CAVEAT EMPTOR: "Let Us Conduct Your Research and Clinical Trials Said the Brazilian Spider to the Foreign Pharma Flies..."

[The following article reflects a concerted effort led by health and regulatory officials within the Brazilian government to entice U.S. and European-based pharmaceutical, biotech and clinical research organizations [CROs] with offers of attractive financing and a 'sound regulatory system' to relocate a portion of their R&D and manufacturing activities within Brazilian national borders. "The country boasts a large, ready patient population, a universal health care system with hospitals able to support clinical research, and rules to ensure adherence to ethical review standards...ANVISA has developed capacity to evaluate clinical protocols and monitor studies, while also conducting more plant inspections to ensure compliance with quality manufacturing standards, working with international authorities to approve new vaccines, and streamlining its registration process to cut the time to analyze new drugs to only 12 months." These offers are being made on the heels of a recently executed "information exchange agreement between the [Brazilian] drug regulatory agency, the National Health Surveillance Agency  or ANVISA, and the [U.S.] FDA."  

However, as this article readily admits, "One challenge is concern about the country’s poor record for recognizing and protecting intellectual property rights...[Indeed, Brazil is said to employ their domestic regulatory system in a manner that secures local pharmaceutical and biotech companies a 'home court advantage'.  "US companies and key officials at the Office of the US Trade Representative [USTR] complain that the slow speed of patent reviews and regulatory overlaps make it difficult to enforce IP rights in Brazil.  The biggest challenge is coping with the lack of coordination between regulatory approval staff and the patent office. Local generic players continue to take advantage by obtaining marketing rights from officials who do not certify whether the reviewed product is under patent or not.  By the time an infraction of the patent terms is documented, the product is already on the market and competing with the originator."  [Furthermore, the Brazilian government has undertaken considerable efforts within international intergovernmental venues within Geneva, Switzerland, such as the World Intellectual Property Organization (WIPO), to broaden in international law the bases and instances in which compulsory licensing flexibilities with respect to patent rights may be employed by 'BRIC' and developing country governments to appropriate/expropriate foreign patented medicines and medical devices for an ostensible 'public' use without payment to the rights holders of full, adequate and complete fair market value compensation. See, e.g.,:  

ITSSD 'Geneva Diary' of the Proceedings of the 15th Session of the WIPO Standing Committee on the Law of Patents Reflects Developed Country IP Rights Under Third World Assault, ITSSD Journal on Intellectual Property Rights (Oct. 26, 2010) at:

http://itssdinternationaliprights.blogspot.com/2010/10/itssd-geneva-diary-of-proceedings-of.html; 

Brazilian Demands for Broader Compulsory Licensing Internationally Generate the Kinds of Legal & Economic Uncertainties Driving the Restructuring of the CRO Market, ITSSD Journal on Intellectual Property Rights (Oct. 30, 2010) at: 

http://itssdinternationaliprights.blogspot.com/2010/10/brazilian-demands-for-broader.htm;

New Survey of Global Pharma Companies Reveals Increasing Decision to Reduce R&D as Result of High Economic Costs and Regulatory and Policy Risks - Some Generated by Developing Country Governments, ITSSD Journal on Intellectual Property Rights (Oct. 28, 2010) at:

http://itssdinternationaliprights.blogspot.com/2010/10/new-survey-of-global-pharma-companies.html.

 Thus, it is highly recommended that all U.S. and European pharmaceutical and biotech companies undertake significant due diligence before taking this kind of a leap into Brazil.  In fact, they would be advised to read the

famous poem, authored by 19th Century English poet Mary Howitt, which holds as important a lesson for adults as it does for children. It is entitled, The Spider and the Fly  which has been reproduced below for their benefit:

The Spider and the Fly

Will you walk into my parlour?" said the Spider to the Fly,

'Tis the prettiest little parlour that ever you did spy;

The way into my parlour is up a winding stair,

And I've a many curious things to shew when you are there."

Oh no, no," said the little Fly, "to ask me is in vain,

For who goes up your winding stair can ne'er come down again."

-----

"I'm sure you must be weary, dear, with soaring up so high;

Will you rest upon my little bed?" said the Spider to the Fly.

"There are pretty curtains drawn around; the sheets are fine and thin,

And if you like to rest awhile, I'll snugly tuck you in!"

Oh no, no," said the little Fly, "for I've often heard it said,

They never, never wake again, who sleep upon your bed!"

-----

Said the cunning Spider to the Fly, "Dear friend what can I do,

To prove the warm affection I 've always felt for you?

I have within my pantry, good store of all that's nice;

I'm sure you're very welcome -- will you please to take a slice?"

"Oh no, no," said the little Fly, "kind Sir, that cannot be,

I've heard what's in your pantry, and I do not wish to see!"

-----

"Sweet creature!" said the Spider, "you're witty and you're wise,

How handsome are your gauzy wings, how brilliant are your eyes!

I've a little looking-glass upon my parlour shelf,

If you'll step in one moment, dear, you shall behold yourself."

"I thank you, gentle sir," she said, "for what you 're pleased to say,

And bidding you good morning now, I'll call another day."

----

The Spider turned him round about, and went into his den,

For well he knew the silly Fly would soon come back again:

So he wove a subtle web, in a little corner sly,

And set his table ready, to dine upon the Fly.

Then he came out to his door again, and merrily did sing,

"Come hither, hither, pretty Fly, with the pearl and silver wing;

Your robes are green and purple -- there's a crest upon your head;

Your eyes are like the diamond bright, but mine are dull as lead!"

-----

Alas, alas! how very soon this silly little Fly,

Hearing his wily, flattering words, came slowly flitting by;

With buzzing wings she hung aloft, then near and nearer drew,

Thinking only of her brilliant eyes, and green and purple hue --

Thinking only of her crested head -- poor foolish thing! At last,

Up jumped the cunning Spider, and fiercely held her fast.

He dragged her up his winding stair, into his dismal den,

Within his little parlour -- but she ne'er came out again!

-----

And now dear little children, who may this story read,

To idle, silly flattering words, I pray you ne'er give heed:

Unto an evil counsellor, close heart and ear and eye,

And take a lesson from this tale, of the Spider and the Fly.

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http://blog.pharmexec.com/2010/10/27/brazil-profile-latin-americas-giant-repositions-for-pharma-growth/

Brazil Profile: Latin America's Giant Repositions for Pharma Growth

By William Looney

Published: October 27, 2010

Brazil claims a bright future as a drug research and clinical trials site — but IP issues continue to raise concerns among the multinational investor community.

Health and regulatory officials of Brazil are making the rounds with a message for pharmaceutical companies and clinical research sponsors about what a great place it is to do business. Most pharma companies have had operations in Brazil for years, but largely to import and sell products made elsewhere. Now Brazilian officials are offering attractive financing and touting a sound regulatory system and clinical research network to persuade R&D and manufacturing operations to expand their presence in the market. 

Washington was a logical choice for conference hosted by the Brazilian Health Ministry last month, coinciding with the signing of a information exchange agreement between the drug regulatory agency, the National Health Surveillance Agency  or ANVISA, and the FDA.  Brazilian officials used the occasion to describe the opportunities offered pharma and biotech firms from its large ($50 billion) retail drug market and the capacity of its export-import bank to finance investment projects. Brazil wants active pharmaceutical ingredient producers to set up shop so domestic manufacturers don’t have to import these products.

One attraction to pharma companies may be growing opportunities to conduct clinical trials in Brazil. The country boasts a large, ready patient population, a universal health care system with hospitals able to support clinical research, and rules to ensure adherence to ethical review standards. A National Clinical Research Network is taking its cue from the U.S. National Institutes of Health in establishing a network of research centers (Pesquisa Clinica), many linked to universities or teaching hospitals able to evaluate and study new technologies, pointed out Reinaldo Guimaraes, Brazil’s secretary of science and technology.  ANVISA has developed capacity to evaluate clinical protocols and monitor studies, while also conducting more plant inspections to ensure compliance with quality manufacturing standards, working with international authorities to approve new vaccines, and streamlining its registration process to cut the time to analyze new drugs to only 12 months.

IP: Still on the Radar Screen

One challenge is concern about the country’s poor record for recognizing and protecting intellectual property rights. Despite a lack of patent protection for medicines until 1996, Brazil is now in compliance with TRIPS, explained Jorge Raimundo, president of Interfarma, the country’s R&D-based pharmaceutical manufacturers’ association. More patents are being registered in Brazil, he said, acknowledging that this has created an immense backlog in patent applications.

However, US companies and key officials at the Office of the US Trade Representative [USTR] complain that the slow speed of patent reviews and regulatory overlaps make it difficult to enforce IP rights in Brazil.  The biggest challenge is coping with the lack of coordination between regulatory approval staff and the patent office. Local generic players continue to take advantage by obtaining marketing rights from officials who do not certify whether the reviewed product is under patent or not.  By the time an infraction of the patent terms is documented, the product is already on the market and competing with the originator.

Despite this implicit homegrown advantage, leading generic drug makers have not yet set up subsidiaries in Brazil, partly due to the complexity of Brazil’s generic policies. Prior to enacting a generics law in 1999, Brazil permitted marketing of “similaires” that did not have to document bioequivalence. In the past decade, generic drugs that meet standards for bioequivalence and interchangeability have become more common and are gaining a larger share of the market. The similaires are supposed to be eliminated by 2014, but are very cheap, and thus still very popular.

Ultimately, the real goal is to attract research operations able to spur development of new treatments that meet Brazil’s key areas of medical need. Brazil offers “spectacular areas for research,” said Raimundo, noting progress in stem cells, genetic engineering, and drugs for neglected diseases. A prime attraction is Brazil’s biodiversity, with 60,000 unique plant species.

Looking for Long-Term Gain

The transition to a new government next month is unlikely to force any dramatic changes in policy toward the sector, considering that the more conservative candidate in the run-off election has a record of supporting aggressive actions to require foreign drug-makers to make essential medicines available at low prices, investors can expect the next government to push for pro-generic policies on the international front while seeking to stabilize the environment for the innovative side of medicines in its domestic industrial strategy for the sector. A truly pro-patent approach to innovation may be too much to expect:  although Brazil has weathered the global economic downturn relatively well, the government remains under pressure to reduce its spending, which could prompt cuts in pharmaceutical coverage.  Still, taking a long term view of change, Novartis, Pfizer and other pharma companies are investing and purchasing local operations and launching clinical trials.

Brazilian Demands for Broader Compulsory Licensing Internationally Generate the Kinds of Legal & Economic Uncertainties Driving the Restructuring of the CRO Market

[The following article once again illustrates the significant legal and economic pressures faced by biotech and pharmaceutical companies and the contract research organizations/clinical research organizations (CROs) with which they collaborate while undertaking efforts to research and develop new blockbuster medicines and treatments that are ultimately patented and subsequently commercialized in order to secure the necessary economic return on investment that  spurs future R&D and commercialization efforts by biopharma entities.  These risks have only become more pronounced as the result of the recent global economic crisis.  It is quite clear that the "drug development enterprise" is a risky enough enterprise from a financial/economic market perspective, especially in a 'down' market, that it can be adversely affected ("pushed over the cliff") by the added legal and economic uncertainties triggered in international markets by foreign government compulsory licensing demands that create added disincentives to engage in the types of R&D and patenting activities that benefit the 'public interest' through transparency and disclosure of new drug discoveries, transfers of technologies and knowledge dissemination and education.  As noted in prior entries within this journal, these compulsory licensing efforts are being led for mostly political reasons by the Government of Brazil and a group of populist developing country governments known at the World Intellectual Property Organization (WIPO) as the "Development Agenda Group" that operate and sustain welfare state economies premised on the notion of 'entitlement'.)  (CROs “provide support to the pharmaceutical and biotechnology industries in the form of outsourced pharmaceutical research services (for both drugs and medical devices) CROs range from large, international full service organizations to small, niche specialty groups and can offer their clients the experience of moving a new drug or device from its conception to FDA marketing approval without the drug sponsor having to maintain a staff for these services.” See Contract Research Organization, Wikipedia at: http://en.wikipedia.org/wiki/Contract_research_organization ).]  

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http://www.contractpharma.com/articles/2010/10/anticipating-structural-change-in-the-cro-market

Anticipating Structural Change in the CRO Market

Sponsor crises lead to an unstable landscape


By Kenneth Getz and Rachael Zuckerman




Tufts Center for the Study of Drug Development




October 2010

The global financial market crisis at the end of 2008, followed by a deep and lengthy recession worldwide, has affected every sector of the economy. The drug development enterprise has been hit particularly hard. Global economic and operating conditions have accelerated the implementation of portfolio diversification and operating strategies put in place prior to the crisis. These conditions have also facilitated the introduction of new — and in many cases reactive — strategies, many of which will result in structural changes in the clinical outsourcing market.

This article explores these structural changes and their implications. Although the short term has been, and will continue to be, a volatile period for both sponsors and CROs, the outsourcing market appears on track to become an even more integrated and collaborative environment in the long term.

Sponsors: Crisis on All Fronts

Over the next several years drug developers face an unprecedented $125 billion in revenue-at-risk due to patent expirations and competition from generic drug equivalents. Many of the largest blockbuster drugs in history — including Lipitor (atorvastatin), Plavix (clopidogrel), and Prevacid (lansoprazole) — are coming off patent with no blockbusters queued-up in the pipeline to replace lost revenue. Instead, pharmaceutical and biotechnology companies are anticipating managing a broader and more active portfolio of investigational treatments for smaller, more targeted illnesses. This ‘patent cliff’ has heightened awareness of the long-term need to contain rising R&D costs and accelerate drug development cycle time.

Weak consumer demand and restrictive price controls have dampened revenue and profitability. Facing far more limited resource availability, sponsors are cutting deeply across multifunctional areas — consolidating head count aggressively. Based on company announcements made between the beginning of 2009 and the first half of 2010, an estimated 100,000 pharmaceutical and biotechnology industry jobs have been eliminated or will not be filled. Of these reductions, approximately 9,000 jobs will be cut directly out of R&D functions.

Poor economic conditions and high market uncertainty have contributed to a major decline in global clinical trial volume. Many companies cancelled and delayed their clinical trials in 2009 through 2010. According to a recent analysis by the Tufts Center for the Study of Drug Development, new clinical trial starts worldwide — as measured by Form 1572s filed by clinical investigators — are down nearly 50% from their peak in 2Q08. Although many observers note that the volume of new clinical trial projects is now picking up, it is doing so sluggishly.

Facing difficult market conditions and the need to diversify their product portfolios, pharmaceutical and biotechnology companies initiated another major wave of mergers and acquisitions in 2009 that will likely continue through 2011. The largest deals: Pfizer’s acquisition of Wyeth for $68 billion, Merck’s purchase of Schering-Plough for $41 billion, and Roche’s completed acquisition of Genentech for $47 billion. Other notable M&A activity during the past 24 months includes Gilead Sciences acquisition of CV Therapeutics, BMS’ purchase of Medarex, Takeda Pharmaceutical’s acquisition of Millennium Pharmaceuticals, Eli Lilly’s acquisition of ImClone Systems, Teva Pharmaceuticals’ acquisition of Barr Pharmaceuticals, and King Pharmaceuticals’ $1.6 billion purchase of Alpharma. In early 2010, Abbot completed its $6.6 billion acquisition of Solvay Pharmaceuticals. And at press time, Sanofi-Aventis is aggressively pursuing the acquisition of Genzyme Corp., and BMS has announced its intent to purchase ZymoGenetics.

An Unstable CRO Market

Faced with an abrupt slowdown in global clinical trial volume and relatively weak sponsor demand, many major CROs struggled in 2009. CSDD’s evaluation of the aggregate performance of six large publicly traded CROs — Covance, Charles River Labs, ICON, Kendle, Parexel, and PPD — found that in the first half of 2010, revenue and earnings growth have slowed down substantially. Growth in the first half of the year between 2009 and 2010 was only 1.8%. This compares to a compound annual growth rate of 12.2% between 2007 and 2009 for large publicly traded CROs.

Operating profitability of major CROs saw an even sharper decline: the aggregate CAGR of those six companies from 2007 to 2009 was 3.1%. In the first half of 2010, operating profit decreased 58.1% in the aggregate compared with the first half of 2009. Individual companies saw their operating profits drop as much as 86%, and only one out of the six public companies evaluated had an increase in profitability in the first half of 2010 over 2009.

[CAGR = compound annual growth rate- "an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. CAGR can be thought of "as a way to smooth out the returns." See Compound Annual Growth Rate, Investopedia Dictionary at: 

http://www.investopedia.com/terms/c/cagr.asp .]

Project backlog, although still growing, has slowed down considerably. From the end of 2008 to the end of 2009, the aggregate backlog of the six companies grew 8.9%, but from mid-year 2009 to 2010, backlog grew 2%. Moreover, the aggregate market capitalization of the six companies grew only 4.3% during the first half of 2010.

In response to market conditions, several major CROs have moved to reduce their fixed operating costs and to focus their businesses — through consolidation of manpower, infrastructure and divestiture. Charles River Labs, for example, suspended operations at one of its large preclinical sites. Covance closed a preclinical and a Phase I unit. MDS Pharma Services sold its remaining clinical trial businesses to Ricerca Biosciences. In June 2010, PPD spun off Furiex Pharmaceuticals, its compound partnering division, as an independent company.

The overall CRO market structure is shifting; the 10 largest CROs dominate the market, contributing 75% of total contract clinical CRO revenue (not including pass-through investigator grant fees and central lab fees). In aggregate, these companies have increased their revenues from $5.2 billion in 2005 to $8 billion, a compound annual growth rate of 8.9%. Average revenue per top 10 largest CRO company is $1.3 billion. The next 10 largest CROs grew at a slightly lower rate of 7.2% between 2005 and 2010 (projected). This segment has an 11% share of the overall CRO market at this time. For scale comparisons, the average revenue for each company in the Next-10-Largest CRO segment is $220 million.

The largest surprise in the CRO market comes from the very fragmented, small, niche provider segment. Comprised of hundreds of companies, this segment in the aggregate has been growing by 20.5% each year between 2005 and 2010 (projected). The typical company in this segment is small with average annual revenue of $3.1 million. The niche CRO segment posted slow relative growth (7.6% annually) between 2000 and 2005. Given unusually high growth during the past five years, this segment now generates 14% of the total global market for contract clinical research services.

To what do we attribute such rapid growth among niche providers at a time when most sponsors are looking to consolidate the number of vendors they manage and to establish preferred pricing through longer-term multi-service agreements? Most sponsors and CROs concede that demand for highly specialized niche services and unprecedented access to local markets worldwide has been strong. As such, both sponsors and major CROs have increased their level of partnering with niche providers.

Tomorrow’s Outsourcing Landscape

Several years ago, pharmaceutical and biotechnology companies appeared poised to embrace common integrated alliance-based relationship structures with CROs. In a study conducted by Tufts CSDD in 2008, nearly half of all companies reported that they had entered into typical functional service provider arrangements. Approximately one out of five reported having entered into a strategic alliance. Adoption of these relationship structures, however, has not unfolded in a predictable or uniform manner.

Since the end of 2008, it appears that many sponsor companies have opted to pursue hybrid relationship models based on a wide variety of factors including corporate culture, pipeline characteristics, legacy systems, and internal operating structures and processes. Sponsors are picking and choosing elements from transactional relationships, full service relationships, functional relationships and alliance relationships with two primary objectives in mind:

1) to achieve higher levels of operating efficiency through integration and the transfer of non-core responsibilities, and

2) to lower the overall cost of outsourcing.

Distinctions between various relationship models are blurring. As companies move to mix and match elements, they rely on communication systems and unique governance structures to monitor and manage performance.

Integrated partnerships appear uniquely susceptible to market volatility. Operating challenges have disrupted the adoption and growth of integrated relationships — particularly for those organizations trying to revise their outsourcing strategies and practices.  As the industry consolidates through mergers and acquisitions, outsourcing practices favor those organizations driving the transaction. Established sponsor-CRO relationships with those organizations being absorbed simply vanish, as acquiring companies and those directing a merger transaction drive the use of their primary outsourcing practices and partners.

Market volatility and weak demand has distracted CROs and prompted many to reduce their operating costs and capacity. Unless market demand improves markedly, there will be more CRO restructurings — including downsizing and divestiture.

Niche CROs continue to enjoy high relative demand among both sponsors and major CROs. Competitive intensity among the largest CROs is increasing, especially as they strive to win new integrated relationship contracts among a shrinking number of pharmaceutical and biotechnology companies.

Servicing large, integrated relationships, however, is expected to be much more demanding without uniformity in sponsor outsourcing models.  Relationships will be more extensive and expensive to operate, involving more elaborate communication and governance. Sponsors will continue to apply downward pressure on margins and to demand a lower tolerance of variance from planned performance. These pressures may spur CROs to further lower their fixed costs and to consolidate their operations. Long term, CROs will be prompted to seek higher margin business opportunities to offset less economically attractive integrated clinical services relationships.

Ultimately, changes in the current landscape will result in a consolidated market with higher levels of collaborative efficiency. Sponsor demand will drive closer, more integrated partnerships between various niche and diversified CROs and between global and local CROs. Getting to this point, however, will no doubt be tumultuous and difficult.

Kenneth Getz is a senior research fellow, and Rachael Zuckerman a research analyst, both at the Tufts Center for the Study of Drug Development (CSDD), Boston, MA. The center can be reached at csdd@tufts.edu.