Drugbaron Blog

January 3, 2012 no comments

New Year, Same Message: Ignore Commercial Risk at your Peril

DrugBaron wishes his readers a Happy New Year.  But how happy 2012 will really be, at least from a biotech perspective, must be open to doubt.  If the health of the drug industry depends on the uptake of its products, then 2011 casts a long, gloomy shadow over the New Year celebrations.

That shadow comes from the faltering sales of the drug candidates that were, a full twelve months ago, the jewels in biotech’s crown.   The biggest disappointment has been Provenge™ sipulecel-T from Dendreon, a ground-breaking cell therapy for prostate cancer.  But it isn’t the only one: sales of Incivek™ telaprevir from Vertex (an antiviral), Esbriet™ pirfenidone (for idiopathic pulmonary fibrosis) from Intermune and Benlysta™ belimumab (a lupus drug) from Human Genome Science have all fallen well below market expectations.

If the sales figures surprised analysts, that only suggests the analysts need to revise their forecasting framework.  The cause of the disappointment has been obvious for a number of years: it is no longer sufficient for a drug to achieve regulatory approval for it to achieve commercial success.  Healthcare providers and physicians alike need to see material improvements in patient outcomes to justify the costs of proprietary medicines.  Clinical data for these agents persuaded the regulators but not, it seems, the patients, physicians and payors.

The root cause of the problem, as DrugBaron already described in detail back in 2010, is the decision to progress product candidates that show proof-of-concept rather than proof-of-relevance.   These new examples simply add more weight to the argument that it is essential to have a market access plan in place right from the earliest stages of a drug development programme.

Moreover, the way we design early stage development has got to change.   The current paradigm is focused on determining whether a drug candidate is likely to meet regulatory end-points in late stage trials.  A decade ago, that was all you needed to know.  But today, you need a much clearer indication of commercial relevance at the very earliest stage of a drug development programme.  If you don’t know how effective your product has to be in order to win market acceptance; if you don’t know how much payors will pay for a given level of efficacy, how can you assess the clinical data as it is generated?  Head to head comparison with the (often generic) gold-standard, as well as designed with the new drug added on top of current treatments, currently almost universally shunned by the industry, will become the norm in Phase II.  Make it your first New Year Resolution to re-evaluate your clinical development strategy to incorporate proof-of-relevance at the earliest possible stage.

“The future lies in a re-imagining of early stage drug development”

Unfortunately, these ‘busters’ (a term DrugBaron coined for products that win regulatory approval, at great cost, but not market acceptance, contrasting them with ‘blockbusters’, for a long time the holy grail of the drugs industry) are not limited to the small and mid-cap biotechs.   In 2011, DrugBaron highlighted several examples of products from global pharmaceutical giants that are suffering the same fate: Effient™ prasugrel (a platelet inhibitor) from Eli Lilly and Eliquis™ apixaban (a direct Factor Xa inhibitor) from Pfizer and BMS are the best, but not the only, illustration.  Both are drugs that show only minor benefits compared to widely-used generic competition (clopidogrel and warfarin).   The reasons for these failures differ between small and large pharma companies, though: big pharma was quicker to realize the need to quantify incremental benefit early in the development cycle, but they (wrongly) assumed their skill in marketing (a core competence for these global companies) could achieve market acceptance with a lower level of incremental benefit than has proved to be the case.

These misjudgments are very costly.   Dendreon have seen their stock price slip 86% since the launch of Provenge™.  Vertex is off 41%, Intermune down 72% and Human Genome Sciences down 75% since their respective product launches.  Some of these losses reflect an unrealistic enthusiasm that accompanied the regulatory approval of each product, artificially elevating the stock prices.  But much of it is a real reflection of the out-dated development paradigms that yielded these products.  For some, at least, of these ‘busters’, choosing a different clinical development path may have yielded a different outcome for companies.

The real innovation we need to see is in the trial designs early stage studies, rather than in shiny new technological advances that glitter and shine all too briefly before falling victim to the cold, calculating marketplace.

Worse still, the impact of these failures is not restricted to the companies who own them or the investors in those companies.  Late stage development and market launch are incredibly expensive.  Public companies in Phase II or earlier raised $1.8 billion in 2011, which was only 4% of the total raised, and even adding in the $1.4 billion these early stage companies raised from private VC investors, brings the total to less than 10%.  The majority of the capital is being consumed by companies in late stage development and market launch.   As Michael Brinkman of Jeffries told BioCentury “For companies that are in Phase III or later, there’s tremendous access to capital.  For companies at an earlier stage its much more challenging”.

The simple fact is that investors seem willing to write any size of cheque as soon as the technical risk has been removed, with the publication of reliable placebo-controlled randomized clinical data.  But with each ‘buster’ the return on this capital declines further.  Markets are quicker to learn than management teams, and the poor return on these past investments is translating into a dearth of capital for the cash-hungry late stage opportunities, as the lengthening ‘IPO queue’ testifies.  Put simply, the return on investment across the biotech sector is too low to be attractive to the generalist investor.

And these later stage development companies, the ones DrugBaron dubbed “silver medal companies”, are the source of that poor return.   These are companies that failed to clear the hurdle for an early stage acquisition, but did well enough to survive.   When, having consumed vast chunks of capital, their product eventually do reach the market for the most part they fail to achieve the commercial success needed to justify the expense of developing them.  Is there any wonder generalist investors look for other places to invest?

The unpalatable prescription to cure these poor returns was to apply a sharper scalpel.  Programmes that would have been commercially, as well as technically, successful a decade ago, no longer pass muster.  The bar has been raised substantially, both by the improving (and often generic) standard-of-care in many indications and by the bulging store-cupboard of big pharma companies packed with technically successful projects they deemed to have too high a commercial risk to proceed with.  Clearly, to be successful any new biotech programme has to be substantially better than both the current gold-standard and these deep-frozen big pharma assets.  Anything less than these exalted heights should be killed before it consumes large amounts of ultimately non-productive capital.

The future, then, lies in a re-imagining of early stage drug development.   More capital needs to be allocated to promising pre-clinical and early clinical opportunities, but that capital needs to be spent on achieving as quickly and cheaply as possible a demonstration of proof-of-relevance.  Those that fail must be allowed to fail early, even if they could achieve regulatory approval.  Those that pass have a greater chance of avoiding the fate of the ‘busters’, hopefully improving the return on investment of the sector as a whole and tempting back those disillusioned generalist investors that control such a large chunk of the available capital.

buster [ˈbʌstə] n. 1.  a person or thing destroying something.  2.  a drug product that achieves regulatory approval but not adoption in the market place

The calendar may have changed, but the underlying message has not.   What 2011 brought us was more examples of ‘busters’ than ever before.  If we really are to have a Happy New Year, the real innovation we need to see is in the trial designs for Phase I and Phase II studies, rather than in shiny new technological advances that glitter and shine all too briefly, basking in regulatory success, before falling victim to the cold, calculating marketplace.


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