How can eminent management gurus whose strategy advice proves so valuable across business in general sometimes get it so wrong on pharma? This column provides a few cautionary tales about stumbles involving some of the most celebrated experts. In showing how they went wrong I underline how important it is to understand the specific characteristics of the pharmaceutical industry when introducing new management concepts. 

Michael Porter, one of the most famous management consultants and the inventor of the concept of competitive advantage, has set himself strongly against strategic alliances. As the apostle of market competition, Porter regards strategic alliances as being anticompetitive.  

This may be the case in many industries. But it has not been so in pharmaceuticals, where the diffuse nature of disease makes it difficult for big companies to achieve a dominant position. Porter's attitude appears eccentric to those in the industry for whom alliances have long been a part of the everyday pharmaceutical scenery. I would argue that strategic alliances have resulted in increased competition in the pharmaceutical industry.  

Unfortunately this is not the sole example of an eminent management guru getting it wrong in my view as far as pharmaceuticals are concerned. Experts concentrate on concepts that will be convincing to as many industries as possible. They do not often have the time or patience to understand the different facets of each industry. That can make some of their advice irrelevant or positively dangerous for some industries, including our own. 

The apostle of disruptive technologies is Clayton Christensen. He has shown through dramatic examples the consequences of new technologies taking over from old, such as the wiping out of Kodak by digital photography. 

But Christensen has a bee in his bonnet about outsourcing. He believes that when companies outsource, they risk teaching future potential competitors how to enter the market. This risks companies letting know-how out of their grasp and fosters a situation where the vendor becomes their future competition, according to Christensen. 

Clayton Christensen has a very broad education and wide experience: he has a medical background but has metamorphosed into a management guru. While his first, highly popular publications in the United States took examples from a variety of industries, he subsequently wrote a book specifically on healthcare. It was in 

 which he co-authored in 2009, that Christensen came out against outsourcing. He based this advice on evidence from industries including pharmaceuticals: "Pharma will find a decade on that they have outsourced their core competencies." 

Perhaps Christensen was influenced by some big companies such as Pfizer. During the early days of outsourcing—20 years ago—Pfizer took a corporate-wide decision not to outsource any work in drug discovery. The company was then indeed concerned about loss of intellectual property and considered that core competences should be developed in house. 

In 2012 Christensen returned to his theme: "We now understand that managing clinical trials is an indispensable element of drug discovery. And so if you outsource that, then you're outsourcing the activities that in the future will be the critical capabilities."  

Outsourcing has been going on for many years, and at a significant level since the early 1980s at least, when the first contract research organizations were set up—for example Kendle in 1981, Parexel and Quintiles in 1982, and PPD in 1985. By 2010, outsourcing accounted for over a quarter of all pharma R&D expenditures. PricewaterhouseCoopers found in 2012 that 43 percent of all pharma and life sciences CEOs had outsourced a business process or function in the previous 12 months. 

Yet what progress have pharma CROs made in the past 30 years to make inroads into the pharmaceutical industry? The answer is relatively little: certainly, none have made very great progress in developing their own intellectual property. None are close to becoming anywhere near fully fledged pharmaceutical companies. And I doubt whether many of them even have the ambition now to do so. 

Generally CROs have only stood a chance of acquiring intellectual property when the bargaining power of the partner has been weak. They have sometimes been able to offer a means of financing projects which start-up companies have had difficulty financing otherwise. It is hardly surprising that none of these deals have so far led to CROs developing products with major commercial potential. 

To avoid this potential problem that Christensen is so concerned about, pharma companies outsourcing to CROs or any other type of contract organization only have to ensure they retain their intellectual property. Also, contrary to the situation between start-up companies and CROs, pharma companies have strong bargaining power relative to any CRO and do not need to concede intellectual property rights. Most pharmaceutical companies are also experienced and efficient in putting effective contracts in place and are unlikely to slip up on intellectual property matters. And so the dangers which Christensen is imagining, in an industry which he has recently rather refreshingly admitted he does not fully understand, are in my view illusory.  

Pfizer eventually began outsourcing certain R&D functions in the late 1990s. Now they are firm enthusiasts. For example, since 2000 the company has been steadily increasing a variety of preclinical activities it has been setting up with the Chinese company WuXi. Christensen has failed to understand that in pharmaceuticals outsourcing not only works, but it is favored increasingly by pharmaceutical companies who have seen over three decades now how it can work for them. It does not lead to the problem he raises because intellectual property rights for pharmaceuticals under active development will be strong—and pharmaceutical companies will continue to ensure that they keep hold of those rights. 

My third example comes from personal experience at the hands of one particular guru. I have mentioned elsewhere the value I consider Gary Hamel and C. K. Prahalad's concept of core competency has for the pharmaceutical industry. But I certainly would not take as carte blanche any other concept that at least the surviving of these two gurus, Gary Hamel, might have in their advice to pharmaceutical companies. 

A few years before Hamel's core competency breakthrough, Glaxo sent a score of my colleagues and I on a residential training week at the London Business School. Gary Hamel was then on the staff there. We were addressed by him one morning at the School's elegant Regency facility. The topic of his lecture—for that is what it turned out to be—was Japan. Hamel's message was that the Japanese were coming—and that if we pharmaceutical types did not cater to this and prepare accordingly, our goose would be cooked.  

At no stage did Hamel bring in any pharmaceutical element or example to his lecture. As far as we could tell, he did not appear the slightest bit interested in the then not particularly fashionable pharmaceutical industry. For when it came to question time...there was no question time. Hamel simply turned on his heels and departed smartly from the lecture theatre. That left some of us, including me, feeling a little thwarted. We would have liked to point out that actually pharmaceuticals was not exactly a star market for Japanese companies, and not likely to become one in the near future. 

Of course, the Japanese pharmaceutical industry has had its successes outside Japan. But it has not improved its position a great deal since then. Indeed you can argue that it has gone backwards, Japan being one of the very few markets perceived as distinctly unfashionable, its thunder stolen by Brazil, Russia, India, and China (the BRIC's) and many other fast-growing developing countries. Within a couple years of our lecture from Hamel, the Japanese economy had imploded, and 20 years later it is still far from healthy. 

However eminent management gurus from outside the industry are, and however applicable many of their ideas may be, they are prone to slip up from time to time when they turn to pharmaceuticals. That is usually because they do not have time to consider the key characteristics of any particular industry such as pharmaceuticals. A deep understanding of these specific characteristics is needed to meaningfully asses whether a new concept will work or not—however eminent the source. Many concepts soon prove universally useless. But in some cases what might work in other industries could be disastrous for pharmaceuticals because of its distinctive inherent characteristics. 

is Senior Partner at the CRO TranScrip Partners. This is an edited extract from his recently published book 

Transforming Big Pharma—Considering the Strategic Alternatives 

(Gower Publishing). He can be reached at 

Articles

Column

Despite their high status, management gurus aren't always on point when it comes to pharma, writes John Ansell.

When Gurus Get It Wrong

on spec and on time is the challenge that never goes away—it's the deadweight baggage accompanying every industry innovation since the arrival of aspirin a century ago. This month's feature on the "state-of-the-art" in medicines adherence strikes a note of modest optimism that progress may be at hand, particularly as rapid advances in technology begin to remove some of the barriers to communication that defy efforts to make patients more mindful of the connection between staying on treatment and better health.  

 works closely with our sister conferencing organization, CBI, in celebrating best practices in adherence through its Strategic Patient Adherence Awards program, given to worthy industry players each year at the CBI Patient Adherence & Support Summit (PASS). The 12th Summit took place in April and, taking the position that success requires recognition, we want to single out this year's winners, selected among dozens of applicants for their cutting-edge initiatives in the following four categories: science, innovation, pharmacy and disease awareness. 

was recognized for excellence in advancing the science behind medication adherence. Led by retiring Merck outcomes executive Colleen McHorney, the company has sponsored dozens of projects to uncover why people don't take their medications and to create solutions. Merck's research has spawned a fresh consensus that time-honored demographics such as age, gender, race, education, and income are not really significant in determining adherence. The main metrics driving non-adherence has been synthesized for the industry in Merck's "Three Cs:" Commitment to the medication regimen; Concerns about side-effects, drug interactions, and general safety; and Cost. 

an industry supported non-profit, received the award on innovation for its Patient Performance Enhancement Tool (PET), a self-assessment to help patients understand where they are in their disease state at the point of discharge from the hospital. In its collaboration with two hospitals in Maine, the PET pilot focused on acute cardiac and other high-risk inpatient settings, and was found to have reduced total readmission rates by almost a quarter. By getting patients to think about their condition and address factors such as their treatment history, financial concerns, social supports, and the role of caretakers and health literacy, the PET tool helps clinicians ascertain why patients abandon drug treatment, allowing them to adjust care protocols and to offer the right education and support. 

MedStart Connect Program also received an award for innovation in providing patients with a full month sample therapy even before they leave a physician's office. As the first point-of-care formulary providing generics, OTC, and even brand therapies, MedVantx specifically addresses primary stage adherence, where an estimated 40 percent of prescriptions written by doctors go unfilled. After the patient leaves the office, MedStart Connect also provides telephone outreach services to encourage prescription filling, as well as giving patients the opportunity to enroll in MedVantx's home delivery program, providing the first "closed-loop" system—anticipating the patient's need at every step of the care journey—from the doctor's office to home.  

For its work to address barriers to adherence for diabetics across a wide network of pharmacies, 

won the award for disease awareness. Launched in 2008, McKesson's Pharmacy Intervention Program (PIP) has 3,000 participating pharmacies that identify and coach patients with the help of pharmacists trained in motivational interviewing and health behavior change techniques. Results from these five minute, face-to-face interviews yielded an average of four incremental refills over 12 months per patient, improving adherence rates by 25 percent. Moreover, these patients remained compliant even after the 18 month mark, evidencing a lasting health behavior change. 

one of the largest drug chains in the world, received the PASS award for best pharmacy program. Also working with diabetes patients, Walgreens partnered with a biopharmaceutical manufacturer to meet a critical care gap by providing an injection training service. Its pharmacists have completed over 200,000 training sessions to date.  

To learn more about these award-winning programs and to review what was discussed at the conference, please visit the CBI website at 

From the Editor

Getting patients to take their medicine on spec and on time is the challenge that never goes away-it's the deadweight baggage accompanying every industry innovation since the arrival of aspirin a century ago.

Recognizing the Best

Brazil, the world's sixth largest pharmaceutical market, has joined the ranks of countries requiring a formal and transparent assessment of a drug's cost-effectiveness, budgetary impact, and medical need to gain access to the public sector. The action has wide-ranging effects: Brazil has a reputation as an innovator in global health policy, so it often serves as a precedent for reform in other countries. It also carries important implications for commercial success in the domestic drug market, which is growing at double digit annual rates. Public spending on health accounts for a significant share—46 percent—of total health spending. Hence, lack of access to this market not only limits the growth potential for foreign drug makers, it is poor public relations, because the majority of the population relies on the public system for healthcare.   

Over the past few years, the government has made a significant effort to improve limited and unequal access to drugs through expanded federal financing. The Ministry of Health recently announced plans to spend $17 billion on drugs between 2013 and 2016. Significantly, 40 percent of current federal spending on drugs is on innovative biologics. This not a race-to-the-bottom pool comprised exclusively of cheap generics. For this reason alone, the actions of the government on this new strategic approach to health technology assessment (HTA) should be followed closely in the industry c suite.  

The Comissão Nacional de Incorporação de Tecnologias (National Commission of Incorporation of Technologies—CONITEC) was established in March 2012. All new technologies now require a positive recommendation from CONITEC for funding in the Brazilian public healthcare system. The new HTA process is significantly more transparent than that of the former HTA body, CITEC, since it is regulated by a federal law that requires assessments of technologies to be publicly disclosed. 

An appraisal by CONITEC can be requested by the government, the manufacturer, or any other stakeholder after a drug receives market authorization from ANVISA, the Brazilian equivalent of the FDA, and has its maximum price set by CMED, the federal drug pricing body.  

CONITEC has set a goal of conducting appraisals within 180 days of the request—and by and large it is meeting that target. CONITEC publishes all its appraisals and has opened a public consultation process online, allowing for feedback from patients, manufacturers, physician associations, and academia. Once there is a positive decision by CONITEC, the technology needs to be made available in the public sector within 180 days. This is a substantial improvement over the previous approach, where appraisals were not publicly disclosed, there were no clear timelines for review and no timelines for making a drug available after a positive recommendation. 

Since its establishment in March 2012 through the end of February, CONITEC issued an impressive 32 appraisals, assessing 48 health technologies (85 percent of them drugs) for 26 therapeutic indications. This is almost twice the number of technologies the former HTA commission CITEC evaluated on average each year. Furthermore, 71 percent of the evaluated technologies received a positive funding recommendation from CONITEC. In comparison, the approval rate for the old CITEC commission was 55 percent.  

Figure 1: Clinical factors driving CONITEC decisions. Sum does not need to add up to 100 percent. Multiple factors per appraisal possible. Selection of most frequent factors shown.			

The primary focus of the CONITEC evaluation is on efficacy and safety data, cost-effectiveness studies, and budget impact analysis. Nevertheless, there have been a few surprises, such as evaluation of net prices in countries not included in the official referencing basket set by the federal pricing chamber CMED, including the United Kingdom and Turkey. 

Figure 2: Economic factors driving CONITEC decisions. Sum does not need to add up to 100 percent. Multiple factors per appraisal possible. Selection of most frequent factors shown.			

CONITEC is open to recommend innovative technologies, supported by the fact that 59 percent of the drugs with a positive appraisal are still on-patent. Significantly, however, all innovative treatments obtaining a positive recommendation target have relatively small patient populations. There are tough trade-offs involved here, because on a per capita level, public payers in Brazil have smaller budgets than government payers in mature markets. The government prioritizes spending on high-cost drugs for severe diseases, which most patients cannot afford to buy, while devoting most resources to generic retail drugs. This has not changed with CONITEC, which did not make a positive recommendation for a single branded retail drug. Branded retail drugs are mostly priced at significant premium to alternatives purchased by the government and are largely paid out of pocket by patients from the upper class and the growing middle class.  

Figure 3: CONITEC HTA decisions versus NICE. 			

CONITEC typically considers clinical factors first, so positive coverage decisions are usually driven by a strong therapeutic improvement relative to publically available health technologies and a high perceived unmet need in the indication. Technologies that meet these two criteria represent 76 percent and 57 percent of the positive decisions, respectively. Additionally, the stated priority level of the indication within public healthcare policies supported 24 percent of the inclusions.  

CONITEC prioritizes technologies that clearly demonstrate large efficacy improvements. For example, boceprevir and telaprevir proved this in the context of the high unmet need of the hepatitis C patient population. Despite their potentially large budget impact, both drugs secured a positive funding recommendation less than a year after their launch.  

Snapshot: How Boceprevir and Telaprevir Obtained a Positive Recommendation			

Lack of efficacy was the determining factor for 45 percent of the negative appraisals. For example, CONITEC argued that the clinical studies of biologic treatments for psoriasis did not clearly define the target patient population, lacked an active clinical comparator, and only evaluated short-term efficacy outcomes.  

However, sources in the Ministry of Health stated that CONITEC may also cover technologies with similar efficacy in indications where there is already public funding in order to broaden the physicians' treatment arsenal and to stimulate price competition. This could have motivated the extensive coverage of biologics for rheumatoid arthritis. 

Technologies considered to have insufficient safety represented 55 percent of the funding denials. For example, certolizumab pegol in Crohn's disease was evaluated as lacking data on long-term safety, despite having been approved by ANVISA for use in the Brazilian market.  

In total, CONITEC concluded that 73 percent of the technologies which received a negative funding recommendation failed to show sufficient clinical evidence to back up their efficacy claims and safety benefits. Studies considered "too short" represented 36 percent of the negative appraisals; those with an insufficient sample size and a lack of Phase III /IV studies represented 20 percent of the denials, respectively. 

Although CONITEC has not mentioned high budget impact as an explicit reason for a negative appraisal, low budget impact played a role in 33 percent of positive appraisals, such as clobetasol for the treatment of psoriasis. Furthermore, 27 percent of applications were denied because budget impact calculations did not include the perspective of the public healthcare system.  

Solid cost-effectiveness studies versus technologies already covered by the public system are a mandatory component of an application for an appraisal. In 62 percent of the positive coverage decisions, this was considered a decisive factor for a positive appraisal; examples include lanreotide acetate, palivizumab, and vaccines for MMRV (measles, mumps, rubella, varicella) and hepatitis A. Important is that CONITEC prefers cost-effectiveness studies based on incremental cost per life year or per avoided event, not incremental cost per QALY. 

Clear evidence on future cost reductions benefiting the public healthcare system, achieved for example through a reduction in hospitalizations, were considered in 24 percent of appraisals. 

CONITEC advisors emphasize that while cost effectiveness is important, budget impact is even more important given the fiscal restraints. Budget impact should be assessed by a pharmacoeconomic model detailing all costs associated to the technology in the Brazilian public healthcare system.  

To that end, gaining support from key stakeholders within the Ministry of Health to advocate for the funding of a new drug significantly increases the likelihood of a positive appraisal. None of the appraisals requested by the Ministry of Health were rejected, while almost all the rejected appraisals are from pharmaceutical companies.  

Calling card of choice: technology transfer 

Another pathway to obtain Ministry support is through technology transfers agreements. The Brazilian government is keen on these deals to encourage domestic development and production of pharmaceuticals. In these agreements, know how on production is transferred from the original manufacturer to domestic manufacturers supported by the government. The original manufacturers are rewarded by preferential access (e.g., by waiving the requirement to conduct tenders or price volume agreements with more favorable conditions for the manufacturer).  

So far 64 technology transfer agreements have been signed. Drug with technology transfers represent 32 percent of the positive appraisals from CONITEC, such as rituximab and the vaccines for MMRV and hepatitis A. 

A fine point is that this is still a learning process for industry in Brazil. Forty three HTA requests were denied prior to assessment by CONITEC due to non-compliance with the required documentation.  

Even though CONITEC has similar functions to that premier HTA body, the United Kingdom's National Institute for Health and Clinical Excellence (NICE), in advising the government on funding decisions and the development of treatment guidelines, the decision criteria used by the two institutions differ. Cost-effectiveness is only one of several criteria considered for CONITEC recommendations, and there is no official incremental cost-effectiveness ratio threshold.  

Positive NICE appraisals don't necessarily guarantee a recommendation from CONITEC. The Brazilian HTA body denied funding for technologies that had received positive appraisals from NICE in 35 percent of cases, including biologic treatments for psoriasis. For those reports where CONITEC reached a different conclusion than NICE, both HTA bodies criticized similar aspects of the data presented such as inadequate data or the lack of an active comparator.  

The suggestion that CONITEC is more even handed than might be assumed must be balanced by evidence that pricing for positive recommendations is may be much lower than in most mature market countries. For high-cost drugs with a positive recommendation, CONITEC often recommends funding subject to usage restrictions, including observational studies. CONITEC may also demand economic concessions in exchange for recommending the funding of high-cost drugs, such as discounts of up to 50 percent below the maximum ex-manufacturer price set by CMED.  

Final government prices may therefore reach levels lower than in developed markets. Compared to international prices, the government prices demanded by CONITEC for two recently approved high-cost drugs are, respectively, 50 percent and 42 percent lower than in Italy, which already has one of the lowest ex-manufacturer prices in the European Union. However, it can be said that there is less worry about the spillover impact of low net prices on other markets. Prices in Brazil do not affect mature markets. Smaller markets such as Colombia or Saudi Arabia may reference Brazil, but do not reference net prices. 

In any case, demands for low prices from CONITEC may still leave some room for negotiation. The government purchasing contract for one of aforementioned drugs in 2013 features a net price which is almost 30 percent higher than the price demanded by CONITEC.  

CONITEC should not arbitrarily be seen as a barrier to public funding in Brazil—the number of new technologies funded has never been higher. CONITEC can be an ally to obtain public funding, if manufacturers are prepared to do the following:  

» Dedicate sufficient resources to evaluate opportunities in different market segments. 

Before even planning to apply for public funding, manufacturers must find out whether this is likely and desirable for the targeted indication. CONITEC is much more likely to recommend specialized care drugs in smaller patient population with high unmet need than retail drugs for blockbuster indications. The Brazilian marketplace is complex, with great differences between therapeutic areas and many relevant stakeholders. Therefore, every single drug to be launched merits an individual assessment of opportunities. 

» Provide scientifically sound evidence on added value in terms of efficacy or safety. 

CONITEC prefers direct comparisons against an active comparator used in the public healthcare system. Trial length needs to consider the natural course of the disease. The sample size needs to be representative of targeted patient population.  

» Target a well-defined patient population. 

Even if a drug shows significant benefit and is cost effective, the government has more limited resources per capita versus mature markets. Targeting a well-defined patient population from the outset and identifying potential subgroups that benefit more from the treatment will address budget impact concerns and increase the likelihood of a positive recommendation. 

» Present solid budget impact studies adapted to the reality of the Brazilian public healthcare system. 

Showing cost effectiveness is useful, but presenting a budget impact model detailing all costs incurred by the technology in the public healthcare system is most important.  

» Identify and engage with key stakeholders in the Ministry of Health. 

An HTA requested by stakeholders related to the government is much more likely to receive a positive recommendation versus an HTA requested by a manufacturer.  

Features

What is really driving decision making by the new Brazilian HTA agency? A look at appraisals issued in the first year.

Unlocking the Key to Public Funding in Brazil

This sponsored supplement was produced by Focus Reports.  

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The elements that have made Ireland attractive for decades are still here. The big difference since 2007, however, is the cost base. If you are building a pharma plant in Ireland today, it will cost 35 to 40 percent less than it did six years ago. 

— Barry O'Leary, CEO, Industrial Development Agency (IDA) Ireland 

Barry O'Leary, head of the IDA, Ireland's inward investment agency, reels off a long list of investments into the country.  

Lilly, he says, committed $420 million (€320 MM) to its second Irish biotech facility. Allergan announced a $250 million (€190 MM) investment in biologics in the west of Ireland. Amgen initiated a $200 million (€150 MM) expansion in Dublin. Mylan declared plans to split $500 million (€385 MM) between production sites in Dublin and Galway. Abbott is making a $110 million (€85 MM) investment in small molecule, high potency production. Lilly, Merck, and Gilead established financial shared services centers. 

The 3 T’s: Positioning Ireland for FDI 			

O'Leary notes that these announcements came in the first six months of the 2012 fiscal year alone.  

 2012 was Ireland's best year for foreign direct investment in more than a decade. It seems that Ireland—the country that Prime Minister Enda Kenny promises will be the best small country to do business in by 2016—has become more attractive for foreign direct investment (FDI) in the wake of an economic crisis that has ravaged its domestic economy.  

Not only has the cost of doing business been reduced by 10-15 percent since the onset of the recession (Ernst & Young), but Ireland has also adopted what Matt Smith, VP and head of the global pharma business for engineering giant CH2M Hill, calls a "laser-clear" focus on the customer. 

Richard Bruton TD, Minister for Jobs, Enterprise and Innovation 			

From what he has seen along his globetrotting route, Smith believes, "Ireland has never been more competitive around the world. The Irish have a clear vision of who they are: their brand, their identity, and their fit in the value chain. I am confident that any manager in the country will have roughly the same impression of what Ireland can offer their business; in other markets, you will find that opinions differ on the country's positioning in the chain. Some of the emerging markets, in particular, don't really know who they are yet—and if you are competing without a clear vision of your value, you will get beat by a country like Ireland any day of the week." 

Ireland has been a pharma industry darling since the 1960s, when a then-newly established IDA targeted the sector as a strategic area for development. Today, the numbers are eye-catching. As reported by the IDA, nine out of the top ten—and 13 out of the top 15—pharma companies in the world have substantial manufacturing operations in Ireland. The industry has invested over $7 billion (€5.4 BN) in the market over the last decade. Ireland has become the largest net exporter of medicines in the world and the eighth-largest producer in absolute terms, with pharmachem shipments worth €55.1 billion ($71.63 BN) (2011) accounting for nearly half of Irish exports.  

Paul Duffy, VP External Supply Operating Unit, Pfizer 			

As Colin Kavanagh, Partner and Head of Life Sciences at local law firm Arthur Cox, puts it, if a company is a player of scale in this industry, then they have likely already invested in Ireland—"and if they haven't, they're thinking about it, or they have a good reason not to." Many of those that have already invested are now diversifying their operations away from what has classically been a pure manufacturing base to include more complex value-added activities like product and process development.  

The concentration of FDI has also had a strong hand in the rise of a growing indigenous life science sector, often led by Irish entrepreneurs who have either learned the ropes by working for a multinational, or built their businesses upon a foundation of collaborating with multinationals from Ireland. 

Matt Moran, Director, Pharmachemical Ireland 			

Yet as multinational investment in infrastructure reaches new heights and indigenous players ramp up overseas expansion, some industry actors face a more uncertain scenario. On the local market, innovator sales operations have been challenged by recession-driven austerity. A new price-cutting agreement has sent a clear message that the government will increasingly delink its approach between courting investment from the industry and supporting an unsustainable drugs bill. For generics marketers, long-expected regulations should open up new possibilities—but the full ramifications of prospective legislation are as yet unclear. According to Anne Nolan, head of the local innovator group Irish Pharmaceutical Healthcare Association (IPHA), companies looking to reach the 4.5 million-patient Irish market must contend with a health system that has changed as much in the last four-five years as the UK's National Health Service (NHS) has changed in the last 40.  			

"An important aspect in the development of the sector—which has helped to significantly boost its contribution to the Irish economy—has been the success of the industry in diversifying the nature of its investment in Ireland, from the original bulk active plants to higher-value activities."

 – Richard Bruton, Minister for Jobs, Enterprise, and Innovation

Edward Canary, General Manager, Lilly Kinsale Site 			

Lilly set up in Ireland three decades ago by purchasing a farm. In its early days, the operation produced intermediaries for small-molecule drugs. Nearby, Pfizer was manufacturing citric acid for soft drinks. The country was a fledgling industrial economy that was still mostly reliant on sectors like agriculture and fishing. 	

No more. Thanks to a strategic revamping of its educational system and the development of a highly attractive package of business incentives, Ireland has diversified its investment base and continually moved up the value chain. The pharma sector advanced from bulk manufacture of chemicals and intermediates to formulation and finished products. In the early 2000s, in addition to small molecules, Ireland became a key location for complex biopharmaceutical production. Pfizer's biotech site at Grange Castle in Dublin, inherited from Wyeth, was the largest in the world when it went into operation in 2005.  

Pfizer VP of External Supply Paul Duffy summarizes a story that is emblematic of the market at large: "In Ireland, we have moved from making sweetener for soft drinks, to manufacturing some of the most innovative medicines Pfizer distributes around the world." 

And today, as reported by Matt Moran, director of local industry association Pharmachemical Ireland (PCI), "the aim is to move the sector from manufacturing, to 'manufacturing plus.'" What is manufacturing plus? Moran explains, "Not very much basic research is done in Ireland. However, the industry is now investing in product and process development—in other words, competencies that are close to manufacturing. This makes sense, given the size of the production base here." 

Joe Costello TD, Minister for Trade & Development 			

Ireland is today a place to not only manufacture, but also to address challenges like 

. At Lilly's operation in Kinsale, Cork, General Manager Edward Canary reports, "As the site's mission has evolved, the complexity associated with our operation has increased. Through ongoing investment in our people and facilities, we have become a center of excellence for chemical synthesis and the commercialization of new molecules. Several new medicines are currently undergoing development work in Kinsale, and new manufacturing technologies such as process analytics and continuous processing are being deployed at the site in collaboration with our colleagues in drug development. We now have the opportunity to advance our late stage pipeline, while continuing to leverage our long history of performance in the supply side of the business."  

Indeed, in a rapidly evolving environment, many stakeholders have said that if Ireland did not itself continue to evolve, the industry would look elsewhere—and in the words of Deloitte Ireland Managing Partner Brandon Jennings, it would look elsewhere "very quickly." 

But what of cost—one of the greatest drivers of change for the pharma business today? Great science alone may not hold the industry's attention. As Bristol Myers Squibb's VP of external manufacturing John Nason says, "To be very clear, we operate in a cold business environment. You either make a profit, or you fail—it's that simple. We are up against Switzerland, and we are up against Singapore and the Far East. China has invested billions to attract the industry." 

Ireland has an answer: leading in the implementation of manufacturing excellence and continuous improvement. Rottapharm's managing director for its Dublin site, Patrick Garrahy—whose team recently won multiple awards for continuous improvement from the World Trade Group—believes that the country "can mitigate whatever cost differentiators may exist between ourselves and the low-cost producers by evolving into world-class manufacturing operations. The efficiencies we gain from these efforts allow us to continue to compete."  

In fact, Rottapharm's neighbor in Clonmel, Pinewood Healthcare—the Irish affiliate of Indian giant Wockhardt—reports manufacturing on a cost-competitive basis with one of Wockhardt's plants in low-cost India. All across Ireland, production and development sites are applying technology and innovative ideas borrowed from industries as varied as aerospace and fast-moving consumer goods (FMCG) to realize some of the most efficient pharma operations in the world.   

The result, as Pfizer's Duffy points out, is this: "Globally, the pharmaceutical industry has seen a significant reduction in capital investiture in the past few years. And yet, when we have chosen to invest, we often chose to invest in Ireland." 

From local supplier to global partner 			

"The government's vision has always been for indigenous companies to develop from the expertise brought in by FDI—and we are seeing that happening now." 

—Joe Costello, Minister for Trade & Development			

FDI into Ireland has created a feedstock for the indigenous ecosystem: raising the bar for standards and technology, contributing to the experience of the workforce, and providing a strong customer and partner base for Irish enterprises. Over the years, the indigenous sector has matured, and today, its companies are making a name for themselves all over the world. 

Frank Ryan, CEO of Enterprise Ireland, the state agency responsible for fostering the growth of Irish companies, describes a marked shift: "Once upon a time," Ryan says, "we had mainly sub-supply companies, who serviced the needs of the multinationals that had invested in the country. While we still have a number of such companies, many of our players have evolved to offer design and development activities, and many now act as strategic partners to multinationals outside of Irish borders. We find that, today, many of our companies engage with major life science companies all over the world—even before they engage with them in Ireland." 

PM Group, Ireland's leading indigenous engineering and project management company, has worked on many of the country's landmark pharma projects. Dave Murphy, CEO, says that PM's early growth was fueled by servicing multinationals that had invested in Ireland—but that its later growth came from following those same multinationals abroad.  

Punching above its weight: how a small affiliate can make a difference 			

Country Report

Ireland has been a pharma industry darling since the 1960s, when a then-newly established IDA targeted the sector as a strategic area for development. Today, the numbers are eyecatching. As reported by the IDA, nine out of the top 10 pharma companies in the world have substantial manufacturing operations in Ireland.

Country Report: Ireland

Admit it. When most pharmaceutical executives think about the pharmaceutical supply chain, their eyes start to glaze over. Traditionally, the supply chain has been considered, at best, a back-room function that reports in to operations and is responsible for delivering a reliable supply of product to meet forecasted demand. 

In fact, the supply chain is a deep and widely underutilized strategic resource for companies seeking to focus their organizations on the changing healthcare environment. New customers with different needs are emerging in every sector of the healthcare market—from tech-savvy consumers that expect instant informational gratification, to newly integrated healthcare delivery systems with access to vast stores of information about how and by whom pharmaceutical products are being used. And pharmaceutical supply-chain executives are seeking new ways to understand the central question of how they can deliver greater value to their organization by helping to improve the customer experience. 

Traditionally, pharmaceutical supply-chain management has been defined as managing the network of suppliers, resources, and manufacturing capabilities that are needed to supply product demand or sales targets. This role is, by nature, somewhat static and reactive rather than proactive, and its ability to be responsive is further limited by the highly regulated nature of the pharmaceutical industry. In general, pharmaceutical supply-chain capabilities lag behind those of the technology and consumer packaged goods (CPG) sectors. In the technology sector, for example, Dell has built a global reputation for its ability to deliver custom-configured products of high quality and reliability, and has built a nimble and flexible supply chain that lets them consistently meet their customer needs and wants. Consider what it would take for a pharmaceutical company to deliver custom-configured products to its millions of customers worldwide. Yet this type of customer need is becoming increasingly possible as science continues to unveil the possibilities of personalized medicine and individualized therapies. 

Although the challenges of personalized medicine are likely a few years out, there are ways in which the pharmaceutical supply chain can be more effectively engaged to address current customer unmet needs. Customers in emerging countries, for example, may have substantially different wants and preferences in terms of pharmaceutical product taste, texture, package size, unit dosing, or services. All of these aspects of the product can be addressed through the supply chain, and could have a large impact on local acceptance and usage.  

Decisions about how to build or engage local manufacturing are another area where strategic supply-chain decision-making can come into play. Traditionally, many pharmaceutical companies have invested in regional manufacturing, building large facilities to meet demand during products' extended lifecycles. Today, however, companies are exploring partnerships with local manufacturers that have underutilized capacity, and are teaching these local resources the skills needed to manufacture and distribute more complex specialty products, such as biologics or other large molecules. Such arrangements may save capital, but perhaps more importantly, prevent the company from having to navigate complex local tax and investment regulations. 

Today's healthcare customer is more complex than ever before. The new healthcare ecosystem encompasses payers and healthcare organizations as well as their preferred service providers, physicians, and a large number and variety of other healthcare providers that interact with patients, either directly or indirectly, during the course of a healthcare transaction. Creating a customer-centric pharmaceutical supply chain requires that information about customer needs, wants, and even desires be communicated throughout the organization. Executives responsible for supply-chain management should have opportunities to engage one-on-one with their customers in the locations where products actually are stored or used. For example, a recent conversation with an infusion nurse uncovered that the packaging for an IV product was stiff and hard to handle, and that nurses were getting paper-cuts. The supply-chain team collaborated with marketing and key customers to change the packaging to recycled paperboard and to improve ease of opening for nurses—a simple, low-cost modification that made the product more customer-oriented and eco-friendly.  

The key to successfully harnessing pharmaceutical supply-chain innovation is a re-imagining of how product and supply-chain attributes can become customer value levers (Figure 1). This 360-degree view of value drivers that can be impacted by the supply chain illustrates the various supply-chain touch-points that can make an enormous difference in addressing customer needs.  

» The manufacturer of an oral solution for treatment of infections in immuno-compromised patients received customer feedback that the product was extremely irritating for patients with oral mucositis, a frequent complication of some cancer therapies. This information led to reformulation of the product into two additional formulations that will address the needs of the full complement of patient types. 

» Responding to requests from a large national managed care organization (MCO) for ways to increase member adherence with chronic-care medications, a manufacturer challenges its supply-chain management team to devise low-cost adherence packaging solutions for several of its best-selling chronic medications. The plan is to test packaging alternatives within the MCO's current population to determine which approach delivers the desired outcomes. 

» A supply-chain manager visiting rural pharmacies in an emerging Latin American market learns that access to refrigeration is not commonplace, leading to a re-assessment of the formulation for a new pediatric product. 

The key to creating a customer-focused supply chain is providing supply-chain managers direct access to customers and integrating key customer information in operations. For example, the supply-chain team could "follow the product" from the time it leaves the company until it reaches and is administered to a patient. Experiencing every aspect of the product flow and customer experience provides significant insights to unmet customer needs. This learning experience should be a part of a multi-layer approach to learning about customers, including the extensive prelaunch research with prescribers and end-users that is done in partnership with commercial teams, or the wealth of customer qualitative or focus-group research that is done to support product configuration and distribution channels.  

Once supply-chain management is engaged in and focused on identification and resolution of customer needs and desires, their focus will shift to the identification of supply-chain solutions: how to design, plan for, source, produce, and deliver and service the product that satisfies customer needs and desires (Figure 2). By shifting the focus from internal customers, including R&D or commercial operations, to the larger customer ecosystem, pharmaceutical supply-chain management can become a dynamic contributor to 21st century healthcare delivery.  

Figure 2: The customer-focused approach to identifying supply chain solutions.			

Strategic management of the supply chain is vital to winning with customers. Cost and quality are important, but they are not the only things customers care about: new services, flexibility in relationships, reliability of supply, and ability to creatively overcome obstacles in delivery of product are also core values. Pharmaceutical product portfolios and customers are becoming more complex. In order to stay ahead of this trend, customer-focused supply-chain capabilities will become a more important part of a company's competitive advantage. 

is Director, Global Strategy, Janssen Supply Chain, and has comprehensive commercial, business development, and operations global experience across pharmaceutical, medical device, biotechnology, and consumer healthcare segments at leading Johnson & Johnson companies. He can be reached at 

Customer-focused supply-chain capabilities are becoming a more important part of a company's competitive advantage.

Finding Strategic Levers in the Supply Chain

PE, June 2013 Cover Image

In October 2012, a spinal meningitis outbreak caused by a tainted steroid rocked the country, and drew national attention to the Massachusetts compounding pharmacy that prepared the drug. Ever since the incident, federal and state legislators have been struggling to determine whether they should ramp up regulation of compounding pharmacies—a debate resulting in new state legislation and the introduction of the Pharmaceutical Compounding Quality and Accountability Act in the US Senate on May 15. As laws are debated at the national and local level, drug manufacturers are also evaluating the impact that increased regulation of compounders will have.  

The pharmacy that caused the deadly outbreak is the New England Compounding Center (NECC), which was preparing injectable drugs despite having been cited in the past for cleanliness and safety issues. The incident shined a light on the federal regulatory landscape—and, importantly, the lack of regulation over compounders preparing high-risk drugs.  

Under the traditional definition of compounding, a compounder prepares products for patients who cannot take a drug in its FDA-approved form; for instance, patients who are allergic to an inactive ingredient, or patients who cannot take the drug as prepared by a manufacturer. Traditional compounding, which takes place in state-licensed and -regulated facilities, calls for drugs to be prepared based on individual, valid prescriptions.  

Because traditional compounders prepare drugs in individual batches, it is difficult to regulate their products in the same way as manufactured drugs. Compounded preparations are patient-specific and each patient has a different set of needs. Therefore, it would be nearly impossible to require a new drug application (NDA) for each drug prepared by a compounder. For this reason, and because compounders have been successful in stymieing regulation at the federal level, the FDA has unclear and limited authority to oversee compounders. In fact, at this time, there is no federal registry of compounding pharmacies—many operate outside of the FDA's notice or reach.  

In certain cases, compounders have used the lack of federal regulation to act as de facto manufacturers, preparing large batches of unapproved drugs without FDA oversight. Facilities have engaged in practices that are clearly outside of the bounds of traditional, patient-specific drug preparation: preparing drugs before receiving individual prescriptions, or making compounds that are essentially copies of FDA-approved products.  

Compounders acting as manufacturers have long competed with drug manufacturers preparing FDA-approved products, which are patented and enjoy a period of market exclusivity. Since compounded products do not have to undergo the NDA process—and because the FDA does not have clear authority to dictate their ingredients—certain compounders prepare copies of FDA-approved products for far cheaper than their manufactured counterparts.  

Increased use of compounded products comes at the expense of manufactured drugs' market share—particularly in the case of costly, complex drugs. The lure of compounded products is only strengthened by ever-tightening hospital budgets. As payers shift to capitated models, hospital purchasers are looking to cut back on costs—compounded drugs can be an easy way to achieve savings.  

Compounding pharmacies are currently regulated at the state level, where boards of pharmacy oversee everything from licensing to cleanliness. However, because certain compounders are acting more like manufacturers, states are often ill-equipped to regulate such facilities. This is especially true in light of many states' tightening budgets. For instance, in Texas (which, along with Missouri, is one of two states that randomly tests compounded drugs), the number of pharmacies given random safety tests in the state has dropped by approximately two-thirds since 2010. 

Until recently, federal legislation has been strongly opposed by compounding pharmacy stakeholders. An attempt to regulate compounders under the FDA Modernization Act (FDAMA) in 1997 was challenged in court because one provision in the law prohibited soliciting prescriptions and advertising any particular compounded drug. In 2002, the Supreme Court agreed that the soliciting and advertising prohibitions were impermissible restrictions on free speech, but did not decide on whether the remaining portions of the law that (among other things) prohibited compounders from acting as manufacturers and from making copies of FDA-approved products, could stand.  

As a result, the decision of the Ninth Circuit (which heard the case before its Supreme Court appeal) striking down the remaining regulations on compounders became the national standard. In 2008, the Fifth Circuit took up the issue, and came to a different conclusion—that the compounding regulations that did not relate to advertising were enforceable. However, this holding applies only in the Fifth Circuit, which covers Texas, Louisiana, and Mississippi.   

The regulation of compounding is split between the Fifth Circuit and the rest of the country, where the FDA's authority over compounders comes in the form of a compliance policy guide issued by the agency after the 2002 Supreme Court case. While it does not carry the force of law, the guide provides the FDA with the right to take enforcement action over compounders that cross the line.  

On May 15, and after months of committee hearings with FDA and public health officials, members of the Senate Health, Education, Labor, and Pensions (HELP) Committee introduced the Pharmaceutical Compounding Quality and Accountability Act. The proposed legislation would create a new class of compounders called "compounding manufacturers," who prepare drugs for shipment in interstate commerce. So-called compounding manufacturers would be prohibited under the proposed law from, among other things, preparing drugs that are copies of FDA-approved drugs. In addition, compounding manufacturers would be required to register with the FDA, and to pay establishment fees starting at $15,000 for fiscal year 2015. This would not only create the first list of compounding manufacturers—which would provide the FDA with critical information about the facilities that it needs to inspect—but it would provide the funding necessary for the FDA to regulate such facilities.  

The bill also clarifies that compounded products are new drugs subject to the Federal Food, Drug, and Cosmetic Act (FDCA)—the law that regulates manufactured drugs—and states which provisions of the law apply to compounded products. Under the proposed law, compounders would not have to comply with all traditional manufacturing regulations, but they would be held to standards set by the FDA. Finally, the bill would require compounders to investigate and report adverse events.  

The recently released bill, which has bipartisan support and has received comparatively little opposition from compounders in light of the spinal meningitis outbreak, appears to present the best opportunity for federal oversight to date. However, to become law, the bill requires support in the House, where some members assert that the existing compliance policy guide provides the FDA with all the oversight authority it needs. 

While the fate of federal legislation remains unclear, states have been working to tighten regulation over pharmacy compounders. For instance, in the fall of 2012, Massachusetts enacted emergency regulations increasing the state board of pharmacy's oversight of compounders, and requiring board approval of the areas where compounders prepare complex injectable drugs. In March 2013, Florida changed its definition of "office use" compounding, limiting the amount of compounded products that compounders could prepare and deliver to physician offices or hospitals in advance of a valid prescription. Finally, in New Jersey, a new statute and a complete overhaul of compounding regulations have been proposed in recent months, in an attempt to provide clearer, more comprehensive regulation over compounding pharmacies.  

Tighter regulation of compounders could also have an impact on product liability claims, which—in certain cases—can impact manufacturers as well as compounders. When patients are harmed by a compounded product, the compounding pharmacy can be sued for product liability. In the case of the NECC, where approximately 50 people have died and more than 700 others have been treated for fungal infections, the volume of ensuing litigation has played a part in crippling the now-bankrupt facility. However, the threat of litigation has yet to stop many compounders from pushing the limits of production and crossing the line into manufacturing. 

In certain states, liability does not stop with the compounder. In Tennessee, for instance, a statute permits patients to sue the sellers of a defective product if the manufacturer of that product is declared insolvent. Drug manufacturers who cooperate with compounders and provide active ingredients could also be at risk of product liability claims if issues arise with the compounded products.  

As federal and state legislators continue to focus their attention on compounding pharmacies, it's likely that new legislation—particularly at the state level, where regulations are easier to push through—will be enacted in coming months. Federal legislation is less of a sure thing, but compounders can count on increased attention from the FDA as the debate about the proper level of regulation and enforcement continues.  

is an Associate in the healthcare practice of Manatt, Phelps, & Phillips. She can be reached at 

Compounders are under increased scrutiny following last year's spinal meningitis outbreak.

Pharmacy Compounding: What's Ahead for Manufacturers

Regeneron is the story of biotech, writ large on a ledger of visionary risk: two men, working out of a New York City apartment, place a big bet on the obscure science of nerve growth factors and end up building a business that today is touted as the millennium's next Amgen, with biotech's best long-term prospects for transition to the big leagues of Big Pharma. 

The story line is a long and twisting one, extending 20 years from the company's launch in 1988 to the commercialization of its first product, Arcalyst, for a rare autoimmune disorder, in 2008. What is ironic—not to mention suspenseful—is how a near-death experience with the science of nerve growth factor forced a re-invention of the company around related process technologies that are spawning a rich legacy of innovations in areas tangential to Regeneron's original core mission.  

So what could have been an epilogue became, through a double dose of forward-looking insight and initiative, a prelude to today's nosebleed high stock price—the ultimate symbol of market success. In the last five years—one-fifth of Regeneron's life as a company—its stock price has gone in only one direction. It was $20 per share in 2008. At press time in late May it hovers around $250.  

Regeneron's staying power, expressed through the company's unwavering pursuit of not just scientific but also technological innovation, derives from the unique partnership formed between two individuals: founder, president and CEO Leonard Schleifer, and founding scientist, president of Regeneron Laboratories, and chief scientific officer George Yancopoulos. Two core beliefs cement the relationship. The first, attributed to Yancopoulos, is a commitment to developing new technologies in the service of drug discovery and development. The second, attributed to Schleifer, is a commitment to recognizing and then leveraging the value Regeneron creates – making deals and forming partnerships that enable the company to continue investing for the future. The fraternity seems to work. Last year, 

 annual reader survey named Schleifer 2012's Best Biotech CEO. "After 25 years, and now being perhaps the longest CEO serving in the business, it's nice to be viewed as an overnight success," jokes Schleifer.  

Regeneron is headquartered in Tarrytown, NY, 30 miles up the Hudson River from New York City. The company has three marketed products on its books—Arcalyst, an orphan drug; Eylea, a blockbuster eye product; and Zaltrap, a cancer therapy—plus a pipeline full of monoclonal antibodies, several in late stages. Regeneron entered the black in 2012 for the first time, as a profitable biotech. This milestone was long in coming but rested on a firm base, with crucial support from Big Pharma. After years spent playing musical chairs with pharma partners, Regeneron struck a sweeping platform technology deal with Sanofi in 2007, following an ex-US development and commercialization deal with Bayer in 2006 on aflibercept, which would become Eylea.  

The story of Regeneron—a portmanteau of the words "regenerating" and "neurons," with "gene" in the middle—is one of a company working to balance the pursuit of cutting-edge scientific discovery and development, with the commercial prospects necessary to keep the bioreactors up and running. It's also about the determination to engineer failure into an adaptive trait for success.  

Regeneron had an early advantage in attracting interest from Big Pharma firms anxious to supplement their in-house pipelines. Schleifer signed a deal with Amgen in 1990 —two years after founding the company—and Regeneron went public in '91, raising $96.1 million. The Amgen deal was based on Regeneron's neurotrophic factors, and a belief that injecting nerve growth factors could regenerate neuronal stem cells, or basically regrow brain cells. Six years later, Regeneron's lead brain-derived neurotrophic factor (BDNF) would fail in a Phase III trial with ALS (or Lou Gehrig's disease) patients. But the 50/50 profit-sharing deal Schleifer had negotiated with Amgen would become his signature, despite the fact that the BDNF candidate, and the other nerve growth factors, never made it to market. 

In Yancopoulos's telling, that kind of deal, now fairly commonplace, was unprecedented at the time. Other companies approached Regeneron about its growth factors, but they all "wanted to partner by essentially buying them from us and giving us a lot of money up front, and a little royalty," says Yancopoulos. "Len said, 'No way.' And that's one of those rare times a little old biotech company stood up to a big company and made such a deal." In addition to 50/50 profits, Regeneron's partners, past and current, provide the vast majority of funding for clinical development, which can run into the hundreds of millions of dollars. "Last year we spent $600 million in R&D," says Yancopoulos. "And about three-quarters of that is funded by our partners."  

It's convenient to frame Schleifer and Yancopoulos as the dual forces of business and science, respectively, but that's not exactly the case. Schleifer is a licensed neurologist; he received his MD and PhD in pharmacology from the University of Virginia, and then left for Cornell University Medical College. Following his residency, Schleifer, working as an assistant professor at Cornell, kept up with the medical journals and was fascinated by some of the work that companies like Genentech were doing.  

But the new biotechnology companies Schleifer was reading about were ignoring his chosen field. Schleifer told his thesis advisor at the time—Alfred Gilman, a biochemist and later, in 1994, a Nobel Prize winner—that he thought a biotech company focused on neurobiology and neurological diseases might make some sense. But Gilman shrugged him off. "[Gilman] said, 'Look, let's forget about that stuff. Get back in the lab, and do what you're well-trained to do,'" says Schleifer. When Gilman realized Schleifer wasn't giving up on the idea, he decided to help by recruiting experts for Regeneron's Scientific Advisory Board. Gilman joined the company himself, as a director, in 1990.  

One of Schleifer's neurology professors, Frank Petito, had a well-connected father (also named Frank Petito) who had served as chairman of the board at Morgan Stanley. Schleifer probed Petito about potential backers for his new venture, which led to a meeting with George Sing, who was working at Merrill Lynch Ventures. Sing helped Schleifer think through some of the business issues, but he respected the intellectual project and wasn't the kind of VC who thinks he knows more about science than scientists. Over Chinese food, Schleifer and Sing scratched out a deal on the back of a napkin, and Sing agreed to give Schleifer $1 million to start the company.  

Regeneron’s ’Trap’ products: Zaltrap, Eylea, and Arcalyst.			

When the lead Regeneron/Amgen growth factor candidate failed a decade later, Edmund Debler, an analyst with Mehta & Isaly, characterized Regeneron's situation as "grim," in a 

article. "Very rarely do companies get a second chance, no less a third," he told the paper. But he also called Regeneron, in the same article, "one of the best research entities in the biotech world," adding that, "they just have not been able to translate that research prowess into a drug." 

Indeed, it would be another decade before Regeneron finally got its first drug approved, in 2008. Schleifer's early vision of cloning nerve growth factors, delivering them to patients' brains, curing a few neurological diseases, and sailing off into the sunset, did not come to pass. "The two biggest surprises for me were just how long it would take to translate good research into an approved drug that you could actually sell to patients, and how expensive it would be to do that," says Schleifer.  

Regeneron's failure to bring the nerve growth factors forward could have been the end of the story. Instead, the team of scientists led by Yancopoulos kept learning from and building on their findings in the lab, which led to new areas of development. Perhaps most importantly, Yancopoulos's team invented new process technologies to facilitate more sophisticated experimentation and discovery. "I can directly trace how the things that we're discovering now started with ideas that we had 25 years ago," says Yancopoulos.  

George Yancopoulos was in his late 20s when he got a phone call from Schleifer, in 1988. "Len was working out of a one-bedroom apartment on the Upper East Side [of Manhattan], trying to start up this company. And people said I was crazy to be talking to this guy," he recalls.  

A Queens, New York native and son of first generation Greek immigrants, Yancopoulos laid the groundwork for his academic career at the Bronx High School of Science, where he was valedictorian. He went on to matriculate at Columbia University, receiving an MD and PhD in biochemistry and molecular biophysics. As a PhD candidate, Yancopoulos worked in the lab of Fred Alt, a geneticist. Alt had recently joined Columbia from MIT, where he'd done his own post-doc work in the lab of David Baltimore, a Nobel Laureate and National Medal of Science recipient. As an early member of Regeneron's Scientific Advisory Board—a who's who of science including several Nobel laureates and National Academy of Sciences inductees—Alt says the call was put out among the board to help find a lead scientist. "I went back and mentioned it to George," says Alt, who is currently a professor of genetics at Harvard Medical School. "I didn't normally lead my students into industry, but it seemed like a very special circumstance for the right person," says Alt.  

Yancopoulos has a slightly different recollection. "I remember Fred sent me up to visit David [Baltimore], to talk me out of it," he says. "My hero, my scientific grandfather, sat me down and said, 'George, you have such a promising future in science. You can't walk away from this. If you go and do this crazy thing, you'll never be heard from again.' And I remember walking out of his office, sort of quaking and nervous, and thinking, wow. But then I thought, if it doesn't work out, I'm sure I'll be able to find something else to do."  

Upon accepting the job with Regeneron, as founding scientist, Yancopoulos walked away from a faculty position at Columbia, a $2 million grant, and eight years worth of research funding to roll the dice with Schleifer, who had dreams and ideas but not much money. Yancopoulos and Schleifer agreed on the business proposition, which was to put science in the driver's seat.  

Schleifer is also from Queens, "about a mile or so" from where Yancopoulos grew up, he says. Both men exhibit a certain New York City frankness and grit. They argue a lot. "We recognize that we're in this together, and we try and come up with a unanimous view on the path forward," says Schleifer. "If we don't both agree, we argue it out until we do agree."  

They agree about the importance of taking risks as a company. At the JP Morgan Healthcare Conference in January, Schleifer told attendees that to stop taking chances in R&D is to initiate a company's decline. "Some people enjoy adventure and don't see risk and failure as endpoints. It's just something along the way," says Yancopoulos. "If you're afraid of it, then you avoid things that have a high risk of failure."  

There's a difference between risk-taking and outright temerity. Regeneron built itself a safety net by constantly improving the technology and processes it uses to discover and assess potential drug candidates, which allows its scientists to safely step out on the high wire. "There's been a singular vision since day one about combining cutting-edge biological science and developing cutting-edge technology that together would provide the opportunity for an endless supply of clinical candidates," says Neil Stahl, Regeneron's SVP, research and development sciences.  

Yancopoulos says Regeneron's approach to developing technology in the service of science comes in large part from Fred Alt's lab back at Columbia. "As soon as I started hiring people, I tried to put in place a system where technology was at an even level with the science," says Yancopoulos. The goal was to "not just provide a technological service, but to develop better technology." 

Regeneron's current success is due in large part to the persistent development of new tools, which enabled the company to build on the failure of nerve growth factors as products, without starting over from scratch. The technology narrative also illustrates the company's approach to drug discovery, which is to begin with an important biological insight, and to develop technologies that can address those insights with drugs to cure disease. 

In the beginning, Yancopoulos and his team developed cloning technologies to study orphan receptors on the surface of cells, to identify the factors that bind to them. Once those factors are identified, they can be studied to uncover their biologic function. This process led to Regeneron's first clinical candidates, the nerve growth factors.  

While working on the nerve growth factors, Regeneron's scientists discovered a way to engineer a new kind of blocker, which would "trap" specific signaling proteins in the body, and prevent them from binding to their natural receptors. At the same time, Dan Kastner at the NIH, and Harold Hoffman, at the University of California, San Diego, were studying patients that presented flu-like symptoms—and sometimes more severe symptoms like hearing loss or nerve damage—as a result of mild temperature change. The disorder, called cryopyrin-associated autoinflammatory syndrome (CAPS), is hereditary, and Kastner and Hoffman were involved in mapping the gene that caused it, according to Yancopoulos.  

Kastner and Hoffman's research pointed to a genetic mutation that caused an excess of interleukin-1. Regeneron was in the early stages of developing its VelociGene platform, which allowed Yancopoulos and his team to put human genetic mutations into mice, to reproduce the disease. Through a collaboration with Kastner and Hoffman, Regeneron tested the genetic theory by creating mice with CAPS, and then treating them with an interleukin-1 "trap." The mice were cured, which gave Regeneron the confidence to do clinical studies in human patients with CAPS. The result was Arcalyst (rilonacept), the first drug on the market to treat the condition. Patients with CAPS have to keep taking Arcalyst, but it's curative, or nearly so; it decreases patients' symptoms by 80 to 90 percent, says Yancopoulos.  

There aren't many patients with CAPS, only a few hundred in the United States, and the drug isn't considered a huge commercial success. But for Yancopoulos, it was incredibly satisfying.  After meeting with patients who'd been cured by the drug, "that alone, if we hadn't made a nickel, is more gratifying than anything that most people could ever do in academia," he said.  

Yancoupolos credits "a think tank of key people" at the company, including Neil Stahl, Drew Murphy, Aris Economides, Sam Davis, Nick Papadopoulos and "a slew of others" with bringing the Trap technology forward. One of the Traps became Eylea, a blockbuster eye treatment indicated for wet age-related macular degeneration. Another became Zaltrap, for metastatic colorectal cancer. Those two products transformed Regeneron, and provided a first real taste of the commercial side of the drug business, after 20-plus years of waiting for a breakthrough.  

For small biotechs, the commercialization process can be a catch 22. Everyone wants to be first to market, but if you're dealing with new mechanisms and novel drugs, the pharma partners necessary to fund late-stage development and drive commercialization efforts want proof that it will work. But to get that proof, you need the late-stage clinical data. 

Eylea (aflibercept), a Trap designed to block vascular endothelial growth factor (VEGF), was approved at the end of 2011. The drug competes directly with Genentech's Lucentis (ranibizumab) and also with off-label Avastin (bevacizumab). Yancopoulos says Regeneron "might have been the first people, or right there [with Genentech]...to consider using a VEGF blocker" for macular degeneration in the mid-1990s. Lucentis beat Eylea to market by five years, but not for scientific reasons. 

Regeneron was a much smaller company in the mid-90s, and totally dependent on a partner to bring drug candidates forward. At the time, Regeneron had a partnership with Procter & Gamble, and P&G didn't like the VEGF trap for the eye. "They said there was zero commercial opportunity, and though we could model it in an animal, nobody else had done it in man, so there was no proof of concept in man," says Yancopoulos. P&G refused to put aflibercept into clinical development, and missed out on Eylea, a product with sales that now exceed $1 billion. "They turned it down for three years in a row," before ownership reverted back to Regeneron, says Yancopoulos. 

Led by two New Yorkers with a mindset that marries novel scientific insights to the processing power of novel technologies, Regeneron's success is a revolutionary challenge to the industry status quo.

Pharmaceutical Executive-06-01-2013