A pathway to Biopharma 3.0
Back to School 2018: How external disrupters will drive biopharma to new business model
As market and social forces continue to tighten around the biopharmaceutical industry, drug companies need to start evolving toward a new business model that both capitalizes on the potential of new technologies and accommodates society’s demands for better, cheaper drugs that are broadly accessible.
This means laying the groundwork for what would be the industry’s third business model in nearly 40 years.
From the late 1970s, when Smith, Kline and French’s heartburn drug Tagamet cimetidine began its march to the $1 billion sales threshold, the biopharmaceutical industry was dominated by the blockbuster model. This aimed to create billion-dollar products through moderately priced drugs for high prevalence diseases that represented major unmet needs, such as hypertension, gastric ulcers and depression. Market access was accomplished by huge detail organizations that competed to persuade physicians to select among drugs that were often therapeutically similar.
Figure: Top causes of death go wanting
Of the top 10 causes of death tracked in the U.S. by CDC, only cancer has received significant numbers of drug approvals. In 2008-17, the other areas garnered 52 drug approvals combined, while cancer collected 75. Diabetes and heart disease tied for second, with 13 each, while Alzheimer’s disease had none. The last new drug for AD was approved in 2003. BioCentury classified indications of new molecular entities and new biologics into each top cause of death as described by CDC, which are shown in order from left to right. The self-harm category includes antidepressants and antipsychotics. Three drugs were double counted due to approval for both heart disease and stroke prevention. The No. 4 cause, “accidents (unintentional injuries),” is omitted. The CDC list is from 2015, the most recent year for which its data are available. Source: FDA, CDC website, BioCentury analysis
In the 1990s, when many of the supposedly low-hanging fruit targets were harvested, and a robust generics market created patent cliffs, the pursuit of blockbusters began to be replaced by the specialty model that sought to treat very rare diseases with high priced drugs. Market access was accomplished by smaller, targeted sales forces.
The specialty model accelerated with the advent of targeted therapies that serve defined, small populations, especially in cancer. Meanwhile, market access increasingly was accomplished by negotiations to list drugs on formularies managed by a handful of gatekeepers.
Figure: Slow to compete
The specialty drug business model has disincentivized creation of second-in-class products compared with the heyday of the blockbuster era. In testimony to Congress, FDA Commissioner Scott Gottlieb stated that 41% of first-in-class products approved to treat non-orphan disease in 1991-2000 had a competitor in the class within five years. That shrank to 18% of products approved in 2001-10.
For products approved in 2011-13 that have been on the market at least 5 years, BioCentury’s analysis found that 27% have a competitor. Whether this represents a reversal of the trend remains to be seen, but the average time until a competitor was approved in this group was 1.8 years. The shortest window was the 10 days between the approvals of HCV drugs Victrelis boceprevir from Merck & Co. Inc. (NYSE:MRK) and Incivek telaprevir from Vertex Pharmaceuticals Inc. (NASDAQ:VRTX) and Johnson & Johnson (NYSE:JNJ), drugs that became obsolete less than three years later.
By comparison, Gottlieb said, “nearly a quarter” of the 1991-2000 cohort had a competitor within two years; for drugs approved from 2011 through mid-2016, 20% had a competitor within that time.
For orphan drugs for non-cancer indications, the rate of products with competitors within five years fell from 26% to 18%. Here again, the small cohort of products approved since 2011 with 5 years on the market has improved, but at 18% still lags the earliest cohort. Source: FDA testimony, FDA website, Health Affairs, BioCentury analysis
This year, the 26th Annual Back to School essay asks whether the Biopharma 2.0 model can survive in the face of mounting external forces that demand the industry’s attention, and identifies where first movers in the industry are seeding the model for Biopharma 3.0.
For the moment, the answer is that the specialty model is not dead yet. Back to School’s outreach to industry and financial stakeholders finds many voices arguing that industry can confidently stay the course. Some say indefinitely.
But Back to School argues drug companies and their investors can’t be complacent while the healthcare ecosystem changes around them. It’s possibly premature to draft the blueprint for the next business model, but there can be little dispute about the drivers of change.
Market forces are pounding nails in the coffin of the industry’s ability to impose prices. Their influence has finally extended into the government-pay setting in the U.S., which has set its sights on the arcane rebate system that enables drug companies, PBMs and payers to profit, even while patients see rising co-pays.
Society wants multisource options for treatments -- even if they are cures -- because competition between drug companies brings the price of innovation down. This means “best in class” is about cost-effectiveness.
Figure: Expense horizon
A surge of products based