March 15, 2015 (Vol. 35, No. 6)

As Biotechs Fill the Research Gap, Developers of All Sizes Scramble to Reduce Risk

Actavis CEO and president Brett Saunders raised eyebrows a few weeks back when he bluntly stated what a growing number of biopharma chief executives appear to be thinking when it comes to the value of internal R&D.

“The idea that to play in the big leagues you have to do drug discovery is really a fallacy,” Saunders told Forbes. “You have to do research, you have to be committed to innovation. I strongly believe that, but discovery has not returned its cost of capital.”

The substance of Saunders’ comments is less surprising than the fact they generated reactions of surprise when expressed on-the-record. Six of 10 heritage “big” pharmas (GlaxoSmithKline, Eli Lilly, Merck & Co., Novartis, Pfizer, and Sanofi) have cut R&D spending between 2011 and 2014, according to a review of results by GEN.

A seventh (AstraZeneca) has been flat, leaving only three big pharmas spending more on R&D in 2014 than in 2011 (Bristol-Myers Squibb, Johnson & Johnson, and Roche). BMS is unlikely to show an increase in 2015, having told investors that its R&D spending will likely be “decreasing in the low-single-digit range.”

Two veteran industry observers say Saunders’ observation is correct.

“It’s no longer reasonable for large pharma companies to try to maintain the capabilities to bring compounds from the laboratory bench all the way to the marketplace. It’s too expensive. It’s too difficult to justify the upfront cost, and it’s just not a formula for success,” Kenneth I Kaitin, Ph.D., professor and director of the Tufts Center for the Study of Drug Development, told GEN.

As a result, Ryan Abbott, M.D., J.D., a physician and associate professor of law at Southwestern Law School, told GEN, “Big pharma is now an intermediary between the research community of the universities and startups, where people are working on genuinely new technologies, and getting things to market.”

“Not to say that there isn’t any R&D in big pharma. Occasionally, something impressive comes out of it,” Dr. Abbott said.

Yet external discoveries, he added, are increasingly important to biopharmas—a trend detailed in two studies. Deloitte Consulting and Thomson Reuters found in 2013 that more than half the Phase III compounds for 10 of 12 unnamed companies came from external research, with one company sourcing 94% of its late-stage pipeline externally, via product licensing, partnerships or acquisitions.

A year earlier, McKinsey & Co. found that the external R&D percentage of molecules advancing to Phase III jumped from 38% in 2002 to 62% in 2010.

Growing R&D Spending

Despite the cutbacks at big pharma, the top 20 R&D spenders in the biopharma industry actually spent 4% more on research and development last year than in 2011. Big biotechs have more than made up the difference as products have advanced to late-stage trials and reached the market. Of the nine biotech giants on GEN’s List of Top 20 Biopharma R&D Spenders of 2014, all reported higher research spending since 2011, though one (Vertex Pharmaceuticals) lowered spending from 2013.

Combined R&D spending by the top 20 biopharmas identified by GEN has grown from $88.643 billion that year to $92.264 billion in 2014. (The 2014 number is likely even larger because it was compiled before the scheduled release of full-year results by three biopharmas).

One of those three is Saunders’ company. Actavis has grown dramatically through acquisitions, and thus appears to have dramatically boosted R&D spending in recent years. While that’s true at first glance, a closer read of the numbers shows a more complex picture.

During the second quarter, Actavis plans to complete its $66 billion purchase of Botox maker Allergan. In announcing the acquisition on November 17, 2014, Actavis highlighted plans to “maintain annual R&D investment of approximately $1.7 billion.” That’s more than five times what Valeant Pharmaceutical Industries promised Allergan, and 63% above the $1.042 billion Allergan spent on R&D in 2013, according to its Form 10-K.

However, the trumpeted $1.7 billion would be just 2.5% above the $1.659 billion that both Actavis and Allergan spent separately on R&D in 2013. The combined figure includes the $616.9 million spent by Actavis during 2013. More than one-third of that reflected higher costs due to two deals: The 2012 acquisition of the original Actavis by Watson Pharmaceuticals, which accounted for $228.8 million in R&D costs, and Actavis’ 2013 acquisition of Warner Chilcott, which added another $33.1 million.

Actavis will likely report higher R&D spending in its 2014 results, due for release February 18, reflecting three acquisitions completed last year—Silom Medical, Durata Therapeutics, and Forest Laboratories. Actavis committed itself to “more than $1 billion” in combined R&D spending when it acquired Forest Labs—about 27% above the $788.276 million Forest Labs spent in its last full year before the Actavis merger, ending March 31, 2014—but committed to no specific figure in buying Silom and Durata.

In addition to committing $1.7 billion in annual R&D investment once the Allergan deal is closed, Actavis has also committed to $1.8 billion in annual cost-cutting or “synergies” starting in 2016. Some of that will likely come from R&D. Actavis has also agreed to carry out the $475 million in annual savings generated through Allergan’s cost-cutting plan of July 2014, which only spared “Phase 2/3 clinical pharmaceutical” R&D programs from the axe.

Losing Their Nerve

rested in reducing development risk, Dr. Kaitin said, two categories of new drugs are likelier to reach the market through external partnerships versus internal R&D.

One category is central nervous system (CNS) disorders. Over the past five years, at least four pharma giants—AstraZeneca, GSK, Merck & Co., and Sanofi—scaled back or eliminated R&D on CNS treatments. A recently completed Tufts CSDD study offers some reasons behind the retreat, noting that CNS drugs take longer to develop than drugs for other indications.

Between 1999 and 2013, the study found:

  • Average clinical development time for CNS drugs approved for marketing in the U.S. was 12.8 years—18% longer than for non-CNS compounds.
  • Average approval phase time for CNS compounds approved for marketing in the U.S. was 19.3 months, or 31% longer than the 14.7 months needed for non-CNS approvals.
  • About one in six CNS compounds received a “Priority review” rating from the FDA, compared to nearly half of all non-CNS compounds.

During the period studied, the FDA approved 42 CNS and 345 non-CNS drugs.

“There’s a huge market opportunity when you consider the graying of the population, and the number of people who will develop Alzheimer’s disease and other diseases of the elderly. But the risk is too great. The expense of developing these compounds is too great,” Dr. Kaitin said. “It’s not worth the risk.”

In oncology, Dr. Kaitin added, the deluge of genetic data has produced new knowledge about the pathophysiology of once-untreatable cancers—yet it’s simply too costly for one company to maintain and harness all that knowledge.

“A lot of this new knowledge about the genetic mechanisms of cancers is coming out of academic institutions, resulting from NIH-funded research. So why not partner with some of these smaller companies that are already doing this?” Dr. Kaitin said. “You could have partnerships with companies that are involved in four or five different approaches to treating cancer, as opposed to, if you were bringing it in-house, if it was all internal, you might be able to only invest in one or two.”

But as one recent cancer collaboration shows, partnerships sometimes require big spending upfront, too.

Pfizer reported a 2014 GAAP R&D expense of $8.393 billion, up almost 26% from $6.678 billion in 2013. Most of that increase consists of $1.15 billion in expenses from an up-to-$2.85 billion collaboration with Merck KGaA, announced in November, to develop and commercialize Merck’s investigational anti-PD-L1 antibody MSB0010718C for multiple types of cancer. 

Pharmas like Pfizer will gladly pay the upfront cost of collaborations if they think they can more than recoup the expense with sales of more treatments, developed faster and cheaper. The question yet to be answered is how much, if at all, external collaboration will truly return “its cost of capital,” in Saunders’ words, by paying off long-term compared with internal R&D—not only in money, but in development time.

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