As national and international marketers, pharmaceutical companies generally champion federal pre-emption of state laws to gain uniform rules governing drug promotion, research, labeling, and other activities. States have launched various efforts over the years to permit drug importing, regulate drug sales and promotion, require disclosure of certain industry activities, and establish systems for tracking drugs through the supply chain. The usual industry response is to call for national standards, as authorized by the Food, Drug and Cosmetic Act (FDCA).  

These issues have moved to center stage recently as states have launched "right-to-try" laws designed to help dying or seriously ill patients gain early access to experimental therapies (see "Compassionate Use Requests Complicate Drug Development" in 

's June 2014 issue). Although FDA routinely approves such compassionate use requests from sponsors, state officials and patient advocates believe their efforts will facilitate the process by allowing a physician to request access to drugs in early clinical trials, eliminating FDA review of these proposals. Local advocates also hope the new policies will put more pressure on biopharma companies to provide a requested treatment, although neither state nor federal agencies can require such action by a private firm. 

The larger danger of the new law in Colorado and proposals in Missouri, Louisiana, and Arizona is that they may offer false hope to patients and could erode confidence in FDA's authority to set standards for clinical research and to determine which drugs are sufficiently safe and effective to come to market. Sponsors of new drug development programs generally believe that broader patient access to a promising therapy can be achieved best by completing clinical trials and gaining FDA market approval. FDA, moreover, is not pleased at the potential for state laws to challenge its authority on drug approvals and to raise the risk of patients receiving therapies that turn out to be ineffective and even harmful. 

Pharma companies and FDA have run into similar concerns with state efforts to permit the import of less costly drugs from other countries. The latest case involves a 2013 Maine law permitting importation of prescription drugs from pharmacies in Canada and other specific countries. Maine officials assert that the program will help local residents obtain needed medicines, but Maine pharmacists and manufacturers have filed suit, claiming that the initiative could bring in unsafe products, and that Maine's action is pre-empted by the FDCA. The case is moving forward following a recent ruling by a Maine judge that local pharmacists have legal standing to bring such a suit— although drug manufacturers do not (see Kurt Karst's FDA Law Blog, May 20, 2014 for more details, 

And the federal Open Payments program recently went live, largely the result of industry's desire for uniform, national standards governing the disclosure of pharma company payments to health professionals. Although public access to data on "transfers of value" by makers of drugs and medical products is likely to hinder industry interactions with medical professionals and with physicians engaged to conduct clinical research, pharma companies decided that the federal program was preferable to dealing with multiple state laws.  

Under rules issued this past year by the Centers for Medicare and Medicaid Services (CMS), in June companies had to submit their detailed data on payments to physicians and teaching hospitals for the last five months of 2013. CMS will post the information as a way to shed "sunlight" on relationships between industry payments and physician prescribing and treatment practices.  

The final Sunshine Act provides only partial federal pre-emption of local transparency policies, as states still may require industry to report additional data and payments to more health professionals. But industry hopes that over time, the CMS program will establish a disclosure model that satisfies local health authorities. 

Similarly, industry's desire to avoid diverse drug track-and-trace requirements was a prime factor leading to enactment of the Drug Quality and Security Act (DQSA) of 2013, which lays out a 10-year process for creating a national drug tracing system through the Drug Supply Chain Security Act (DSCSA) section of DQSA. After years of debating various options for better securing the drug supply chain to thwart counterfeiters and thieves, supply chain partners lined up behind DSCSA last year to avoid compliance with a California law establishing its own drug tracking system beginning in 2015.  

The new law pre-empts California and other state tracking programs, reflecting general agreement that a national system is more capable of identifying genuine medical products and preventing bogus or adulterated drugs from entering the supply chain. The DSCSA requires manufacturers and distributors to establish systems able to transmit information on prescription drug movement in the U.S. from production plant to distributors and ultimately to dispensers. With an initial information-exchange phase set for launch Jan. 1, 2015, FDA is busy consulting with stakeholders on options for data exchange standards able to transmit information, initially via paper or electronically; a fully interoperable system is required by 2023 that can track drugs electronically through package-level two-dimensional bar codes.  

The drug tracking measure gained traction in Congress last year due to a sense of urgency among policy makers to strengthen FDA oversight of large drug compounding operations. Although traditional pharmacy compounding is regulated by state law, a lethal meningitis outbreak linked to contaminated injectibles produced by certain compounders generated a groundswell for stronger federal controls.  

The new policy walks a narrow line between tighter FDA oversight of those compounders that operate more like drug manufacturers, while retaining state regulation of the many thousands of small entities that provide compounded dosage forms to local hospitals and doctors. Maintaining a balance between state and federal rules is challenging, though, as seen in emerging disputes between FDA and compounders over specific policies, such as limits on the production of  "office stock" drug supplies by unregulated compounders—something sought by FDA but opposed by some states. Compounders largely prefer state rules and regulations, and only a handful of large operators have signed up for the new voluntary FDA regulatory regime. 

Articles

Column

Pharma backs federal standards for compassionate use, drug importing, data transparency, and track-and-trace. Jill Wechsler reports.

Pre-emption and States' Rights

In 2008, FDA sent its first inspectors to live and work full time in global markets, where active pharmaceutical ingredients (API)—and finished drug products—to be used by US patients, are increasingly being manufactured and exported.  

That project has since expanded to 11 international offices, but the current level of permanent staffing in some regions is unbelievably, if not terrifyingly small: between 2008 and 2013, just one policy analyst and one inspector worked full time in China, for example, although that number has grown to 11 locally-based drug investigators in 2014, said Christopher Hickey, director at FDA's China office, at DIA's annual meeting last month. Given the fact that China exported $3.25 billion in API to the US last year, up from $410 million 15 years ago, it's in some ways surprising that American patients haven't endured other large-scale adulterations along the lines of the Heparin debacle, which killed 80 people in 2008. 

In India, America's second largest global source of API and finished drug products, some 1,965 manufacturing facilities export to the US, but only around 600 sites are registered with CDER, said Atul Agrawal, supervisory consumer safety officer at FDA's India office. Drug manufacturing capability in India doubled to represent 12% of total US drug imports in 2012, up from 6% in 2008. "India is a major player in the prescription drugs Americans take on a daily basis," said Agrawal, much to the envy of Chinese nationals everywhere. And yet, FDA's operation in India currently consists of five full-time Americans, and two locally employed staffers, spread across two offices, one in New Delhi and one in Mumbai.   

As a result, FDA officials in China, India, Latin America, and elsewhere are working tirelessly to form partnerships with "competent authorities" in local governments, to extend the reach of manufacturing inspections. Progress is being made, and the 2012 passage of The Food and Drug Administration Safety and Innovation Act contained critical provisions designed to improve the integrity of imported drugs sold in the US, FDA speakers said. In May 2014, FDA announced the Mutual Reliance Initiative, in cooperation with the European Commission (EC) and the European Medicines Agency (EMA), which aims to deepen the information exchange between inspectors to promote higher quality exports and better manufacturing practices.  

Challenges remain: reporting structures within foreign governments can be labyrinthine, inspection protocols vary, training is expensive, and economically-motivated adulteration of products, and records, is still in play. In many places, said Michael Rogers, regional director of FDA's Latin America office, additional governmental clearance requirements block out FDA personnel entirely: "We have no information or inspectors" in these places, which means FDA "must partner," or simply hope, blindly, that any problems get sorted stateside, before they end up in a pill bottle or an injection.  

FDA officials willing to relocate, often with their families, to far-flung global cities (on modest salaries) ought to be congratulated for their herculean efforts to protect American patients. Patients themselves, particularly those who vote for politicians running on platforms touting lower taxes, economic globalization, and funding cuts to government agencies, ought to be careful who they blame when the next round of adulterated medicine shows up in a loved one's medicine cabinet. 

FDA officials willing to relocate to far-flung global cities should be congratulated for their herculean efforts to protect American patients. But funding cuts hamper the Agency's international presence.

FDA Abroad

Vaccines are a proven and cost-effective preventative therapy for numerous disabling and fatal diseases, producing significant public health gains that generate tens of billions of dollars in health system savings each year. Only recently, however, have vaccine producers experienced the commercial returns commensurate with this long record of positive public health performance. Vaccines are now the industry standout in delivering high rates of revenue growth, with double-digit increases of 10% to 15% annually, which are expected to continue for the next several years, significantly outpacing the 6% to 7% growth rate we see in traditional pharma.  

The sector's improving prospects are driven by a surge of innovation in the underlying science of disease prevention as well as the increasing importance that national health systems attach to vaccines as their primary tool in the fight against communicable disease. These factors are driving change across manufacturers and their products as well as with markets and key customers. In the era of patent cliffs and shrinking pipelines, the high rates of post-Phase III R&D success in vaccines combined with a long product life cycle—often extending well beyond patent expiry—has forced the broader industry to look at vaccines anew. Nevertheless, companies seeking to benefit from this growth must adapt to a fast-evolving environment that includes lengthy clinical development timeframes, large investments in complex manufacturing platforms, and an often politicized price and reimbursement structure that demands significant attention to building relationships with numerous external stakeholders.

There is significant untapped potential in the preventive vaccines market. Unmet needs remain since many diseases still have low immunization rates or no available vaccine. Financial analysts have projected the market to reach $39 billion in 2015. The World Health Organization (WHO) expects the global market to soar to $100 billion by 2025, with 120 new products flowing from company pipelines over the next decade. 

A range of factors are driving this growth. Our experience in the industry has highlighted three: an increase in awareness of infectious diseases, changes in the global reimbursement landscape, and higher prices for new vaccines. 

Increased awareness of infectious and communicative diseases: 

National governments are the dominant customer globally and play a substantial role in purchasing, enforcing safety regulations, and influencing uptake. Over the past decade, governments and supranational organizations have expressed growing concern over public awareness of infectious disease prevention, dedicating substantial investment in mass immunizations and outreach programs in efforts that translate into opportunity for manufacturers. 

Global outbreaks of vaccine-preventable diseases have driven much of the growth in public awareness. Seasonal influenza outbreaks like the H1N1 strain have claimed many thousands of lives and taken enormous tolls on national health expenditure. Growing awareness provides the impetus for governments to invest in programs aimed at preventing onset of future outbreaks. These programs supply funding for mass immunization programs, which play an instrumental role in elevating uptake. The WHO, for instance, now supports campaigns that provide not only funding but bottom-up infrastructural support, through numerous  public outreach programs for vaccination, including sponsorship of the annual World Immunization Week.  

Recent examples of how outbreaks can impact awareness and government policy are the meningococcal B (MenB) outbreaks, which led to meningitis cases and at least one death on a handful of US college campuses. In response, the US CDC and FDA made Novartis' Bexsero vaccine available for use with limited populations despite the product not being broadly licensed for use in the US. In addition, Bexsero and Pfizer's rLP2086 recently received "breakthrough" designation from the FDA, making these two products eligible for accelerated review. We anticipate an updated Advisory Committee on Immunization Practices (ACIP) recommendation for MenB vaccine use. Such a recommendation is expected to compel most payers to cover the product for eligible populations.  

Non-profit and non-governmental organizations, such as the Gates Foundation, the Clinton Health Access Initiative, Global Alliance for Vaccines and Immunization (GAVI), as well as many others are increasingly influential as brokers in the negotiation of vaccine purchasing for ministries of health for developing nations and/or as advocates for vaccine use. Each of these  groups are receiving more philanthropic support. They also provide access to medications in emerging and developing markets, prioritize vaccination on public health agendas, and help shape national immunization program strategies on coverage, pricing, and uptake. 

Better access and more predictable pricing: 

Immunization is attracting more attention on national health agendas; governments, in collaboration with supranational organizations, have responded by improving or adding vaccine coverage linked to preventive public health interventions. Provisions in the 2010 US Affordable Care Act mandate all health insurance plans to make recommended vaccines available with no out-of-pocket deductible or co-payment incurred to the patient, a provision that is intended to bring improved prevention coverage for 88 million beneficiaries by 2013.  

Other mature markets, including Japan, have increased their emphasis on vaccination as a public health priority. In an effort to narrow the country's historical "coverage gap,"  Japan's  Ministry of Health, Labor, and Welfare  (MHLW) has poured investments into the vaccines manufacturing and R&D pipelines of Takeda, Astellas, Daiichi Sankyo, and Mitsubishi Tanabe to promote immunizations against prevalent infectious conditions. The MHLW has provided generous incentives for vaccine manufacturers, funded awareness programs, and by 2015, aims to include HPV, Hib, pneumococcal, varicella, mumps, and hepatitis B vaccinations as part of the national immunization program. The Japanese vaccines market has grown at a 28% CAGR from 2006-2011. 

Uptake is also heavily driven by improved vaccine coverage and distribution in emerging markets (see chart below). Argentina, which currently has one of the most comprehensive national immunization programs in Latin America, provides vaccines for free and has expanded the number of mandatory vaccines from six to 16 over the past ten years. Moreover, Argentina's Ministry of Health aims to increase the percentage of covered individuals from 80% to 95% and has drafted plans to expand its vaccine distribution system to ensure universal access. Brazil currently leads Latin American countries in immunization protection, with 26 products covered under the national immunization program. In China, select provinces and cities have instituted regional programs for flu and select pediatric vaccines designed to lessen the individual financial burden of vaccines that are not covered for patients.  

Growth is heavily driven by improved coverage and distribution of vaccines in emering markets.			

More evidence of the importance of immunization in emerging markets is the increasing activity of local mid-sized manufacturers and government labs. China's Sinovac, Brazil's Butantan Institute, South Africa's Biovac, Mexico's Birmex, and the Government of India's Serum Institute are developing newer vaccines, investing in more advanced manufacturing technologies, and experiencing higher uptake of in-line products. Brazil has made technology transfer a critical part of its overall national vaccine policy as was seen with Brazil's Ministry of Health agreement to purchase $2.2 billion worth of GSK's Synflorix in return for a gradual receipt of the technology to independently manufacture the vaccine after the end of the 10-year-long contract. Sanofi has partnered with Birmex in Mexico and Butantan in Brazil in a tech transfer agreement for its influenza vaccine. Many of the mid-size institutes have entered into purchasing agreements with supranational organizations such as GAVI, the Bill and Melinda Gates Foundation, and the Program for Appropriate Technology in Health (PATH).  

Strong innovation is reflected in elevated price levels: 

Part of the sector's growth is derived from the higher prices newer first-in-class products have commanded based on the value they provide (see chart below). Wyeth launched Prevnar-7 in 2000 at a price that exceeded most other pediatric vaccines combined while still demonstrating high cost-effectiveness. Merck's Gardasil for human papillomavirus was priced at near $400 upon launch in 2006. With increased value driven by six additional strains, Pfizer's launched Prevnar-13 at a price of approximately $513 per course.  

Prices for new vaccines are increasing relative to traditionally mandated products.			

Even in categories that are crowded with competition, innovation has enabled price differentiation, as evidenced by Sanofi Pasteur's Fluzone HD, which is targeted at the elderly sub-segment of the overall flu market where unmet need is most pronounced. While Fluzone HD has not demonstrated greater protection from influenza disease than regular flu vaccines at the time of this writing, it has demonstrated improved immune response in clinical trials. Significantly, the private list price for Fluzone HD is more than twice that of multiple standard dose flu products. AstraZeneca's FluMist was recently able to gain a CDC recommendation at the other end of the age spectrum.  The CDC indicated that influenza incidence was markedly lower in the 2- to 8-year-old age group when vaccinated with a nasally administered vaccine. FluMist also commands a premium price in the market. 

In addition to the drivers already mentioned, we have also seen growth from successful lifecycle management strategies. The two largest-grossing products in the preventative vaccine industry, Gardasil and Prevnar, are perfect examples. Gardasil for instance, doubled its eligible recipient base after receiving approval for male anal cancer, genital warts, and pre-cancerous lesion indications. In January 2013, Pfizer's Prevnar similarly received a nod from the FDA for an age 50+ expansion, a decision that has led Wall Street analysts to project an increase in sales from $4 billion to $5 billion a year. Vaccines that currently lead market sales have and will continue to provide a steady source of growth, and manufacturers intend to leverage R&D, manufacturing, and marketing capacity and increase year-on-year investments on promotional spend, post-marketing surveillance studies, and indication expansions.  

Industry growth has led to M&A activity: 

Many large-scale manufacturers have turned to vaccines to drive sustained growth and branded revenue. In 2010, the industry reported over 195 vaccine partnering deals, including Johnson & Johnson's acquisition of Crucell, a $2.3-billion deal which strategically introduced the big pharma conglomerate to the mid-size vaccine manufacturer's portfolio of pediatric, endemic, and travel vaccine assets.  

Other notable deals include GSK's recent $5.25 billion initial cash purchase of Novartis's non-influenza vaccine assets, in return for the transfer of GSK's oncology franchise and the development of a distinct consumer healthcare business. This brings to GSK a portfolio of travel assets that includes a promising meningitis vaccine franchise. Sanofi Pasteur's acquisition of Acambis in 2008 augmented the second-largest vaccine manufacturer's flu and tailored multivalent combinations with West Nile and dengue fever travel vaccine assets. In 2007, AstraZeneca acquired MedImmune for $15.6 billion in a deal that through Synagis and FluMist, positioned the company as the sixth-largest vaccines manufacturer. Takeda (see sidebar) launched a new business unit dedicated to vaccines in early 2012, and Mitsubishi Tanabe acquired Canadian company Medicago, thereby getting access to Medicago's innovative technology for producing vaccine-like particles from tobacco plant leaves.  

Takeda’s New Divison Charts Course to Global Growth			

The next generation in vaccines development will rely on platform strategies founded on  genomics, reverse vaccinology, high throughput DNA sequencing, new plant and insect based expression and production systems, and new more potent vaccine adjuvants. These developments carry the potential to rapidly produce novel, optimal and cost-effective vaccine targets that carry high chances of success in clinical development programs. Promising new vaccine candidates such as meningococcal-B, GBS, methicillin-resistant 

 are already in development. Not only do these new platforms improve the prospects for vaccines against major infectious diseases such as AIDS, tuberculosis, dengue, and malaria, they also provide a basis for therapeutic-based vaccine development against other new and emerging conditions, including allergies, autoimmune disorders, and cancer. 

New markets and diseases, specialized target populations, and increasing needs for preventive vaccines all lead to new opportunity, but also impose new challenges. The key strategic questions manufacturers will need to address include:  

» How to price products whose commercial benefit will rest predominantly in emerging markets?  

» How to effectively capture niche populations within an established vaccine disease area?   

» Within the structure of public health requirements and recommendations, how can technology advances be effectively translated into commercial advantage? 

The benefits that the vaccine market offers will accrue to those who are able to creatively adapt and build on past approaches while incorporating the advances of new science and a more supportive policy environment: vaccines are no longer a fringe business—it's the "must have" in any public health agenda. 

 Principal at IMS Consulting Group. He can be reached at 

is Engagement Manager at IMS Consulting. He can be reached at 

. The authors wish to thank Amy Guan for her contributions. 

Features

Its only recently that vaccine producers experienced the commercial returns commensurate with vaccines: long record of positive public health performance.

Vaccines: Fire in the Cold Chain

Experts from big Pharma and biotech dissect the road ahead for M&As, licensing, and partnerships.  

, SVP, Corporate Development, Vical Pharmaceuticals 

, Head Global Licensing,  Takeda Pharmaceuticals    

, VP, Business Development, Geron Corporation  

, SVP, Business and Corporate Development, BioMarin  

, Senior Director, Corporate Development & Strategy, Sangamo Biosciences  

, Entrepreneur in Residence, SRI International 

, Chief Business Officer, Sorbent Therapeutics  

, Co-Founder and SVP, Ardea Biosciences  

, Executive Director, Business Development, Merck & Co. 

, Chief Research Officer, Myelin Repair Foundation 

After fading to dreary summer stock for the past few years, dealmaking is today back to center stage, but with the major roles reversed—small biotech, yesterday's understudy, now gets top billing, while big Pharma has to work harder for its close-up. As the pacing around the urge to merge picks up, 

 brought partner Campbell Alliance and a select group of West Coast dealmakers to a Sonoma raceway for a test performance on what lies ahead for asset licensing and M&A activity in 2014. The following is excerpts from a full morning of discussion—and despite all the high-octane rhetoric around deals, the key differentiator of success hasn't much changed. It's still that hard—and honestly wrought–evidence of value to payers and patients.  

: Campbell Alliance has conducted its Survey of Dealmaker Intentions for six years, one of the most volatile periods in memory. Three of Pharm Exec's top 20 sales leaders—Wyeth, Schering-Plough and Genentech—have disappeared, along with major realignments in the generics and mid-size biotech sectors. What has been distinctive about the past 12 months and how is this weighing on the current business calculations of pharma companies and the host of new partners emerging in this space?

  Our annual survey, which was conducted early in the first quarter this year, is focused on director-level and above executives engaged in key corporate functions, including executive management and business development. There is a slight bias in the survey toward those who are engaged in out-licensing activities, mainly reflecting the fact that right now there are more companies selling assets than buying. Our geographic scope is primarily the US along with a strong sample from Europe. Companies are a mix of public and private, and range in sales from the billion dollar plus big Pharma players to some micro-cap biotechs with revenue below $5 million. In essence, our data is broadly representative of the dealmaking field, which bolsters our ability to accurately gauge forward-looking sentiment.  

As far as expectations for activity over the next 12 months are concerned, there is a solid if nuanced convergence around expectations for an increase in the overall volume of deals. Significantly, both out-licensors and in-licensors expect more deals at the early preclinical stage and carrying forward to Phase II clinical trials. At Phase III, there are tempered expectations for deals versus early stage assets. For fully marketed assets, both groups are largely aligned, this time in anticipation that the number of deals will decline. The expectations on marketed assets represent a reversal in sentiment from our last survey, when respondents were expecting an increase in deals.  Driving this is the growing confidence among biotech firms in being able to commercialize independently—conditions are more conducive to making that final sprint to the finish line, without any push from big Pharma. 

Out-licensors and in-licensors expect more deals at the early preclinical stage and carrying forward to Phase II clinical trials.			

Might it also be due to the perception that there are fewer good deals at the later Phase III stage?

That has been the prevailing view in our Survey for the past two years. But there is a healthy contrarian view among some buyers that a few real gems are still out there waiting to be discovered. What is determinative is value. Most buyers believe that if an asset can provide real evidence of value, it deserves a premium price. It is emblematic of the "de-risking" sentiment that is driving valuations today in the life sciences.  

Which therapeutic areas are attracting the most interest among dealmakers this year? 

There is relatively little change—oncology assets are by far the top draw; this has been the case since we began the Survey.  Both buyers and sellers are committed to signing deals in oncology, which is to be expected, as this is where the science is trending, too. We haven't cut the numbers in detail, but one thing I expect to see is a rise over the years in both out-licensing and in-licensing deals that cover earlier stage, pre-commercial assets. Competitive interest in oncology means that mid- to late-stage deals are harder to find; you have to move earlier to find an asset worth licensing.  

What is interesting this year is the therapeutic category we call "Other."  Interest is scaling up in this category, which includes mainly orphan drug assets for a growing list of rare diseases.  "Other" also includes ophthalmology drugs, which is a favorite for the high pricing flexibility these give to investors. Overall, virtually every company we surveyed—from the biotech start-up to the big Pharma top 10—now includes orphan drugs as part of its business development and licensing strategy. Another intriguing finding is the continuing interest in cardiovascular and metabolic diseases, despite the intense competition and high costs of the large-scale outcomes trials now being required by registration authorities and payers.   

Is the willingness to move earlier to license or acquire oncology assets due to the greater confidence that investors have in the underlying science?  

Yes. Significant progress has been made over the past 10 years in understanding the biology behind tumor formation and metastasis. Diagnostic instruments have advanced considerably. As a result, treatments being developed are more targeted, resulting in a practical progression of survival rates for many individual cancers. Cancer itself is seen increasingly as a collection of rare diseases, which is advantageous to drug developers because it helps concentrate resources.  

The greater availability of capital is reshaping the overall strategy of developing an asset. Companies now have more financing options than just relying on out-licensing or an outright acquisition deal, particularly if they have more than one asset to play with. For example, we may be seeing more companies looking to sell some assets earlier in the development pipeline in order to self-finance commercialization of the best of the lot, rather than the formerly common strategy of "selling the first born."  

Capital markets have a big impact on deal strategy because you have additional options to consider.   If you are a small company like mine, the strategy is to go first – and get it done fast.  If I can raise the capital, I will use it to keep pushing the company forward to  generate more value as well as to help fund an expanded, complementary portfolio.  Or if someone outside steps up and puts a valuation on the table that my shareholders are willing to take, then I can do that too.   Today, the capital markets are open enough that I can do a financing deal much faster than negotiating to sell the asset to someone else.  

 The key objective for a seller in exploring any option today is to maximize the value of its most important asset. I would rather have one strong lead asset than a portfolio of runner-ups. Prior to the capital crunch than began around 2007, it was acceptable to fold all the less interesting candidates into a deal, as part of a platform approach. Since then, the dominant perception is that it is folly to waste money developing assets that big Pharma doesn't want. Even among companies that claim to have multiple assets in play, the focus is still on that proverbial "asset A." 

Over the last two years, our Survey has seen a significant increase in structured asset transactions built around contingent value rights, leveraged through a "earn out" clause. The "earn out" is a useful way of establishing a contingent value for an asset, which is attractive to companies that want to quantify their risk exposure by tying payment to a goal or an event that has to happen. If you believe we will continue to see a buoyant capital market, then it will be interesting if the availability of funds trumps the necessity for sellers to negotiate these "earn outs."  

I don't think future growth in funding through the private capital markets can be assumed. At any rate, what really drives a transaction is not capital but the level of competition for the asset. If this is lacking, the buyer can do whatever he likes. Alternatively, when there are multiple bidders, there is no end to the creative things you can do to seal a deal. On balance, when you can get a competitive bidding situation going, then the likelihood is the seller won't have to settle for a structured transaction.  

Contingent value rights (CVRs) are typically driven by the differing opinions of the buyer and the seller about the value of the asset. Buyers will often have a more conservative view of the prospects for an asset's market success, while the seller tends to see a higher potential. CVRs are a tool to bridge the gap. Based on what is happening in the capital markets, sellers are becoming ever more confident and optimistic, while buyers in big Pharma cannot always match that. To find that elusive common ground, you have to opt for a structured transaction that can end up being quite complicated. 

It is a tricky process. The deal can include provision for issuing a separate class of securities that are tradable in their own right, which often creates a big drag on the issuing company's own stock. The big Pharma players can afford to take the hit, but the toll on smaller companies can be considerable.  

CVRs are one of the most useful tools to set terms around a defined event that is expected to occur in the relatively near future. When you are able to identify the specific event and establish the success metrics, then there is less operating risk because you can also set expectations. Otherwise, a CVR ends up being very hard to structure. 

The number and quality of assets available to transact has a strong bearing on the final structure of a deal.  What is interesting in our Survey this year is the soaring level of demand for preclinical and early-stage assets in oncology. This is a reversal of previous years, when there was enough supply to meet the demand; now what is available has shrunk, resulting in a much higher level of competition among buyers. Another striking development is the level of interest in products with orphan designations. Everyone wants a stake in this area, to the point where asset sellers are re-classifying products as orphans as opposed to other therapeutic categories.  

One card that is increasingly hard to play is that of the contrarian investor—going against the grain. The reason is the long lead times that still confront any drug developer interested in the ultimate goal of market authorization. Big Pharma remains the biggest buyer, with the deepest pockets, yet we see much more turmoil in the way they manage their pipeline portfolio and therapeutic franchises.  

This is true. We see a clear pattern here: a promising compound fails in Phase III and all of a sudden management decides to exit that entire therapeutic area. Every asset in that zone is declared

, even though the company might have spent many millions in acquiring the assets and even entire companies, seeking a position of leadership. And we are not even considering the churn in management ranks, where there is an innate tendency for newcomers to do the opposite of what their predecessors did.   

As the pacing picks up around dealmaking as the alternative to organic growth, Pharm Exec brings together experts from big Pharma and biotech to dissect the road ahead for M&A, licensing, and partnership activity.

Pharm Exec's 2014 Dealmakers Outlook

A SURPRISING TAKE AWAY FROM THE BIO INTERNATIONAL CONVENTION

 in San Diego last month is the stark contrast between cooperative industry engagement and an unstable geopolitical order marked by xenophobia, drift and active, often violent government 

engagement from the hard work of building common ground. While BIO held 29,000 partnering meetings over four days, convened the first meeting of a new 20-member International Council of Biotech Associations (ICBA), and launched an industry-wide commitment to fighting anti-microbial resistance, Convention keynoter Hillary Clinton spent all but six minutes of her 90-minute issues 

 covering the sad breakdown of good governance and peaceful dialogue in virtually every area of public life.  

With the state-sponsored sectarian implosions in the Middle East as the main topic, there was little time to talk about all the new science that promises to preserve and extend life—that is, assuming biotech gets the predictable, risk-deflecting operating environment it needs to wait out those long product development cycles. 

Consider, however, if current events had allowed BIO to change the conversation with our likely 2016 presidential candidate. Instead of the nuclear option in Iran, how about the public health meltdown in the Middle East caused by the uncontrolled spread of diabetes? One of every 10 adults in the region is now a diabetic, a figure slated to grow to two in ten by the next decade. Some countries, like Saudi Arabia, are already there. The region recorded some 400,000 deaths from diabetes last year; more than half the victims were under age 60, reflecting the fact that many young patients go undiagnosed until it is too late.  

Governments are aware of the problem, but priorities remain elsewhere. Combined public and private outlays on diabetes in the region totaled $12 billion in 2012, a small fraction of the nearly $120 billion spent on arms purchases. Significantly, experts attribute the prevalence of the disease and its many comorbidities to the region's damaged infrastructure—in both physical and cultural terms—and the pressure this puts on the stability of families and community. This is reflected in statistics showing that the Middle East has among the world's worst record in drug adherence, with some 70% of patients cycling off a new medicine only four months after the initiation of treatment due to lack of follow-up.   

The fact that gets no traction is BIO members have a solution to this and other critical public health challenges. For diabetes, it is biologic therapies promising tighter glucose control, a better safety profile and more patient convenience—with a potentially big payoff from higher rates of adherence to treatment. Industry researchers are also examining the links between type 2 diabetes and stress-related hormones such as cortisol. This is uniquely suited to the Middle East's distinct profile on population health. Millions of otherwise healthy people are suffering from stress due to sectarian strife and randomized violence on a daily basis, not to mention the disruptive effects of urbanization, gender inequities, and other cultural and religious barriers. 

The cancer of poor global governance also weighed on BIO's efforts to showcase emerging country markets as a source of future medicines growth and innovation.  The grease behind that wheel is captured in one word: partnership.  Government officials from country after country touted this, at least in shorthand. However, conducting a partnership dialogue in full paragraphs depends on a punctuated, no-exception commitment to private enterprise and open borders, in finance,  information, and especially in people.   

A big unknown is how much Russia's budding pharma potential has been driven off course by the country's sudden militaristic push for territorial realignment on ethnic rather than economic lines. There is some government money and a small private sector with expertise in promising fields like regenerative medicine and nanotechnology. Building this base requires extra lift in the form of more foreign multinational expertise, as well as persuading the huge brain drain of experienced  researchers from the Yeltsin-era diaspora to return to Russia: but for what?  The critical draw is not more government aid or philanthropy.  Instead, it's a good commercial opportunity, one that requires a market-incentivized governance structure free of the internventionist  distractions that reward brawn more than brains. 

Today, there are too many examples of how divisive, dysfunctional governance erodes human potential. It is not a discussion limited to dictatorships. The implications are especially harsh in biopharmaceuticals, one of the few industries  with a social impact far beyond its own area of expertise. To me, the message that resonates from BIO 2014 is: let the innovators in this industry do their job!  

From the Editor

A surprising takeaway from the recent BIO Convention, writes William Looney, is the stark contrast between cooperative industry engagement and an unstable geopolitical order.

The Peace Dividend

This sponsored supplement  was produced by Focus Reports.  

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We honestly feel like a member of the richest club of pharmaceutical countries," declares Igor Radziewicz-Winnicki, undersecretary of state at the country's Ministry of Health. Not only is Poland the largest pharmaceutical market in the Central & Eastern Europe region and the sixth largest in Europe (USD 8.1 billion in market value), it is also a hub for production and functional activities. With a GDP growth of 3 percent forecast by the OECD, and the first positive balance of trade in 2013 since its accession to the EU, there are also clear signs of economic momentum. However, Poland has some of the lowest prices of both innovative and generic drugs in Europe. At the same time, as cost containment measures keep the pressure on other European health authorities to reduce drug reimbursement expenditures, the Polish pharma industry is also struggling to deal with the pressure from its own 2012 Reimbursement Act while reasserting its positioning alongside the Big 5 Germany, France, Spain, Italy and the UK.

THE REIMBURSEMENT ACT:  REVOLUTION OR EVOLUTION?

 "Cost containment measures are not just a Polish story, but a European reality," says Marcin Hanczaruk, general manager at Amgen. "The Reimbursement Act is a real revolution, but it has brought both benefits and shortcomings. One consequence is that Poland has the lowest average price of medicine in the European Union," adds undersecretary Radziewicz-Winnicki. In fact, the price of innovative drugs in Poland is 59 percent below the EU average and 43 percent for generics. Poland has historically been a branded generics market and still remains today with 62.5 percent of Poland's market value and 88 percent in volume. "In 2008, the Ministry of Health predicted that by 2015 a gap would emerge between the cost of running the healthcare system and the contributions for health security," says PwC's healthcare sector leader for the CEE region Mariusz Ignatowicz. "In other words, for the first time, healthcare costs would be in excess of the National Healthcare Fund's resources." Poland's Ministry of Health decided to prepare for the future, with the aim of simultaneously improving healthcare access, and bringing more innovative drugs to the market. However, the result was very different indeed.  

Value of the Polish pharmaceutical market over the last 5 years with forecast 2014 (in bln PLN)			

"With this new 2012 legislation, the situation for patients has deteriorated, as well as that of the industry, doctors, hospitals, pharmacies, distributors, and wholesalers," says Zdzislaw Sabillo, founder and CEO of PBA, a Polish consultancy. "At the same time, copayment has risen, from 36 percent to 40 percent today; but this is only for reimbursed products. However, the total copayment for the whole pharmaceutical sector is at 60 percent." PwC's Ignatowicz adds: "The natural question then is, if they saved this much money, shouldn't it be spent on innovative therapies or in the introduction of drugs that have been waiting years for reimbursement? Such reinvestment has happened to a very limited extent." Indeed, the state budget could earn as much as PLN 5 billion (USD 1.6 billion) by 2015 from the cuts, which has not been reinvested in introducing more innovative drugs.  

Igor Radziewicz-Winnicki, Under Secretary of State at the Ministry of Health			

"Despite the fact that the Polish environment has changed significantly, access to innovation is still challenging," says Marynika Woroszylska-Sapieha, general manager at Sanofi and president of the board of INFARMA. "This is not because Poland cannot afford innovation but rather because there is no recognition of the value of innovation. INFARMA, the association representing innovative companies in Poland, has been acting since the beginning to change the perception of innovation."  

Marynika Woroszylska-Sapieha, General Manager, Sanofi Poland			

The government is aware of this situation but has many other issues to resolve. "Our biggest priority is to counteract rising waiting lists. Polish society must overcome the burden of health inequality. We believe that a rationalization of health capacities, improved accessibility, availability and adequate health services are the tools needed to enhance the efficacy of our health system," remarks undersecretary Radziewicz-Winnicki. However, Michal Bichta, Merck's country manager in Poland, feels that there is still a long way to go before the industry and the health authorities are aligned. "I personally feel there is lack of long-term perspective in our discussions with health service authorities," he explains. "They are still very much driven by the here and now."  

Zdzislaw J. Sabillo, CEO, PBA Consultancy			

Although this dialogue is only a first step to bringing more innovation and more diversified care for patients, the road ahead is still winding. "In the end, real savings happen with a real revolution and it is not the one we are having right now," says PBA's Sabillo.  

January 2012 Reimbursement Act â Main regulations			

With a declining Rx market and market access challenges, "companies have to develop new strategies and anticipate change to remain competitive," states IMS Poland's general manager Maciej Kuzmierkiewicz.  

Michal Bichta, Country Manager, Merck Poland			

Some multinational companies have implemented a three-leg strategy in Poland that has proven to be successful. "Diversifying our business has been essential to our success in Poland," says Sanofi's Woroszylska-Sapieha. "Before 2010, OTC represented 12 percent of our turnover, whereas today consumer healthcare (CHC), which includes OTC, accounts to 20-21 percent. Given these results, last year we were the fastest growing CHC company in the Polish market with 16 percent growth."  In such a dynamic environment, the healthy level of diversification that Merck has attained is a critical factor for sustainable growth. Merck has built its nearly 300-year history on diversification. "Merck's market share in OTC, biotech and off-patent products in Poland are well balanced, and we know we can rely on them to outperform," says Merck's Bichta. "We believe this three-pronged setup gives us stability and flexibility in the short-term, making us less dependent on the business environment." Mathieu Fitoussi, country manager of Servier Poland, comments: "We are mostly present in the reimbursed segment; thus we have to diversify; and in the near future, we believe that the prescription non-reimbursed and OTC segments represent the best opportunities."  

Mathieu Fitoussi, Country Manager, Servier Poland			

Even for multinational generics players, diversification has been a must. "Actavis is a fully active branded generic company focusing on cardiology, urology, CNS, oncology, hospital products, and since the new Reimbursement Act was implemented, we also decided to move into OTC. Diversifying our business has been a great strategy, and even though OTC is still small, it is also our fastest growing segment at Actavis Poland today" says Izabela Zimmermann, general director at Actavis Poland. 

"We are therefore investing our resources and capabilities to increase our portfolio in this area. At the moment we have 250 SKUs on the market, 80 molecules and each of our business units manage between 30 to 40 SKUs. These numbers give us credibility and the assurance that great things are still to be accomplished in Poland," she adds.  

Bristol-Myers Squibb has taken another approach; focusing on specialty care with biopharmaceutical cancer research and a new treatment in immuno-oncology. "The goal of immuno-oncology is to change survival expectations and the way patients live with cancer," says Piotr Marciniak, general manager of BMS Poland. Their first immuno-oncology molecule for the treatment of advanced melanoma was approved in March 2014. "In line with our specialty care BioPharma strategy, we aspire to continue delivering the greatest value to customers and patients, with the highest standards of scientific excellence, business ethics and integrity," he adds.  

With an Rx segment under pressure from the Reimbursement Act, the OTC market was arguably the easiest and fastest option to obtain results. With a market value of PLN 8 billion (USD 2.6 billion), the OTC/dietary supplement market has been booming in Poland, with Aflofarm, USP Zdrowie and Polpharma the biggest market players. Self-medication rates in Poland are high, perhaps unsurprising given that one in every four TV advertisements is for drug promotion.  

Ernest Bartosik, General Manager, Unipharm Poland			

Novascon Pharmaceuticals and Unipharm are two of the fastest growing OTC companies in Poland with 37.8 percent and 28 percent of growth in 2013, close behind the leader Adamed with 39 percent (IMS data). Novascon is a Polish company, created in 2007 and specialized in the development and implementation of innovative dietary supplements and foods for specific medical purposes (FSMP). Andrzej Sybicki, founder and ceo comments: "We decided to focus on these two areas as it was the fastest way to develop and bring products to the market. With broad clinical trial availability in Poland and the possibility to choose the best active ingredients, we were able to develop high quality products, and register them to sell them in pharmacies."  

Best performing companies in 2013 sales growth - OTC segment			

The competitive landscape has increased in this attractive market and finding the right approach is a must. "The OTC market, like other markets, has many entry barriers, and successful companies are the ones which provide new products and solutions and not copies of existing products," says Ernest Bartosik, general manager of Unipharm Poland. "To grasp these opportunities, it is key to master the marketing mix but above all understand the needs of consumers and doctors." Finding the appropriate niche and diversifying the portfolio has also been on the agenda of both companies. Novascon's Sybicki adds: "We are always looking for new opportunities and although dietary supplements and FSMP have a great deal of opportunities, being a real player in cosmetics and medical devices is our next challenge. At Novascon we look to develop any type of product that can be sold in pharmacies; this is our baseline."  

Maciej Kuzmierkiewicz, General Manager, IMS Poland			

Polpharma has been and still remains Poland's powerhouse and a role model for the domestic pharma sector. However, Poland's giant remains humble, and Rajmund I. Martyniuk, president of Polpharma Trade, still sees room for expansion: "Polpharma still has to develop its portfolio to meet current Polish healthcare needs, and this is why a few years ago we decided to invest in biotechnology and optimize our production network. Martyniuk also attributes the company's success in Poland to its "marketing and communication strategy, which has been tailor-made for doctors, nurses, pharmacies, distributors, payers, government and patients."  

Izabela Zimmermann, General Director and deputy CEO, Actavis Poland			

But Polpharma is not only a Polish story and is rapidly growing its international footprint. "We decided to enter markets with similar healthcare systems and business models to Poland. The companies we have acquired in Poland in recent years already had strong connections with CEE and CIS markets, so this is a good starting point for us and we plan to capitalize on this heritage." says Martyniuk. Certainly, Polpharma has the capacity and resources to become better recognized internationally in the years to come.  

Piotr Marciniak, Country Manager, BMS Poland			

 "Poland has the means to become a recognized European hub and export platform," says Hendrik Venter, general manager at DHL Supply Chain. "Both local and international manufacturers are present and deliver the highest standards. We are seeing more pharmaceutical manufacturers looking at Poland as a regional hub for CEE rather than setting up individual CEE country warehouses. This allows them better inventory management, the ability to reduce working capital and to exercise better control over their supply chain."  

Of course Poland still has challenges to meet: "Polish infrastructure is still in need of significant development and investment, particularly in the road network," he adds. But there might be a new positive trigger as new investment (overall European Union budget 2014-2020 of EUR 144 billion – USD 195 billion) is arriving to solve infrastructural issues and help the Polish pharma industry and manufacturers blossom. "In the previous budget perspective we had spent a large sum of money, about EUR 10 billion (USD 13.6 million), on capital expenditures for machinery and infrastructure," explains Jerzy Majchrzak, general director at the department of Innovation and Industry under the Ministry of Economy. "This time, up to 80 percent of the budget will be invested in research subsidization. We will also be subsidizing up to 51 percent of the development and engineering of production and installation construction." He goes on to highlight Poland's advantages as a manufacturer: "Poland has significant manufacturing capabilities which, along with a highly skilled and experienced workforce, allow us to specialize in the manufacture of medicines. Polish companies are leading the way with international co-operation in the pharmaceutical industry. Among multinational pharmaceutical companies that have manufacturing facilities in several countries, including Poland, the Polish plants usually perform best in terms of quality, cost-reduction, environmental impact minimization and so on."  

Special Sponsored Section

Poland's pharma industry, the largest in Central and Eastern Europe, confronts the fallout from the government's controversial 2012 Reimbursement Act.

Country Report: Poland

Just a few weeks ago, in late May, yet another international law enforcement operation uncovered another series of drug counterfeiting outfits, seizing more millions of dollars worth of fake prescription medicines, resulting in  the arrest of hundreds more makers and distributors of illegal drug products. Nearly 200 enforcement agencies across 111 countries, led by Interpol, took part in Operation Pangea VII,  targeting the criminal networks behind the sale of fake medicines. 

While action is heating up at the international level to tackle counterfeit drugs, Europe is making its own efforts to stop fake medicines from entering  the legal supply chain. An improbable cross-sector partnership is struggling to secure support for a pan-European system to keep counterfeits out. It's improbable because it brings together not only manufacturers, wholesalers, and pharmacists, but also parallel traders—long treated by drug manufacturers as pariahs and even downright enemies. And I use the word struggling because the system this partnership is advocating will be expensive, complex, and require unprecedented collaboration right across the European Union.  

It's a struggle also because time is running out. This is not a spontaneous gesture by the private sector. It is a response to European Union rules adopted three years ago, that are due to come into full effect less than three years from now. There are no options: heavy new obligations will fall on each of these components of the medicines supply chain, and the private sector players are simply trying to set up the most cost-effective way to meet those obligations through a largely self-regulatory system. If they fail, they face legal action for non-compliance, and still tougher—and doubtless more expensive and onerous—obligations under additional legislation and systems that will be imposed on them by the authorities. 

In June, the partnership issued a progress report, with an impressive plan of action and an even more impressive appeal for urgent action by the thousands of drugmakers, wholesalers, pharmacists, and traders across the continent. "Start now," urged Lothar Jenne, the managing director of German wholesaler Max-Jenne Artzneimitte, who is one of the key architects of the new system. "Timely implementation requires concrete planning now" was the message from the partnership.  

The report listed the many tasks that must be accomplished for the system to work. Specifically, manufacturers will have to modify production lines to affix a 2D data matrix code on each pack that will bear the product code, batch or lot number, expiry date, and a unique randomized serial number. They will also have to apply tamper-evidence features to each pack. And they will have to report the data securely to a national data repository that they will also have to create, along with a Europe-level "hub" that can allow national systems to talk to each other. Pharmacists will have to install equipment and data-transfer links so they can read the 2D code and receive instant verification (or an alarm) via the "hub" on each product before they dispense it. Wholesalers will also have to be plugged into the system so they can keep a check on products going through their hands. And parallel traders will have to work with the system too, affixing new 2D codes and new tamper-evidence features to every medicine they re-label or repackage, and reporting the new data to the system. Everyone will have to be able to receive and respond to queries regarding codes, and make provision for handling exceptions, reverse logistics with recalls, and further queries and investigations. 

There are costs as well as long lead-times attached to all these elements. Current estimates range from $100 million a year to double that sum, just for running the system. Unsurprisingly, the question of costs has been at the heart of the discussions—and remains so today. Above all, the cost question has caused a split among manufacturers, with the European Federation of Pharmaceutical Industries and Associations (EFPIA) firmly inside the partnership, and the generics industry still hesitant on the outside.  

The European Generic medicines Association (EGA) feels its members are being unfairly treated, since the products they produce are—it claims—so rarely counterfeited that the complex new EU requirements are disproportionate and excessive. There is little reason for them to share the cost burden when the real targets of counterfeiters are the more expensive branded products made by research-based companies, they say.  

The generics industry has not given up hope of winning some exemptions under the EU legislation. But it is also hedging its bets, and is exploring joining the partnership if it can do a cut-price deal. What it is insisting on is that the costs—most of which are to be shared among manufacturers—should not be based on volume sales, because that would disadvantage its members, who specialize in large runs of low-cost products. A compromise could be reached soon. EGA has proposed a flat rate approach, under which each company would pay a fixed amount for each of the marketing authorizations it holds. Since big companies with many products in many markets hold more individual marketing authorizations than smaller companies with restricted product ranges, the idea is that this formula would tip the balance the other way.  

But it is not yet a done deal. EFPIA has somewhat reluctantly conceded that this methodology might be acceptable. But EGA has yet to win the backing of its board for the approach. And even if it does, there are countless other questions to be resolved to get this system up and running in time for the 2017 deadline that the EU has set—and on which the Commission  is refusing to make any concessions.  

By a profound irony, the one thing that all these efforts will have no impact at all on is the one thing that Operation Pangea VII was exclusively devoted to: illegal online drug sales. The EU legislation covers only the legal supply chain—leaving gullible patients the world over still just as vulnerable as ever to the purveyors of counterfeit treatments for everything from erectile dysfunction to cancer. 

Cross-sector partnership seeks support for a pan-European system to keep fake drugs out, but obstacles are many.