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Sourcing R&D innovation: why pharma companies need to evolve their business models

Recent years have seen a significant shift in drug development to specialty areas

The global pharmaceutical and biotechnology industries have achieved many significant milestones in innovative research and drug development in the past decade – including the broad adoption of immunotherapies and the introduction of the first generation of gene and cell therapies.

Historically, both large pharmaceutical and small biotechnology companies have relied on both internal and external sourcing of innovative and promising therapies. Internal teams led the clinical side of R&D, while business development teams worked to identify collaboration opportunities, including partnerships or licence agreements with other companies to build their pipelines.

This approach has proven successful for many companies, but recent years have seen a significant shift in drug development to specialty areas including rare diseases. In this environment, many companies are finding that traditional strategies for sourcing R&D innovation are often sub-optimal or no longer practical.

As we transition to a more specialty-focused future, companies may need to modify and potentially replace established models in R&D and asset sourcing to reflect the unique considerations of targeting specialty therapeutic areas and the pace of innovation in clinical research and drug development to remain competitive and ensure success in the years ahead.

Evolving focus: from primary care to specialty medicine to rare disease

In decades past, pharmaceutical and then biotechnology companies worked to develop therapies to address unmet medical needs in general medicine that were often considered ‘low hanging fruit’. Examples of this approach include developing statins for the treatment of dyslipidemia, angiotensin-converting enzyme (ACE) inhibitors and angiotensin II receptor blockers (ARBs) for hypertension, and glucagon-like peptide 1 (GLP-1) receptor agonists for type 2 diabetes.

Now that there are multiple approved therapies available for these general conditions, R&D focus has shifted to areas that affect smaller populations with higher and more specialised areas of unmet needs.

With this shift, companies have faced unique tactical and technical challenges related to manufacturing, disease awareness, patient identification and recruitment, administration methods and other areas. The investment and risk associated with new technologies and bringing innovative and often first-time treatment options to overlooked patient populations, including people living with rare and ultra-rare diseases, has been balanced by higher drug prices.

These higher prices are often supported by the fact that many rare disease populations have limited or no approved treatments available with an acceptable efficacy and safety profile. Companies developing rare disease drugs can also often secure faster access to market (eg, expedited reviews and approvals) and longer market exclusivity (eg, through orphan drug designation).

Substantial revenue potential, coupled with a plethora of specialty disease areas in need of either a first or more effective treatment options, has led to an environment that has supported the growth of many mid-sized specialty pharmaceutical companies. One example is Genzyme (now Sanofi Genzyme), a pioneer in the rare disease space with a focus on R&D efforts targeting enzyme replacement therapies for lysosomal storage disorders and leading to multiple product approvals including Cerezyme, Fabrazyme and Lumizyme.

Amgen developed a portfolio of supportive cancer care drugs including Epogen, Neupogen and Aranesp, and Endo Pharmaceuticals developed a pipeline of pain products that includes Lidoderm, Percocet and Opana. Many other companies built similarly robust immunology and oncology portfolios.

In response to this success, some Big Pharma companies have reorganised their operations to include new business units dedicated solely to specialty disease areas. Novartis created Novartis Oncology in 2016 and Pfizer formed several new business units including specialty care, rare diseases and oncology.

As the industry has continued to evolve, more companies, both large and small, have increasingly realised the market potential of rare disease therapies specifically and expanded their focus to this sector, including Shire/Takeda, Actelion/J&J, Sanofi Genzyme, Alexion, Amicus, BioMarin, Sarepta and Vertex.

The expanding role of technology and innovative sourcing models

With the growth of many innovative smaller pharmaceutical and biotechnology companies, Big Pharma has often supplemented its pipeline and internal R&D efforts by acquiring novel technologies and drug development platforms. Strategies for sourcing external innovation include collaborations with universities and leading academic research centers based on their research focus (eg, oncology companies partnering with Memorial Sloan Kettering Cancer Center) and geographic location (eg, La Jolla/San Diego, Boston/Cambridge).

Also, on the execution side of R&D, many companies outsource development to contract research organisations (CROs) such as Covance or WuXi Clinical to improve efficiency and reduce costs, especially in niche markets where specialised expertise is essential.

Larger pharmaceutical companies also have relied on hybrid venture capital firms, corporate venture capital arms and/or incubators for sourcing R&D innovation. For example, GlaxoSmithKline, one of the early movers in this space, founded the venture capital firm SR One in 1985 to identify investment opportunities in promising
new technologies.

J&J Innovation also formed JLABS, a global network that enables life sciences innovators to accelerate the delivery of healthcare solutions to patients around the world. Similarly, Novartis formed the investment firm Novartis Venture Funds and Merck & Co. created the Merck Research Venture Fund. Nowadays, having a venture arm to proactively research for outside R&D sourcing is common for most mid- to large- sized players.

Many drug developers also have looked to engage and acquire companies with synergistic discovery-stage platforms to expand their portfolios to include next-generation and potentially curative therapies including gene, cell and
CAR-T therapies. Gilead’s acquisition of Kite Pharma and Bristol-Myers Squibb’s acquisition of Juno Therapeutics, as well as the merger and acquisition agreements between Novartis/Spark and Novartis/AveXis, are all recent examples of larger companies that have expanded their pipelines in this way.

With ever-increasing pressure to innovate, companies will seek new tools to help reduce total spending on advancing a drug to regulatory approval, a widely used R&D performance indicator. We anticipate that advances in technology including artificial intelligence, analytics, and big data will serve as the new frontiers in the future of R&D business, as already shown by collaborations between pharma and technology companies. In 2014, Novartis licensed Google’s smart contact lenses to help diabetic patients monitor their glucose levels.

In 2019, Qualcomm Life, Inc. and Roche agreed to a strategic collaboration to improve remote monitoring and management of chronic disease patients. With recent FDA approval of EndeavorRx by Akili, a ‘first of its kind attention treatment for children with ADHD delivered through a captivating video game experience’, and multiple innovative technologies in the pipeline, the use of technology in medicine is expected to grow and so are the associated deals, mergers and acquisitions.

With the introduction of new data analytics capabilities and broader adoption in the pharmaceutical industry, research platforms that heavily depend on data (eg, RNAi and CRISPR therapies) will likely increase their share in product pipelines. Such developments are also expected to improve the efficiency of research and discovery, catapulting the current R&D business model into an era of increased productivity and improved economics.

The path forward for drug developers

As the pace of innovation continues to accelerate and drug developers focus more on addressing unmet needs in niche populations, companies will need to expand their existing capabilities across the product lifecycle.

They will need to create R&D models that allow them to accurately assess and forecast opportunities in rare and specialty diseases, which will require a nuanced understanding of a disease and patient experience from before diagnosis through to treatment. Companies and regulators will also need to overcome unique regulatory challenges, which may depend on closer collaboration with key stakeholders, including regulators, starting in early stages of clinical development.

Post approval, companies may continue to face new challenges. For example, sales teams will operate in novel patient care settings where there will be higher demand to help coordinate patient access to new drugs. From a strategy development perspective, companies will enter new disease areas at an accelerating rate.

In earlier commercial models, companies aimed to build portfolios of multiple products within few therapeutic areas that featured large and relatively homogeneous patient populations. This deep presence allowed them to be thought leaders in therapy area knowledge and commercial strategy development with relative ease. However, due to the relatively smaller size of rare, ultra-rare and specialty diseases, it is challenging to build similar levels of commercial presence by only focusing on a few categories.

Rather, companies may need to be present in a relatively larger number of small but highly nuanced disease areas simultaneously. This may require a shift in strategy from ‘few large’ to ‘many small’ and along with the change, an increased need for frontier exploration in new disease areas.

In the effort to modify R&D models to address and adapt to challenges associated with rare, ultra-rare and specialty diseases, both large pharmaceutical and smaller biotechnology companies will likely need to consult with external partners to access specialised expertise in their target therapeutic areas.

These partners can help assess the commercial opportunity of external products or portfolios and determine how well they fit with a company’s resources, research focus, and commercialisation strategies. They also can help identify collaboration opportunities including partnerships, licensing deals and merger or acquisition agreements to insource/outsource innovation. It is likely that no single approach or business model will fit all needs.

As a result, insights from experts and close collaboration with industry stakeholders will be essential to guide and customise solutions to address each company’s unique challenges and optimise the chance for success.

The views expressed herein are the views and opinions of the authors and do not reflect or represent the views of Charles River Associates (CRA) or any of the organisations with which the authors are affiliated.

Emre Vural (pictured) is an Associate Principal in the Life Sciences Practice at CRA and Kishore Gangangari is a Consulting Associate

19th January 2021

Emre Vural (pictured) is an Associate Principal in the Life Sciences Practice at CRA and Kishore Gangangari is a Consulting Associate

19th January 2021

From: Research

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