Next move

As the pharmaceutical industry emerges from at least the first phase of the global financial crisis, it knows that companies and shareholders can no longer be assured that it will be a safe haven during a financial storm. Indeed, its vulnerable period really begins now, as governments beset by towering debts - hundreds of billions in euros, pounds or dollars - strive to bridge the fiscal chasm stretching across the public purse. No politician ever lost majority backing by proposing to force pharmaceutical companies to reduce their prices.

Downward pressures created by the financial crisis will heighten the price sensitivity of healthcare delivery systems, virtually guaranteeing that the next few years will see an accelerated transformation of the pharma industry. With the pricing environment in the 'old world' - defined as Europe and other developed economies - constrained by budgetary pressures, global pharma can look forward only to the somewhat forced emergence of a new world order. So what are the options?

While there will always be a major opportunity for true innovation - the first H2 blocker, PPI, statin, ACE inhibitor etc - neither the old world nor the new will have an appetite to pay premium prices for the umpteenth drug in the class. Pharmerging markets may prove to be a useful distraction for a couple of years to deflect shareholders' attention from the core problems of the pharma model, but there is no escaping the fact that such markets are each complex, difficult to access and subject to precipitous change, not to mention somewhat alien for firms built from the ground up to service European and US-style thinking and business models.

Of course there is an ethical obligation for the industry to make products available in developing markets, but it would be prudent for global pharma to be wary of basing its business growth prospects too heavily on the alleged untapped potential of 'pharmergence'. Global pharma is not designed as a commodity seller in markets where prices are low and the required infrastructure is nascent. 

Those few companies with established and cash flow-positive operations spanning Europe should be in a comparatively strong position to attract new partnerships. However, the nature of these regional alliances is evolving too. Common standards for new product registration and ever higher requirements for post marketing surveillance are driving companies to earlier, closer cooperation in which a handful of partners (at most) covers both the major markets and the largest emerging markets. In this new scenario, ensuring that the partners share a long-term vision for a product and a therapy area is critical to the selection of a licensee, which is where the doors open for Europe's small-to-medium-sized enterprises (SMEs).

By building networks focused on a number of products or therapy areas with other regional specialists, the SMEs can compete effectively with big pharma, as they are more likely to be able to integrate and apply existing scientific knowledge to develop solutions to unmet needs, ie small products that add real value to carefully defined sub-groups of patients. The clear result of recent trends is that a product that has a demonstrable advantage for a specific sub-group of patients will be priced according to the value of that proven advantage, but its use will be limited to that sub-group. However, these smaller products, adding real value to carefully defined sub-groups of patients, can still sustain the growth of a SME.  

The relatively lean cost structure of SMEs also enables these networks to develop new products more cost effectively. In an environment where health economic benefit must be proven before launch, cost effective development programmes focused on moderate-sized therapeutic targets are more likely to generate a positive return on investment, while not placing an undue burden upon the healthcare system.

In contrast to many in big pharma, Europe's SMEs are not only avoiding the distractions of uncharted pharmerging territory, but remain focused on delivering innovations that make a difference for patients and thereby add value for healthcare systems. Groups such as Norgine, for example, delivering meaningful incremental innovations and with an established footprint across Europe, will seek to commercialise products profitably from their R&D pipelines through a network of regional partnerships around the world. Conversely, the existing European infrastructure makes these firms attractive for other regional commercial companies, as well as those focused solely on new product development.

However, it is not surprising to see a spate of consolidations among the smaller SME players without the European coverage or critical mass. This will produce companies more able to compete effectively through participation in global networks.

Regarding big pharma too, it is a commonly held view that another round of mega-mergers will - once again - be the industry's salvation. While these big pharma mergers facilitate cost-cutting and therefore can delay the day of reckoning, the combination of two dinosaurs is unlikely to yield a dynamic pharmaceutical development engine. In order to succeed, companies must remain focused on the industry's core mission: the development of innovative products to improve the provision and quality of healthcare outcomes. 

Affordable innovation
For SMEs to benefit from their position, however, they must continue to search out innovation, while the definition of that innovation has itself evolved. Some would argue that innovation has, in the past, been measured (by the global industry and some of its representative associations) by the number of patents protecting a product, rather than the benefit a product conveys to the patient or the healthcare provider; but times are changing. By the new definition, true innovation comes from providing a proven benefit in healthcare outcome, however that advance is delivered.

Unfortunately, there are still examples of products launched today without well-designed active controlled studies against the best existing therapy, but increasingly these will become the exceptions. At the same time, there is growing potential for cost effective research programmes, which apply existing scientific knowledge and, in certain cases, even well established chemical entities, to solve unmet medical needs.