The future of the life sciences industry

Patent expiries and an improving economy, Dr Gareth Williams explains what the life sciences industry faces in the future and asks - is big pharma moving across the pond?

The life sciences industry is in little doubt that the low-hanging fruit of yesterday’s drug discovery and development has been enjoyed, and the future of R&D lies in far more complex and costly products. The pharma and biotech sectors are becoming inextricably interdependent and will converge yet further in the face of looming patent expiries for big pharma on its major blockbusters, and the clear threat to revenue this entails. The future of medicine is dependent on the marriage, and the fortunes, of the industry as a whole.

In this context, this year’s Marks & Clerk annual report into the life sciences sector reviews and assesses the challenges facing the industry with respect to innovation. The industry-based research reflects the views of the 380 life sciences representatives worldwide who took part in the detailed online survey conducted in April 2010.

One of the headline themes to emerge from the research is that of an improving economic climate. A clear majority (63%) of respondents indicate that the climate for doing business and access to funding have improved over the last 12 months. 

This is significant in the context of our emerging from a global recession frequently cited as the most severe economic contraction since World War II. Looking back at the Marks & Clerk 2009 industry report, the picture painted by the life sciences sector was rather more bleak.

Understandably, given the global economic situation at the time, the research was dominated by severe concerns as to risk aversion among investors, and the consequent funding drought that plagued the industry – particularly for smaller biotechnology start-ups at earlier stages of their drug development cycles. Fears abounded as to the level of bankruptcies expected, with many of the opinion that the existing funding structure would struggle to survive the downturn. At that time, 93% of respondents believed the climate for biotech had deteriorated, with funding terms becoming increasingly onerous, yet nearly six in ten (58%) feared it would take beyond 12 months before investors returned to the sector. Since this point, the global economy has begun to recover in earnest, albeit that some concern remains.

Improving optimism can be seen elsewhere in our survey. Nearly two-thirds (65%) think that the brightening economic situation means the industry now has the confidence to press ahead with acquisitions, coming good on last year’s prediction that the recession would result in further industry consolidation as major pharmaceutical companies took advantage of depressed valuations. Meanwhile, 84% believe the appetite is now there to strike strategic commercial collaborations with partners.

This is not to say, however, that the sentiment expressed in this year's research is overwhelmingly positive – and indeed it may be the case that market appetite for deal-making is driven more by need than desire. In short, in the face of dwindling pipelines, big pharma may have little choice.

However, it is fair to say that the predominant concerns of respondents have simply shifted to longer term industry-specific problems that are coming to a head, rather than immediate economic fears.

There can be no doubt that the pharmaceutical industry is reaching a critical phase with regard to R&D and the dwindling drug pipelines of originator companies. This is having a significant effect on both business and patenting strategies.

The market for conventional small molecule drugs is now very mature, and the development of new blockbuster drugs within this space appears to be slowing significantly. Meanwhile, a patent cliff looms for several major pharmaceutical companies over the coming years, with a number of blockbuster drugs, such as Pfizer's cholesterol pill Lipitor, Wyeth’s heartburn medicine Protonix and GSK’s cancer drug Hycamtin, set to come off-patent between 2010 and 2014.

This headwind is compounded by the difficulties traditional pharmaceutical companies have experienced so far in replenishing drug development pipelines with new generation biologics, whether through internal redirection of R&D, or acquisitions of smaller biotechnology companies. Over eight in ten (82%) respondents believe that big pharma's inability to innovate sufficiently from within to replenish these pipelines will result in increased acquisitions. Over two-thirds (68%) believe that we will see substantial acquisition activity within the next two years, with almost one in five claiming that this will be staged within the year.

The solution to the patent cliff is, however, two-fold; including much deeper engagement by the industry with strategic patenting activities. Another major consequence highlighted by respondents is an increased dependence on patent term extensions (or Supplementary Protection Certificates (SPCs) in Europe), to maximise the product life of existing products while simultaneously pursuing new R&D sources. 

Some 87% of respondents claim the industry’s current interest in patent term extensions/SPCs can be attributed largely to dwindling pipelines at innovator companies, while the vast majority (97%) think that this trend will either remain or intensify as blockbusters near the end of their patent life.

Moving away from the practical considerations of the approaching patent cliff, respondents expressed concerns over a number of regulatory and policy issues facing the sector, emanating from both the European Commission and the European Patent Office (EPO).

In July 2009, the European Commission published its report following a sector enquiry into alleged competitive abuses, delaying the market entry of generic competition. The Commission rejected root-and-branch reform to the intellectual property system, however, and instead launched a series of targeted probes where it felt there to be abuses.

As such, the general reaction to the Commission's activity from respondents was far more muted this year than last. The industry has been able to breathe a sigh of relief. Yet some concerns still linger, on several fronts.

Nearly two-thirds (64%) remain of the view that European policymakers are fundamentally hostile towards secondary patents for follow-on drug development. Over three-quarters (78%) suggest that critics of secondary, follow-on drug development do not give sufficient recognition to the role incremental innovation plays in advancing medicine. Some 59% also expect serious fines levied in the coming months as a result of the Commission’s targeted investigations.

However, the European issue of predominant concern to respondents related to changes affecting their patenting strategies. In April 2010, the EPO made rule changes significantly affecting patent examination procedure and the availability of divisional filings, designed by the EPO to vastly increase the speed in which patent applications are processed and thus reduce patent backlogs.

Survey respondents are in broad agreement that the measures – which will force companies to make more concrete decisions about the future direction of their R&D and patenting strategies at an earlier date – are likely to be a particular burden on smaller companies with more limited resources (82%). This is particularly worrying given that, as we approach the end of the ‘small molecule era’, the blockbusters of the future are likely to hail from smaller biotechnology outfits – the very organisations hit hardest by these reforms.

By contrast, the picture from across the Atlantic is far sunnier. Discussion necessarily must focus on the passing of the historic healthcare bill – seemingly on the rocks only a few weeks prior to its passage – pushed through by the Obama administration, with its profound implications for the provision of US healthcare.

A majority of respondents reject the notion that this reform will ultimately harm drug innovation in the US, with just over 65% contending that margin reduction will be offset in the long run by increased sales or that the reforms will even benefit innovation. Furthermore, 88% support the longer term given to complex biologics in the bill (of 12 years data exclusivity), arguing that this creates the right level of incentive for R&D (as opposed to a five-year term for conventional small molecule products). Lastly, a compelling majority of 89% suggest that the certainty provided by US healthcare reform will result in lasting capital being attracted back into the US market in the long run – presumably at the expense of other major markets, such as Europe.

Taken together, the findings suggest that we are continuing to see a more hospitable environment for drug innovation in the US than Europe. There is a clear fear that the gap in securing and exploiting innovation between the US and Europe may grow, and that – in Europe at least – the future innovations in medicine needed to promote health may be compromised.