• Strong fundamentals cited in the report include
  • robust cash positions
  • strengthening balance sheets
  • improved credit markets

Dealmaking fundamentals

• Fortune 1000 Companies continue to hold a tremendous amount of cash on their balance sheets and have over $2 trillion in cash.²

• Access to credit has also steadily improved since 2009.

• Buyer-seller expectation gaps are narrowing and valuations are stabilizing.

• Fifty-five percent of US companies expect asset prices to remain at current levels over the next six months.

• 36% of US companies say they will pull the trigger on an acquisition in the next year, according to the Ernst & Young survey.³

Private equity’s split personality in 2011

Private equity (PE)  increased momentum through the first part of 2011 evidenced by bigger deals and larger exits, including two record breaking IPOs.

However, halfway through 2011 activity slowed down impacted by the sovereign debt crisis, deficit reduction impasse and a growing concern about a slowing economy.

For the year, PE activity decreased 19% in value to $138.1 billion, while the number of deals remained flat, declining only 1%, at 914 deals.⁴

Focus on divestitures

In the US the number of divestitures increased 3% to 2,453 and experienced a 12% increase in deal value.⁵

According to the October Ernst & Young survey, divestiture activity is likely to increase with 30% of US companies expecting to execute a divestiture in the next 12 months. ⁶

Key sectors

With the total number of US deals remaining flat, power & utilities and healthcare stood out and saw double digit growth year over year in deal volume. Along with technology, activity in these sectors is expected to increase in 2012.

Healthcare 

Healthcare activity in the US increased 11% to 565 deals year to date and the value of healthcare deals skyrocketed 159% to $113.8 billion.⁷

This was mostly driven by a handful of large deals as healthcare services companies and payers looked to achieve scale and, in some cases, drive sector convergence in the wake of healthcare reform legislation passed in 2009.

Technology

In 2011, deal activity in the technology sector was relatively flat in the US compared with 2010, with a slight decrease in both the number of deals and value to $79.4 billion.⁸

Globally, the number of tech M&A deals saw an uptick of 5% and deal value significantly increased by 18% to $152.4 billion.⁹

Brazil and China

China is the number one country in the world where companies are looking to invest or execute deals in the next year.¹⁰

With plenty of financing and capital available, M&A was strong in China with $119 billion in deal value and 2,493 deals announced in 2011 so far this year, up nearly 9%.¹¹

China itself is also looking overseas, with over $22.3 billion in outbound deal value announced so far this year, representing an 8% increase over the prior year.¹²

Although opportunities are abound in China, this Reuters article provides insights into the challenging American business experience in China over the past 10 years since China joined the WTO.

U.S. companies have demonstrated significantly more interest in Brazil; with the number of U.S. inbound deals in 2011 up 15% over the previous year.¹³

The total number of deals in Brazil increased 22% to 578 deals in 2011.¹⁴

Brazil has been minimally affected by the global economic crisis; in fact, the country has benefited from the slower growth in more matured economies.

According to the International Monetary Fund, Brazil is expected to overtake the United Kingdom as the sixth largest global economy in terms of GDP by the end of this year and is expected to break into the top five by 2020.¹⁵

 Conclusion

“In the immediate term, it is hard to predict M&A activity as we see drastic market swings, but we know for certain that the eagerness for M&A is there and we expect to see dealmaking pick-up in the first quarter of 2012. In the US, companies with strong balance sheets and plenty of cash on hand are well-positioned to finance and execute strategic transactions and grow in 2012,” says Rich Jeanneret, Americas Vice-Chair, Transaction Advisory Services at Ernst & Young LLP.

Regards,

The Bourne Partners Team

¹ Thomson Financial as of 11/30/2011

² 2011 Fortune 1000 as of November 15, 2011

³ Ernst & Young’s Global Capital Confidence Barometer, October 2011

⁴ Dealogic as of November 30, 2011

⁵ Thomson Financial as of 11/30/2011

⁶ Ernst & Young’s Global Capital Confidence Barometer, October 2011

⁷ Thomson Financial as of 11/30/2011

⁸ Thomson Financial as of 11/30/2011

⁹ Thomson Financial as of 11/30/2011

¹⁰ Ernst & Young’s Global Capital Confidence Barometer, October 2011

¹¹ Thomson Financial as of 11/30/2011

¹² Thomson Financial as of 11/30/2011

¹³ Thomson Financial as of 11/30/2011

¹⁴ Thomson Financial as of 11/30/2011

¹⁵ International Monetary Fund World Economic Outlook, September 2011

To shed light on the R&D productivity problem, 450 new drugs approved by the FDA between 1996 and 2010 were evaluated by Oliver Wyman according to the following criteria:

1. The number of new drugs approved by the FDA each year.
2. The value of the new drugs launched each year (based on the revenue generated by the original NME in the fifth year after launch, in constant dollars).
3. The total amount invested in R&D each year, again in constant dollars.

Data from the report

• Based on the return of productivity metric, the study divides the fifteen-year period into an ‘era of abundance’ from 1996 to 2004 and an ‘era of scarcity’ from 2005 to 2010, divided by the September 2004 withdrawal of Merck’s Vioxx.

• Even with recent reductions, R&D expenditures almost doubled over the study period, from an average of $65 billion per year in the good times to $125 billion per year. However, “those dollars produced significantly less” and in the era of abundance with drug companies making an average of $275 million in fifth-year sales for every $1 billion they spent on R&D. In the era of scarcity, that figure fell dramatically to $75 million.

• The development drought also led to a declining economic value of approved drugs, to an average $430 million from $515 million.

• Drug approval itself plunged about 40% in the dry years, amounting to 22 FDA approvals per year on average, versus 36 in the better years.

• Drugs produced an average of $9.4 billion in fifth-year sales in the dry period, half of the $18.3 billion during the more productive years. Fewer blockbusters and fewer new drugs overall contributed.

• In all, 17 of the 20 companies faced productivity declines, though Novo Nordisk, Bristol-Myers Squibb and Johnson & Johnson did better than most, the report notes. Dips in high levels of productivity hit everyone, however.

Possible explanations for the drop in return

A Forbes article last week explored this drop in productivity in light of Lipitor’s patent expiration – and, specifically, the lack of new blockbuster drugs in the wake of Lipitor’s huge success.

There may never be another medicine like it [Lipitor]. That’s because of fundamental shifts in our understanding of biology, because of the demands made by patients, doctors, and society on new drugs, and because new drugs now have to compete with the super-cheap, generic versions of every medicine ever invented. Already, eight of ten prescriptions are for generics, and the drug industry is focusing on higher priced, specialty products for patients who are not helped by existing options. Good luck creating a new cholesterol drug as potent, safe for most people, and widely tested as Lipitor.

The Forbes article touches on some of the same reasons discussed in the Oliver Wyman report for the poor return on R&D investment, namely it’s become tougher to find new drugs, and pharmacoeconomic pressure is changing the way drugs are prescribed.  Not mentioned in the Forbes article, but perhaps equally compelling to this discussion, are the effects of an increasingly stringent and inconsistent regulatory environment, and the shift from antiquated, brute-force marketing methods within the pharmaceutical industry to an emphasis on focused marketing in select, specialized areas, each of which will be discussed in more detail below.

The standard of care in many disease categories is high and rising

After decades of abundant discovery, many disease categories are well supplied with safe and effective therapies—once-daily pills that control symptoms or modify disease progression. And many are cheap: in the U.S. overall penetration by generic drugs reached 78 percent of prescription volume last year, up from 63 percent in 2006.  Increasingly, physicians and payers alike see less value in drugs with incremental benefits.

Tougher to find new drugs

Many within the industry acknowledge that the easiest biological pathways are now well understood, and the mechanisms for manipulating these pathways are targeted by some of the drug blockbusters referenced above.  Lipitor, a statin, is an excellent example.  Statins lower cholesterol levels by inhibiting the enzyme HMG-CoA reductase, which plays a central role in the production of cholesterol in the liver. Cholesterol levels are highly correlated with cardiovascular diseases – and a mechanism (statins) to control said levels.  On the other hand, diseases such as schizophrenia and Alzheimer’s disease are difficult to clinically classify and even more difficult to understand from a pharmacological perspective.  Yet these diseases and many others represent huge markets, but will require equally huge R&D investments to yield useful drugs.

Tougher regulatory environment

Lipitor was introduced prior to the big drug safety scandals that changed the industry.  After Vioxx’s link to heart attacks and worries that antidepressants like Paxil and Zoloft might increase the risk of suicide in some patients, the medical community, especially regulators, changed the way they evaluated new drugs.  Not surprisingly, the regulatory environment has become more stringent.  While becoming more stringent, many within the pharma industry (and those that invest in the industry) also complain that the FDA lacks consistency – both in terms of policy and timing, thereby leaving the industry with an even more difficult path to the market.

As expected with the tougher regulatory environment, the average number of NME approvals per year during the era of abundance (36 NMEs) is higher than during the era of scarcity (22 NMEs). (See Exhibit 1 of the Oliver Wyman report).  It’s also interesting to look at the number of NME applications filed to better understand the FDA approval rate during this period, and it’s effect on pharma R&D output (application submissions).  As the graph below clearly shows, less applications are being submitted to the FDA during the study period.

Source: FDA

Also, the nature of clinical trials has changed.  It used to be new drugs were introduced, and later approved, for a general indication (e.g., cardiovascular disease risk) that was prescribed to a large patient population by general practitioners.  Now, drug makers are being forced to design clinical trials to better identify those segments of the population that are likely to respond to the drug.  As a result, fewer drugs are being more highly scrutinized for smaller segments of the population.  This may be good science, but it cuts against pharma’s bottom line.

Pharmacoeconomic considerations

Rapidly rising healthcare costs are now a political and economic challenge in every mature economy. Payers are scrutinizing every category of expenditure, including drug spend, and they have become increasingly aggressive about using their purchasing power to push back on prices.

Also, many doctors are now wary of treating everybody with the same pill for years in order to get a small benefit for the average patient.  There is a push to better understand which patients are helped most by a particular drug (for example, through pharmacogenomic studies), and to utilize electronic health records to track how well medicines are working in the real world. The one-size-for-all system is being rejected, and it’s being felt at pharmaceutical companies.

New emphasis on specialized marketing

Previously, when a new drug made it to market, pharma companies would invest heavily in marketing it, while also leveraging its existing primary care infrastructure. All of the major drug makers operated in the same major disease areas, and competitive differentiation focused on power in sales and marketing.  But the new pharma environment, namely cheaper generics, more aggressive payers, more stringent regulatory standards and denser, tougher, rarer science—have upped the competitive requirements. Now big pharma is realizing that they can’t compete effectively in every therapeutic category, so they must specialize – whether it’s during the R&D phase and/or during commercialization.

Going forward

Regardless of the cause or the metric used to measure it, almost everyone agrees there has been a drop in productivity among pharma companies.  Still, as the report points out, pharma companies’ net income is a healthy 20 to 30 percent and the industry has maintained six percent annual growth over the past five years in the face of global economic headwinds.  In order to maintain these levels or improve upon them, the report recommends pharma companies:

•    Raise the bar on product innovation

•    Do more to solve the payer’s problem

•    Treat drugs not as predictable or abundant, but as rare

•    Make concrete moves toward differentiation and focus

Many of these recommendations have been suggested before, but the report digs down and focuses on addressing the needs of patients and identifying those who truly benefit from a particular drugs.  While the biology has gotten tougher, technology continues to advance in such a way that responders can be better identified thereby appeasing both the medical community and the payers. However, a lot of these changes come at the expense of pharma companies that will face smaller, specialized markets as they wean themselves off the fat days of widely prescribed drugs with marginal effects that resulted in large margins and high growth.

Regards,

The Bourne Partners Team

Pfizer’s patent on the cholesterol-lowering medication Lipitor expired on Wednesday, opening the door to generic competitors in the US.

Lipitor came on the market in 1997, and has yielded nearly $100 billion for Pfizer, which according to CNBC represents about a quarter of Pfizer’s total revenue over the past decade.

When a drug’s patent expires, the first generic company to file is usually granted a six-month period of exclusivity to offer the generic version of the drug. Following the initial six-month exclusivity period, additional generics companies are allowed to also offer the drug and the market quickly becomes commoditized.  Typically, the exclusivity period results in prices 25% below the original brand price, followed by continued price erosion to as much as 80% or more as multiple generics enter the market.  In the past, upon patent expiration, the original drug maker would often raise the price of the brand to offset some of the volume decline and usually shift commercial focus to its newer products.  Ultimately the brand would retain less than 10 percent of the market share by volume (usually 3-5% after a few years).

However, Pfizer – in an effort to preserve the value of the Lipitor brand – has implemented a new, aggressive post-patent strategy to maintain as much of the Lipitor market as possible. Pfizer claims more than one-third of its Lipitor patients prefer to stay on Lipitor.

Pfizer’s strategy includes:

—Offering insured patients a discount card to get Lipitor for $4 a month, far below the $25 average copayment for a preferred brand-name drug and below the $10 average copay for a generic drug. Pfizer is promoting this heavily through ads, direct marketing to patients and its http://www.LipitorForYou.com site.

—Paying pharmacies to mail Lipitor patients offers for the $4 copay card and to counsel patients that Lipitor lowers bad cholesterol more than rival drugs.

—Keeping U.S. marketing spending nearly level through the patent expiration date.

— Negotiating never-before-seen exclusive deals with some insurance plans (e.g., Coventry Health Care), pharmacies and prescription benefit managers (e.g., Medco Health Solutions, Catalyst Rx, CVS/Caremark and Express Scripts) to exclusively offer Lipitor at heavily discounted prices to block pharmacists and mail-order services from dispensing generic Lipitor.

In a memo from CVS/Caremark, a pharmacy benefit management company, and dated Monday, pharmacies were notified that the generic form of Lipitor, called atorvastatin, would not be covered for 29 prescription drug plans it managed for Medicare Part D. Instead, any prescription claims for generic atorvastatin will be rejected with a notice saying: “Brand Lipitor will pay at generic co-pay.”

Watson launches generic

US-based Watson Pharmaceuticals immediately announced its launch of an “authorized generic” version of Lipitor, atorvastatin calcium, under an exclusive supply and distribution agreement with Pfizer, whereby Pfizer manufactures the drug and Watson sells it with its brand name, sharing net sales with Pfizer until 2016.

Watson CEO Paul Bisaro said he had thought Pfizer would retain about 25% of Lipitor users for the next six months, but he now believes that number to be 40% to 45%.”

“This is sort of the new generation of brand protection,” he added.

Here is an interview with Watson CEO, Paul Bisaro, discussing Pfizer’s new strategy Lipitor strategy.

Meanwhile generics company Ranbaxy continues to have problems

Ranbaxy, India’s largest drug maker, is the other company entitled to sell generic Lipitor during the six-month, post-patent exclusivity period. However, an actual launch depends on whether FDA regulators lift a ban that has kept Ranbaxy from exporting some products to the United States following quality control lapses at the firm’s Indian factories.  According to estimates from Mumbai-based analysts surveyed by Bloomberg, Ranbaxy is estimated to generate as much as $650 million from generic Lipitor sales.  However, that number is likely to be modified if Ranbaxy is limited to sales outside the United Sates.

Patients seem to benefit from Pfizer’s new strategy

 Patients stand to benefit from a program that offers the branded drug at the same lower price or lower than its generic version.  While generic medicines are supposed to work the same as brand drugs for nearly everyone, some patients prefer the brand, especially if costs are comparable.  Thus far, Pfizer’s new strategy seems to be popular among Lipitor users, saying sign-ups for its $4 discount card have exceeded its goals.

Pfizer after Lipitor

 As companies compete for market share of the cheaper generic version of Lipitor, Pfizer is left hunting for new sources of revenue to replace the cash flow from its blockbuster.  However, it is well documented that pharmaceutical companies have been struggling to come up with new blockbusters, as discussed in this Forbes article.

Pfizer has not released its projected losses due to the patent expiration, but its company forecasts call for sales in 2012 of $63-63.5 billion, versus $67.8 billion in 2010. Lipitor global sales were over $10 billion last year, and Morningstar analyst Damien Conover estimates a sales figure of $3.8 billion in 2012 – still among the top of drug sales.

Ramifications for the pharmaceutical industry

Pfizer’s aggressive strategy may offer lessons for drug makers facing similar losses of patent protection for other blockbuster drugs over the next few years, and may chart a new path for shifts between the big pharmaceutical companies and generic rivals.  However, it’s important to remember this new model makes the most financial sense during the first six months following patent loss when significant margins still exist, but thereafter it seems the current generics model will remain unchanged.

This new strategy also highlights an emerging trend seen within the pharmaceutical industry wherein the lines between traditional “pharma” companies and “generics” companies are becoming increasingly blurred as their markets begin to overlap.  For a deeper look at this please see Bourne Capital Partner’s October 2011 Generics Report.

Other notes:

European Lipitor patent coverage – As of July 2011, Lipitor had already gone off patent in Spain, Finland and Norway, but elsewhere across the EU the drug remained protected as Pfizer seeks six-month extensions in at least 11 other markets, including the UK, France and Germany.

Additional ramifications for Ireland include the following:

1. Five of the world’s top-selling dozen medicines are produced in Ireland, and their sales will fall 52 percent to $13 billion by 2013 from $27 billion in 2010 as their patents expire. (Data compiled by Bloomberg based on analysts’ estimates).

2. The Irish Exporters Association (IEA) on Nov. 4 cut its 2012 growth forecast to 1.6 percent from 2.5 percent. It predicted that exports would grow by 3.8 percent next year, compared with an April forecast of 5.7 percent, based largely on the decrease in exports already seen YTD in the pharma/chemical sector. This will likely hinder Ireland’s prospects of exporting its way out of the economic crisis affecting all of Europe.

3. Drugs companies in Ireland paid just over €1.0 billion of tax in 2010, a figure that is likely to decrease if Ireland maintains its business-friendly 12.5 percent corporate tax. See Table 1 below for comparative European area corporate tax rates.

4. Ireland is fighting to keep its drug-manufacturing stronghold by pitching its low corporate tax rate and relatively cheap labor. According to the European Commission, Irish unit labor costs have declined strongly. In 2010, unit labor costs fell 4.9 percent. They are seen falling 2.5 percent in 2011 and 0.9 percent in 2012.

Some of the ramifications for the pharmaceutical industry include the following:

1. A surplus of manufacturing throughput in all of the EU and continued health care pricing pressure from single-payor negotiated national agreements for treatment procedures, fee structures and rate ceilings are resulting in tougher operating conditions for drug manufacturers in Europe.  According to Washington Monthly, Europe’s pharmaceutical businesses make one-third of their profits in the U.S. market because they can charge five times as much in the U.S. for the same pill made in the same factory.  If the U.S. moves to a more regulated health care system similar to the European model, the entire pharmaceutical industry including drug manufacturers will likely feel the effect.

2. Increased drug manufacturing competition from areas outside of the EU (see India and China – low labor costs and growing throughput; Singapore – low taxes). In India, generic-drug companies are investing heavily in large state-of-the-art manufacturing and development facilities to meet the anticipated generics demand, which is further discussed here. In Singapore, Merck has invested an estimated $1.5 billion, including a commitment to invest an additional $250 million over the next 10 years for new manufacturing, marketing, and research activities. A recent survey by Eric Langer of Pharmaceutical Technology (Volume 35, Issue 8, pp. 78-80) shows Asia gaining quickly among the potential biomanufacturing outsourcing destinations. See Chart 1 below.

TABLE 1: CORPORATE TAX RATES

CHART 1: POTENTIAL BIOMANUFACTURING OUTSOURCING DESTINATIONS

Venture Capital Investments

For the first three quarters of 2011, venture capitalists invested $21.2 billion into 2,725 deals, representing 20% more dollars and 3% more deals than the first three quarters of 2010. The 2011 pace already exceeds the $19.7 billion invested in 2009.

Venture capitalists invested $6.95 billion in 876 deals in the third quarter of 2011, which represents a 12% decrease in terms of dollars and 14% decrease in the number of deals compared to the second quarter of 2011 when $7.9 billion was invested in 1,015 deals. Additional VC data are provided by the National Venture Capital Association, including Regional Data and data going back to 1995.

Healthcare Investment Breakdown

For the 3rd quarter, the Biotechnology industry was the second largest sector for dollars invested with $1.1 billion (versus $1.34 billion in Q2) going into 96 deals, falling 18% in dollars and 20% in deals from the prior quarter. The Medical Devices and Equipment industry also experienced a decline, dropping 18% in Q3 to $728 million, while the number of deals declined 21% to 74 deals. Overall, investments in the Life Sciences sector (Biotechnology and Medical Devices) fell 18% in dollars and 21% in deals, dropping to the second lowest quarterly deal volume since the first quarter of 2005. To the contrary, Healthcare Services investments surged with $152 million going into 11 deals (a 200% increase in dollars and 38% increase in deal volume over the second quarter).

BIOTECH VC INVESTMENT

HEALTHCARE SERVICES VC INVESTMENT

MEDICAL DEVICE & EQUIPMENT VC INVESTMENT

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters

Venture Capital Deal Structures

The total number of VC deals thus far for 2011 (876) is up 3% from last year, but down 14% from the second quarter with a trend towards larger average deals going into expansion and later stage companies. See the Table 1 below. The later stage average deal size of $12.5 million represents the largest average deal size for this stage in a decade.

TABLE 1: Total VC Deals by Stage of Development

Within the healthcare sector, the number of deals is also down in Q3 and YTD for 2011. See Table 2 below.

TABLE 2: Number of Deals within the Different Healthcare Sectors

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters

Amount Raised

52 U.S. venture capital funds raised $1.72 billion in the third quarter of 2011, according to Thomson Reuters and the National Venture Capital Association (NVCA). This level marks a 53% decrease by dollar commitments and a 4% decline by number of funds compared to the third quarter of 2010, which saw 53 funds raise $3.5 billion during the period. The third quarter marked the lowest amount raised in a quarter since the third quarter of 2003. See chart below.

FUNDRAISING BY VENTURE FUNDS

Despite the challenging environment for VC firms, particularly those with a focus on healthcare, Sofinnova Ventures created its eighth venture fund during the quarter, with a total of $440 million in new capital to invest, bringing its total money under management to $1.4 billion. Read more about the raise here.

Factors Affecting VC Investments and Raises

The Economy
Mark Heesen, president of the NVCA, explained, “Public policy challenges in the life sciences and clean technology sectors are impacting investment levels this quarter as is the IPO market that basically came to a screeching halt in August.”

Regulatory Environment
Part of the reason was the difficult and unpredictable nature of the approval process at the Food and Drug Administration, said Tracy Lefteroff, global managing partner of PricewaterhouseCoopers’ venture capital practice.

“Challenges in the regulatory environment for Life Sciences companies are prompting VCs to look to other industries to put their money to work for a faster return on their investment as indicated by the notable increase in Software investments,” Lefteroff said.

“Accordingly, over the past two quarters, we’ve seen a clear shift in Life Sciences investments from Seed/Early Stage companies over to more Later Stage companies.

Among companies, Reata Pharmaceuticals Inc. got the largest investment of the quarter, $300 million. Founded in 2002, the company develops oral anti-inflammatory drugs.

Similar Trends Seen in Healthcare M&A Transactions

Some of the same factors affecting the VC industry, namely an uncertain economic picture and a challenging regulatory environment, have also slowed M&A activity. Managements of many firms have reported a wait-and-see attitude in regard to potential transaction activity. As illustrated below, global deal volume and values across all sectors are down for the past few quarters. A similar pattern is also seen in the healthcare sector (see lower chart).

GLOBAL M&A VALUES AND VOLUME – ALL SECTORS

GLOBAL M&A VALUES AND VOLUME – HEALTHCARE

Source: Bourne Partners Internal Research

There are currently 172 drug shortages, of which 131 are generic injectables.  2011 shortage numbers are on pace to exceed the totals of the year prior, indicating this issue remains a relevant, ongoing problem.

Many companies choose not to make these products because they are not as profitable as other drugs, and manufacturing them is complex. The FDA acknowledged the problem and added that few manufacturers produce the medications to meet the nation’s needs, thus contributing to the increasingly common shortage of drugs.

A partial list of drugs in short supply as reported voluntarily by drug manufacturers is provided here:

http://www.fda.gov/drugs/drugsafety/drugshortages/ucm050792.htm

Possible Causes

The drug shortage situation in the U.S., including possible causes of shortages were discussed at a House Energy and Commerce health subcommittee hearing on Sept. 23.
Some of the possible causes include the following:

• Deferred maintenance at manufacturing facilities that produce hard-to-make sterile injectable drugs may lead to disrupted production while they resolve contamination issues. Relatively few facilities produce these drugs, so they are under pressure to operate continually without maintenance.
• Drug manufacturers claim the FDA’s sometimes long approval processes have limited manufacturers’ production abilities (i.e., manufacturers can’t quickly address shortage issues).
• Generic Pharmaceutical Assn. President and CEO Ralph G. Neas claims such common factors as insufficient supplies of raw materials to meet demand, delayed communications about shortages, and changes in clinical practices have altered production volume.
• Business and economic factors have lowered profit margins for generic sterile injectable drugs, which has led some businesses to discontinue production of certain drugs.
• Health care prices, including those for drugs, aren’t determined by patient demand, said W. Charles Penley, MD, a medical oncologist with Tennessee Oncology in Nashville who testified at the hearing. “This is not a free-market environment.”

A summary of the House Energy and Commerce Committee hearing, including comments from industry leaders and medical professionals is provided in the American Medical News article linked here:

http://www.ama-assn.org/amednews/2011/10/03/gvl21003.htm

Situation being investigated by Congress, including the role of gray markets

According to a Premier report entitled, “Buyer beware: Drug shortages and the gray market”, gray market pharmaceutical vendors are offering drugs in short supply at an average markup of 650%.

http://www.premierinc.com/about/news/11-aug/Gray-Market/Gray-Market-Analysis-08152011.pdf

As the drug shortage situation has gathered more attention nationally, Democratic Representative Elijah Cummings, a member of the House Committee on Oversight and Government Reform, has begun an investigation into the role five “grey market” middleman companies play in the shortage and how they may be capitalizing on it. Specifically, the investigation aims to determine how the alleged companies are obtaining the drugs and how much they are making in profits by selling them to hospitals, pharmacies and health providers.

http://www.pharmatimes.com/Article/11-10-10/US_drug_shortages_soar_Congressman_probes_grey_marketeers.aspx

A bill by Rep. Diana DeGette (D, Colo.) would ask drug manufacturers to tell the FDA about drug shortages six months in advance, if possible. The agency would be able to keep such warnings confidential to prevent drug hoarding, but it also could notify health professionals and hospitals when appropriate.

Currently, drugmakers rarely have to notify the FDA of drug manufacturing issues. The exception is when a company plans to discontinue a lifesaving drug for which it is the only manufacturer.

Possible solutions

Prescription drug shortages – especially acute for sterile injectable generic cancer drugs – have multiple causes and require multiple solutions, according to the American Society of Clinical Oncology. Proposed solutions include the following:

• Expediting Food and Drug Administration approval for drugs vulnerable to shortages without compromising patient safety or drug quality.
• Updating Medicare’s generic drug pricing methodology frequently, especially for shortage drugs.
• Enacting bipartisan legislation to give the FDA authority to require a drug manufacturer to notify the agency when the company becomes aware of potential shortages.
• Providing tax incentives to encourage makers of generic drugs to upgrade their facilities and continue or begin producing shortage drugs.
• Increasing collaboration between government agencies to create a stockpiling program similar to counterterrorism programs.
• Encouraging other companies to take over or boost their production of shortage drugs when possible. Although the FDA does not have the authority to require drugmakers to increase production, the agency or other government agencies may consider offering incentives to companies to fill the shortage gap.

Below are links to a summary of the Sept. 23rd drug shortage hearing held by the House Energy and Commerce health subcommittee, and an archived webcast of the hearing:

http://www.hhs.gov/asl/testify/2011/09/t20110923a.html

and

energycommerce.house.gov/hearings/hearingdetail.aspx?NewsID=8926

Finally, here is a recent video piece from PBS that explores how drug shortages affect patients and health providers:

The overall market is witnessing significant growth due to the increasing incidence of diabetes and the corresponding increase in government support for diabetes care. Governments all over the world are taking huge initiatives on various research and development projects in order to improve their diabetes drug delivery techniques

China and India are currently the biggest diabetes markets. According to figures released by the International Diabetes Federation (IDF), in October 2009, China was estimated to have 43.2 million diabetics, compared to 50.8 million in India. According to the IDF, the number of diabetics in India is expected to increase to 87 million. As diabetics around the world still remain under-diagnosed, there continues to be a high global demand for the treatment and prevention of diabetes.

Approximately 24 million Americans have been diagnosed with diabetes, and another 12 million are expected to be diagnosed by 2020, according to the American Diabetes Association (ADA). Diabetes creates a huge burden for those diagnosed, including a loss in productivity levels. A survey from the ADA puts the toll of lost productivity and caring for diabetic patients at a whopping $218 billion annually in the United States alone.

The increase in the number of patients with the type 2 form of the disease, plus the emergence of potential new drug treatments, is expected to raise competition within the diabetes market. This shows a great opportunity for investors to take advantage of the rapidly growing and demanding industry.

A few companies poised to take advantage of the growing diabetes market include:

Amylin Pharmaceuticals Inc.

Ticker: AMLN

Company description:   Amylin markets two medicines to treat diabetes, BYETTA (exenatide) and SYMLIN (pramlintide acetate) injection. It is also currently seeking approval for BYDUREON (exenatide extended-release for injectable suspension), a medication for type-II diabetes, which is administered only once a week.

Novo-Nordisk

Ticker: NONOF

Company description:

Novo Nordisk is a focused healthcare company and a world leader in diabetes care.  The company has a new drug to improve blood-sugar levels as well as weight control. Called Victoza, the treatment won FDA approval in January 2010 and has been available in some European countries and Japan since 2009.

Prodigy Meters

Private

Company description: Prodigy Meters develops, manufactures, and markets audible blood glucose monitoring systems for diabetes patients. It offers meters that help blind and people with low vision to test their blood glucose levels.

LifeScan Inc.

A Johnson&Johnson Company

Company description: LifeScan, Inc. develops, manufactures, and distributes blood glucose monitoring systems for home and hospital use. It offers blood glucose meters, test strips, and lancing devices.

Private equity firms have exited 144 healthcare companies since 2008.  Recently, KRG Capital Partners and Bain Capital Ventures sold dialysis services provider, Liberty Dialysis Holdings to Fresenius Medical Care for $1.7 billion.  Also, private equity firm TA Associates backed American Access Care who also agreed to be acquired by Fresenius Medical Care in a $385 million transaction.

The chart below illustrates that the services sector continues to have the largest percentage of private equity exits in the healthcare industry, while the healthcare technology sector has grown the most year-over-year.

* As of 8/4/11

The FDA’s drug approval figures involve drugs or biologics that are made from living cells, which are considered to be new types of products. So far,  new treatments have been approved for lupus (Human Genome Sciences’s Benlysta), melanoma (Bristol-Myers Squibb’s Yervoy), prostate cancer (J&J’s Zytiga), hepatitis C (Vertex’s Incivek) and Seizures (GSK and Valeant), to name a few. Also, in many cases, these new approved drugs offer a significant improvement over existing treatments.

There are still more than a dozen more drug candidates that are scheduled for review by year-end including, Seattle Genetics’ Adcetris (brentuximab vedotin), a first-in-class cancer drug, to treat cytotoxic payload. At this pace, the FDA is likely to approve more drugs this year than the previous years. The increase in drug approvals is part of a general improvement in the biopharmaceutical sector. We believe the performance of the life sciences industry this year is shaping up to be relatively strong.

Read more: http://www.pharmatimes.com/Article/11-08-04/2011_s_US_new_drug_approvals_already_match_2010_s_total.aspx

PBM Sector Snapshot June 2011

The proposed merger announced last week between the two largest Pharmacy Benefit Managers speaks to the changing dynamic of the industry.  For a transaction profile on this deal please use the link below.

Express Scripts to Buy Medco for $29 Billion