Five years ago when considering potential changes to pharmaceutical R&D, I speculated on a number of trends which may become increasingly important.
These include organisational changes to focus on operational excellence in areas of core competency such as late stage clinical development, complemented by nimble internal R&D units focused in specific therapeutic areas.
A change in pharma was under way, shifting from a ‘blockbuster’ model based on ‘shots on goal’ to a model focused on targeted innovation and speed to clinical proof of concept.
I speculated that there would be an increased focus on genetic diseases and segmentation of patients, and that there would be increased opportunities for creative external partnerships to enhance pipeline productivity. Five years on, some of these changes have become or are becoming a reality. However, the pharma ‘ecosystem’ is now undergoing considerable change, and R&D in different segments of pharma is being forced to adapt by focusing in areas where their organisations may add unique value.
The pharma ecosystem comprises a number of key players, including Contract Research Organisations (CROs), venture capitalists, specialist technology companies, research institutions, ‘virtual’ biotechs, regulatory agencies and payers. New players are also starting to enter this ecosystem, including information providers focused on e-health, social networkers exploring the identification and monitoring of patients, and technologists focused on novel ways of assessing biological functions at a distance – either as diagnostic tools or for clinical trial monitoring.
Until recently, many pharma R&D organisations directly controlled many activities across R&D, and in multiple therapeutic areas. However, budget pressures driven by decreased R&D productivity resulted in many companies ramping up the outsourcing of specific R&D processes.
This resulted in CROs significantly expanding their capabilities and learning from corporate partners such that numerous activities that were once performed within the walls of pharma are now routinely outsourced and offshored, including medicinal chemistry, animal models, toxicology, pharmacokinetics, clinical operations, process development and manufacturing. Some CROs have established multiple capabilities, thereby providing ‘one-stop’ shopping for programmes for preferred pharma partners. As CROs have core capabilities in costsavings, outsourcing provides opportunities to decrease expensive internal overhead costs for pharma, in addition to generating budget flexibility to respond more rapidly to changes in focus or to adjust R&D budgets without disruptive changes to internal organisational footprints.
These changes are also driving a shift in talent in the ecosystem, with many experienced pharma R&D executives transitioning to CROs. Moving forward, some CROs may establish their own pipelines or transition to more creative funding models based on speed and commercial success of programmes they support. These CROs have also now become a vital support system for smaller or virtual companies focused on the early stages of R&D, thereby further affecting the ecosystem.
In preclinical and early clinical development the ecosystem is increasingly dynamic, with multiple players offering opportunities for a wide range of creative business partnerships focused on access to innovation. In addition to partnerships with technology companies and early stage biotechs, there is the start of expansion in the number of ‘virtual’ biotech companies. These companies typically comprise a handful of venture-backed entrepreneurs who prosecute an idea utilising academic labs and CROs, often to specific value inflection points such as IND or clinical proof of concept.
Frequently their aim is to be acquired by a larger company – although the IPO market has reignited in recent years, providing an opportunity for nascent biotechs to become established in the absence of an acquirer. There is also a trend for technology companies to establish part of their structure as umbrella organisations, under which are established a series of separate LLCs as virtual biotechs focused on specific projects sponsored by pharma R&D partners. These ‘build to buy’ models are proving successful, and are likely to expand in the future. Research and academic institutions, teaching hospitals and charitable patient associations increasingly have a business focus due to challenges in other forms of funding, and they are providing opportunities for synergistic strategic partnerships to strengthen R&D pipelines, with both parties financially benefitting from success.
With these changes in the ecosystem, aspects of both scale and early stage innovation are increasingly being performed outs ide of the walls of pharma R&D. What five years ago may have been considered a core competence of pharma R&D is becoming commoditised. At an extreme of commodity-thinking, we have recently seen the emergence of a segment of pharma companies who have adopted a model of acquiring mid-size pharma companies with commercial or late-stage assets, maximisation of the external management of acquired assets, a focus on driving deep cost synergies and dramatically decreasing R&D capabilities.
These companies will continue to be serial acquirers of progressively larger companies in the future. It will be interesting as to how far this disruptive approach to pharma can expand, as there needs to be balance in the ecosystem to support the generation of new high quality assets.
More generally, pharma will adapt to the new ecosystem by decreasing the size of their internal R&D engine, focusing on very specific therapeutic areas and managing a smaller core of internal research programmes focused around areas of therapeutic domain expertise. The core competencies and competitive advantage of such R&D organisations will be the ability to manage and co-ordinate the activities of a wide range of external partnerships – requiring a different skill set from traditional R&D organisations. In addition, to be successful this same smaller core will need to excel at partnering with business development experts to rapidly identify, assess and integrate external licensing and M&A opportunities in their areas of domain expertise.
Effective risk-management will be key to success; speed and quality of decisionmaking will be essential, addressing the specific risks associated with innovative programmes and stopping projects when key issues cannot be rapidly addressed. Indeed, the most rapidly-growing biotech companies are now starting to be differentiated by their ability in calculated risk-taking on external assets, with some of the investment decisions being very surprising to the external community. The crisp focus of these organisations in specific therapeutic areas provided the ability to recognise opportunities which others missed.
In addition to the risk associated with prosecuting highly innovative new drug targets, there will be a need for these to be complemented by creative lifecycle programmes where the therapeutic utility of derisked clinical or commercial assets will be assessed in new indications, or utilising novel delivery technologies to address the specific needs of patients. As pharma companies continue to grow in this model, rather than developing into more traditional large pharma organisations with larger R&D organisations which increase their breadth, it is likely that companies will increasingly swap assets with traditional competitors or split into smaller organisations in order to maintain therapeutic focus. In this case, growth will be driven in part by commercial expansion into new geographies with increased ability for reimbursement.
A third segment of pharma R&D, generally supporting larger companies, will continue to grow in areas where they can apply their scale to sectors which may expand as a consequence of, or despite, downward pressure on healthcare costs. Such areas may include generics, biosimilars, products where consumers may be prepared to make considerable out-of-pocket payments, or partnerships with healthcare providers. Such companies will become increasingly less attractive as a career choice for innovative R&D talent.
In addition to R&D in the ecosystem going through rapid change, additional stakeholders such as patient associations, regulators and payers are also changing their focus, and this will inevitably create challenges and opportunities. For example, regulators recognise the need to more effectively support the rapid approval of high quality therapeutics and have recently established ‘breakthrough therapy’ designation, accelerated approval based on biomarkers and they are starting to increasingly engage patients in benefit-risk assessments.
In the near future the implications of these changes will become clearer, and R&D organisations who respond to these opportunities (eg selection of programmes to achieve breakthrough, capabilities to clinically validate biomarkers) will drive considerable competitive advantage. Furthermore, with healthcare cost concerns continuing to increase, early engagement with payors is becoming essential and it will be equally important to incorporate endpoints into clinical trials which will not be required for regulatory approval but provide insights relevant to health economics considerations.
Innovative products which address unmet medical need will continue to be the growth driver in pharma R&D, and this will lead to further focus on patient segmentation within larger populations, in much the way cancer treatments are now much more targeted than they have been in the past. In addition, creative R&D organisations will be able to apply cutting edge technologies (eg social networking, e-health, novel diagnostics and drug delivery devices, technologies to remotely monitor biological functions), through novel partnerships. A focus on rare diseases will also be aligned with the trend for focus on discrete patients segments – either to realise value in their own right with approaches that specifically target a genetic defect, or with less targeted approaches that may modify an underlying biology and can be used to bridge from rare diseases to larger patient segments.
There are unique challenges with R&D in rare diseases, and companies focused in this space will be well placed to exploit their capabilities and experience, at a time when there will inevitably be an increase in our knowledge of the genetic basis for disease and how this is manifested clinically in different patient populations. We are at a time of exciting change in the pharma ecosystem, coupled with major technological advancements. R&D organisations which carefully consider the challenges and opportunities that are provided will flourish as engines of growth, in addition to having a powerful impact on the lives of patients.