If you can’t beat them, join them

Interesting article in the FT today… not particularly informative nor deep in analysis, but provocative for thought nonetheless. This article describes the recent trend of Big Pharma to partner with or acquire generic drug manufacturers and suggests, at least tangentially that this “may be essential for the industry to arrive at a sustainable new business model.”

The old model was beautiful. A high margin patent protected market produced phenomenal returns. It must be a difficult sell to shareholders to invest or support businesses which exist to purely to commoditize your core portfolio of previously lucrative patented products. The real issue is that producing blockbusters through massive investments in low probability R&D experiments is no longer viable especially with biotech, genomics, proteonomics, and other innovative technologies providing more targeted and higher probability results. The tweaking of molecules of drugs to provide dubious additional incremental benefits when most drug classes have a previous satisfactory blockbuster which is now available generically and which gets the job done, is getting increasingly difficult to sell to patients and payers.

Take the following example:

Antihistamines> Antihistamines are a class of drugs used to treat a variety of allergies most commonly allergic rhinitis (runny nose and sneezing). The first generation or “sedating antihistamines” like diphenhydramine or chlorpheniramine have been around a long time and are extremely cheap. The second generation or “non sedating antihistamines” are now the standard of care for most allergy symptoms but (see link for cost comparison) range from cheaper and OTC generic alternatives to very expensive non-generics. The credibility problem in the public eye and a (occasional) source of frustration for physicians is that today’s truths turn out to be tomorrows falsehoods. As this link shows, as time passes and more outcome data is analyzed, standards of care tend to shift creating uncertainty between physicians and patients. The original first generation antihistamines worked well albeit with the adverse effect of sedation. The second generation Claritin or it’s generic equivalent loratidine works pretty darn good as well. I have used it personally and it works and I do not get sedated (unfortunately sometimes).

However, is it really necessary to link a first generation with a second generation (tweaking of molecules) to come up with the new patented “blockbuster”?

I can accept that the effort, investment, and innovation the industry demonstrated in first discovering Claritin and its successors was impressive and there was a tangible benefit (at least initially thought and I believe still is). The more recent “discoveries” seem to show more of a desperate search to find protected revenue streams from a model that is now under serious threat.

The question of buying or partnering with generics doesn’t seem to be as appropriate fit as purchasing, investing, or partnering with the firms now driving innovation in drug discovery. You don’t improve your business model if you are a luxury automobile manufacturer brand like Mercedes by buying a mass producer of low cost cars like Chrylser, but this is especially true when the differentiation between your product and the low cost product is minimal or debatable, and especially when payers are increasing their scrutiny.

BOOM AND BUST
But it was the merger with Chrysler that diverted management attention from controlling costs and quality at Mercedes. Starting in 1998, troops of managers started flocking to Auburn Hills on a corporate jet. Soon the Germans discovered that Chrysler, which has a long history of boom-and-bust cycles, was in much worse shape than they anticipated. It spun deeply into crisis in 2000, racking up $4.7 billion in operating losses the following year alone. Mercedes had to make the ultimate sacrifice, squeezing its own costs to pump out better profits for the group. Analysts say Mercedes demanded lower prices from suppliers and allowed them to cut corners on quality. By July, 2003, Mercedes had fallen to near the bottom of J.D. Power & Associates’ reliability survey.

…Nearly seven years after Schrempp brought together Daimler and Chrysler, with the promise of building an auto maker with sufficient size to compete globally, the question that has dogged the merger from the beginning remains: Does this marriage make sense? Schrempp sold investors on the idea of an historic merger of mass with class. Together, Mercedes and Chrysler would have the money, clout, and knowhow needed to produce next-generation engine technologies. They would produce a series of small cars for the world’s emerging middle classes. Chrysler would tap into Mercedes technology, and Chrysler would give Mercedes the ideal hedge in case the luxury car market plateaued. Synergies and cost savings would proliferate. Later, Schrempp spent $2.1 billion adding a stake in Mitsubishi Motors to his visionary empire, hoping to get needed exposure in Asia as well as help Chrysler with small and medium-size cars. And he encouraged the growth of the Smart division at Mercedes as a way into the market for small, affordable cars in Europe.

Nothing worked out as planned. Far from being the perfect hedge, Chrysler proved to be a massive rescue job that sucked up billions and absorbed German management for years. Mercedes has lost share, reputation, and now is losing money.

.. And last year, BMW (BMW ) overtook Mercedes as the world’s No. 1 luxury carmaker. The smaller rival — which took a diametrically opposite strategy from Schrempp’s and now builds only premium cars — continues to make gains.

and our pharma analogy….

MUMBAI, India (AP) — India’s largest pharmaceutical company, Ranbaxy Laboratories, said Wednesday that it will resolve problems that led the U.S. Food and Drug Administration to ban the import of more than 30 of its generic drugs.

On Tuesday, the FDA barred Ranbaxy from importing a raft of drugs — including generic versions of the popular antibiotic Cipro and the cholesterol pill Zocor — citing poor quality at two Ranbaxy factories in India.

The warning comes amid mounting concern in the U.S. about the safety and effectiveness of imported drugs. Western pharmaceutical companies squeezed by dwindling drug pipelines and price pressures have outsourced a growing share of drug testing, manufacture and development to Indian companies.

Ranbaxy, which says it has been working for two years to redress FDA concerns, said it was “very disappointed” by the Tuesday action and looks forward to continued cooperation with the U.S. drug regulator.

and from the Financial Express…

New Delhi: The third largest drugmaker of Japan, Daiichi Sankyo, on Tuesday posted a record annual net loss of $3.5 billion for the year ended March 31, 2008, mainly on account of sharp erosion in the share price of Ranbaxy Laboratories Ltd. Daiichi acquired 64% stake in June last year for $4.9 billion

Ultimately within your firm you will have a group of individuals who are trying to maximize their revenue/profits, selling a low cost/price product canabalizing a higher cost/price product another group of individuals in the same firm are trying to sell. These are two different corporate cultures with different agendas and ultimately this approach will substantially affect resource allocation and ultimately erode the firm’s capacity to invest and produce newer innovative drugs. Even if there is no overlap within your own firm, across the industry there will be someone attacking your high end products.

The better approach to improving your business model is to invest in the future innovative technologies such as biotech, medtech devices, device/pharma combinations, genomics, and proteonomics which will allow you to maintain your competitive advantage and to continue to produce higher margin products. At the same time the industry should compel the digitalization of research and consumer health records so that outcomes data can become more readily available and analyzable which will help drive future research more cost effectively. Standards of care can be more readily established until compelling evidence of benefit of new therapies surface as opposed to constantly back and forth evolving treatment protocols which only serve to confuse all and in the end only compound the cost of healthcare provision.

Tej Deol, M.D.