering-Plough, which invested €1.5 billion in R&D in 2005, doing to improve the process of bringing drugs from the lab to the patent?

Hassan: “It is not a linear process; there are many parallel processes – you need a lot of feedback and by correcting that you learn to go forward. We work on simplifying the basics of moving these molecules through. We designate certain projects as a high priority and they have my attention as CEO. We have one major decision-making body that promotes projects from one phase to the next. The head of every function whose input is needed – clinical trials, toxicology and pharmaceutical sciences – is at the table. This is one of our most important means of dealing with complexity.”

Hit the target

Garnier says that R&D at GSK, the world’s second largest pharma company, was identified as needing a shake-up back in the mid nineties. “It has been a seven to 10 year journey from the time we realised R&D productivity was declining to the time we turned the corner. The true answer is not to flee the scene but solve the core problem and turn the corner in terms of R&D productivity.

“If you can make your R&D engine work well then you can create enormous shareholder value. First you have to have the tools that will help you discover those drugs more quickly.” This is because, as Garnier puts it: “A fool with a tool is still a fool.” And with so much resting on the product making it through trials and onto the drug market: “You have to treat R&D as a business and try to do it in a more cost efficient manner. I hear my colleagues complain that it costs €1 billion plus to discover new drugs but if you improve R&D productivity you bring down that number significantly.”

Garnier believes the low success rate of molecule testing needs also to be looked at: “Very worrying is the attrition in the pipeline – the time up until launch – where 93 percent of the molecules don’t make it, a figure that’s slightly less for the biotechs. This is a problem that we clearly need to address… You need to make sure you pick the target with drug discovery. There is this magic moment where you hit a target and you commit hundreds of millions of dollars – so you better pick right.”

Garnier likens this to the search for oil. “Science is a game like drilling for oil. You can halve the odds by drilling in more favourable territories but the companies like Exxon Mobile and BP succeed because they place so many bets.”

Investors see GSK’s R&D pipeline as opaque, many different drugs at different stages of development – making it hard to assess the company’s development. There are also grumblings that the company is not releasing enough information about the prospects for its top-selling asthma drug medicine. Bosses are also accused of holding onto data on the largest ever study carried out into diabetes, which could have a massive effect on GSK’s Avandia. Ganier refutes claims that information about the company’s pipeline is kept from shareholders – but these investors will want a little more convincing that GSK has the products in the pipeline to keep it at the top of the pharmaceuticals tree. After all, GSK is another drug maker with revenues from its biggest earners, such as its anti-depressant, Wellbutrin XL, under threat from the generics.

There is good news. The growing number of people reaching retirement age means our craving for medications is not going to wane soon. “Society as a whole wants new drugs and vaccines, especially with the baby boomers getting to the age where they are going to depend on drugs and vaccines,” says Garnier, who will retire himself in 2008.

The evidence suggests that meeting this demand is only going to be achievable by fixing a thinning R&D pipeline and developing future blockbusters. Only then will we shareholders again be able to charge their glasses and toast the industry’s long-term growth.

David Brennan: “Effective lifecycle management and commercial excellence should continue to drive top line growth.”

Jean-Pierre Garnier: “I’m not saying I won’t do clinical trials in Europe or the US anymore, but I don’t have to do all of them there.”

Fred Hassan: “If there is one common thread in this evolution, it’s the ability to manage complexity.”