Over the last few years—and during the last few months in particular—there has been a tremendous amount of media coverage on the role of microbes—specifically the gut microbes—in regulating human health and disease. Recent stories have covered a wide range of related topics, including research linking microbes to inflammatory bowel disease, autism, and type 1 diabetes. There have also been research reports about the use of microbial infusions to treat infection and restore a healthy gut microbiome.   We are living in an exciting time, where a collective group of scientists and researchers are just beginning to unlock the full power of the human microbiome, the collective genomes of all microorganisms present in or on the human body.  

The interest in the human microbiome was sparked in part by the Human Microbiome Project, a five-year effort sponsored by the US National Institutes of Health. The goal of the $115-million research effort was to characterize the microbial communities found at several different sites on the human body and to correlate the relationship between changes in a microbiome present at a particular body site to a specific illness.  

Why all the excitement about these developments? One of the reasons is that this research is dramatically changing the way medicine views bacteria. Another is the very real possibility of developing non-antibiotic treatments for disease.  

Britain's Prime Minister David Cameron recently came out with a powerful statement when he said that "Antibiotic-resistant superbugs threaten to plunge the world back to the 'dark ages' of medicine," and also pledged that the UK will lead a global effort to develop new drugs.  

First billed as the "miracle of modern medicine," antibiotics have been overused for so long that some types have become ineffective. In today's world, it's become quite common to turn on the evening news and find that the lead story is about a virulent antibiotic-resistant disease showing up in patients in a local hospital. What was once easily treatable now has no known cure. The frightening thing is that antibiotic resistance is even more problematic than most people realize.  

Every year, an estimated two million people in the US are infected with antibiotic-resistant organisms, also known as superbugs, which result in about 23,000 deaths annually

—and this number is growing. These developments can be directly attributed to the fact that antibiotics have been and continue to be a central component to the healthcare landscape. A multi-pronged effort that combines antibiotic stewardship with new non-antibiotic approaches to treating infectious disease is needed.  

There exists a deadly superbug that goes mostly unnoticed among many, that is until an individual or someone they know contracts it. 

 infection—can cause life-threatening diarrhea and is the leading healthcare-acquired infection, with far more cases than Methicillin-resistant 

 (MRSA) infection implicated in "flesh eating" necrotizing fasciitis.  

In the US alone, there are about 250,000 cases of

 infections each year, linked to 14,000 deaths annually.

  The incidence and severity of infections began around the year  2000, placing a significant burden on the US healthcare system. At least $3 billion in excess medical costs per year have been attributed to 

 infection itself has been linked to the prior use of antibiotics. Indeed, 

infection was one of the first diseases formally linked to perturbation of the microbiome

 and previous antibiotic use is a prerequisite for development.

 Yet, ironically, the first-line treatment for the disease is more antibiotics. While most people are cured using this treatment approach, about 20% to 30% of people will go on to have more than one episode, and each additional episode predisposes to additional episodes, leaving these individuals trapped in a vicious cycle of recurrent disease.  

Those over 65 years old with concomitant medical conditions are at greatest risk of  

infection, most cases of which are contracted while in a healthcare setting. However, an increasing number of cases are being seen in younger patients, and there is a higher incidence of community-acquired cases as well. People who develop chronic 

infection can be very sick for months and are at risk of dying. More than 90% of deaths occur in people older than 65.  

Trillions of bacteria, viruses, and other organisms live in our bodies and work together to regulate processes critical to life, including metabolism and the immune system. Collectively, the genetic material of these microbes forms the human microbiome. In healthy individuals, commensal ("good") bacteria live in balance with pathogenic components of the microbiome, giving us an inherent resistance to disease.  

Research dating to the 1950s and perhaps far earlier shows that transplanting microbes from a healthy person's gut into a sick patient is an effective treatment for some diseases, including 

 infection. It is thought that the transplanted microbes restore the intestinal microbiome to a healthy state and in the process overwhelm pathogenic bacteria such as 

. Thus, the patient is restored to health without using antibiotics. 

New therapeutics derived from the human microbiome have the potential to revolutionize the industry. As it becomes increasingly difficult and expensive to develop new antibiotics, it may be possible for non-antibiotic therapies based on human-derived microbes to fill the gap. It may even be possible for these new therapeutics to preserve the effectiveness of the remaining antibiotics by reducing their use and slowing the development of antibiotic resistance.  It is crucial that we continue to expand our knowledge of the human microbiome and look to harness its power to treat 

http://www.cdc.gov/drugresistance/threat-report-2013/

2. Dubberke ER, Olsen MA. Burden of Clostridium difficile on the healthcare system. 

3. Britton RA, Young RA. Role of the intestinal microbiota in resistance to colonization by Clostridium difficile. 

is Founder, President, and CEO of Rebiotix. She can be reached at 

Articles

Column

New research on the role of microbes in fighting disease is transforming the way medicine views bacteria, writes Lee Jones.

The Human Microbiome—Our Body's Secret Weapon

Crowdfunding has proven to be an attractive financing mechanism for smaller start-ups seeking to market consumer products, video games, and even movies. Remarkably, KickStarter has raised over $1 billion through donation- and reward-based models that avoid SEC regulations prohibiting crowdfunding platforms from offering equity or debt securities. The SEC's recent roll-out of the changes implemented by the Jumpstart Our Businesses (JOBS) Act will enable a wider swathe of capital-intensive businesses, such as biotech and pharma start-ups, to utilize publicly advertised securities-based offerings outside of the IPO context. Such new avenues of funding are worth exploring in the face of dwindling backings by venture capital, but, as illustrated by recent crowdfunded offerings, capital-seeking companies must be wary of potential liability from online advertising that could be deemed materially misleading.  

Passage of the JOBS Act in April 2012 altered the financing landscape by directing the SEC to promulgate new rules to increase start-ups' access to capital. The amendments to Regulation D (Reg D) and Regulation A (Reg A) create important mechanisms for "more efficient" solicitation of investments from a wider pool of investors. Amended Reg D Rule 506 lifts the ban on general solicitation for offerings to accredited investors. As for Reg A, which already allows for publicly advertised offerings to both accredited and non-accredited investors, proposed rules will create a new second tier of exemptions ("Reg A+"), with an offering limit increase from $5 million to $50 million. 

Reg D has always been a popular funding avenue for biotech and pharma relative to other exempt offerings, as it allows for offerings to accredited investors with no limitation on the aggregate amount. For example, a recent study indicated that in 2012 private offerings under exemptions such as Reg D eclipsed public ones by 42%. However, the amendments to Reg D eliminate the prohibition on general solicitation or advertising—a nonstarter in the context of online public offerings—so long as "the issuer takes reasonable steps to verify that purchasers are accredited investors." 

The resulting increased interest brought about three portals supporting online public offerings of biotech/pharma securities soon after enactment of the amendments: VentureHealth LLC (

). VentureHealth provides for purchase of an ownership interest in a special purchase venture capital fund that holds securities in a private company. In contrast, Poliwogg and HealthiosXChange allow direct purchases of securities. Poliwogg specifically identifies on its portal an online Reg D offering—common stock in Neurotez, a company focused on Alzheimer's treatments—and it lists three additional offers as "coming soon."  

Online portals provide benefits to both offerors and investors. Start-ups can efficiently reach a large number of investors through online exposure and the potential to create special purpose vehicles that allow offerors to deal with a single entity—the portal—rather than scores of individual investors. Investors can efficiently find and review investment opportunities and pool funds, thereby lowering the minimum required investment. Thus, the final rules amending Reg D provide new incentives to seek capital through Reg D offerings. 

The pre-JOBS Act Reg A exempts issuers from filing a full federal registration, instead allowing a "mini-registration" process requiring the filing of an offering statement (a limited registration statement) and an offering circular (a disclosure and selling document akin to a limited prospectus). Reg A already possesses certain positive attributes: 

» Securities may be offered to any number of prospective investors, accredited or not. 

» General solicitation and advertising are permitted. 

» Shares may be freely traded by purchasers on the open market.  

» Issuers may test the waters prior to engaging in the mini-registration process.  

However, Reg A limits offerings to $5 million, which does not typically meet the threshold required by biotech/pharma ventures, though such offerings have occurred.  

Therefore, Congress created Reg A+, in part, to allow for an aggregate offering amount of up to $50 million. Issuers must provide audited financial statements both in the offering statement and annually, and, although such auditing costs are not trivial, the overall reduced costs of the mini-registration process, estimated at anywhere from $40,000 to $125,000, remain significantly less than that of a registered offering. Taken together, the reduced registration costs, increased offering limit, and ability to solicit, advertise, and sell a liquid security to any type of investor make Reg A+ an ideal capitalization vehicle for direct online public offering by biotech/pharma businesses.  

However, there's no assurance that the final rules governing Reg A+ will provide for preemption of state Blue Sky laws.  This has not dissuaded at least some biotech/pharma startups from taking advantage of pre-JOBS Act Reg A. For example, Easton Pharmaceuticals filed a Reg A offering statement for $5 million dollars per year to piggy-back on financing obtained under Reg D, though the offering was only made to "current financing partners." Because investors need not be accredited, Reg A+ can provide a valuable new avenue of funding at the growth stage of a company's development cycle. Moreover, the reduced administrative costs allow growing companies to direct a larger percentage of funds toward clinical testing and research and development critical to attracting future investment. However, unless and until the SEC promulgates final rules preempting state Blue Sky laws, it is unclear that offerors will use Reg A+ in online public offerings potentially involving scores of investors residing in numerous states. 

Disclosures under Reg D and Reg A+ offerings

To engage the network of potential investors, companies must publicize substantial information about their products. The increased exposure accompanying online advertising may heighten SEC scrutiny of public disclosures. According to the proposed rules, both issuers and advisors face civil liability if information provided is deemed materially misleading, i.e., information that either (1) contains an untrue statement of a material fact, or (2) omits a material fact necessary to make a statement not misleading, when there's a substantial likelihood that such a statement would have been viewed by the reasonable investor as having significantly altered the total mix of available information. 

Some disclosure requirements tend to be more straightforward. For example, a Reg A offering requires a current balance sheet and income statements for a period of two years prepared in accordance with GAAP. However, disclosure requirements for intangible assets, like IP, which may constitute a biotech/pharma start-ups single most valuable asset, are subjective and case-specific. In particular, disclosure issues arise when a start-up must endeavor to provide enough to attract investors without divulging so much information as to give the competition a leg up. 

Where a company generates revenue primarily from its IP, it could be argued that disclosure or non-disclosure of IP-related information significantly alters the total mix of information, rendering it material. Shareholder lawsuits can arise in a number of IP-related contexts, including ownership and assignment, patent application status, patent claim coverage, licensing details, expiration dates, patent counsel opinions, or status of ongoing litigation. See, e.g., Nathenson v. Zonagen, Inc., 267 F.3d 400 (5th Cir. 2001); Pommer v. Medtest Corp., 961 F.2d 620 (7th Cir. 1992); Alna Capital Assocs. V. Wagner, 532 F. Supp. 591 (S.D. Fla. 1982). 

Though insufficient time has passed for shareholder lawsuits to result from offerings under the amended provisions of the JOBS Act, the non-equity crowdfunding context is illustrative. Recently, 3D Systems, Inc., owner of several patents in the 3D printing arena, filed a patent infringement suit against start-up Formlabs Inc. and Kickstarter. Though Formlabs publicly noted the expiration of certain potential blocking patents for its product, it did not address several still in force. Had investors purchased securities rather than rewards rights, Formlabs' failure to disclose such patents held by the competition might have created additional problems. This example illustrates how a company seeking to generate investment through online public offerings could inadvertently end up facing liability. 

Amended Reg D and Reg A+ provide exciting new opportunities for biotech/pharma start-ups to raise capital through online public offerings. These new exemptions will only foster an increase in potential investors and, concomitantly, potential investment dollars. But companies who generate revenue primarily from their IP, such as those in the biotech/pharma sector, must be wary of potential liability that can arise from online advertising.  

, PhD, are attorneys at Finnegan, Henderson, Farabow, Garrett & Dunner LLP. They can be reached at 

Is crowdfunding an attractive alternative to finance pharma and biotech start-ups? Seth R. Ogden and M. Andrew Holtman report.

Crowdfunding: The Open-Source Option Against Capital Crunch

Up until a few months ago, there was little industry interest or public support for developing vaccines and treatments to combat the Ebola virus. Now the rush is on to launch clinical trials of therapies with some potential effectiveness against the disease. As deaths have mounted, the World Health Organization (WHO), government health agencies and the biomedical research community have marshaled resources, creating new opportunities for biopharma companies to demonstrate their ability to ramp up R&D and production. Big Pharma companies such as GlaxoSmithKline and Johnson & Johnson stand to gain public recognition and to bolster global vaccine programs, while tiny biotech firms see stock prices rise, along with government contracts and grants.  

The situation also encourages FDA and regulatory authorities to facilitate these efforts by collaborating on testing and production requirements for experimental treatments. FDA recently approved initial trials in humans of two vaccine candidates and previously utilized its Emergency Use Authorization to allow broader use in Africa of a not-yet-approved Ebola diagnostic. The agency also has permitted Tekmira Pharmaceuticals of Vancouver to provide its experimental treatment for emergency care, despite continuing a "partial hold" on its  Phase I trial. FDA guidance issued in July on developing drugs for neglected tropical diseases (NTDs) should help sponsors design clinical trials and gain assistance and advice from FDA and other federal agencies. 

The U.S. has provided nearly $200 million for Ebola relief efforts on the ground, including some to bolster infectious disease and pathogen research at the National Institute of Allergy & Infectious Disease (NIAID), the Biological Advanced Research and Development Authority (BARDA), and several Department of Defense (DOD) programs to protect against biological threats. Similar amounts have been pledged by the World Bank and the European Union, and the Bill & Melinda Gates Foundation recently contributed $50 million to emergency efforts, including Ebola therapy development.  

An important step in spurring Ebola drug research was WHO's decision in August that it is ethical to use unproven therapies to help contain the spreading outbreak. WHO further assembled some 200 movers and shakers of the biomedical research and public health community in Geneva last month for a "consultation" to identify the most promising treatments for further testing and development. Vaccine industry executives and biotech hopefuls joined the discussion about resources available to conduct clinical trials and the feasibility of production scale-up. The group examined the ethics of conducting clinical trials, the need for regulatory cooperation and flexibility, and potential hurdles to distribution and administration of new treatments.  

Agreement on which vaccines and antivirals had sufficient data on immune response in primates to warrant initial testing in humans has generated a race between big and small vaccine makers to demonstrate safety and efficacy for their respective vaccines. NIAID quickly obtained FDA approval to launch early studies in healthy volunteers of the vaccine developed by GSK's Okairos unit in Switzerland. A $4.6 million grant from the Wellcome Trust and British health agencies will support additional studies in Europe and Africa, plus production of some 10,000 units for broader administration to healthcare workers and at-risk populations if studies are successful.  	

FDA also authorized initial human testing of the VSV-EBOV vaccine, developed by NewLink Genetics of Ames Iowa, using a platform licensed from the Public Health Agency of Canada. That set the stage for the Walter Reed Army Institute of Research to initiate Phase I trials. In addition, Johnson & Johnson hopes to launch clinical trials of an Ebola vaccine formulated by its Crucell vaccines unit (Netherlands) in collaboration with NIAID and Bavarian Nordic (Denmark). J&J says it could produce some 7,000 doses in six months if wider distribution is warranted.  

The WHO consultation further identified a number of antivirals with potential to treat Ebola, some developed as protections against influenza and other viruses. BioCryst Pharmaceuticals, for example, has support from NIAID for primate testing and Phase I safety studies of a small molecule injectable for hemorrhagic fever viruses. A subsidiary of Japan's Fujifilm plans to test its new oral influenza treatment favipiravir for Ebola treatment. The Japanese government authorized stockpiling of the drug for pandemic flu earlier this year and has offered to make thousands of doses available to Ebola victims. Boston-based MediVector has been conducting Phase III trials in the U.S. for influenza protection, and DOD is supporting additional testing of favipiravir against Ebola.  

Most discussed is the ZMapp cocktail of three monoclonal antibodies from Mapp Biopharmaceutical of San Diego, which made headlines when two American health workers infected by Ebola recovered following ZMapp administration. Last month, BARDA awarded an additional  $25 million contract to Mapp to accelerate ZMapp testing and production. The drug comes from tobacco leaves in a process for antibody production operated by Kentucky BioProcessing (a unit of tobacco giant Reynolds American) with support from DOD. There has been broad interest in using tobacco and other plants to produce vaccines and biologics, and the excitement over ZMapp creates  an opportunity to evaluate biopharming capabilities further. 

Expanded production of experimental Ebola therapies could utilize three new BARDA Centers for Innovation in Advanced Development and Manufacturing, which were launched in 2012 to provide more flexible, modern vaccine manufacturing technologies able to produce 150 million doses in 12 weeks in the event of an influenza pandemic. BARDA's fill-finish manufacturing network also could be tapped to support production of Ebola vaccines and injectibles. These programs and other medical countermeasure initiatives supported by HHS, DOD, and other federal agencies will be discussed at the annual BARDA Industry Day, Oct. 15-17, in Washington, D.C. 

's Washington correspondent. She can be reached at 

Companies gain support-and pressure-to deliver new treatments for spreading outbreak.

Ebola Crisis Challenges Pharma R&D

Training to become a United States Navy SEAL (SEa, Land, and Air) is considered among the most intensive preparation in the world. The average successful Navy SEAL candidate spends over a year in a series of formal training environments, including a rigorous Boot Camp; Basic Underwater Demolition; Basic Parachute Training; and Advanced Specialty Training.  

While most people focus on the physical challenges of SEAL training, few appreciate the arduous mental preparation that helps SEALs win a mission even before they conduct it. In his recent book,

 The Way of the Seal: Think Like an Elite Warrior to Lead and Succeed

, former SEAL Mark Devine reveals many SEAL conceptual frameworks that can be used for not only military battles but also brand battles.  

Devine believes that "to win at anything, we must first control our minds." Pharmaceutical professionals, teams, and organizations can apply many of these conceptual practices to enhance their mental toughness and establish a winning attitude. Here are some of the most relevant SEAL principles to help pharmaceutical professionals succeed at an elite level. 

 SEALs are mentally trained to possess a can–do attitude. They do not think or believe they are going to win; they 

 they are going to find a way to win. Winning pharma professionals and brand teams embrace a similar attitude. They manage to overcome competitive challenges, compliance issues, regulatory hurdles, resource constraints, organizational bureaucracy, and—perhaps most importantly—their own real or pre-conceived limitations.

SEALs are constantly training as individuals, in their platoons, and as part of larger task groups to maintain, enhance, and ultimately master their skills. Ironically, most pharma companies only provide competitive training for their sales representatives and not for the rest of their extended multi-disciplinary brand team members. Imagine the consequences of a SEAL Team that has only one of its SEALs trained to fight?

SEAL teams must identify and evaluate multiple different options to determine the optimal approach for each mission. The details of the selected option ultimately become the mission plan. Devine recommends the four question "PROP Process" to assist in this planning: What are the current priorities? What are the realities of the situation? What options do your targets offer? What path forward will you select to succeed? Pharma brand teams can learn from and adopt a version of the PROP Process for market and competitive planning.

"Dirt-dive the mission" is SEAL-speak for "rehearsing until the team has won the mission in their minds." Similarly, pharma companies should regularly rehearse their plans for product launches, counter-launches, and other competitive activities in the form of Competitive Simulations, the new, improved version of business war games. Like SEALs, winning companies conduct simulations for many different types of situations: franchise and portfolio planning; annual brand plans or longer-term strategic plans; new product indications or data releases; and global, regional, and local market planning.

"Front-sight focus" is how Devine describes the incredible concentration and single-mindedness that SEALS rely on when pursuing a target. Prior to their mission, SEALS deliberately select "high-value targets" where their resources are best directed to achieve the overall mission. They apply the four-question "FITS Process" to analyze and prioritize these targets: Does this target fit your team's skills and does it give a good return on investment? How important is this target to achieving mission success? Is the timing optimal for pursuing this target? Is the target simple and clear?

Pharma professionals can leverage front-sight focus to complete prioritized projects, streamline their commitments, and start new initiatives without getting derailed. The FITS Process can help these professionals identify the three to five "highest value targets" or the essential action steps for winning against competitors. 

Very few people have the ability, desire, or opportunity to become a Navy SEAL. However, pharma professionals can apply these cutting-edge approaches to learn the mental fortitude, leadership skills, and winning mentality of the world's most elite warriors.  

 MD, MBA, is President of Bernard Associates LLC. He can be reached at 

Pharmaceutical professionals, teams, and organizations can succeed at an elite level by tackling the tough mental challenges of Navy SEAL training.

Gain a Competitive Edge: Think Like a Navy SEAL

"Better volcano forecasting," the European Union announced with pride in mid-September. The breakthrough was a new EU-funded monitoring scheme for Iceland's volatile geology. What the EU has paid less attention to is the volcano that is soon likely to blow apart its assumptions on the pricing and reimbursement of medicines. 

The agenda for the informal meeting of EU ministers of health in the last week of September should have been warning enough. Italy is host to this six-monthly meeting, in Milan. Exercising its privilege as the current holder of the revolving EU presidency, it set the agenda—with an eye to pyrotechnics. The centerpiece for the meeting is a discussion on the price of drugs, driven particularly by concerns over the cost of innovations such as Gilead's hepatitis C treatment, 

, on which the Italian and French health authorities have been leading the attacks.  

A discussion paper circulated in advance to national ministers starts blandly enough, with an outline of the challenges of bringing innovation rapidly to patients—all that familiar territory of the cost and risk of R&D, and meeting unmet medical need with therapies that "are affordable to the EU healthcare systems," along with calls for closer dialogue with regulators and more capital investment. Similarly, the paper rehearses the range of EU options for speedier marketing authorization—conditional, exceptional circumstances, compassionate use, and the more recent moves by the European Medicines Agency (EMA) toward adaptive licensing. But it soon edges closer to controversy with an observation that "some challenges remain since there are still medical needs to be met and patients are demanding faster availability of promising new therapies at affordable prices."  

That allusion to affordable prices is the bubbling of lava underground. The paper that ministers are to discuss notes how the focus is shifting beyond questions of authorization, and starting to embrace considerations of a medicine's added value and its reimbursement potential. So although pricing and reimbursement remain matters for national decisions in the EU, "relevant bodies and competent authorities need to link into discussions," it says. The organizations currently engaged in health technology assessment in Europe "often work in isolation and follow slightly different processes and modalities," the Italian paper remarks—and the limited experience of cooperation so far "has shown that working together delivers substantial results in sharing information on assessments carried out by national and regional agencies, in developing common methodologies and in testing them." The needles that measure seismic movement start to twitch as the paper proceeds to argue that "robust agreements and cooperation structures are needed for working jointly at EU level and for enabling member states to use the results of the cooperation in their national and regional activities on HTA." 

But it is when the paper moves on to "defining reasonable and affordable prices for innovation" that the subterranean rumbling really starts. "The current perception is that, for new products particularly, prices are too high for the public payer," it says. "Several member states have stressed the need for a broader debate on how to balance out competing needs for paying the adequate value for innovation and equitable and affordable access to innovative therapies for patients." Discussion at a high political level "would be very timely to steer priority setting." 

This discussion at high political level is going to take the EU directly into the most sensitive area of the drug industry's relations with national authorities—those complex and discreet deals that companies reach over pricing and reimbursement. Because drug firms in Europe must contend with the double jeopardy of reference pricing, it has become the custom to fix deals with individual member states that draw a veil—for the outside world—over the precise financial arrangements reached, amid the numerous variables relating to discounts, or agreements covering volume, or managed entry schemes, or even a company's entire portfolio. This is the equivalent of the thinnest part of the earth's crust, and Italy's discussion paper marches boldly onto it.  

"There is a lack of transparency in prices: member states do not necessarily know what prices other member states are paying for a given volume of products." it says. And it treads undaunted into zones considered, until now, more or less off-limits for public discussion. "Managed entry schemes: do we know if they work?," it demands. On "price-volume agreements as part of a tender: are these comparable prices?" And on "market volume: what is the implicit price discount larger markets will command, and can this be up-scaled at EU level, for example, through joint procurement agreements?"  

"There is a case for increased transparency and cooperation between member states on price setting," concludes the Italian presidency. It even suggests extending a controversial network designed to assist European countries in exchanging drug-pricing information. And it poses direct questions to ministers on what they believe should be done to change the situation. Do they agree, Italy is asking, that efforts should go beyond increased transparency and information exchange, and lead to systematic direct cooperation on prices of health technologies and products. Would they be willing to contemplate "dissemination of analysis of prices in member states and voluntary common mechanisms?"  

The answers are awaited with interest. To express it with delicacy, it is reasonable to assume that some EU countries, particularly those facing the greatest economic challenges, will be ready to support such approaches—because the more they know about drug prices and reimbursement levels in other member states, the easier it is for them to negotiate with drug firms and exert pressure for the best deals available in Europe. The attitude of those EU countries with a strong medicines industry is harder to predict. While Germany or the UK or Sweden, for instance, are obviously interested in containing their domestic drug bill, they are also conscious that if drug prices are cut back everywhere, their domestic industries will suffer—along with jobs and research and exports. The answers from industry (although it is not at present being asked) are likely to be more clear-cut: if wider information and cooperation were to mean a more coherent view of pricing and reimbursement that would take account of the benefits of therapy as well as its costs, and lead to better treatment on prices, it could be advantageous—but any levelling downwards would be bad news. 

With rather less delicacy, an explosion is on the way. On the one hand, companies feel they are harshly treated on pricing even in some of the more generous countries—and they feel constantly at risk of seeing much of their returns eroded by parallel importing in the EU's single market. On the other hand, the pressure on health and finance ministries to contain costs is huge—fed by inflammatory debates in national and European parliaments. A European Parliament debate just days before the Milan meeting featured repeated accusations of industry's "shameless profiteering," and was embellished with numerous calls for price caps, reduction of patent term, compulsory licensing, and joint procurement of medicines. Even senior officials in member states nowadays speak openly of industry "blackmail."  

And with the debate intensifying as new treatments for cancer and hepatitis C come on the market seeking tens of thousands of euros as their price, something is likely to crack. Any comfortable assumptions about business as usual in the EU drug pricing scene are poised for extinction. 

On its Iceland monitoring project, the EU said: "Volcanic eruptions are notoriously difficult to predict." Maybe in geology. Not in the politics of European pricing and reimbursement. Get ready to run. 

An escalating political debate over pharma pricing and reimbursement nears the boiling point.

Eruptions on the Drug-Pricing Horizon in Europe

Just over three years ago, Congress enacted the America Invents Act, hailed as "one of the most significant legislative reforms to the patent system in our Nation's history." The Act included several sweeping changes, including advent of 

 Review (IPR)—a new litigation procedure held before the Patent Trial and Appeal Board (PTAB) to challenge the validity of patent claims. Designed to be a faster and less expensive alternative to district court litigation, IPRs have taken the patent bar by storm. 

Before enactment, the United States Patent and Trademark Office (USPTO) anticipated handling 460 IPR petitions annually. But the response by patent challengers has been overwhelming, with more than 1,750 petitions filed in the first two years, resulting in 114 final decisions through September. In 2013,  87% of the petitions filed met the "reasonable likelihood that the challenger will prevail" standard and progressed to trial. That number has decreased slightly in fiscal year 2014, with trials being instituted in "only" 76% of the petitions filed. The majority—more than 86%—of the petitions have challenged electrical and mechanical patents, while petitions challenging pharmaceutical and biotech patents account for just over 5%. 

Several factors may explain the disparity. First, it may be simple math—according to one source, about five-fold more patents are granted on electrical inventions than on pharmaceutical and biotech inventions. Another reason may be statutory. IPR challenges must be based on printed publications and arguments are limited to anticipation and obviousness. In contrast to the "predictable" nature of electrical and mechanical inventions, biotech and pharmaceutical patents are considered to be "unpredictable and undeveloped art." The USPTO routinely requires a stronger showing of showing of enablement and places greater scrutiny on the written description requirement for pharmaceutical and biotech inventions. Thus, common rejections encountered during patent prosecution in the unpredictable arts—lack of written description or enablement, and obviousness-type double patenting—are not proper bases for challenging patent claims via IPR.  

Nonetheless, if a potentially invalidating prior art is available, IPRs can be a useful tool offering several unique advantages over traditional district court litigation, particularly for smaller companies with limited financial resources. 

The IPR framework is set by statute. Briefly, a challenger prepares a petition, typically supported by an expert declaration, providing detailed reasons why each challenged claim is invalid. Then, the patent owner has the option of submitting a preliminary response focusing on the propriety of the petition. Within three months after a preliminary response is filed or waived, the Board will decide whether to initiate a trial after evaluating whether the petition includes evidence suggesting that the petitioner has a reasonable likelihood of proving invalidity of at least one challenged claim.  

Once initiated, IPR trials offer several advantages over district court litigation.  First, IPRs provide for quicker, streamlined proceedings before judges who have been hired, in part, based on their patent and technical expertise. The Board is then required to render a written decision within 12 months after the decision to institute the IPR trial, although an additional six months are available with a showing of good cause. Thus, an entire IPR proceeding, including the time for an appeal to the Federal Circuit, can occur in about half the time it takes for traditional district court litigation.  

Second, IPRs can offer significant cost advantages. According to AIPLA, costs of defending patent litigation in district court frequently surpass several million dollars. IPR costs, on the other hand, typically range in the of hundreds of thousands of dollars.  

The limited discovery available in IPR proceedings is the primary driver of reduced costs. In an IPR, discovery is generally limited to documents cited in the parties' filings and depositions of the parties' declarants. Interrogatories, requests for admission, and extensive document collection and review are not typically available in IPR proceedings. Costs are further reduced because infringement is not at issue. And, in many cases, stays of parallel district court litigation may be possible. Third, the burden of proof required to prove invalidity is lower in IPR proceedings than in district court. Patents issue with a "presumption of validity" that must be overcome by "clear and convincing evidence" of invalidity in district court. However, challenged patents do not enjoy this presumption in IPR proceedings, which are governed by the lower and more challenger-friendly "preponderance of the evidence" standard. Finally, in IPR proceedings, claims are given their "broadest reasonable construction," which should operate to increase the amount of prior art available to the challenger.  

The differential standards governing validity challenges in the USPTO and district court can lead to unusual results, further illustrating a benefit to potential patent challengers. 

  the Federal Circuit affirmed a finding of invalidity based on obviousness decided by the USPTO after a re-examination proceeding, despite the fact that the very same patent was found to be valid by a district court—in a decision later upheld by the Federal Circuit. 

In addition to these potential benefits, there are certain drawbacks that should be considered when contemplating IPR. The prospect of estoppel looms as the primary downside for patent challengers. Once the Board issues its final decision, estoppel attaches and precludes the petitioner from raising in district court any invalidity argument that was raised or reasonably could have been raised during the IPR. In the pharmaceutical and biotech spaces, however, the estoppel effect may not be as onerous as it is in the electrical or mechanical spaces. Even though a challenger could be precluded from arguing invalidity based on anticipation or obviousness, arguments based on lack of written description or enablement, and obviousness-type double patenting remain viable options in district court litigation and are unaffected by the estoppel provisions. Thus, a petitioner may be able to take advantage of IPR proceedings based on prior art and still have certain invalidity defenses available in district court if the IPR is unsuccessful.  

Despite the relatively small percentage of IPRs relating to biotech and pharmaceutical patents, a handful of written decisions have issued and provide some interesting information. Apotex and Ranbaxy were among the first pharmaceutical companies to take advantage of IPR proceedings. In 2013, Apotex submitted a petition challenging patents owned by Alcon Pharmaceuticals directed to

, a drug for reducing intraocular pressure. Determining that there was a "reasonable likelihood" that Apotex would prevail, the Board instituted a trial. Previously, a district court had determined that one of the challenged patents was not invalid based on the same prior art references Apotex presented to the Board. Ultimately, the parties settled before a written decision issued. Ranbaxy has also used IPR proceedings  to its benefit. In 2013, it challenged a patent held by Vertex Pharmaceuticals directed to the HIV drug 

. As with the Apotex cases, the Board instituted a trial that settled prior to issuance of a written decision. Ultimately, the parties settled not only the IPR, but also any potential Hatch-Waxman litigation on the patent. Thus, through strategic use of IPR, Ranbaxy was able to ensure that it would not be sued in district court on the same patent. 

Although settlement is encouraged in IPR proceedings, there is no guarantee that the Board will refrain from issuing a written decision if the parties settle, especially as the proceedings move toward the hearing stage. At least one petition has been filed to ostensibly force a written decision. In August, the Initiative for Responsibility in Drug Pricing LLC (IRDP), which is not a pharmaceutical company, filed a petition challenging a Wyeth patent directed to the antibiotic 

. IRDP's petition mirrors the arguments and relies on the same prior art Apotex submitted in its petition on the same patent. In its petition, IRDP explains that "it is possible that Apotex and [Wyeth] will settle and move to terminate [the IPR] so that no written decision issues for the [challenged patent] in a timely fashion." According to IRDP, "settlements between brand-name and generic pharmaceutical companies ... do not serve the public interest."  

Not all pharmaceutical IPRs settle. Notably, in June, the Board issued written decisions in a series of related IPRs brought by Gnosis S.p.A. challenging patents directed to vitamin supplements held by the South Alabama Medical Science Foundation (SAMSF). The Board determined that several challenged claims were invalid as obvious over a combination of U.S. and foreign patents and references, despite the patent owner's substantial evidence of commercial success—one of the so-called objective indicia of non-obviousness. After considering the evidence, the Board concluded that SAMSF failed to link commercial success to any particular aspect of the claimed invention, as the law requires. SAMSF has appealed the Board's decision to the Federal Circuit. Meanwhile, SAMSF's related district court litigation against Gnosis and other defendants involving the same patents, is stayed.    

Biotech companies have also taken advantage of IPRs. The first biotech IPR decisions were handed down in March when the Board invalidated patents owned by Columbia University directed to technology known as "sequencing by synthesis." During the IPR, which was initiated by Illumina Inc., the Board rejected Columbia's efforts to amend the challenged claims. Although IPR rules allow claim amendments, the rules are strict and strongly favor the petitioner. For example, proposed amendments may only respond to arguments presented in the IPR petition and must narrow the scope of claim. Moreover, the patent owner must demonstrate the patentability of the proposed amendments by explaining how the proposed amendments are novel over both the prior art identified in the IPR, as well as any prior art known by the patent owner.   

Whether as a potential pressure point for settlement or as tool for challenging patent claims, IPRs are proving to be popular options for companies seeking patent certainty, either as a standalone procedure or in conjunction with parallel district court litigation. 

In re Baxter Int'l Inc., 678 F.3d 1357 (Fed. Cir. 2012).

, PhD, is of counsel at Winston & Strawn LLP. He can be reached at 

Inter Partes Review can potentially offer a more economical and streamlined litigation strategy for pharma and biotech players, writes David Dalke.

New Patent-Defense Path for Pharma

New leadership is finally settling in at what is arguably the world's most prominent arbiter of pharmaceuticals pricing and access—the UK's National Institute of Health and Care Excellence (NICE). Professor David Haslam, who began his career in academic medicine as a rural general practitioner (GP) in the National Health Service (NHS), assumed the position of NICE Chair in April 2013, succeeding the outspoken Sir Michael Rawlins, who, it can be said, single-handedly institutionalized the use of health technology assessment (HTA) to drive decisions on the use of drugs in medical practice, not just in the UK but in many other nations as well.   

The last 18 months have put the modest, soft-spoken "physician's physician" under a great deal of public scrutiny. Haslam has managed controversial changes to the Pharmaceutical Price Regulation Scheme (PPRS), implemented in January, and is playing a prominent role in lengthy ongoing consultations with government, industry, and other stakeholders on a new value-based assessment (VBA) tool designed to clarify NICE guidance on NHS reimbursement for new medicines. Last month, Haslam helped vet the first NICE recommendation on an orphan drug, through a new highly specialized technology (HST) process to speed decision-making on access to patients in areas of high unmet medical need. Then there's the constant dull roar of dissent around NICE's approach to the assessment of cancer medicines, a moving target for standard cost-benefit metrics due to the complexity and undocumented promise of the many novel therapies now emerging from industry labs.  

Other notable commitments taken up by Haslam include expansion of NICE's international activities, with new income generated from customized assessments and consultancy advice for other HTA agencies. A project in the Indian state of Kerala on maternal hospital care guidelines, support for HTA capacity building in Vietnam and implementation of clinical practice guidelines in Cyprus are just a few examples of this expanding presence beyond the UK. 

, Haslam acknowledged he is often on the hot seat. "My job is to help the NHS get the best bang for the buck. This holds true for all of us who work here.  We must recognize that every £ we put in to healthcare can only be spent once.  And we want—and should expect—real benefit from that expenditure."   

As a physician, Haslam is direct in stating that his overriding concern is the welfare of every patient affected by NICE decisions. His scope in defining that patient interest is broad, ranging from those who advocate through the media or serve as advisory committee experts to individuals with the condition that NICE is looking at—extending even to those who are silent because their particular condition may not benefit directly from access to a new medicine or device. "One of our key roles is to recognize how other health resources might be affected by the outcome of an individual technology appraisal. What else could that money be spent on? Who is going to miss out?"   

Haslam laughs when asked if NICE will ever be able to escape the regular headlines in the UK press about "denying sick patients access to life-saving drugs." He says it is up to the media to decide to stop using headlines to provoke and emotionalize the debate, while noting that the media often publishes contradictory information simultaneously, which ends up confusing the public. "We often find that NICE is being criticized on the front page while inside the paper there is another story holding the NHS to account for not following NICE guidance," says Haslam. "I used to think you could not have your cake and eat it too, but apparently this works for some members of the press."  

In a more serious tone, he acknowledges the important role of patient advocates who lobby and insist on asking the difficult questions. "There will always be pressure groups that focus on a specific condition and a given drug. They will make a lot of noise, and they are entitled to do that—it's exactly their job. But NICE and I have a responsibility to all those who are 

 making noise. When the strongest voice wins, the silent majority can lose out and so what we have to do is strike a balance between the two." 

Haslam is conscious that Rawlins, who served as the founding chair of NICE for 14 years, from April 1999 to March 2013, is a tough act to follow. He doesn't shy away from the comparison, but points out that "trying to be another Mike Rawlins would just be impossible. He's unique. He's a world authority on many aspects of the issues relating to drugs and the use of drugs.  I'd never ever pretend to fill his shoes. In fact, my job today is different because the organization itself has evolved, which is to be expected."   

Haslam explains that NICE now has a very diverse mandate, which plays to his early strength as a GP, where he was used to treating every condition imaginable. NICE was originally set up in 1999 to tackle "postcode prescribing" of medicines, where there were geographic variations in use of medicines within the NHS. Today, the organization's tasks range from appraising new medicines to drafting clinical guidelines or formulating quality standards in social care.  

Haslam says that when the NICE position came up, it became clear to him that NICE's job is much more than just technology appraisals. "NICE is an organization with an extraordinarily broad charter; we deal with orphan drugs at one end to palliative care in the home setting at the other. That breadth is where I thought my background as a GP generalist could help." Haslam explains that, "As a GP, you just have no idea what is coming next. The next person through the door could press you on any topic of medicine. The skill of being a GP is listening and working with patients to understand their concerns and expectations; what is going on in their lives that are causing problems. That applies to my role as NICE Chair, whether I am meeting government ministers, company executives, patient groups, journalists or anyone else. The first thing I have to do is to understand where they are coming from." 

The biggest challenge Haslam knew he was going to face after starting in April 2013 was developing guidance for patients with multiple morbidities, which he notes covers most of the patient population. "Trying to work out the best way to address quality for individual patients is a tough task," but one he thinks NICE is up for. Tailoring evidence and analysis to the differences seen in real-life patients has been a long standing concern for the medical community, as there is really no such thing as an "average" patient. NICE has some leeway to cope with these differences, not only through extra numbers crunching that it might request from companies to explore how cost effectiveness differs according to patient characteristics, but also by developing "optimized" recommendations. These tend to recommend use for a subgroup of patients deemed most likely to benefit.  Close to one in five of NICE's 532 technology appraisal recommendations completed through July 2014 have taken this "optimized" format.  

that the review of statin drugs raised some unforeseen issues. NICE looking at statins isn't new. Its latest guidance, confirmed in July this year, changed the risk threshold from 20% to 10% for prescribing statins. The adjustment in clinical guidance has resulted in millions more NHS patients being eligible for statin treatment. It earned NICE another wringing in the headlines, this time on grounds of not saying no—the argument is that the NICE recommendation would promote increased access, perhaps too much. An open letter posted in June to Haslam from a group of senior physicians urged NICE to withdraw the guidance. Their concerns included hidden data, industry bias and conflicts of interest. The case has also led to questions as to who can, or should, provide expertise to NICE, especially when the parties are pharmaceutical companies producing the drugs.   

Haslam is sticking by the statin guidance, though he admits it raises some "interesting questions" for the organization. Not least is who would provide expert views on real-world use of these products, at the desired point at or close to launch, if you can't include those involved in the trials that established the basis for product approval? He notes that NICE has updated its conflict of interest policy, with revisions tabled for review by the NICE Board at its September meeting. Not much has been changed: the focus is still on requirements to declare outside financial interests with few automatic exclusions. Expert advisors with the backgrounds that prompted concern in the statin guidance will still be invited to take part as long as they fully disclose their interests. NICE officials affirm that it has the discretion to invite an expert even where there is evidence of a potential conflict in those cases where he or she is the only source of advice available." Still, Haslam insists that NICE's conflict of interest policy will remain stringent and it is a priority for him to ensure it is fully enforced.  

Postcode prescribing: Still on the agenda

Haslam is also candid is admitting that the geographic discrepancies in access exemplified by postcode prescribing remains an issue, 15 years after it became a justification for the creation of his agency. "We're in a lot better place than we were, but there remains an issue of inconsistent implementation of NICE guidance across the system."  

This is something that NICE is tackling through the NICE Implementation Collaborative. "We're working with academics, industry, patient groups and the NHS to figure out together why we haven't got the uptake that we want, and why the NHS can be slow to pick up NICE recommendations." This is occurring despite positive technology appraisals being supported by the legal requirement to fund access to these treatments, so that all patients who qualify get them. Haslam suggests that the Appraisals alone don't carry that legal mandate. "However, I would be uncomfortable if we made them mandatory. I want clinicians to use their wisdom and discretion with their patients along with our guidance."  

He also points out that variation is, to a degree, inherent when the NHS is organized around clinical commissioning groups (CCGs), which hold budgets to prioritize and allocate care for geographically defined populations across England. He also acknowledges that "these are guidelines, not tramlines. They are intended to support clinicians and patients in their decisions which need to take into account issues like multi-morbidity and patient preferences." Generalists are also so busy that Haslam could not expect them to be on top of all of its guidelines. "That's why we are working to make guidelines as easy to find as possible, including tools that can be used during a consultation." But what he absolutely rejects is when specialists avoid applying any guidance in their specific area of expertise. "This won't wash with me. It is inexcusable not to have at least taken on board key messages that experts in the field have decided is optimal for their patients. NICE doesn't produce world-class research and practice-relevant guidelines for them to just sit on the shelf." 

Cancer is the only therapy area to get it's own set of statistics for NICE's technology appraisal recommendations, which are posted for all to see on the NICE website. The cancer statistics updated to July 2014 are slightly at variance to the norm: 57% of recommendations are positive vs 62% for all recommendations (see chart). Of course, it's the "no's" that prove most controversial, and with a rejection rate of 33% of all cancer recommendations, it's a fact that this is more than twice the proportion compared to all other appraisals outside cancer. The numbers exist despite NICE's special consideration of the benefits of new medicines at the end of life, which can secure a "yes" when otherwise it would be "no." NICE's use of end-of- life criteria yielded 14 "yes" decisions on cancer drugs up to July 2014.  

Comparing the total cancer technology appraisal decisions by NICE versus the agency’s total overall decisions during the period from March 2000 to July 31, 2014. Four recommendation categories are illustrated.			

NICE has sharpened the spotlight on cancer drugs by publicly criticizing company pricing for many cancer medicines, stating that the high price tags give it little choice but to reject any positive guidance. For example, NICE recently delivered a negative assessment on the Roche drug 

 even though it agreed the drug had clinical benefits for certain patients. It asked Roche to lower its price for 

Asked if he worries about the impact of the separately budgeted NHS Cancer Drugs Fund (CDF) on NICE, Haslam is careful to separate the political from the practical. The CDF is a ring fenced fund that pays for cancer medicines that either NICE has said no to, or hasn't yet provided an appraisal. It's a small pot, and only in August this year was it expanded from £200 million to £280 million a year. It only covers England, too, which leaves out NHS patients in Scotland and Wales.  

"It's a tricky one. I respect the right of the government and politicians to address access issues that they think are important," says Haslam. "Cancer is an extraordinarily important topic but there are many other areas equally as important. A few months ago, I spoke to a group of patients with motor neuron disease. Someone in the audience, in a wheelchair, with tears running down his face, asked me 'what's so special about cancer?' Now, that's a painfully difficult question to answer. Yet that patient was right to ask it." 

Haslam goes on to say "in the longer term, it will be helpful for the health services to find a way to bring together the NICE process and the CDF process. That's something we can accomplish, but it won't come overnight. There is momentum because the CDF is currently slated to end in March 2016." 

Throughout the conversation at his London office, Haslam references back to the biopharmaceutical industry and the role it plays in making a difference to people's lives. He exhibits not a trace of smugness in claiming that he is wholly supportive of the innovative drug process. "We all need a vibrant, strong life sciences industry. My own brother died in his 30s from leukemia. But these days he wouldn't have died because of the medicines we now have that weren't available then."  

Haslam doesn't share concerns raised by others about the potential negative impact on innovation from using generic comparators. He claims to be simply pragmatic on this score. "We do and will include generic comparators. We need to consider what is in regular use and the data that is available, and if that's a generic then it would be illogical not to use that in an appraisal." The same he says, applies to unlicensed products.    

Haslam is also keen to point out how companies can work with NICE on the evidence needed to support the adoption of innovative medicines. This, he says, is not just about doing the requisite randomized controlled trial (RCT). "There is no tyranny behind our use of the RCT. We want the most appropriate evidence for what we're looking at. Through earlier scientific advice we can help industry develop the evidence that will support NICE making the best possible judgment about a new product. NICE is proactive in trying to involve industry at the very beginning of this process."   

The early scientific advice service covering products at the Phase II stage of development is, Haslam says, "very popular." A quick stat check reveals that 34 companies have taken it up, and 17 of them have done so more than once. Haslam's not sure how many companies actually implement NICE advice: "I'd be intrigued if they didn't." The advice that NICE gives to a company isn't binding, nor is it determinative as to what NICE does itself. It's still early to determine its impact, and industry continues to express concern that NICE is able to change its mind about what it really needs by the time the actual appraisal is underway. The risk involves getting blindsided.  

Halsam admits to being worried when companies choose to eschew submitting a new technology. That's happened 18 times to date. "I see this statistic as a lost opportunity. The NHS looks to us at NICE to provide them with guidance based on the best evidence available."   

Knowing more: The cost and pricing of new medicines

 (eclulizumab) is the first example of NICE looking at an ultra-orphan medicine through its new HST process.  Back in March, as the drug was going through the process, NICE asked for a "clarification" of the high cost of treatment. "High cost" in this case means around £340,000 per patient per year—although some experts dispute this price tag, it appears now to be the highest-priced drug ever. That translates to a cost for the NHS of £58 million in the first year, rising to £82 million after five years. 

Picking up on this general theme, Haslam is pushing for more price transparency from industry. "Setting prices is a black box—actually, it's a form of art. I simply don't understand it. I'm not naïve, I recognize and understand the commercial sensitivities. But if we just understood a bit more about how pricing happens, that would be helpful to our committees." His concern must not be misinterpreted as advocating a role for NICE in pricing. "Setting prices is not for NICE. We come at price tangentially, i.e., we explore effectiveness and cost effectiveness once the price is set by the company. Everyone here is comfortable with that."  

, NICE issued draft guidance in September recommending its use. But it hasn't let go of the pricing and affordability concerns, stating in its decision that NHS England and the company should consider what opportunities might exist to reduce the overall cost of 

Haslam also remains unflappable when asked about his response to recent calls by John Emms, President at the Association of the British Pharmaceutical Industry (ABPI), for a "political reform" of the NICE charter and mandate. To the ABPI, reform starts with moving away from the cost per quality adjusted life year (QALY) that serves as the bedrock of NICE's methodological approach to cost effectiveness.   

Paul Catchpole, value and access director at ABPI, adds to this by suggesting a new mandate may be needed in order for NICE to raise its "yes" rate for new innovative medicines. That has some resonance with the efforts of NICE's northern neighbor, the Scottish Medicines Consortium (SMC). After a major review on access to new medicines in Scotland during 2013, Alex Neil, Cabinet Secretary of State for Health and Wellbeing set out his expectation that changes to the SMC would result in substantially improved access to medicines for patients in Scotland. Observers and the industry see this as a political missive to have SMC say yes more often.  

To that, Haslam just smiles, pointing out that although he'd need to check, he suspects "the same call has been coming in to the NICE postbox every month since the organization got its working papers." 

Features

NICE's David Haslam discusses the UK drug watchdog's new challenge in meeting expectations around what quantitative calculations of value mean to patient access today.

The Gate Keeper: Dr. David Haslam, Chair of NICE, UK

The record-breaking level of dealmaking activity in the pharmaceutical and life sciences (PLS) sector in 2014 is telling us more than that it will be a good year for investment bankers' bonuses. There are profound strategic shifts occurring in the PLS business that will change the transactions field for PLS companies out across the next five to ten years.  

Key among those shifts—there's a changing of the guard. Going back several decades, it used to be that household names in the pharma industry, such as Pfizer, Johnson & Johnson, and the like, dominated PLS transactions. While these players continue to be very active, we're dealing with different companies, many in specialty pharma and biotech, that were small entities ten years ago, but after pursuing mergers and acquisitions (M&A) for growth in the years since, are today major players in the PLS deals space. This includes companies like Valeant, for example. 

Among other shifts, PLS companies increasingly have to navigate fiscal pressures, sweeping regulatory changes, and an industry-wide shift to consumerism in the new health economy. But this new environment shouldn't be seen only as a challenge—it can be an opportunity for companies to take a step back, assess their current business mix and portfolio, and determine if and how they might better deliver on stakeholder value. Perhaps there are gaps in service offerings that they can fill in or underperforming areas that they may want to consider selling off.  If so, M&A, divestitures, and alternative deal structures can all be valuable strategic tools to gain strength in the core businesses and create added value. 

PLS companies seeking merger partners and acquisition targets do so for a number of reasons, including to create business synergies and open up new markets. With the ongoing globalization of the PLS sector, the industry has seen an unprecedented number of cross-border PLS M&A transactions. As companies consider these transactions and determine the business strategy, a number of decisions must be made, including where the combined company should be headquartered for tax purposes. 

As these trends accelerate, and economic conditions and industry trends continue to create opportunities, PLS companies—household names and new faces—are likely to remain active dealmakers at least out to 2020. 

With all this flurry of deal activity, seasoned PLS executives recognize we are operating in a complicated deal environment. More companies are chasing fewer available assets, driving pricing higher according to the age-old law of supply and demand. Amid that increased competition, companies need to be laser focused on identifying those opportunities that are right for them—and being prepared to extract the maximum value from each transaction—either as seller or as a buyer post-acquisition. The good news is that PLS CEOs tend to be ahead of the curve when it comes to their transaction strategies. According to PwC's 17th Annual Global CEO Survey, while global economic recovery remains fragile, immediate economic pressures are easing. CEOs are becoming more optimistic and are gradually shifting from survival mode to a greater emphasis on company growth. Moreover, half of PLS CEOs told us they are actively changing their transaction strategies to uncover new growth opportunities through M&A and other deal structures. They are increasingly confident about their company's prospects and are looking to realign their portfolios in light of evolving industry dynamics to ultimately expand their businesses.  

A look at the market's PLS deal activity can be illuminating. The first half of 2014 has seen the most PLS deal activity in history. There were 84 closed deals in the industry—which includes pharmaceutical, medical device, biotechnology, diagnostics, and services companies—a 44%-increase in activity compared to the same period in 2013. On a value basis, total value of closed deals reached $59.6 billion in the first half of 2014. While the level of deal value is less than the same period in 2013, the volume of deals announced is indicative of the overall heightened level of M&A activity in the industry. Looking more broadly at all announced deals, not just closed deals, there was a dramatic rise in announced transactions in the second quarter with 62  of them representing $167.4 billion in value. The high level of deal value announced primarily stems from two large transactions, including Medtronic's pending acquisition of Covidien, valued at $42.9 billion. Furthermore, the pace of M&A activity seen so far this year is likely to create heightened competition among buyers and may lead to an increased number of hostile takeover attempts due to the relative scarcity of acquisition targets.  

So which PLS sub-sectors are turning to M&A for a boost? The pharmaceutical and medical device sub-sectors saw the most activity in the first half of 2014 with 28 and 29 transactions, respectively. Medical device deal value more than doubled relative to the first half of 2013, from $3.56 billion to $9.74 billion. Excluding Medtronic's pending acquisition of Covidien, the medical devices sector had an additional 10 deals pending that were announced in the second quarter of 2014, comprising a total potential deal value of $17.1 billion. A majority of this additional value arose from Zimmer Holdings Inc.'s interest in Biomet Inc. at $13.4 billion. 

Pharmaceutical companies have seen increasing competition from biotechnology companies in M&A activities. In recent years, there have been a handful of biotechnology companies, including Amgen, Gilead Sciences, and Celgene that have realized significant success from the products they bring to market. As companies in this sector gain considerable strength, they are looking to further extend their role in the industry and M&A is a key component in their strategies. These biotechnology companies, bolstered by product approvals and commercial successes, seek to gain scale and mitigate risk through a more diverse product portfolio. In the first half of 2014, there were 14 announced deals in the biotechnology sector, compared to nine deals in the same period in 2013. By nature, biotech companies are very R&D driven and have a different business model than pharmaceutical companies. With intense competition for biologics, biotech companies have significant pricing power in the M&A market. Biotechs looking to pick up assets to keep their pipelines full have an upper hand in the marketplace because of the synergies they offer to smaller biotechs who want to see their legacy continue with a buyer that has a similar culture to their own. This new competition means that pharmaceutical companies need to be well-positioned with their M&A strategies.     

Deal activity in the diagnostics sector saw a very strong start to 2014 with six acquisitions closing in the first quarter worth $19 billion, including the acquisition of Life Technologies for approximately $15.5 billion by Thermo Fisher Scientific. In the second quarter, one transaction—Carlyle's acquisition of Ortho-Clinical Diagnostics, a global provider of solutions for screening, diagnosing, monitoring and confirming diseases, from Johnson & Johnson—closed valued at about $4 billion. This transaction in particular is an example of the ongoing interest from PE firms and other "financial sponsors" in the market, which when added to the acquisition appetite of existing PLS companies, is driving additional competition for the scarce assets that are coming to market. Overall, in the diagnostics sector, it's worth noting that the seven deals closed in 2014 so far equal the volume of deals in all of 2013 and we expect activity in this sector to continue for the foreseeable future. 

PLS companies today are seeking to continue efforts to gain scale, improve operational efficiency, develop new business models, and adapt to shifting regulatory and economic climates in key markets—all objectives that are presumed to flow from dealmaking. These priorities have prompted several very large transactions while also contributing to mid-size and smaller deals, as companies seek to offer complete product portfolios. One technique being used in the PLS sector by companies looking to realign their areas of focus is the "asset swap"—transactions that allow companies to consolidate in a specific product category or therapeutic area by seeking out assets in that particular space, while also shedding other assets that are no longer aligned with a company's strategic growth plans. Several transactions this year are evidence of this trend. For example, Novartis sold its vaccines business (excluding flu) to GlaxoSmithKline and it has an agreement in place to sell its animal healthcare division to Eli Lilly, and, in turn, acquired the oncology products of GlaxoSmithKline.  

The trend of swapping assets is another significant strategic shift we are observing in the PLS industry and one that is likely to continue as successful transactions breed even more efforts to participate. Companies that have cash on their balance sheets but can't deploy it for one reason or another (i.e., the cash is domiciled abroad) are able instead to use asset swapping transactions as a non-cash way to acquire an asset they need and sell something that's non-core to the business. The industry is taking note of the value created in these deals and companies are looking to be opportunistic with their own assets. It won't take much more activity of this nature to say this is a significant strategic trend for the future.  

Divestiture planning activities have been on the rise for several years and are expected to continue into 2015 as companies continue to evaluate and optimize business portfolios by selling, carving out, or spinning-off non-core assets. In the past several years, the industry has seen many transactions, including Pfizer's sale of its infant nutrition business for $11.9 billion, Pfizer spinning off its animal health business, the separation of Abbott and AbbVie, and Baxter's proposed spin-off of its bioscience business. Management teams are finding that successfully planning and executing a disposal strategy can be far more challenging than they initially expect, especially when it comes to preserving value across the lifecycle of the transaction. Sellers need to understand their capabilities and the value they bring to a transaction. It is critical to plan for all aspects of the process, present financial information tailored to the deal that is prepared thoroughly and position for the exit and execution.  

There are several things PLS companies can do to drive alignment between buyers and sellers, enhance the pace of separation activities, and contribute to a successful divestiture. Sellers need to be agile and informed, enabling them to bring their perspectives to buyers, highlight sources of value, and demonstrate that they thought through the risk associated with the asset and transition. As a result, buyers will engage more effectively with sellers that are prepared, which will likely lead to a more constructive separation process. Ultimately, the alignment of key transaction elements is expected to accelerate the deal timeline and result in enhanced value for both parties. Divestitures can be an extremely efficient way for PLS companies to unlock value. Those that will be successful in extracting the most value from the disposal of non-core assets need to be thinking opportunistically when looking at their portfolio of assets.  

Finding success in alternative   deal structures

The PLS industry constantly faces pressure to develop new products and bring them to market. But at the end of the day, deals need to have a willing buyer and willing seller who can agree on a value for the asset in question—which can be a challenge when dealing with future projections of a PLS product's value. Given the high cost of R&D, as well as market demand, it's not surprising to see that PLS companies are more likely than those other industries to employ a variety of alternative deal structures, including partnerships, strategic alliances and licensing agreements—structures that adjust for uncertainty in the future value of an asset by allowing both parties to participate in the upside of a deal. In contrast to traditional M&A, these types of deals can take any number of forms. Specifically in licensing agreements, companies look for partners to either provide capital or expertise to further the likelihood of a drug getting through development or the regulatory process. Companies like Pfizer, GlaxoSmithKline and AstraZeneca have found success with these types of agreements for years.   

While M&A activity is expected to remain robust, strategic alliances and joint ventures continue to be the primary vehicles for collaboration in the PLS sector as the deal terms can be very attractive. At the same time, these deal structures provide a variety of benefits to buyers as well as sellers. Buyers are able to gain access to a market or product category while mitigating some of the risk associated with the initial investment, while at the same time, managing cash flow. Sellers are able to bring in new capital or realize some liquidity while oftentimes remaining involved in the business and retaining a portion of the upside of the transaction. For example, a biotech company that has advanced a product to a late stage and secured approval in a territory where it does not have resources or the capability to distribute the product, may look for a partner to help distribute the product in that market. By agreeing to a licensing transaction, a pharmaceutical company will take over the distribution of the drug in exchange for upfront payment or royalties upon commercialization. In some cases, the biotech company will remain involved in the development of the product and work collaboratively with the licensing partner. But many times, especially in the biotech industry where capital can be scarce, companies will look to prioritize projects by licensing off some products completely and using the capital to fund others. What companies attempting alternative deal structures need to keep in mind is that it's complicated—unforeseen consequences can drain the value right out of a deal, especially if management doesn't stay focused on its long-term objectives and the value it is trying to create. For example, it can be hard to monitor whether or not a partner is fully complying with the terms of a complex agreement—something that can result in financial losses—and that is especially important when dealing with global and emerging markets. It's critical to have a centralized and consistent approach to the oversight of all aspects of these agreements. Deal success will most likely be realized by PLS companies who carefully evaluate potential deal structures and make sure that the incentives of buyers and sellers are carefully aligned. 

While partnerships, licensing agreements and alliances have traditionally been conducted among PLS players, it's likely that we'll see more alliances between PLS companies and other players in the larger healthcare ecosystem in the next decade. This is one outcome of the emerging New Health Economy—driven by increasing financial power of healthcare consumers, the empowerment that advanced technology is offering to all healthcare participants, and the role that new entrants from outside traditional healthcare—retailers, consumer electronics companies, software giants—are playing in bringing fresh innovation to healthcare. The new range of partnerships will require different financial terms and a new framework for how to measure and extract value. And it will be important to keep in mind the lessons that PLS learned several decades ago when pharmaceutical companies were buying up pharmacy benefit management (PBM) companies, only to find those deals fall apart because the PBM model required access to a broader product stream than could be provided by an exclusive alliance with a single pharma company.  

Funding opportunities in the capital markets

PLS companies, particularly in the biotechnology and biopharmaceutical sectors, are also looking to the capital markets to fund growth opportunities. PLS companies dominated the IPO market in the first half of the year with 59 offerings, more than double the number in the first half of 2013. Kite Pharma, Versatis, and Avalanche Biotechnologies were among the big biotech IPOs in the first half of 2014. However, these IPOs typically have raised smaller levels of investment due to the developmental stage of many biotechnology and biopharmaceutical companies—for example, in the second quarter, proceeds from PLS offerings only totaled $2.1 billion, or nearly 16% of total IPO proceeds for the quarter. 

Regardless of the size, properly preparing to be a public company is critical to a company's future. An IPO is a transformational event requiring many different parts of the business to work together towards a common goal. It goes without saying that this process requires intense, long-term planning and execution in order to successfully transition into a public entity. What is sometimes overlooked in the heady euphoria of IPO preparation is that as areas of the company collaborate to get ready for a listing, management can easily be distracted from operational execution. Failing to stay focused on strong business fundamentals can undermine chances for a successful IPO.  

Meanwhile, it's important to note that while the IPO market momentum in the PLS sector is expected to continue through the rest of 2014, it's likely to be a bit more subdued as a result of the IPO window not being nearly as open as it was last year. Companies that need a liquidity strategy may also want to consider alternative financing avenues, including M&A, licensing and other partnership avenues, to backstop against the time when the IPO window does close.  If we don't see the same eye-popping IPO returns as companies were seeing a year ago, companies that still need liquidity will have to go the M&A route to achieve that objective.  

Companies in the PLS industry also continue to explore opportunities to expand into new geographic regions, buoyed by increased confidence in overseas markets, especially in Europe. In the first half of 2014, several announced cross-border transactions involved decisions to domicile outside of the US.  PLS companies are likely to continue to look internationally for new market opportunities while remaining mindful of issues that can derail cross-border transactions such as currency volatility, tax effects, and different regulatory environments. 

The most basic reason for this is that our world and the world economy have changed and PLS companies must adapt to a new reality. In the past, it was possible for a PLS company to be successful based on business success in a single market.  That is no longer the case.   

This trend of globalization in the PLS industry is expected to continue both on an inbound and outbound basis. US companies looking to expand abroad will need infrastructure outside of the US and are finding it more cost effective to buy that infrastructure rather than building it from scratch. And overseas companies recognize the need to have a presence in the US to succeed on a global basis, which will likely drive additional inbound activity in the future.   

Several emerging markets are presenting significant opportunities for PLS companies, including China, India, and Brazil. Establishing or expanding a presence in the Chinese market remains a priority for many PLS companies. In the first half of 2014, nine deals involved targets in China, with a total value of more than $900 million. China's economy remains the fastest growing of the world's large economies; favorable trends in demographics and public policy are creating tremendous opportunities in the region for PLS companies. At the same time, the rules to succeed in China's new economy are changing: companies that are able to adapt may be well-positioned to realize the benefits of participating in this important market.   

India's healthcare market also has enormous potential, with an established domestic PLS industry, and PLS companies are ramping up their investments in the country accordingly. However, the market in India is facing significant regulatory changes that are having a direct impact on how clinical trials are conducted and how products are priced in the marketplace. Looking to the future, demographic and economic trends suggest that the country is among those most poised for growth in the industry throughout the next decade and beyond.  

Brazil also offers high growth potential for companies that successfully penetrate this complex market. Projected to be the world's fifth-largest economy within the next decade, the country boasts political and economic stability and strong legislation to protect investors. At the same time, complex tax and labor regulations, compliance risks with corruption and anti-bribery laws, and post-integration issues mean that dealmaking in this resource-rich country presents significant challenges.  But overall, the significant changes that Brazil's multifaceted healthcare sector has undergone allow for a more promising area for investment. 

As we look over the PLS landscape, we believe transactions in all their varieties will continue to fuel value creation in the sector. Fundamentally, PLS is oriented toward dealmaking—and the increasingly intense competition for attractive assets will continue to be a key factor driving the robust M&A market. The household names who have been big acquirers in the past decade will likely continue to look for targets, but there is also a whole group of new up and comers, especially in the biotech and specialty pharma space, who have caught the M&A bug. And have used it to fuel their own rise to prominence on the global stage.  

For companies looking to grow, both traditional M&A as well as alternative deal structures, can serve to accomplish several operational imperatives. Companies can supplement their R&D pipeline, diversify into new markets and products, and share risk. Economic conditions and industry trends and objectives together are driving opportunities for PLS companies to chart new courses for growth and find opportunities for successful transactions.  All this can be achieved if companies considering deals maintain focus on how they expect to monetize those assets and stay disciplined in their approach to negotiations.  

With product lifecycles shrinking and a new normal of pressure to consistently replenish pipelines, companies are finding M&A to be very instrumental in their growth strategies. And smaller companies are embarking on a significant M&A path earlier in their lifecycle than in the past. All these factors are pointing to a strong outlook for M&A activity as the PLS industry reshapes itself across the coming decade.  

is Partner and Global Pharmaceutical & Life Sciences Leader, PwC. He can be reached at 

. Dimitri Drone, PwC Partner and Deals Pharmaceutical & Life Sciences Leader, and James Woods, a Director in PwC's Deals practice, contributed to this article. 

All M&A data and figures are sourced from Thomson Reuters. 

Amid the continued surge in M&A activity, Michael Swanick asks, what are the crucial considerations pharma executives should weigh before sitting down at the deals table?

Pharmaceutical Executive-10-01-2014