ITSSD: U.S. High-Tech Innovations Face Gathering 'Perfect Storm' of Compulsory Licensing and Royalty-Free Interoperability Frameworks Abroad
PRINCETON, N.J., Dec. 16, 2010 /PRNewswire-USNewswire/ -- In the Washington Legal Foundation Working Paper published today and in the Global Trade & Customs Journal article to be released in February 2011, international business and regulatory attorney Lawrence Kogan identifies and describes the growing number of foreign regulatory frameworks and national standards initiatives designed to convert privately developed intellectual property-rich high technologies into virtually free-of-charge 'public interest' assets mostly at the expense of U.S. innovators and investors.
These articles are based on Mr. Kogan's continuing involvement in the work of the World Intellectual Property Organization Standing Committee on the Law of Patents and a related event he recently convened on this subject while attending the body's 15th session meetings during October 2010 in Geneva, Switzerland.
According to Mr. Kogan, "such market intervention mechanisms are grounded in United Nations human rights, technology transfer and wealth redistribution soft law declarations and ambiguous UN environmental and World Trade Organization treaty provisions that have already begun to weaken the prevailing neo-liberal exclusive private property right basis for patents, trade secrets and copyrights which has long provided an invaluable incentive for undertaking high-risk technological research & development, innovation and commercialization activities. 'BRIC' nations, in particular, seek to replace the current international system with a state-centric utilitarian regulatory model that guarantees to their public constituents universal access to U.S. high technologies at pre-determined concession-rate prices," emphasizes Kogan. "However, the European Union, for economic competitiveness and trade protectionist reasons, is also involved."
"Capital-intensive technology development and commercialization already engenders significant economic and legal risks and other uncertainties. Given the precarious state of today's global economy, it simply defies logic and common sense that governments and civil society organizations would seek to create additional regulatory and policy risks capable of stifling discoveries and innovations that could lead to the job creation, knowledge dissemination and other downstream public benefits they desire," Kogan believes.
"Consequently, it would be unwise for the U.S. innovator and investment communities to be lulled into a false sense of security by U.S. and foreign government assurances that these frameworks are narrowly focused and applicable only in a limited number of instances," warns Kogan. "Much to the contrary, compulsory licensing and government procurement interoperability regimes are quite broad and expansive, applying to a number of technology industry sectors including, but not limited to, software, broadband, healthcare, energy, transportation, education, emergency and disaster management, and defense/national security. Thus, competent counsel should be retained as soon as possible to identify possible public and private law opportunities to mitigate such risks."
[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.,:
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.
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.
[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 ).]
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:
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 CROmarket 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.
[The following articles reflect not only that scientific and technical research and development costs/risks are particularly high in the life sciences sector, but also that the market cost/risk of innovation/commercialization of basic R&D can be much greater and subject to myriad regulatory requirements and obstacles in the marketplace during the normal course of introducing new medicines. It is clear that these costs and risks are significant enough to cause companies to reconsider their business models when they are unable to earn a fair rate of return on investment (ROI). The choice to consider new business strategies and/or business models becomes easier, however, when international regulatory and market risks are added to this calculus.
Indeed, global pharmaceutical companies, whether based in Europe, Japan, or the United States, are quite aware of the growing threat to their IP assets and overall economic interests as the result of developing country foreign government efforts, led by Brazil, to broaden their international human right to issue more 'compulsory licenses' in order to secure the patented medicines created and commercialized by such companies for less than fair market value. Such companies recognize that these foreign governments are being supported by the political and policy advocacy efforts of US and foreign nongovernmental organizations (NGOs) and liberal law professors, which eventually over time work together with such governments to transform 'soft' law declarations into hard law obligations. For example, these groups recently sought the assistance of the Special Rapporteur on the Human Right to Health housed within the Offices of the United Nations High Commissioner for Human Rights to commence an investigation against the Office of the US Trade Representative for international human rights law violations, allegedly committed as the result of the USTR's publication of its 'Special 301' Report and its continued efforts to ensure that foreign governments recognize and protect US citizens' patent rights abroad, consistent with the US constitutional and international trade law protections afforded patents and trade secrets. SeeLiberal Law Professor Files at UN Formal Allegations Against US Government's 'Special 301Program' Claiming US Laws Protecting IP Violate 'International Human Right' to Access to Medicines, ITSSD Journal on Intellectual Property Rights (Oct. 28, 2010) at:
The ITSSD recently attended the 15th session meetings of the World Intellectual Property Organization (WIPO) Standing Committee on the Law of Patents (SCP) during October 11-15, 2010, where it observed firsthand and reported how Brazil and a group of developing countries (the "Development Agenda Group" - (DAG)) had been quite vocal in calling for broad use of compulsory licensing and other government intervention (regulatory) flexibility mechanisms to reduce the scope and the strength of patents internationally. See 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 of Intellectual Property Rights (Oct. 27, 2010) at:
Indeed, with these industry concerns in mind, the ITSSD convened and moderated a side-bar panel event during the WIPO SCP meetings that emphasized the added legal and economic uncertainties triggered by these and other recommended government intervention mechanisms which have the effect of dampening R&D and innovation efforts undertaken by high technology companies, including those in the life science, cleantech and information and communication technology sectors.
The following articles which report about the recent biopharmaceutical sector survey (see below) corroborate industry concerns and the ITSSD's research and observations.
Two thirds of pharma companies face 'strategic crisis'
By Ben Adams
October 25, 2010
The pharma industry is moving away from traditional in-house innovation and toward a more diversified business model, but will encounter problems on the road ahead.
A survey by German analysts Roland Berger found that 65% of companies are facing a “strategic crisis”, with diversification the most common ploy to avert it.
The analysts’ Fight or Flight? study identifies three dimensions of diversification - innovate, integrate andde-risk, with the latter two proving most popular.
“Big pharmaceutical companies are at a turning point,” says Stephan Danner, partner and pharmaceutical expert at Roland Berger Strategy Consultants.
“With more than half of the industry's sales going off-patent within the next three years, 65% of the companies surveyed think the pharmaceutical industry is facing a strategic crisis.
“In this context, 67% of pharma executives see diversification as a potential way forward.”
Roland Berger conducted a ‘high-level’ survey across 25 pharma companies representing over 40% of global pharmaceutical revenues and including 7 of the global top ten firms. The analysts also conducted 50 chief executive and board level face-to-face interviews.
Seventy-eight percent of executives questioned in the study perceived generics to be the most important area of diversification.
Pfizer and Novartis are two of the more recent examples of big pharma buying up generic companies to help offset looming patent expiries of their own.
This will come as a little surprise to the industry as almost half the pharma companies surveyed expect a negative return on current R&D investment and are losing faith in traditional patent-based protection.
Roland Berger said that there are two reasons for this. First, the industry expects the margins of innovative medicine to come under “tremendous” pressure, as government deficits need to be managed globally.
Second, the large R&D investments are no longer expected to bring the required level of return with many companies outsourcing their R&D to cut down on costs.
Danner said: “The future pharma industry will be more diverse, ranging from highly focused, innovative players to fully integrated healthcare conglomerates.”
He advised that companies considering diversification should start preparations today, concluding: “The first mover advantage provides an excellent position to shape the future healthcare environment.”
Two-thirds of large pharmaceutical companies are focused on diversifying away from patented drug development as they grow increasingly sceptical about the returns from future innovation.
A survey by Roland Berger, the strategy consultancy, of 50 top industry executives showed that 65 per cent considered their sector was facing a “strategic crisis” and 67 per cent saw diversification as a potential solution.
Almost half believed that current investments in research and development would yield a negative return, although two-thirds believed future scientific advances could yield positive returns over the next decade.
The negative perceptions towards innovation reflect the view of the financial markets, which are giving higher valuations to more diversified companies. “The industry does not trust its own innovative capabilities. We are burning money,” said one industry executive Roland Berger interviewed.
The report also highlights a growing divergence between companies.
Sanofi-Aventis of France placed greatest emphasis on diversification from 2004-2009, boosting non-patented drug sales from 5 per cent to 12 per cent.
Pfizer, Merck, Johnson & Johnson, Novartis and GlaxoSmithKline also moved in this direction. Groups facing a steep “cliff” of patents which expire in the coming years have generally moved furthest in diversifying in response, led by Sanofi-Aventis, which will soon lose exclusivity on its blockbuster Plavix.
Industry-wide, it estimates 57 per cent of 2008 sales will be off patent within three years and 75 per cent within five years.
But some companies with similar patent pressures, including Eli Lilly, have diversified far less, while Bristol-Myers Squibb has instead shed non-core activities to bet on enhanced innovation in its pipeline of experimental drugs.
A few other drug companies have also concentrated on pharmaceutical operations, led by Roche and – until recently – AstraZeneca, which since 2008 has also diversified a little and expressed some interest in generic drug sales.
The report stressed that there are significant variations in the approach taken to diversification, with the majority focused on de-risking through a shift into generics, consumer health and vaccines. While these tactics increase the scope to boost sales and expand into emerging markets, the report suggests greater value could come from diversification into more innovative areas, notably into personalised healthcare and diagnostics.
The report stresses the potential to increase efficacy and value in a way sought by healthcare systems and insurers – from integrating drugs with genetic markets, imaging and molecular markers, and with medical devices.
While integration into enhanced “healthcare value” could boost returns, Roland Berger concludes: “Most executives still shy away from this path due to the perceived magnitude of change required.”
One anonymous interviewee said the industry was a “victim of its own pipeline focus”.
"Fight or flight?": Roland Berger Study identifies diversification as one of the most prominent trends in the pharmaceutical industry
Press Release - Munich, Germany
Oct. 25, 2010
65% of the companies surveyed believe that the pharmaceutical industry is facing a strategic crisis
Diversification is one of the most prominent trends across the pharmaceutical industry as a way out of the crisis
Three dimensions of diversification can be distinguished: innovate, integrate and de-risk
Today's most important diversification area is the generics business
R&D productivity crisis drives diversification – almost 50% of companies expect a negative return on today's R&D investments
Big pharmaceutical companies are facing more and more challenges. The study "Fight or flight?" by Roland Berger Strategy Consultants identifies diversification as one of the most prominent trends across the pharmaceutical industry. The participating companies include seven of the global Top Ten and represent over 40% of global pharmaceutical revenues. The Roland Berger experts also conducted interviews with top executives to validate the findings and derive strategic implications. The study identified three dimensions of diversification: innovate, integrate and de-risk. At the moment, the most important area for diversification is the generics business. With innovative medicines coming under increased cost pressure and more and more R&D investments yielding a negative return, pharma is embracing the diversified business model as a potential way out of the crisis. In a break with the past, the financial community supports this move.
"Big pharmaceutical companies are at a turning point," says Stephan Danner, Partner and pharmaceutical expert at Roland Berger Strategy Consultants. Public cost containment measures, difficult market access as well as massive patent expiries require a fundamental review of the traditional business model."With more than half of the industry's sales going off-patent within the next three years, 65% of the companies surveyed think the pharmaceutical industry is facing a strategic crisis. In this context, 67% of pharma executives see diversification as a potential way forward," states Danner. For those companies currently pursuing diversification, the Roland Berger study "Fight or flight? – Diversification vs. Rx-focus in big pharma's quest for sustained growth" identifies three dimensions: the de-risk path, the innovation path and the integration path.
Pharma focuses again on generics
At the moment, the industry seems to be focusing on the rather conservative de-risking strategy. 78% of executives perceive generics to be the most important area of diversification followed by consumer health (50%) and vaccines (42%). Acquisitions in this context aim for top-line growth while preparing for opportunities in the BRIC countries. Diversification along the innovation path ranks second. It results from the trend towards personalized healthcare and diagnostics. Regarding the third dimension, integration strategies along the healthcare value chain would turn pharma companies into active healthcare solution providers. Most executives still shy away from this path due to the perceived magnitude of change required.
The art of managing a diversified business
Leveraging existing capabilities and realizing related synergies are key to creating value from diversification. Pharma executives are very cautious in this respect. The most successful transfer of skills and capabilities is expected in the areas of generics (45%) and diagnostics (43%). According to the managers surveyed, Rx companies lack capabilities for forward integration. In particular, despite huge investments, access to prescribers or branding concepts are not perceived as Rx capabilities to be leveraged in an effort to diversify.
R&D productivity crisis drives diversification
Among the executives interviewed, over 60% are reevaluating their traditional business model which focused on high margins and patent-protected drugs. There are two reasons for this. Firstly, the industry expects the margins of innovative medicine to come under tremendous pressure as government deficits need to be managed globally. Secondly, the massive R&D investments are no longer expected to bring the required level of return. Almost 50% of the participating executives expect a negative return on today's R&D investments. The ongoing restructuring efforts of R&D functions across the industry support this assessment.
The financial community and shareholders support diversification
Unlike in the past, diversified companies are no longer being penalized by the financial markets. With over USD 400 billion of market capitalization lost over the past 10 years among innovative pharma companies, the financial community has once again started linking high growth expectations to diversified companies. Today, the price-to-earnings ratios of diversified companies are already higher than those of more focused players.
Diversification is here to stay
Over 80% of pharma executives believe diversification is a long-term trend that will be pursued regardless of R&D productivity issues. For the rest, it will be a bridging strategy used to compensate for profit and growth shortfalls.
Danner: "The future pharma industry will be more diverse, ranging from highly focused, innovative players to fully integrated healthcare conglomerates. Companies considering diversification should start preparations today: the first mover advantage provides an excellent position to shape the future healthcare environment."
Fight or flight? Diversification vs. Rx-focus in big pharma's quest for sustained growth
SHORT REPORT VERSION
...For those currently pursuing diversification, the study distinguishes three alternative dimensions: the de-risk path, the innovation path and the integration path
At the moment, the industry seems to be focusing on the rather conservative deriskingstrategy. By acquiring particularly generics and consumer healthcompanies, the industry aims at top-line growth while also preparing for the opportunities emerging markets offer.(p.5)
Diversification along the innovation path ranks second. It results from the trend towards personalized healthcare and diagnostics
Three dimensions of diversification can be distinguished
INNOVATE - • Continue on path of medical progress by investing into adjacentmedical disciplines - "High risk, high fun"
INTEGRATE - • Defend existing top-line by forward integration along the healthcare value chain - "Maintain fun"
DE-RISK - • Reduce dependency on Rx business model by investing into other non-Rx life science businesses - "Low risk, still fun" (p. 13)
[CAVEAT: ITSSD research reveals that governments are now seeking to reduce the need for patented technologies in the area of SMART-healthcare - a/k/a - 'electronic health records and personalized health care.
[On July 20, 2010, Professor Sean Flynn of the Program on Information Justice and Intellectual Property (PIJIP) at American University School of Law, Washington, DC, representing various liberal clients including US and foreign nongovernmental organizations (NGOs) and two US law professors from Howard University, Washington, DC, filed a formal complaint against the U.S. government with the United Nations Special Rapporteur on the situation of Human Rights Defenders, Anand Grover, 'housed' within the Office of the United Nations High Commissioner for Human Rights.
See IN THE MATTER OF USE OF THE “SPECIAL 301” PROGRAM, SECTION 182 OF THE TRADE ACT OF 1974, TO LIMIT ACCESS TO MEDICINES IN VIOLATION OF THE INTERNATIONAL RIGHT TO HEALTH, accessible online at: http://www.wcl.american.edu/pijip/go/healthgap07202010 . The complaint assumed the form of an "Allegation Letter" which the Special Rapporteur typically uses to make contact with the State (country) alleged to have committed human rights violations. See Special Rapporteur on the situation of Human Rights Defenders - Submitting Allegations, Office of the United Nations High Commissioner for Human Rights website accessible online at: http://www2.ohchr.org/english/issues/defenders/complaints.htm .
The Allegation Letter claims that the following US government practices violate the international human rights of the world's poor which foreign governments are responsible for protecting via exploitation of the WTO TRIPS flexibilities - (e.g., compulsory licensing, patent exclusions, exceptions and limitations to the patent right more generally, etc.):
"The United States has a long history of using Special 301, other trade negotiations, the Generalized System of Preferences, foreign aid, technical assistance and diplomatic pressure to promote intellectual property and pharmaceutical regulations that restrict access to affordable medications in developing countries. These policies are continuing in the present administration, and cause grave and needless suffering around the world. UN Human Rights officials have frequently affirmed that promoting access to medicines in poor countries is a human rights duty of all countries, including of donors and trade partners, and have reviewed country compliance with these mandates in human rights review proceedings."
In support of their creative argument that international human rights laws trump the United States Constitution and the protections that it guarantees to American citizens, including legal persons, pursuant to Article I, Section 8, Clause 8, of the U.S. Constitution (the 'inventor's clause') and the Fifth Amendment of the US Bill of Rights to the US Constitution (the 'takings clause'), namely, the protection of their exclusive private property rights, including patents and trade secrets, as against the arbitrary and capricious actions taken by foreign governments abroad (e.g., the threat to issue or the actual issuance of compulsory licenses for public interest purposes without payment of full, adequate and complete FMV), the complainants make the following claims:
"12. UN human rights officials and bodies have repeatedly found that the globalization of intellectual property rights can only be squared with human rights if countries are permitted and encouraged to utilize the full scope of intellectual property exceptions and limitations provided for in the TRIPS agreement to promote access to medicines and that even then the international intellectual property regime is ill-equipped to provide competitive and low-cost access to medicines to incentivize medical research on so-called neglected diseases primarily affecting poor people in developing countries."
"13. As described by the Special Rapporteur on the Right to Health, to promote access to medicines and the right to health while complying with the minimum standards of the TRIPS agreement, developing countries 'should incorporate the flexibility to: (a) Make full use of the transition periods; (b) Define the criteria of patentability; (c) Issue compulsory licences and provide for government use; (d) Adopt the international exhaustion principle, to facilitate parallel importation; (e) Create limited exceptions to patent rights; (f) Allow for opposition and revocation procedures. In addition, countries need to have strong pro-competitive measures to limit abuse of the patent system.'"
"14. Examining the human rights duties of states to take advantage of TRIPS flexibilities to promote access to medicines has been a frequent subject of human rights treaty monitoring bodies. Such reviews have included analysis of the duties of wealthy countries to promote the use of TRIPS flexibilities in poor countries."
"15. This body of human rights law was summarized by Special Rapporteur Paul Hunt as meaning that 'that no rich State should encourage a developing country to accept intellectual property standards that do not take into account the safeguards and flexibilities included under the TRIPS Agreement. In other words, developed States should not encourage a developing country to accept 'TRIPS-plus' standards.'” (boldfaced italics emphasis added).
Professor Flynn's UNHRC Allegation Letter sought the following 'relief':
26. The Special Rapporteur for the Right to Health should call on the U.S. halt its use of the Special 301 program and other elements of its foreign policy to encourage and coerce developing counties to adopt intellectual property norms that restrict access to medicines, including access to antiretroviral medicines for people living with HIV/AIDS. The Special Rapporteur should encourage the U.S. to use its trade and foreign assistance programs to promote full use of TRIPS flexibilities and to otherwise revise its foreign policies to promote access to medicines. The Special Rapporteur should call on the U.S. to provide a procedure for the appeal of human rights issues within the Special 301 report, to reverse its unlawful unilateral threats of trade sanctions via Special 301, and to reconsider and reverse the many decisions it has made that violate the right to health of poor people around the world.
The Allegation Letter followed Professor Flynn's previous submission of a formal complaint to the Office of the US Trade Representative (UTSR) prepared on behalf of other US and foreign NGOs this past February 2010. See IN THE MATTER OF 2010 SPECIAL 301 REVIEW: IDENTIFICATION OF COUNTRIES UNDER SECTION 182 OF THE TRADE ACT OF 1974 (Feb. 16, 2010), accessible online at: http://www.wcl.american.edu/pijip/go/ngos02182010 . This complaint essentially argues that as the result of fulfilling its US constitutional responsibility, as determined by US Supreme Court caselaw, to protect in international and multilateral venues the exclusive private property rights of US citizens, the USTR has violated international trade and human rights law:
"1. Using Special 301 to Promote Restrictions on Public Health Flexibilities in TRIPS Violates the Doha Declaration;"
and
"2. The 2009 Special 301 Report Violates International Commitments of the US and Fails to Adhere to Basic Administrative Justice Norms." Id.
[Unfortunately, Professor Flynn's Allegation Letter, however, ignores the following:
1. Property rights are natural, individual-based human rights, within the meaning of the 1948 Declaration, the 1948 American Declaration on the Rights and Duties of Man, the 1976 International Covenant on Economic, Social and Cultural Rights, and ultimately, the United States Constitution (1787) and its accompanying Bill of Rights (1791). Consequently, governments mustpay heed to the strict substantive and procedural conditions imposed on unauthorized governmental ‘takings’ of private IP rights set forth within TRIPS Article 31(a), (d), (h), (i), (j) and (k); 44.2; and 62.44.
2. Although the TRIPS Agreement may have grandfathered the highly disputed Paris Convention grounds for issuing compulsory licenses (incorporated by reference within TRIPS Article 2 and the Preamble to TRIPS Article 31 (‘the broad mouth of the funnel’), these bases remain tightly circumscribed by the substantive and procedural conditions imposed by the subsections to TRIPS Article 31. These provisions were arguably intended to ensure protection of patentees’ affirmative right to substantive and procedural due process of law against wanton governmental seizures of exclusive private property (human) rights within the meaning of theFifth Amendment of the U.S. Bill of Rights and other U.S. constitutional provisions (‘the narrow neck of the funnel’). See ITSSD Comments on ‘Desk Review of the Intergovernmental Working Group on Public Health, Innovation and Intellectual Property from a Right to Development Perspective’
3. This means that when a government (e.g., Brazil, Thailand, Canada, France, India, etc.) or an intergovernmental organization such as the WHO, etc. wishes to ‘take’ patented private medicine or medical technology products for a ‘public use’ (i.e., on the basis of an identified and declared ‘public interest’), that government or intergovernmental organization must pay itself, or cause a selected third party licensee to pay, full, complete and adequate fair market value compensation for such patents. After all, this is consistent with established U.S. Supreme Court jurisprudence and with the understanding of the parties to the WTO TRIPS and WIPO Agreements. And, fair market value (FMV) means ‘arms-length’ pricing agreed to between a willing buyer and a willing seller; not some unilaterally predetermined price deemed to be ‘fair’ by a national or regional government or intergovernmental body. See ITSSD Comments Concerning Document (SCP/13/3) Patent Exclusions, Exceptions & Limitations, Institute for Trade, Standards and Sustainable Development (March 27, 2009), at:
4. The Special 301 statute requires USTR to address in its review foreign country practices that "deny fair and equitable market access to U.S. persons that rely upon intellectual property protection.” A country cannot be said to adequately and effectively protect intellectual property rights within the meaning of the trade statutes if that country puts in place regulations that effectively nullify the value of the patent rights granted. A patent gives the patent holder the exclusive right to sell his invention in a market, but that right can be undermined by government polices which work to push the price down toward the marginal cost of production. The Special 301 statute calls upon USTR to designate a trading partner as a priority foreign country ('PFC') even if there were no apparent clear-cut violations of the country’s TRIPS Agreement obligations in the operation or enforcement of its intellectual property rights laws. Section182(b)(4) of the Trade Act of 1974, as amended, requires USTR, in making a PFC designation, to take into account whether a country is providing “adequate and effective protection...of intellectual property rights.” A country that maintains IPR laws on the books but eviscerates the value of patented inventions through other regulations cannot be said to provide “adequate and effective protection.” This is further reinforced in section 301(d)(3)(F)(ii) of the Trade Act of 1974, as amended, which “includes restrictions on market access related to the use, exploitation, or enjoyment of commercial benefits derived from exercising intellectual property rights...”
5. The U.S. Supreme Court has held that the U.S. Government cannot act against, and must affirmatively protect, outside of the territory of the United States, any and all of the constitutional rights guaranteed to U.S. citizens by the U.S. Constitution and the Bill of Rights within the United States. The Fifth Amendment right against the taking of private property for public use without just compensation falls within this obligation. This has remained the law of the land for over 150 years. In the case of Reid v. Covert, 354 U.S. 1 (1957), the US Supreme Court explained its reasoning as follows: “[R]eject[ing] the idea that when the United States acts against citizens abroad it can do so free of the Bill of Rights. The United States is entirely a creature of the Constitution...When the Government reaches out to punish a citizen who is abroad, the shield which the Bill of Rights and other parts of the Constitution provide to protect his life and liberty should not be stripped away just because he happens to be in another land...The language of Art[icle] III, [Section] 2 manifests that constitutional protections for the individual were designed to restrict the United States Government when it acts outside of this country, as well as here at home...This Court and other federal courts have held or asserted that various constitutional limitations apply to the Government when it acts outside the continental United States. While it has been suggested that only those constitutional rights which are ‘fundamental’ protect Americans abroad, we can find no warrant, in logic or otherwise, for picking and choosing among the remarkable collection of ‘Thou shalt nots’ which were explicitly fastened on all departments and agencies of the Federal Government by the Constitution and its Amendments.”). Id., at , 5-9;See also Mitchell v. Harmony, 54 U.S. 115, 135 (1851).
6. The obligation of the federal government to protect the private property rights held by U.S. citizens outside of U.S. borders against unlawful appropriation also extends to takings effectuated pursuant to treaties. The U.S. Supreme Court recognized this hierarchy almost fifty years ago, in the case of While treaties and federal statutes constitute the “supreme law of the United States,” and are effective equal to one another in status, they are both inferior to the U.S. Constitution and the Bill of Rights. Reid v. Covert. Thus, according to the Court, it is arguable that the President cannot execute and that Congress can neither ratify nor enact legislation implementing a treaty with another nation that effectively violates any of the Constitutional protections afforded U.S. citizens. Furthermore, “the records of the Virginia Ratifying Convention contain specific discussions of thescope of the treaty power. These discussions confirm that the Framers did in fact envision [constitutional] limitations on the treaty power.”Consequently, the President, in the exercise of his Article II powers, and the Congress, in the exercise of its Article I powers,would therefore be constitutionally precluded from executing and implementing a treaty the provisions of which did not adequately protect U.S. citizens against non- or poorly compensable takings oftheir intellectual property by a foreign treaty party’s government. Reid v. Covert at p. 18 (“The prohibitions of the Constitution were designed to apply toall branches of the National Government and they cannot be nullified by the Executive or by the Executive and the Senate combined ...This Court has regularly and uniformly recognized the supremacy of the Constitution over a treaty.” (footnoteomitted)). See Lawrence A. Kogan, Brazil's IP Opportunism Threatens U.S. Private Property Rights, Inter-American Law Review, 38 (Fall 2006): 1–139, 114-116, accessible online at:
Mr. Kogan is CEO/President of the ITSSD. During 2007, he served as an Adjunct Faculty member at the John C. Whitehead School of Diplomacy and International Relations at Seton Hall University, where he taught International Trade Law & Policy to graduate students.
ITSSD, The Institute for Trade, Standards, and Sustainable Development, Inc. is an independent, not-for-profit, non-partisan educational organization dedicated to the promotion of a positive paradigm of sustainable development consistent with private property, free market and WTO Rule Of Law-based principles. The ITSSD examines evolving international law and policy as it relates to trade, science, technology and sustainable economic freedom and development around the world.
The charitable mission of the ITSSD and its Advisory Board is further explained at: http://www.itssd.org/mission.htm and at: http://www.itssd.org/board.htm .
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