Pharmas Breaking Out of the Box; Five Ways to Innovate

Last week I chastised the New York Times for dispensing five-year old news about the pharmaceutical industry's fundamental problems. Even worse, the Times then followed its warmed-over gruel by giving credence to some fantasy solutions that industry executives use for placating investors. My purpose last week and now is not to paint an insolubly dismal picture of pharma but, instead, to argue that the industry does not lend itself to easy analysis or perspectives derived from most other sectors.

This week I want to mention five promising approaches that pharmas of disparate size are taking to develop a more effective business model.

1. Allergan -- make money from lifestyle products and then repurpose them

Allergan has long maintained prosperous business units in dermatology and vision care. While the latter business includes prescription ophthalmic products, it generates far larger profit margins from the contact lens "after-market," specifically, variations of saline solution and liquid soap. But for several years now, the Godzilla of Orange County has been Botox, the derivative of botulism poison that millions of women receive at doctors' offices and at hen parties. The company also caters to suffer-for-beauty vanity with its Latisse, an application to produce thicker eyelashes.

More recently Allergan has used its lucrative returns to repurpose some of its products for more serious medical needs. So, for example, it gained FDA approval for Botox to reduce the frequency of migraine headaches. The company is currently studying the product to relieve serious, chronic pain.

In other areas Allergan has worked through cosmetic benefits to arrive at devices with potentially important medical applications. For one of these, they developed a type of balloon that physicians can insert down the mouth and into the stomach, thereby curbing overeating without the need for a surgical procedure.

2. Novo Nordisk, Gilead and Vertex -- make money by sticking to a core competence

The Danish company Novo Nordisk, from its inception, was a prominent developer and marketer of insulin products. For many years this gained them a steady, albeit unspectacular revenue base. Then as the diabetic population in the world's advanced countries started to reach epidemic levels, Novo decided to develop a comprehensive package of products to redefine and treat diabetes. So for example, since insulin tends to promote weight gain, Novo developed an analog of another naturally occurring hormone that lowers blood sugar even as it confers weight loss. Since obesity is a major contributing factor to the onset and progression of Type 2 diabetes, Novo has promoted a redefinition of the disease by suggesting that weight control is as important to diabetes management as glucose control. As a result of the competence Novo has developed after decades of work in diabetes, the company's stock rose by 83% last year from an earlier low.

Gilead and Vertex are two of the world's leading virology companies. Their current and pipeline products for diseases such as HIV and hepatitis C command premium prices and the respect of physicians that treat infected patients. Except for a couple of small forays into other product areas, these companies have disdained Big Pharma's cover-the-waterfront approach to development, as well as the bloated sales forces that other companies have been busily trimming over the past two years.

3. Valeant -- forget doing research, just buy other companies that have done research

Valeant started its life as ICN Pharmaceuticals, a company founded in 1959 by Milan Panic who had the distinction of losing the Serbian presidency to Slobodan Milosevic. After the board pressured Panic to resign and then changed the company's name, they initiated an unconventional approach for a biopharmaceutical company by essentially discontinuing their research effort. That's not to say they dismissed the value of original research, rather they found it more efficient to buy other companies that were able to demonstrate their own capacity for it. Toward that end Valeant sought to diversify from a narrow product line by buying Cordia to enter the dermatology field, Aton (in Princeton) to get into ophthalmology and Biovail to enter the neurology and generics lines. As Big Pharmas try to lower their annual expenses by cutting their R&D lifeblood, Valeant has leaped past them to become a financial entity with diversified pharmaceutical holdings.

4. Genzyme -- develop products for rare diseases, charge an arm and a leg for them

Genzyme, which was recently acquired by Sanofi-Aventis for $20 billion, is the premier exponent of the orphan disease strategy. They developed Cerezyme for Gaucher's disease and Fabryzyme for Fabry's syndrome, conditions that affect only a few thousand people. Genzyme's products effectively extend life for people so afflicted, but it charges each of them $200,000 per year for the privilege. Of course, these patients don't have to pay the entire $200K if they're insured, just 20% of it. Still, that means those who can pony up $40,000 a year will live. Now Genzyme has made deals with many of these patients to discount that $40K tab, while remaining content to take the $160K from insurers. As long as only a few thousand people a year come down with conditions that require these mondo-expensive meds, the insurers won't raise everyone else's premiums through the roof. The only problem is that Big Pharma now wants to expand this strategy of charging $50K to $200K per patient per year for as many new products as it can. That violates the old axiom that what's good in small doses can be poison in larger concentrations.

5. Pfizer -- cut yourself in half

Pfizer exemplified the mega-company, blockbuster approach that Big Pharma started over 20 years and brought the industry to its current, precarious state. A major consequence of several dovetailing trends in the US and elsewhere (a trough of scientific innovation, price resistance by payors, the consolidation of practices) is that pharmas will have to learn to be profitable from small, niche products. After a score of shortsighted mergers that reduced the depth of R&D, the louts in the C-suites know they can't use small products to manage quarterly net income and earnings growth for companies capitalized at $160 billion.

I never thought that any of the small-bore Tony Sopranos who run the industry would make the rational choice to divest major portions of their companies to lower their equity base and fixed overhead. The obstacle to that course of action is the fact that the principal focus of C-suite denizens consists of their personal compensation, not the profit of shareholders or the well being of patients and their employees. Since CEOs don't get paid more for managing smaller companies, it appeared that the prospect for major divestments was nil. Then just this week the new CEO at Pfizer, Ian Read, showed my skepticism was misplaced. He suggested that Pfizer might jettison 40% of its operations. It bears watching to see how the story plays out, but given that pharma is a remarkably follow-the-leader industry, Read's initiative may just open the floodgates.

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