Articles

Issue PDF

Click here for a link to open the Pharmaceutical Executive August 2020 issue in an interactive PDF format.

Pharmaceutical Executive, August 2020 Issue (PDF)

’s 19th Annual Pharmaceutical Industry Audit. We present a unique financial performance analysis of the top 18 publicly traded biopharmaceutical companies based on sales revenue. That total is down to 18 this year due to the acquisitions of Celgene, by Bristol Myers Squibb, and Allergan, by AbbVie. The Audit is focused on a number of financial performance metrics, particuarly critical metrics such as growth in shareholder enterprise value, enterprise value to sales, and return on invested capital. Regarding the latter metric, the 2020 Audit examines the impact of weighted average cost of capital (WACC) factored into last year’s numbers. WACC adjusts return on invested capital (ROIC) by assessing the difference between ROIC and WACC.

This year’s Audit relies on secondary reported information for the 2018–2019 time period. The metrics are also weighted reflecting their relative importance in assessing a company’s performance. Some metrics are more important than others. For example, sales growth is important, but sales growth can occur as a result of mergers and acquisitions and in-licensing. So, it takes a back seat to the crunch metric, ROIC, which measures how well a company is managed, including margin management (the profit and loss or income statement) and asset management (use of assets on the balance sheet), and, most importantly, whether ROIC exceeds the cost of capital (cost of debt and the opportunity cost of stock equity).

Two metrics are included that are not weighted: sales, general and administrative (SGA), or overhead; and profit per employee.

The higher a company performs on a metric is reflected in a ranking based on the number of points it receives per metric. The highest placing for each metric is 18 based on the number of firms in our Audit, and the lowest is one. For example, if a company places 17th (second highest) on the critical metric enterprise value to sales (EV/S), it receives 51 points on the metric (18 rank x weight of 3). In another example, if a company comes in at a ranking of five (five places from the bottom) on the metric gross margin (pricing power), its total points would be 10 (5 rank xweight of 2).

Basic indices are the growth of the US economy and inflation. An organization has to be able to grow faster than the US economy: around 3% in 2019, and higher than inflation as measured by the Consumer Price Index (CPI): about 2% for 2019.

Other important benchmark metrics are posted in Figure 1 below.

Table 1 below shows sales in US dollars along with sales growth for 2018-2019. It is good to grow, especially organically, compared to just acquiring companies. But that’s easier said than done for organizations at absolutely high sales levels, such as Johnson & Johnson, Novartis, and Roche.

The poster firm for growth is Amazon. Amazon’s profits pale in comparison to its retailer competitors such as Walmart, but its enterprise value (EV), or market cap, is the envy of its peers, less stellar sales growth, notwithstanding.

The average dollar sales for our 18 pharmas was $31.84 billion in 2019, vs. $30.51 billion the previous year, a growth rate increase of 4.3%, outpacing the US economy and inflation. The top pharma by total revenues last year was J&J at $82.11 billion. BMS posted the highest growth rate at 16%, due in part to the its Celgene acquisition. Six companies’ sales decreased last year.

Enterprise or shareholder value and growth

This is the first of three crunch metrics. EV/Sales and ROIC are the others. There are other worthy performance metrics (e.g., corporate responsibility, sustainability, the best places for women and minorities to work, etc.), but our focus is financial performance and enterprise value and growth. Did a company create or add to shareholder (enterprise) value or destroy shareholder value?

EV is the sum of an organization’s market capitalization; then add in debt and adjust for cash and other current assets. Simply put, EV is the market value or market capitalization of a company.

At present, two firms are duking it out for the highest company value on earth: Microsoft and Amazon, with each approaching market caps of $1 trillion.

Table 2 above shows that the pharma with the highest EV is J&J at $414 billion, with an average growth of shareholder value for the year of 5.1%. The company that grew its EV the most was BMS, with a 79.8% spike, in no small part due to Celgene’s strong EV position. To put that in perspective, the average EV for our 18 pharmas in 2019 was $156.3 billion, a growth rate of 18.9%. Of the 18, 12 firms increased shareholder value, and six experienced a drop in their EV. Novo Nordisk ranks second, with a growth rate increase of 32%.

Now compare shareholder value and market cap growth to the benchmarks in Figure 1. Compare the overall 18.9% growth rate to those benchmarks. Biotechs outperformed their mainstay pharma peers on shareholder value.

EV and EV growth are very important performance metrics. EV to sales supplements that metric by assessing which firms are still climbing, 

 companies whose best performance is behind them, via so called “value” stocks—those stocks for widow or orphan drugs that, if not growing in value, still pay noteworthy dividends and are solid businesses.

Table 3 lists EV to sales. The average EV/S for 2019 is 4.59, an increase from 2018’s 4.20. At the top of the list is Amgen at 7.1, an increase from the drugmaker’s 5.4 EV/S in 2018. Twelve companies increased their EV/S ratios: the higher the ratio, the more likelihood the company’s performance is going to get better.

Yes, there is net-net and list price vs. net price, but at the end of the day, there is gross margin, which is tantamount to markup. As Warren Buffet would call it, “the moat around your castle.”

Gross margin reflects a company’s power to maintain or, even better, increase price. The metric represents total revenue minus cost of goods sold from the income statement. This is quintessential margin management: how price is managed while simultaneously managing operating costs to produce net income. The higher the gross margin is, the more a firm is able to cover operating expenses, including SGA. Table 4 above shows Novo Nordisk at the top with a gross margin of 82.60%, a slight decrease from 2018. The biotechs rule pricing as they have ever since the first 

 Industry Audit in September 2002. But note the significant drop in gross margin average for our 18 pharmas, from 77.7% in 2018 to 68% in 2019. Ten firms were able to increase their gross margin, with Lilly and Novartis raising it the most.

Staying with margin management, Table 5 below shows pre-tax operating income, or profit to sales. Again, the higher the gross margin is, the more that contributes to improving pre-tax, operating income. Operating income consists of total revenues minus cost of goods sold and minus operating expenses related to a firm’s typical business. It excludes one-time gains and losses, dividend income, and interest income.

At the top in this metric is Biogen at 56%, a seven-digit increase from 2018. To put that number in perspective, 56% would qualify as a decent gross margin; for Biogen, it is its pre-tax operating income. The average figure for 2019 was 20.3%, a significant six-digit drop from 26.3% in 2018. Only eight of our 18 companies saw their pre-tax operating incomes increase for the year.

Gross margin and operating income have to do with margin management; sales to assets has to with asset management. If a firm is at $70 billion in sales, it won’t be doubling revenue anytime soon. If the company has also curtailed SGA and disposed of assets, it won’t be cutting operating expenses in half anytime soon either. Then it turns to asset management to do a better job making use of, not necessarily owning, assets.

When you multiply profit to sales (pre-tax operating income) by sales to assets (asset management), you get a far more important measure: return on assets. An organization can have a relatively low profit margin with a relatively high sales-to-assets ratio that will result in a better performance in terms of ROIC.

As seen in Table 6 above, Novo Nordisk’s sales-to-assets ratio is 1.0. For every dollar invested in assets, Novo Nordisk gets back $1. Roche comes in at No. 2, getting back 80 cents for every dollar invested in assets. Only six companies rank above average regarding how productive they are in managing their assets.

Now we come to the mother of all Audit metrics: ROIC. ROIC is net income left over to shareholders as a percent of debt and common stock. According to longtime organizational consultant Mark Van Cleaf in 

, the best measure of business performance is ROIC—how much is a company generating on its capital investments, plant and equipment, minus the cost of that capital, debt, and equity?

Combine this with our relatively new addition to the Audit, weighted average cost of capital (WACC). Management should be providing value that exceeds its cost of capital, according to Van Cleaf. For example, two organizations can have an ROIC of 10%, but company 1 has a WACC of 12% while company 2 has a WACC of 7%. The first firm is destroying shareholder value while the second one is creating shareholder value.

Prior to the mid-1980s, the conventional wisdom was that debt had a cost (the rate you pay for borrowing) but issuing stock was free. But what if the peer groups an organization competes with have a higher ROIC than the company? Even though the firm shows a profit, it is destroying shareholder value if its profit is below its peers’ average.

What return could an investor get by investing in an organization of equal risk? This was the brainstorm of Stern Stewart, a consulting firm based in New York City.

Our source for WACC relies on three years of income statements and balance sheets to arrive at a firm’s WACC percentage.

Table 7 above shows Novo Nordisk far out in front, with a ROIC of 80%. Biogen ranks second at 31.6%. Average ROIC increased to 16.13%, from 14.54% in 2018.

Half of our 18 companies increased ROIC while the other half saw that number drop.

To avoid overstating the impact of ROIC, and double-counting its value, we use the ROIC number to come up with the rankings on this metric. But the inclusion of WACC in Table 7 tells an interesting story: The greater the difference between ROIC and WACC, the greater the return to shareholders.

The top 10 organizations substantially created shareholder value, with double-digit increases in the spread between ROIC and WACC.

This metric, presented in Table 8 above, is not weighted in the rankings. It is interesting, however, to show how profitable the pharma sector is. Biogen produces the most profit per employee of our 18 pharmas, at $795,700 each, up from $563,038 in 2018.

Selling, general and administrative expenses to sales

SGA is another metric that does not impact the rankings. Nonetheless, it is still important because the expenses in this category are necessary to run an organization and constitute routine spend such as rent, salaries, advertising, marketing, legal, and more. Laying off and firing workers costs money in severance before it begins to pay off. It’s also important to keep in mind that this is a one-year comparison.

A company can be making investments in advertising, training its sales force, etc., and that will pay dividends down the road. One swallow does not a season make.

Opportunities exist to cut advertising costs by being more efficient with agencies and revamping supply chains. Also, SGA can increase, but it is the goal for sales growth to grow faster, thereby lowering the SGA-to-sales ratio. Ballooning overhead leaves a firm inefficient and less productive than it otherwise could be.

Table 9 below shows that generics makers are lean and mean on this metric, before Biogen enters, producing the fourth-lowest percentage number. The average SGA for 2019 was 41.6% of sales, vs. 42.4% in 2018.

Table 10 above reveals the winner of this year’s Audit: Novo Nordisk. Repeating for the second consecutive year, the Danish-based drugmaker totaled 275 points, according to our scoring system explained in the methodology section.

Novo Nordisk finished among the top two spots in five of the metrics weighed.

Amgen comes in second overall with 239 points, followed by Biogen (229) , Roche (227), and Lilly (216) rounding out the top five. 

, is Professor of Healthcare Strategy & Marketing at 

St.Joseph’s University Haub School of Business in Philadelphia

Features

Our latest review of biopharma financial performance reveals solid growth rates in enterprise value and rebounding value-to-sales numbers—proving once again the business imperative of regaining and sustaining shareholder value.

Pharm Exec’s 19th Annual Industry Audit

The hype has never been higher for artificial intelligence (AI). AI permeates trade publications, medical conference keynotes, and high-visibility partnerships between large pharmaceuticals, the Big Five tech giants, and academia.

Progressing AI for most begins with cutting through the swirl to curate the most relevant and credible resources. The goal is to bridge the delta between AI that is so advanced it is unrealistic, and a practical application of AI that can help fuel a company’s growth.

Let’s demystify AI and dispel myths that it’s unrealistic, unaffordable, or too complex to implement within existing technology platforms.

AI is a very broad and vague term that encompasses countless subspecialties. At its core, it refers to algorithms, or computer programs that are fundamentally more elaborate algorithms, that automatically learn with experience and adapt based on that experience without a computer programmer having to intervene.

As a branch of AI, machine learning (ML) focuses on how algorithms identify patterns and nuances—at times in mitochondrial-level detail. The algorithms take actions based on the patterns they “see.”

These technologies are far from new. Spotify, Netflix, and Amazon have long used AI and ML to serve customized content.

The difference now is the unprecedented power of today’s AI algorithms that can seek, sort, distill, and synthesize billions of data points, in hundreds of languages, at incalculable speed—algorithms that learn and predict.

AI and social listening: How far it’s come

Social listening works by using an algorithm to scour the internet, usually on a massive scale, to see what people are saying about your brand or other topics. Social listening is much more powerful when it is paired with AI to support commercialization.

Like AI, social listening began in the 1990s. But it was rudimentary at the outset, with only basic trackable metrics; the volume of comments, whether the sentiment was positive, negative, or neutral, and the comparison of these metrics with competitors. Additionally, the social listening tools required someone to create a list of keywords, an informal process usually carried out by an intern or junior team member. Basic words yield only basic results.

Today, the intersection of linguistics, natural language processing, and technology is an entirely new field unto itself and provides precise results. AI-driven social listening can identify sarcasm, tonality, dialects, and trending lexicon. Images and videos are easily crawled to determine awareness of branding or public relations uptake of events.

What is more, the rigor of advanced market research methodologies is incorporated into best practice social listening, including cluster analyses useful for finding rare disease patients. Real-world evidence and health economics and outcomes research are standard overlays, as are LexisNexis, peer-reviewed journals, and conference keynotes.

Key opinion leaders (KOLs) also play a role in AI and social listening. Connections between KOLs are easy to surface, as are additional, more contemporary criteria for determining influence. Historically, a KOL might be measured largely by publishing activity, institutional affiliations, drug research, and time in the field. Today, a KOL may have a large social following and fewer of the other components.

Another critical part of AI and social listening is predictive analytics. Algorithms collect an infinite range of behavioral data to forecast, such as the propensity of a clinical trial participant not to quit a clinical trial prematurely, assuming all medical aspects are in order.

In the simplest form, AI and social listening is an exceptionally powerful tool into which one can insert a near-infinite wish list of data sources and gain unparalleled insights. It is a companion to traditional market research, not a replacement. A license for a social listening platform costs an average of $30,000 per year. Consider it a “must-have” tool for life sciences companies, not a “nice to have.”

Brand Insights - Thought Leadership from Marketers I Paid Program

Columns

AI and Social Listening: Myths vs. Facts

As the world waits anxiously for more effective COVID-19 treatments and for a vaccine to halt the pandemic, analysts on all sides are examining appropriate pricing models for these critical products. Gilead’s $3,000 price tag on remdesivir ($2,300 for US public health programs), set in late June, came in lower than financial analysts expected, but still outraged consumer advocates and liberal politicians. Skepticism has greeted promises from some vaccine makers pledging to offer preventives on a no-profit basis due to uncertainty about what that promise means and the timeframe for free or low-cost programs. Meanwhile, Congressional leaders are adding modest drug pricing provisions to new legislative proposals, consumer groups are complaining about annual pharma price hikes, and the White House still signals plans for administrative action to link US drug prices to international rates.

The debate over access to and pricing of safe and effective COVID vaccines has heated up as several candidates move into later-stage clinical trials. If based on estimated cost savings to healthcare systems and to the global economy, the value of successful vaccines would be multi-billions of dollars. But few believe that most of those benefits should go to the manufacturer.

Leading vaccine makers Johnson & Johnson and AstraZeneca have stated they plan to offer their treatments on a no-profit basis, but it’s not clear what “no profit” means here. Pfizer recently agreed to provide 100 million doses of its anticipated COVID vaccine for $1.95 billion, which sets the price at $19.50 per dose; other agreements between the UK and vaccine makers imply prices of $10 to $3 a dose. Congressional leaders are insisting that COVID vaccines be available at no cost to Americans, as outlined in a recent 

 from Senate Democrats that maps out policies for “Getting a Safe and Effective Vaccine to All.”

A related issue is to what extent support from the NIH or the Biomedical Advanced Research and Development Authority (BARDA) should affect prices. Analysts put federal government support for Gilead’s remdesivir at around $6.5 billion. The Institute for Clinical and Economic Review (ICER) initially said that the drug’s announced price was in line with its earlier cost-benefit analysis that supported a price of $2,800 for treatment, but only if the therapy actually saves lives (which Gilead now says it does).

These and other issues related to prices for COVID-19 drugs and vaccines were the subject of a recent 

 hosted by the National Pharmaceutical Council (NPC). Is there something unique about a pandemic that alters how one looks at drug pricing, and should that translate into paying more—or less—for remedies? asked NPC chief scientific officer Robert Dubois. Would too-low prices curb future innovation, as industry and investors insist, or does more profit block equitable public access to drugs and vaccines?

The drug pricing conversation is different in a pandemic, where everyone’s goal is to “get back to normal,” observed ICER executive VP Sarah Emond. And that outcome should be rewarded, according to Craig Garthwaite of the Kellogg School of Management at Northwestern University. At the same time, the system needs to ensure public access to drugs and vaccines, noted Peter Neumann of Tufts University Medical Center. Instead of focusing on cost and profit and future innovation, Peter Bach of Memorial Sloan Kettering’s Center for Health Policy & Outcomes urged industry to invest in obtaining sound data from randomized, placebo-controlled clinical trials to ensure appropriate use of a new therapy and to fully understand its value.

The visible commitment of biopharma companies to developing and producing critical therapies and vaccines to combat the pandemic has boosted the public’s regard for the industry. But that could plummet if new treatments prove too costly or unavailable to certain population groups. These issues were raised at recent hearings on Capitol Hill, where some members of Congress continue to call for Medicare to negotiate drug prices and for the feds to exercise “march-in rights” to seize patents from biopharma companies that accept federal funding but then fail to make resulting products available on “reasonable terms” to the public. And to ensure that prices and access are “reasonable,” all parties will be comparing what COVID-19 therapies cost in the US to the rest of the world and how any differences in the global market affect American patients.

’s Washington Correspondent. She can be reached at jillwechsler7@gmail.com.

Should therapies and vaccines be cheap or free in a pandemic and would that really dry up innovation?

Drug Pricing Back in the Spotlight  

COVID-19 has done a lot of bad things to our world, but it has also revealed opportunities for efficiency and value in the healthcare chain, with virtual health being a prime example.

Looking through the pharma lens, this seismic shift has, in a few months, collapsed something that took decades to develop: the in-person selling model. A change of this significance offers an opportunity to adapt, but this must be achieved via a strategic rethink, not just the addition of tactical solutions.

REVAMP (Remote Engagement through Value Added Marketing for Payers/Professionals/Patients) is an approach that advocates for a revised view of pharma marketing within a remote engagement framework.

It’s important to make the distinction between the service itself and being able to access it in a seamless, on-demand manner. For example, it’s great to have a brand-enabled at-home visit from a nurse for administration and monitoring, but it’s another thing for a chatbot to suggest it and schedule it in real time.

Platforms, different from one-off services, are data- and content-driven, where contributors and consumers create value through participation. These platforms are powered by data and value is created by enabling an exchange between creator and customer.

The systems at the core of a REVAMP effort require a transition to being “always on”—they use behavioral data, integrate cross-channel access, and engage dynamically to allow interdepartmental connections between sales and patient support.

The idea of an always-on platform operates on two levels—access and value creation. It can be compared to an app store, but instead of offering apps selected by the customer, the pharma store would include all customer interactions. The key enhancement is that the apps would share data and allow real-time remote access to features across the apps or touchpoints. These touchpoints would include salesforce details, personalized emails, virtual booths, speaker meetings, and other functional goal-oriented interactions, which are digital, trackable, and support a shared master data set about the customer.

The relationship-based sell is a function that has outlived its usefulness. Relationships are important, but creating real-world value will always win over small talk, especially at a time of crisis. Clinical relevance and depth is what customers value. Pharma reps are being forced to take a hard stare at how to deliver on this, especially with high-decile prescribers who might already be familiar with the data and talking points on the product profile. What’s wanted now is real-world evidence, best practices on telemedicine, innovative ways of providing remote care and monitoring, and of course, outcomes. Pharma must rebalance the rep-to-medical-science-liaison staffing ratios and adapt marketing plans to be content- rather than message-centric.

In other words, clinical content needs to go beyond top-line messages and data that can be gleaned from a cursory read of the product profile. It’s more imperative that real-world opinions, evidence, and patient experience come alive in a way that is clinically relevant and meaningful. The shift from selling to listening, sharing, and supporting is not an easy one, but that is what the customer demands in the post-COVID world.

“Patients first” is a mantra that is etched on the walls of big pharma. The most profound shifts in engagement will take place only if we truly embrace that idea. The first consideration is that pharma does NOT engage with physicians during work hours. There are too few doctors, too many patients, and too little time to sufficiently care for them. With the always-on world of remote engagement, unfettered by geographical and physical constraints, reps must now engage before or after hours and connect with physicians when they’re involved in research, CME, or other non-clinic times.

It’s both a matter of pragmatism and principle that pharma plays a supportive role to the healthcare professional’s daily schedule, rather than a disruptive one.

How one COVID-sparked model could help usher in needed reset.

A Good Time to ‘Revamp’ Sales and Marketing

In the pharmaceutical sector, manufacturers have become accustomed to the significant and increasing “burden” of regulatory compliance demanding that they update their processes, systems, and skills to accommodate the latest reporting requirements. Of course, life sciences regulators exist to hold companies to account and keep customers safe, by enforcing certain standards and ensuring that manufacturers adhere to them over time (and can demonstrate, on demand, that they have done so).

But maintaining compliance can be relentless. Each time companies think they are on top of everything, specifications are updated or a new wave of change comes along. It can be demoralizing, and draining—from a time and resource perspective. A better way to drive value from an investment in compliance is to look for a wider range of wins. Traditionally, companies would have approached regulatory requirements as a necessary evil, something to satisfy the authorities and minimize business risk. Beyond this, organizations have not typically looked for strategic benefits.

In today’s digital new world, there is a chance to treat compliance very differently. That’s as companies move away from processes built around manually filling in paper or PDF documents for each unique regulatory reporting requirement, toward building rich, dynamic databases whose contents can be repurposed many times over. A definitive central resource where all of the required information (and more besides) can be collated, checked, refined, and updated—so that anything else that happens thereafter with that information is, by default, correct and compliant.

The pharmaceutical sector has tended to be slow to adapt to the benefits of this approach—because of the legacy data, systems, and processes companies have had to unravel first. But unless they strive to do things fundamentally differently, they will be increasingly at a disadvantage.

Basing compliance activity on structured, ready-to-go data, in a consistent format, means the latest, correct information can be called up and prepared at speed using the latest digital tools to ensure efficient data exchanges with authorities, with full details and a clear line of sight across every product’s lifecycle—for reliability, traceability, and protected data access.

By harnessing these characteristics, pharma companies can start to think beyond the immediate goal of compliance for its own sake, and toward the wider benefits that come with being able to quickly access great detail about products, including their application, use, and efficacy in the real world.

Traditionally, audits, inspections, complaints handling, and pharmacovigilance have put the spotlight on non-compliance. It is why, in the US, we see lawyers and other professionals with roles dedicated to damage limitation and crisis management.

But what if positive action and preemptive compliance were made business differentiators? If they became a signal to the market, and to customers/patients, that a company has an enriched sense of public duty, of “wanting to do the right thing?” Amid the continued COVID-19 disruption, and the Black Lives Matter movement, there is an expectation that businesses review their culture, policies, and practices. Markets and customers have heightened sensitivity to whether companies are “walking the talk,” or whether everything they do is secondary to making a profit.

In life sciences chemistry, manufacuturing, and controls (CMC) and, more recently, safety disciplines, new concepts have been developed by adopting a proactive rather than a defensive approach to compliance. The quality by design initiative in CMC makes it possible to incorporate potential non-compliance risk in the development phase of the manufacturing process, for instance. The idea is to establish methods to increase robustness, minimizing post-market manufacturing inspection impacts. And, by extension, improve the patient experience by bringing better products to market, faster.

The premise of proactive safety planning is similar—eliminating more risk at the outset, simultaneously hitting two targets: a higher/faster market success rate; and becoming a more trusted brand/supplier. Here, risk management plans involve anticipating and paying close attention to an initial holistic review of all aspects (both positive and negative) of a product from its earliest development stages, allowing companies to anticipate and mitigate the safety profile of each drug.

In a world where more and more detail is captured about products, and shared with agencies right across their lifecycle—in some cases even made accessible to the public through digital channels—anticipating non-compliance becomes strategically important for a whole range of reasons. Companies don’t just want to avoid fines; they want to improve their safety records and show the public where their priorities really lie.

Companies can still look for cost efficiencies in all of this. Rather than lament next waves of regulatory demands, smart companies will look out for them—and be ready.

Maintaining ‘compliance intelligence’

The above requires maintaining active “compliance intelligence”—proactively identifying and anticipating trends in emerging rules, laws, or good practices. Regulation rarely comes out of nowhere. First, positioning papers are composed, shared, and developed. Then, guidelines and staged implementations follow, with time allowed for transition. Where once the tendency might have been to “wait and see,” in case of delays or changes to requirements, companies are realizing increasingly that deferring action can put them on the back foot and render them less able to capitalize on adjacent opportunities for the business—and for customers/patients.

With new waves of regulatory advancement never far away, there will never be a better time to transform compliance measures. We generally advise the relevant team within the company—or a suitable partner—to conduct a risk assessment within the context of the organization’s current business model, highlighting points to anticipate as new requirements appear on the horizon.

Companies might also consider spinning off compliance activity. This could involve appointing a dedicated team (usually associated with a risk management department)—or even relying on a service partner to outsource it. Once official requirements are published, the next task is to perform a gap analysis identifying all the potential implications. This might range from a simple but time-consuming review of a number of interrelated documents and data that will be involved, to potential additional technical and scientific work (e.g., to replace a banned ingredient or questionable material by another). Then companies must gain approval from the authorities for any changes made.

Where a company has adopted a proactive approach to compliance, or, better still, harnessed compliance as a lever to optimize the way it develops and manages drugs, then the smart thing to do is capture the lessons learned, perform a risk assessment, and engage in process changes through a controlled transformation process.

Reacting to each new compliance requirement as if it were an unwelcome surprise is no longer sustainable. Instead, businesses that are proactive in planning to address emerging compliance demands will benefit from compliance as an ongoing contributor to business success.

How pharma leaders can convert data collected for compliance purposes from a cost center into a critical success factor.

Tapping Compliance Data to Drive Success

Innovation and equitable distribution appear largely an unachievable goal, especially when looked through the lens of healthcare, and, more specifically, pharmaceutical therapies. And against the backdrop of COVID-19, the global dialogue around pricing and innovation is growing more reactionary and frantic. Our two columnists who diligently report on the US and European landscapes, each discuss the current climate of pricing and innovation in their respective columns in this month’s issue.

In the US, Congress is rife with its solutions to ensure reasonable prices and access to COVID-19 therapies or vaccines through everything from Medicare negotiation, “seizing patents from biopharma companies,” and reference pricing. Meanwhile, in the EU, COVID-inspired healthcare budgets proposed for $10 billion, along with a change in health policy—that included an “EU-led renaissance of pharmaceutical manufacturing”—were dashed when the negotiated budget of $2 billion was announced in mid-July.

, I discussed pharma’s image around the pricing of Gilead drug remdesivir. Because clearly, pricing has always been a contentious issue between pharma and the general public. And then I found an 

 that encapsulated and addressed the issues of pricing and innovation posted on biotech journalist Luke Timmerman’s website. It made complete sense to me, so I reached out to Peter Kolchinsky, the author of “The Remdesivir Pricing Letter Gilead Should Have Written,” who is also a biotech investor and scientist, managing partner of RA Capital Management, professor, and the author of 

Kolchinsky is passionate and well-versed on this topic. But beyond the myriad of truths he speaks, one solution he offers would surely be something that most people could get behind, because it literally previously existed, if the stakeholders could agree to agree—Contractual Genericization. Kolchinsky positions Contractual Genericization against the current practice of over-litigating drug patent expiration at the cost of both rewarding innovation and misaligning the intention of the Hatch-Waxman Act.

He says, “Though branded drug prices seem high, that’s misleading. Branded drugs actually offer America the best value of any aspect of healthcare because they go generic—so they don’t stay expensive forever. Nothing else in healthcare, not hospitals, not doctors, go generic. Think of what America pays for branded drugs a mortgage toward a public good that will serve us and our children indefinitely at low costs. And because sometimes drugs don’t go generic via competition, let’s implement Contractual Genericization to ensure that America always continues to get value for its investment.”

This, says Kolchinsky, would give Congress its pound of flesh, but instead of price controls from the point of launch that many call for, which he likens to reaching for the heart of innovation, he’s suggesting industry yield the rent-seeking, patent-gaming tumor that has been growing within pharma. “We are builders,” he says, “but the ease of turning what should be finite mortgage streams into extended rent payments is corrupting the industry into an increasing number of landlords, who don’t need to innovate for a living.”

Clearly, there are other aspects in play, and all of these are addressed in Kolchinsky’s Letter. They include the role of PBMs and health insurers that conflate the drug pricing process, while offering exactly zero in the form of innovation; the need for biomedical innovation through a capitalistic mechanism; the overall net positive effect that drugs have on the holistic healthcare picture; as well as the support offered by NIH and government infrastructure toward discovery of medicines.

Kolchinsky says, “The remdesivir case warns us about what is wrong with America’s insurance system. We need insurance reform so that health insurance does what it is supposed to do—pool the risk over large populations of people, so that healthy people are paying the bills for those who are sick.” Kolchinsky succinctly lays out the problem between insurers and pharma, but the problems don’t exist just in healthcare.

What is becoming exceptionally clear is that COVID-19 has exposed the cracks in many bureaucracies, not just pharma. The truth is that many entities that were in trouble before COVID are now facing tough choices. Do you do everything in your power to maintain the status quo, no matter the short- or long-term consequences? Do you adapt and reinvent yourself? Do you make minor concessions for long-term investment? Do you open yourself to regulation and risk being told how to run your company? Or, do you cease to exist?

’s Editor-in-Chief. She can be reached at 

From the Editor

How “Contractual Genericization” could revitalize pharma and reframe the public conversation.

Pricing, Innovation, and a Pound of Flesh

Amid the search for effective COVID-19 treatments and vaccines, the pandemic will have long-term side effects for the global pharmaceutical industry. Drug manufacturers will need to focus on change in three areas—portfolio reprioritization, accelerated R&D, and technology transformation—if they are to position their businesses successfully for the future.

To that end, organizations should address major strategic questions now. In this article, we look at the impact of the coronavirus pandemic on the life sciences and the long-term prognosis, and suggest some priorities for executives to consider in order to position their companies best.

Our assessment is that the life sciences industry will see significant change in at least those three key areas mentioned.

Companies that are allocating significant resources to COVID-19 are forced to reprioritize their limited resources, reducing their focus on other activities.

 The urgency to identify treatments (from either new or approved medicines) and vaccines has caused health authorities to turn things around with unparalleled speed. This will raise expectations for shorter timelines in the future.

Rapid adoption of technology and transforming operations.

 This involves digital innovation, especially to solve the dilemma of the pharma “innovation paradox,” whereby highly innovative companies in R&D are quite conservative in operational innovation.

Refocusing significant efforts on COVID-19 will not be without consequences. A dollar can be spent only once, and even though people and systems can be more productive, this will inevitably lead to deprioritization of R&D activity in other areas.

A significant number of companies are allocating substantial resources to either developing or identifying treatments or developing vaccines for COVID-19. This will require reallocating resources (people, facilities, budgets), which will lead to other programs being delayed or cancelled. As it is difficult to cancel an ongoing clinical trial, this will mostly impact programs that have not yet started. This means, for some patients, it will take longer for treatments to become available, or it may never happen. Clinical programs have expiration dates linked to patents, and must be executed by certain times to be attractive commercially.

Although the industry is generally cash rich, there are plenty of early stage companies that will find it hard to survive this crisis, and others that are currently vulnerable due to other factors. This may mean good M&A opportunities for private equity, venture capital, and larger pharma companies.

The pandemic is forcing companies, regulators, and governments to enhance collaboration and speed up R&D activity in multiple ways. Regulators have demonstrated that they can act fast if they need to, and this potentially sets new standards for the future.

The urgent drive for treatments and vaccines is forcing companies to do things in ways they haven’t done before at this scale—although the Ebola and H1N1 scenarios hold learnings that are being leveraged. Organizations are also compelling regulators to (re)act much faster than they are used to. Clearly these are extraordinary circumstances, and some of this progress will fall away when the situation normalizes. However, some of the lessons that companies and regulators are learning should stick, which will result in a smoother and faster process. Certain caveats remain—a clinical trial that takes two years to perform cannot feasibly be delivered in less time. The randomized clinical trial will remain preeminent.

The pharmaceutical industry is home to an interesting paradox. It has a well-deserved reputation for innovation, based on its R&D output and scientific prowess. However, when you shift from science to operations, there is generally resistance to innovation and doing things differently. This means that while organizations have been looking at options for telehealth, virtual trials, wearables, etc., progress has been cautious and slow.

From an operational perspective, most of the pharma industry has rapidly adopted working from home, opening quite a few eyes along the way. Remotely selling medicines or conducting clinical trials is a lot harder, but significant efforts are being made to adapt operations. Research labs and manufacturing facilities need to maintain core operations on-site, but the overall impact has been enough for pharma executives to start making plans for inventive new ways of working.

Pharma has been reluctant to adopt digital beyond iPads for sales reps and other logical applications. COVID-19 has dramatically changed this attitude, with future concepts now up and running. With pharma company associates not allowed into hospitals to monitor clinical trials, sales reps not welcome at doctors’ offices, and patients unwilling or unable to go to trial sites to get their medications or undergo their assessments, companies have had to be agile to maintain the integrity of trials and protect their major investments. This has opened the door to home visits (a key component of virtual trials) and implementation of telemedicine, which are expected to continue.

The same applies to working arrangements, with companies concluding that they can safely rethink these quite radically.

Beyond innovation and operations, these changes may have a dramatic impact on culture. Taking risks in operations, rather than just in major development programs, will become acceptable. Companies will, therefore, need to develop new capabilities to manage these.

Many, when discussing the pandemic, now use the already cliché phrase “the new normal.” Pharma executives, who are used to thinking long term while, at the same time, providing shorter-term updates to Wall Street analysts, are looking well beyond the crisis and planning how to best position their companies to take advantage of the changed world.

Currently, it appears the life sciences sector is not going to be hit very hard financially. Although there is significant longer-term uncertainty, compared to other sectors, pharma is positioned to come out well. There will be strategic opportunities for new operating models, increased productivity from new and accelerated technology, and potentially more efficient ways to market as regulators change how they operate.

However, the overall economic environment will change significantly and impact how well pharma companies can recover and grow. Healthcare costs are an obvious target, which means drug prices will be under close scrutiny. This will impact the top line, and executives have to look at how to maintain margins, including new opportunities uncovered during the crisis. Hospitals have been hard hit financially, which will impact their spending and ability to support clinical trials going forward.

 Having been forced into wholesale adoption of technology much faster than anticipated or desired, life sciences companies will come out of the crisis with a new set of capabilities and a thirst for putting them to work. Telemedicine, artificial intelligence and machine learning, data science, and a range of digital tools are now being used in clinical trials, sales activities, and other areas. The drive to implement and innovate outside R&D has become stronger. Full transformation will not happen overnight, but the industry will not return to pre-crisis operating methods.

Most experts expect that the current coronavirus, and potential new ones, will not depart soon. This means the pharma industry has a role to play in the long term, and a commercial model is needed—one that aligns with public expectations to avoid impacting the industry’s reputation. Most of the companies engaged in COVID-19-related trials will just come out of it with experience and goodwill. A few will be successful, and given the size of the market for both therapy and vaccines, blockbuster status seems assured. Scaling fast and globally will be a challenge, but it is a core competency of big pharma.

Who “wins” could impact the whole industry—as shown by the share price of Moderna Therapeutics quadrupling in less than three months on high hopes for its vaccine development.

The crisis is an opportunity for the pharma industry to do what it excels at—developing innovative therapies and vaccines by using its scientific and operational capabilities. A side benefit would be enabling the sector to reshape its public image into something much more positive. In our view, the life sciences sector will come out of this crisis stronger, but this won’t happen automatically. There are critical takeaways for executives as they position their companies.

Leaders need to consider current strategies relative to the new environment. What is changing in the therapeutic areas in whichtheir company is active, and does it need to adapt? Are there any assets out there that are complementary to internal portfolios and can be acquired for good prices? Is the risk landscape changing?

If the R&D timeline is shortened, what does that mean for a company specifically? Where in the organization do leaders need to change and bolster capabilities so it can take maximum advantage of shifting landscapes and timelines? If companies make those choices now, they will have a head start when the “new normal” becomes actually normal.

Pharma needs to step up the development of data science and digital capabilities. Companies understand this, and although some have made progress, it needs to become ubiquitous. This will push pharma over the hump and turn it into the data industry it really wants to be.

Lastly, if an organization is not in the coronavirus rat race of developing therapeutics or vaccines, it should build an understanding of the areas deprioritized by others, and execute its strategy to take advantage.

Manager and US Lead for Energy & Utilities, Both with 

In adjusting to the long-term aftershocks from the coronavirus pandemic, pharma companies will need to focus on change in three core areas.

Strategic Realignment for a Better Future

Dr. Patrick Soon-Shiong is a physician, surgeon, researcher, philanthropist, and owner of the 

. From 1997–2010, he served as founder, chairman, and CEO of American Pharmaceutical Partners (APP) and Abraxis BioScience, where he developed the drug Abraxane, which received FDA approval for the treatment of metastatic breast cancer, lung cancer, and advanced pancreatic cancer. In 2008, Soon-Shiong sold APP to Fresenius for approximately $4.6 billion. Two years later, he sold Abraxis to Celgene for about $3.8 billion.

Soon-Shiong currently serves as chairman and CEO of NantWorks, an “ecosystem of companies” aiming to create transformative global health information and a next-generation pharmaceutical development network.

Under the NantWorks umbrella, Soon-Shiong is also chairman and CEO of NantKwest, an immunotherapy company focusing on natural killer (NK) cells, and ImmunityBio, a company that aims to deploy a broad portfolio of biological molecules as an integrated cancer vaccine platform targeting multiple tumor types without the use of high-dose chemotherapy.

Since the outbreak of COVID-19, Soon-Shiong has been applying his various resources toward understanding and combatting the virus. In May, ImmunityBio’s COVID-19 vaccine candidate was one of 14 companies selected for Operation Warp Speed, a national program to accelerate COVID vaccine development. The candidate is the first human adenovirus (Ad5) vaccine designed to deliver both spike (S) and nucleocapsid (N) DNA for potential long-lasting humoral and cell-mediated immunity.

 caught up with Soon-Shiong to talk about how his companies are progressing in developing a COVID-19 treatment and his goal to produce billions of doses to tackle the virus worldwide.

PE: Can you talk about how you became involved in the fight against COVID-19?

My companies, Abraxis BioScience and American Pharmaceutical Partners, were working back in 2010 on the hypothesis that we could drive memory T cells for both infectious diseases and for cancer. We had developed Abraxane, which is now owned by Bristol Myers Squibb. Unfortunately, much as I tried to explain the motivation behind my developing Abraxane was to avoid high-dose chemotherapy by a paradigm change of using this protein nanoparticle as an immuno-modulating agent rather than a cytotoxic drug, the concept was not understood. By the early 2000s, I came to realize that high-dose chemotherapy, still the current standard of care, was counterintuitively the wrong therapy and would do little more than induce metastasis and drive resistance toward an incurable outcome. What my colleagues did not realize is that Abraxane was a protein nanoparticle designed to penetrate the cancer microenvironment and activate the macrophages as well as induce what are known as DAMPS (damage-associated molecular patterns or activators of the innate immune system) to expose the tumor to our immune system.

That stimulated in me as far back as 2008 that what we’re doing with regard to chemotherapy was all wrong, that high-dose chemotherapy was wiping out our immune system. Only by activating the immune system could we ever have a chance to find a cure.

But I couldn’t convince anybody. I basically threw up my arms and said, fine, I’m selling APP to Fresenius, I’m selling Abraxane to Celgene, and we’ll go stealth for a decade and prove this hypothesis.

For the past decade, NantWorks has spent close to $3 billion building five to eight manufacturing plants with full R&D facilities on properties spanning about 40 acres in Colorado, California, and Chicago. We needed to collect within NantWorks all the tools in the armamentarium that could prove this hypothesis. That meant we needed to develop a vaccine vector that could drive the code of whatever cargo or transcript is necessary into the human being, whether it is a tumor-associated antigen, a new epitope, or a COVID sequence, into the dendritic cell and allow that dendritic cell to pump out this code as long as possible, so that we can activate the T and B cell memory.

For this vaccine vector, we selected and modified an adenovirus vector, which we call the second-generation adenovirus and which, by the way, has eluded every company, including Merck, Johnson & Johnson, and AstraZeneca, who with Oxford University in the UK is still developing a first-generation adenovirus.

First-generation adenoviruses produce in us adenoviral fibers and in so doing completely limit the capability of the dendritic cell to pump out its code, because these fibers alert the immune system in a healthy person that there is something foreign inside the dendritic cell, and therefore kills that dendritic cell.

The breakthrough was to develop an adenovirus that had all the propensities of the first-generation adenovirus, that is, being able to get into the dendritic cell and drive the code, but to remove the capability of that adenovirus to make adenoviral fibers, (or proteins) so that it remains stealth. All of a sudden you have an adenovirus that can actually pump out its code for as long as six months, which is remarkable. To us that was the breakthrough.

The next step was to figure out what happens as you age. As you age, your T cells die, your NK cells die or diminish. The molecule that up-regulates growth of these cells is IL-15, so we brought in a mutant of IL-15, which is called N-803, and ran that through clinical trials, specifically in bladder cancer. And that has received a breakthrough therapy status from FDA; it met the primary endpoint in bladder cancer. When you add to that a NK cell, which we could grow in an unlimited supply, and modify that NK cell to target the tumor, you now have a triple whammy, what I call the triangle offense (a nod to Soon-Shiong’s love of the LA Lakers and the famous offensive strategy run by former head coach Phil Jackson). You have a dendritic cell to activate the B cell. You have the memory T cell, and now you have a targeted NK cell.

Using that, we were able to get a complete remission, now lasting over six months, in metastatic pancreatic cancer; a complete remission, now lasting over a year, in triple-negative breast cancer, that had failed all previous therapy; and complete remission now lasting four years in Merkel cell carcinoma, that had failed all therapy. So, we have evidence that the hypothesis was correct.

When COVID-19 came along, it appeared that everything we were doing in cancer and infectious diseases was ready made, thank God, for COVID. Our manufacturing capacity was ready because we were growing NK cells. So we jumped into action. But one advantage we had over other companies is we made a scary discovery about COVID when we were doing molecular dynamic modeling of the receptor-binding domain (RBD), which is the tip of the spear of the virus’s spike protein, to the ACE2 receptor, which is the receptor in the lung or the body.

We discovered that this genius virus has figured out a way to hide its RBD, or the business end of the virus. In partnership with Microsoft, we now have a hundred terabytes of data, using a couple of thousand GPUs, and by analyzing this interaction, we discovered that the spike protein when given by itself, unfortunately, hides this RBD. Using an unmodified spike in combination with a first-generation adenovirus vector is a huge limitation to this approach. The second-generation adenovirus, however, is stealth to the dendritic cells; it’s hidden from T-cell attack. You have a much longer time for the appropriate cargo to dispense.

PE: How does your vaccine differ from other adenovirus approaches?

Ours is a second-generation adenovirus (Ad) that includes the nucleocapsid gene as well as the spike gene, allowing for a broader immune response. Other Ad approaches use spike only and this could allow the coronavirus to mutate and escape the immune response.

By including nucleocapsid as well, we significantly reduce the ability of the virus to escape. The others are also using first-generation adenovirus, but boosting with this same vaccine may not be possible and won’t work as well if in people previously exposed to the adeno “common cold virus.” Ours avoids the preexisting immunity issue altogether, allowing multiple boosting/dosing if necessary [as in our cancer trials].

PE: What’s your timeframe for moving forward with this?

By January 2020, we had undertaken the sequence. By March, we had confirmed that the antibodies recognized our protein construct. By April, we created finished dosage form of both constructs; we submitted our IND (investigational new drug) and went immediately into scale-up. We have a magnificent facility already activated that has a capacity now of 100 million doses by the end of the year. And so, in Q3 we will do first-in-human studies, and then we’re off to the races with everybody else, and we will hopefully be on the path to the billion doses.

PE: Can you talk a little bit about the supercomputing power you are deploying to understand the COVID virus?

Around 2012, NantWorks took over National LambdaRail, which ran the Large Hadron Collider and was behind the 12,000-mile fiber-optic network that links physicians with data from big science projects such as The Human Cancer Atlas. That was the basis of us building our supercomputing network. Now, in collaboration with Microsoft, which has been a fantastic partner, we have one of the largest graphics processing unit (GPU) clouds.

We’re leveraging Microsoft’s Azure platform to perform a highly detailed computational analysis of the spike protein structure of the SARS-CoV-2. A digital blueprint of the spike protein obtained via a process called cryo-electron microscopy was published in February by researchers at the University of Texas and the NIH. Our teams have applied a technique called molecular dynamics to the blueprint. Molecular dynamics analyzes the physical movements of the virus components at the atomic level over an extended period of time and runs a series of computationally intensive simulations that result in a detailed model of the most likely solution structure of the spike protein.

Microsoft and ImmunityBio’s engineers and scientists deployed a cluster containing over 1,250 NVIDIA V100 Tensor Core high-performance GPUs specifically designed for machine learning and other computationally intensive applications. Similarly, ImmunityBio has deployed its 320 GPU cluster, which has been optimized for molecular modeling of proteins, antibodies, antivirals, and targeted small molecule drugs. This has given us an amazing amount of information about where to attack this virus. We’re looking into neutralizing antibodies and finding the best sites on the virus to attack. I anticipate we’ll make some exciting announcements in this area soon.

PE: That immense amount of computing power notwithstanding, you noted that SARS-CoV-2 is a “genius virus.” Can you elaborate?

It is a genius virus. What’s happened is that just one mutation on the RBD has increased the infectivity of this thing by 20 times. That’s why it’s so effective.

What is encouraging, however, is that we have discovered that patients who have recovered 11 years on from the first SARS-Cov outbreak have memory T cells to the nucleocapsid (N) phosphoprotein.

This validated our decision to add N into our construct so that we can generate memory T cells, because while spike and RBD will mutate, N can’t mutate.

The science of this virus is fascinating. Integrating this computational science with modernized DNA systems and modernized genomic devices, such as the second-generation adenovirus that can actually induce this code in the dendritic cell, gives us a real fighting chance to create memory T cells against SARS-Cov-2.

PE: From an operational point of view, how are you managing to balance your resources in terms of fighting COVID-19 and continuing with your work in cancer?

 I hope that our government recognizes that a second-generation human adenovirus, which uniquely includes N in addition to S, warrants support because there’s no way that we as a small privately held company could do this alone.

My next challenge then is not fighting the virus but receiving the resources to scale to a billion doses. It is making sure that we stand as tall as the large pharma companies that have been funded by the government to date. The Gates Foundation has analyzed our adenovirus approach and we are in negotiations for their support, for which we are very grateful. But this will not go far enough to manage the potential billion-dollar cost to see this all the way through and manufacture billions of doses for the world.

PE: We just wanted to touch on your role as owner of the LA Times. That puts you in a unique position to communicate the progress of your scientific work on COVID-19. How much do you feel that is your responsibility to do?

I have no control, and rightly so, of the editorial content of the newspaper. To avoid any conflicts, it’s best that this kind of news is broken by a newspaper like 

. I’m very aware that I have to be careful as the owner of the

It’s important that the editorial staff follow the science rather than the specific research in which I’m involved.

Patrick Soon-Shiong, the billionaire biotech entrepreneur and owner of NantWorks, a network of health startups, discusses his companies’ COVID-19 vaccine candidate and its “fighting chance” to outsmart the virus’s hidden tricks through merging supercomputing and modernized DNA delivery.

Pharmaceutical Executive-08-01-2020

Pharmaceutical Executive, August 2020 Issue (PDF)

Pharm Exec’s 19th Annual Industry Audit

AI and Social Listening: Myths vs. Facts

Drug Pricing Back in the Spotlight

A Good Time to ‘Revamp’ Sales and Marketing

Tapping Compliance Data to Drive Success

Pricing, Innovation, and a Pound of Flesh

Strategic Realignment for a Better Future

Tackling a ‘Genius Virus’

Leaders Need to Hit Pricing Issue Head-On

The New Data Dynamic: How COVID-19 has Upended Model

Making Strides in Pharma Gender Parity

Pharma’s Digital-Trust Mandate

Holograms as Industry Tool Here to Stay

Health Policy Funding, Hopes at Odds in EU