One size doesn't fit all: the paradigm shift of the pharmaceutical industry

Pfizer’s treatment for cardiovascular disease, Lipitor, is the largest selling prescription pharmaceutical with sales reported at twelve billion US dollars in 2008. Lipitor is sometimes cited as an example to illustrate the pharmaceutical industry’s alleged focus on developing drugs with mass market reach.

Alongside the increasing public attention on the need for more personalised treatments, there is a degree of scepticism about the desire or ability of the pharmaceutical industry to adapt to a world where the average market potential for individual drugs might become a lot smaller. Indeed, if you can target a large market, reap economies of scale in manufacturing and keep a large sales force better occupied, why change? But large pharmaceutical companies may have no choice but to change and adapt as pressure mounts at the regulatory level, reimbursement schemes change and reputational risks rise.

1. Regulatory requirements

Drug approval agencies have started making recommendations on the need to test patients with sophisticated diagnostics before prescribing certain pharmaceuticals, which are expected to work only for certain patient sub populations. Such measures should help focus funding on those patients most likely to benefit but will also protect them from potentially severe side effects where there is no or little prospect of efficacy.

This trend is raising the hurdles for market access as pharmaceutical companies are being asked to become ever more precise in defining target patient populations. Amgen’s experience with Vectibix, its drug for a form of late stage colon cancer, provides a good illustration. In September 2006, the US Food and Drug Administration (FDA) gran-
ted accelerated approval of Vectibix for the treatment of advanced colon cancer. Market access in Europe, however, proved more challenging. In May 2007, one of the committees of the European Medicines Agency (EMEA) postponed marketing authorisation for the drug. The committee referred to numerous studies suggesting Vectibix may not work if a certain gene, called K-Ras, is mutated in the patient.

European marketing authorisation was granted eventually in 2007 but only for colon cancer patients with the non-mutated version of the K-Ras gene. The immediate implication of this decision was to limit the market potential of this drug in Europe.

The effects of this decision are expected to be felt in the US as well as in Europe. The FDA may still decide to restrict the US label for the drug. But even without a modification of the label, US physicians started using K-Ras gene tests regularly in 2008, a practice, which could lead to a limitation of the US market adoption to the same patient sub population as in Europe.

This example illustrates the low level of coordination between approval agencies. Overall, however, they are encouraging greater use of biomarkers and diagnostics in drug development and prescribing decisions, thus promoting the concept of companion diagnostics for drugs.

The FDA recently published a list of 32 genomic biomarkers that it considers valid to guide the appropriate clinical use of approved drugs. A genomic biomarker is any gene related information that may be used as an indicator of a particular disease state or a predictor of the likely future development of a disease.

One or more drugs are available for each of the biomarkers on the FDA’s list. However, the FDA wishes to encourage testing of the relevant biomarker before a physician prescribes one of these drugs. For four of these 32 biomarkers, testing is actually “required” rather than “recommended” or “for information only”. This list marks the beginning of a trend towards more systematic testing to guide prescribing.

The EMEA has a longer list of cases where biomarker testing is “required”, including the prescribing of nine cancer drugs, one HIV drug and one drug for a neuropsychiatric disease. The European agency is also currently developing a new framework regulating applications for genomic biomarkers.

We expect greater harmonisation between different regulatory agencies to develop over time through greater consultation but also following pressure from clinician communities as stakeholders in one country push to implement practices already in place in approved treatment protocols in other countries.

2. Reimbursement

Marketing authorisation by drug approval agencies is not the only market access hurdle that pharmaceutical companies are facing. Some specialist therapies are very costly and gaining a favourable reimbursement regime is a key success factor when trying to achieve deep market penetration. For certain drugs, reimbursement is only available for patients that present certain biological characteristics. In such cases, relevant tests are required to establish whether the patient belongs to a certain biological sub population.

Herceptin is a well known example. This breast cancer drug, marketed by Roche and its subsidiary Genentech, is prescribed for cases of breast cancer. However, Herceptin tends to be reimbursed only for patients who have undergone validated diagnostic testing in order to predict how the tumours would respond to the drug – cases where a certain protein (HER2) is over-expressed.

As the cost of Herceptin has been reported at circa 80 000 US dollars for one year of treatment, the importance of reimbursement rules cannot be underestimated. The trend of linking reimbursement to specific molecular diagnosis is expected to continue. At a biopharmaceutical conference in June 2009, the chief medical officer of one of the largest US health care payers confirmed that he expects reimbursement coverage for drugs to be increasingly linked to appropriate
biomarker testing procedures. In Europe, EMEA’s on-going efforts to improve regulation for the use of genomic biomarkers will encourage insurers to develop new reimbursement protocols linked to biomarkers as predictors of likely patient drug response.

3. Reputation

Reputation is something less tangible than regulatory requirements and reimbursement coverage, but it can be just as powerful. Currently, patient response rates to drugs are still unsatisfactory, varying widely from 20 per cent to 75 per cent depending on the drug and the disease. There is thus a pressing need for improving the specificity of drug treatments; and if new tools become available to help achieve greater efficacy and fewer side effects through better targeting, how could pharma companies afford to ignore them? The reputational risk stemming from a refusal to move towards more personalised medicine would be too significant in the long run.

4. Economics

But what about the economics of serving narrower target markets? Can pharmaceutical companies expect to make a profit with the smaller sales volumes associated with more personalised drugs?

‘Smaller’ does not necessarily mean ‘small’; for instance, sales of the targeted breast cancer drug Herceptin were reported at CHF five billion in 2008. Several factors combine to determine how large a more targeted market can be, including:

• Size of the targeted sub population. These populations are bound to be smaller, by definition, as we are not including the whole population. However, the prevalence of certain disease sub types can still range from the ‘very small’ to the ‘very large’, thus producing a significant diversity of possible scenarios. It will depend on epidemiology.
• Price. Many of the targeted drug treatments consist of large biological molecules and prices tend to be higher for such types of molecules than small chemical compounds. The higher prices are due partly to the complexity and cost of the production process and partly to the perceived value of the treatment. But a complex production process means competition is relatively low, as it is more difficult for competitors to create replica drugs.
• Market share. The size of target populations may be smaller with better targeted treatments but the market share may be larger. The factors mentioned for ‘price’ will also impact the market share. In this context, combining the drug with a companion diagnostic that helps guide the prescribing of the targeted drug can help protect a market position by providing more transparency for clinical decision making, and fewer incentives to switch to a competing product that might not have a companion test or might be targeted slightly differently.

Inevitably, there will be cases where markets become too small to be profitable for the largest pharmaceutical companies. This will offer an opportunity for medium sized companies whose business models may be more suitable. However, we also expect good business cases for big pharma as smaller target populations could be compensated for by higher market shares. The industry may still have to face strong downward pressure on prices from key stakeholders, but interestingly, better targeted treatments will provide the strongest possible arguments for a high price if efficacy is higher and side effects lower. Some insurers have indeed mentioned their increased willingness to sign off on high costs for specialist drugs where they have greater guarantees of effectiveness. In this context, new diagnostic tools, which can also be used to demonstrate the value of a targeted use of specific drugs in pharmacoeconomic studies, will play an increasing role in improving prescribing and minimising wastage.

5. The cost side

On the cost side of the profit equation, the three principal drivers to be considered are:

• Research and development. The R&D cost burden will remain significant and may have to be matched with smaller future revenues per drug. However, the increased use of biomarkers and diagnostic tools at an earlier stage in R&D could also help eliminate products earlier during the drug development process. This would help avoid the higher costs of large scale trials in late stage development. Diagnostics could also help improve the efficiency of studies by improving patient selection for clinical trials. This could lead to fewer cases where the FDA asks pharmaceutical companies to redo various studies to confirm findings.
• Manufacturing. The industry has been slow at implementing new enabling technologies that will be key for a world where smaller specialty market rather than “mass market” manufacturing will become more prevalent. However, the US FDA has introduced guidelines that will accelerate their implementation. Pharmaceutical companies may thus face lower gross margins as there will be fewer economies of scale to exploit but there will be no choice but to adapt. Companies have started preparing for this future and some of the new technologies they have introduced to support smarter manufacturing, including continuous manufacturing and built-in quality monitoring, may actually help create value through higher production yields.
• Sales and marketing. The industry has already started to change its approach to sales and marketing following the decreasing productivity of the large sales force based model of drug promotion. Increasingly, the industry will be communicating with key opinion leaders, payers and other stakeholders that can influence prescribing decisions. The increased availability of targeted therapeutics, with companion diagnostics and supporting pharmaco-economic data to demonstrate benefits, will actually help develop a more effective, and cost-efficient, sales and marketing model.

Conclusion

The jury is still out on whether the overall economics will work out for large pharmaceutical companies facing markets that are becoming smaller for each individual drug. However, in the current regulatory, reimbursement and reputational environment, they don’t seem to have a choice. Increasingly, pharmaceutical companies will not move a drug candidate to the clinical development stage without a clear biomarker development program. These companies understand the contribution of biomarkers and diagnostics in improving the design and probability of success of clinical trials. In addition, pressure from healthcare payers is putting more emphasis on the availability of a companion biomarker test when deciding on a drug’s reimbursement.

Large companies will have to make it work or else make way for competitors with a more effective business model.

Laurent Probst, Loïc Kubitza and Erica Monfardini are partner, director and expert respectively in the Pharmaceuticals & Life Sciences advisory practice of PricewaterhouseCoopers in Luxembourg.