Specialty Pharmaceutical Industry Trading Multiple Analysis

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Both branded and generic specialty pharmaceutical companies have recently offered unique growth opportunities over both the recent long and short terms.  The last 24 months have seen tremendous growth in branded spec pharma value, which has translated to significant increases in EBITDA multiples, which are currently over 15x.  However, the rapid growth has recently started to slow which may signal the beginning of a normalization period.  Nevertheless, we believe that both branded and generic spec pharma will retain above market growth even after returning to historical norms.

Year-to-date an index of branded specialty pharmaceutical companies (comprised of Allergan, Auxilium Pharmaceuticals, Ipsen, Jazz Pharmaceuticals, Paladin Labs, Salix Pharmaceuticals, Santarus, Shire, The Medicines Company, UCB, United Therapeutics, and Valeant) have increased in value over 36% and doubled the return of the S&P 500.  Likewise, an index of generic specialty pharmaceutical companies (comprised of Actavis, Akorn, Hi-Tech Pharmacal, Hikma Pharmaceuticals, Impax Laboratories, Lupin, Mylan, Perrigo Company, and Teva Pharmaceutical) has increased in value over 26% and significantly outperformed the S&P 500 as well. (see below for more details).


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An Overview of Global Regulatory Trends in the Nutraceutical Industry – April 2013

This report is intended to provide a high level overview of nutraceutical regulatory trends in the US and abroad with snapshots from Europe, Japan, Israel, China, India and Latin America including Mexico and Brazil.  However, it should be noted that the nutraceutical regulatory environment is evolving and remains murky as the number of nutraceutical products continues to expand internationally and local agencies, working with international trade associations, struggle to harmonize regulations across different jurisdictions to ensure consumer safety while also creating a level playing field for competition. Our hope is this report will serve as an introductory guide for industry insiders with designs on going international as well as the financial community trying to better understand sector trends and valuation. Increasingly nutraceutical companies will be forced to navigate a wide range of different local regulatory requirements as regional players seek the global scale necessary to compete.

Key Takeaways

* Generally the goals of nutraceutical regulation have been focused on safety and labeling with lesser emphasis (as compared to pharmaceuticals) on product claims and intended use. This is achieved through Good Manufacturing Practice (GMP) regulations and a recent increase in enforcement.

* Consumers are largely responsible for determining the usefulness and value offered by nutraceutical products, although regulatory agencies are increasingly enforcing industry requirements that call for nutraceutical companies to track adverse events.

* There is consensus among nutraceutical companies that increased regulation related to quality and safety will benefit the industry, and help mitigate the risk of regulatory backlash if scrupulous players engage in abusive practices and are left unchecked.

* Greater enforcement of GMP regulations are likely to drive further consolidation in the relatively young, fragmented industry as those lacking proper scale are unable to comply with the greater emphasis on regulation or make the necessary investments to become compliant across multiple jurisdictions.

The Nutraceutical Market

Bourne Partners released an April 2013 Nutraceutical Sector Report (free download) that put the global nutraceutical market at $142 billion in 2011. With an estimated growth rate of 6.4% (CAGR), the market is expected to reach $204.8 billion by 2017. Growth is being driven by favorable demographics, increases in disposable income, rising healthcare costs and an increasingly robust OTC market. In developing nations, the middle classes are growing, which translates to increased disposable income because of typically regressive tax structures. Also, developing nations are increasingly becoming the preferred source for cheaper raw material supply found in many nutraceutical products.

Classifications and Definitions

Part of trying to better understand the regulatory environment begins with defining nutraceuticals, which are also referred to as dietary supplements – a term preferred by the US Food and Drug Administration (FDA). For the purposes of this discussion, nutraceuticals can be thought of in a broad sense as a food, food derivative or food product, usually in extracted form, that reportedly provide health or medical benefits, including the prevention and treatment of disease. Such products may range from isolated nutrients, dietary supplements, herbal products and specific diets to genetically engineered foods and processed or supplemented “functional” foods such as cereals, soups, and beverages. Often used interchangeably to describe “nutraceuticals” are “dietary supplements”, which include vitamins, minerals, herbs, botanicals, amino acids, fatty acids and probiotics. For the purposes of this discussion, we will use nutraceuticals to refer to all of the above categories. The below chart from Frost & Sullivan’s report, “Global Nutraceutical Industry: Investing in Healthy Living,” provides a helpful overview of the different nutraceutical classifications:


 Source: Frost & Sullivan and FICCI

 All together, nutraceuticals represent a wide range of health products, and with a patchwork of local regulatory oversight and no global standards for compliance, those in the industry struggle to make distinctions between the ever growing number of nutraceutical categories. For example,

How might regulatory agencies distinguish between dietary supplement tablets and conventional foods with dietary, or “functional,” ingredients?

Is an energy drink a dietary supplement or a beverage? What are the ramifications for ingredient disclosure requirements? (Read more about the Monster Energy drink reclassification here).

How do specific cultural requirements for nutraceutical products vary from market-to-market in the east versus the west?

These are just some of the challenges facing a rapidly growing industry with varying product definitions and a collection of non-unified regulatory policies. However, what remains constant is the continued global demand for nutraceutical products as life expectancy increases and consumers take greater interest in their personal health.

Regulation Background & Recent Trends

Nutraceutical foods are not subject to the same testing and regulations as pharmaceutical drugs. The aim of nutraceutical regulation is largely to ensure products are safe and properly labeled. It’s important to note that nutraceuticals do not face the same level of scrutiny as pharmaceuticals in regards to product claims and intended use. There is a perception that this lack of oversight leads to products of variable quality and with claims of questionable merit. Unfortunately for the nutraceutical industry, this perception was reinforced in an April 2013 Research Letter published online in JAMA Internal Medicine. As reported in the letter, FDA data showed supplements were involved in half of all drug recalls. More specifically, 51% of Class I recalls over a 9-year period involved adulterated dietary supplements instead of a pharmaceutical product. Sexual-enhancement aids were the most commonly recalled product (40%), followed by body-building (31%) and weight-loss products (27%). Nine out of 10 (89%) supplement recalls occurred after 2008, and unapproved drug ingredients were involved in all of the supplement recalls. The study was limited since it only accounted for Class I recalls, and was unable to associate the use of many adulterated supplements with adverse events. Also, it should be noted that the increase in recalls coincides with an initiative by the FDA to increase inspections. Whether the recalls are the result of greater enforcement or a lack of compliance (or both), the findings reinforce the notion that the industry lacks oversight. Without improved self-policing and harmonized international standards and policies, the industry risks a regulatory backlash that could see nutraceuticals regulated with the same rigor as pharmaceutical drugs.

For the purposes of this discussion, we will focus primarily on policies relating to GMPs with an emphasis on overseas regulation. As noted in the above research letter, nearly a quarter (24%) of the recalled supplements were manufactured outside the U.S., a concern given that manufacturing practices in foreign countries are not held to the same regulatory and enforcement standards as seen in the US, Europe and Israel. However, not all of the blame falls overseas. The FDA has found GMP violations in at least half of the domestic dietary supplement firms it has inspected. Finally, we will close by briefly addressing areas of regulation that fall outside of GMP. This includes product claims, intended use, marketing and safety, which are discussed in their own section at the end of this report.

US Regulatory Agencies & Polices

Currently the FDA regulates dietary supplements under its own set of unique regulations, summarized here, that differ from those covering “conventional” foods and drug products. Under the Dietary Supplement Health and Education Act of 1994 (DSHEA):

* The manufacturer of a dietary supplement or dietary ingredient is responsible for ensuring that the product is safe before it is marketed; and

* The FDA is responsible for taking action against any unsafe dietary supplement product after it reaches the market.

However, the absence of consistent enforcement by the Food and Drug Administration (FDA) and globalization of supply sources has contributed to perceptions of significant safety loopholes. Perhaps not surprisingly, it was the nutraceutical industry that pushed both the FDA and the Department of Health and Human Services (HHS) to implement good manufacturing practices (GMP). Before then, the industry was largely self-policed, as it currently is with regard to product claims and intended use (see below), by its own trade association (Natural Products Association). However, with the introduction of the federal Good Manufacturing Practice (GMP) regulations (21 CFR, Part 111) in 2007, the FDA and HHS assumed oversight of GMP enforcement. Under the rule, all domestic and foreign companies that manufacture, package, label or hold nutraceuticals, including those involved with testing, quality control, and nutraceutical distribution in the US, have safety-related responsibilities, including, but not limited, to the following:

• assuring the safety of the ingredients used in their products, both before and after introduction to the market;

• evaluating the identity, purity, quality, strength, and composition of dietary supplements;

• preparing, packaging and holding products in compliance with FDA’s current good manufacturing practice (cGMP) regulations; and

• submitting reports to FDA of serious adverse events.

These requirements were implemented to avoid wrong ingredients; too much or too little of a dietary ingredient; improper packaging; improper labeling; or contamination problems due to natural toxins, bacteria, pesticides, glass, lead, or other substances. For their part, the FDA monitors nutraceutical products by reviewing adverse event reports, obtaining information from inspections of dietary supplement manufacturers and distributors, reviewing consumer and trade complaints, performing laboratory analyses of product samples, and monitoring retail outlets, including the Internet. There are also third-party GMP certifications and inspections, specifically those done by recognized organizations such as NSF International, the Natural Products Association (see above), and the U.S. Pharmacopoeia – all of which play an important role in overseeing industry GMPs.

A more detailed discussion of the 21 CFR, Part 111 requirements is provided by Nutraceuticals World here, and a description of the rule’s most relevant subsections is provided here. Also, Pharmavite, the maker of Nature Made® nutraceutical products, provides this infographic, which serves as a good overview the US regulatory process and includes a guide to the different sections found on a typical nutraceutical label.

In terms of regulatory trends, there’s a consensus within the industry that the FDA has thus far been focused on facility acceptability and manufacturing practices, with less attention paid to testing products, including ingredients supplied from overseas manufacturers. However, as regulatory efforts continue to ramp up, attention is expected to shift more to products and product label compliance.

With regard to adverse events, Congress passed legislation in 2006 that requires the regulator to collect consumer complaints of illnesses, medical complications and death (i.e., serious adverse events). It is the responsibility of the manufacturer, packer, or distributor – whose name appears on the label of a dietary supplement marketed in the US – to submit to the FDA any serious adverse event reports associated with use of the dietary supplement marketed in the US. From 2008 to 2011, the FDA received more than 6,300 nutraceutical-related “adverse event reports” (AERs), according to a report from the Government Accountability Office (GAO).

To help ensure companies are compliant with cGMP and adverse event reporting (AER) requirements (e.g., submitting serious AERs, maintaining AER records, and including firms’ contact information on product labels), the FDA increased its inspections of nutraceutical companies and took some actions against noncompliant manufacturers. According to the same GAO report, the FDA increased inspections from 120 in 2008 to 410 from January 1 to September 30, 2012. Over this period, the FDA took the following actions: 3 warning letters, 1 injunction, and 15 import refusals related to AER violations, such as not including contact information on the product label or submitting a serious AER.

As evidenced by the 15 import refusals, a major focus of FDA enforcement has been on ensuring the quality of imported raw materials while also increasing inspections of domestic manufacturers, including small and medium-sized manufacturers that often avoided the earlier attention of the FDA. However, the agency has raised concern that the recent budget sequester may result in fewer inspectors and a return to pre-initiative inspection rates.

There has also been a push by Senate Democrat Dick Durbin to reintroduce the Dietary Supplement Labeling Act, which would require companies to give the FDA the name of each supplement they produce, along with a description, a list of ingredients and a copy of the label. Sen. Durbin has used recent reports of adverse events associated with energy drinks to highlight the need for greater ingredient disclosure requirements in an effort to better inform consumers of potential risks associated with nutraceutical products (or in the case of Monster energy drinks, a newly classified beverage).

Legislation and policy relating to the nutraceutical industry is at a critical point. The popularity of the products along with the perception of minimal oversight and variable quality, has put the industry in the spotlight. Obviously a shift towards regulation more in line with pharmaceuticals would dramatically alter the global landscape. Tell us what you think:

Should the FDA take a larger role in oversight of the domestic nutraceutical industry?

Visit the Bourne Partners “Pharma and Healthcare M&A” group on LinkedIn to vote for how you believe the industry should be regulated by the FDA.

European Regulatory Agencies & Polices

In the European Union, food legislation is largely harmonized under the European Food and Safety Authority (EFSA). The legislation focuses on “food supplements”, which the Europeans define as concentrated sources of nutrients (e.g., proteins, vitamins and minerals) and other substances that have a beneficial nutritional effect. The main EU legislation is Directive 2002/46/EC related to food supplements. The EU maintains a list of permitted vitamin or mineral substances which may be added to food supplements for specific nutritional purposes. Vitamin and mineral substances may be considered for inclusion in the lists following the evaluation of an appropriate scientific dossier concerning the safety and bioavailability of the individual substance by EFSA. Companies wishing to market a substance not included in the permitted list need to submit an application to the European Commission. New products originating from Europe are presumed to have passed these stricter European development and quality requirements. As a result, European nutraceutical companies, which are generally regarded as leaders in innovation, enjoy a perception of creating the highest quality products. For example, the European approval process evaluated a total of 533 applications between 2005 and 2009. Of these, 186 applications were withdrawn during the evaluation process, and EFSA received insufficient scientific evidence to be able to assess around half of the remaining applications. Possible safety concerns were identified in relation to 39 applications. Source.

Europe also enforces stricter rules for product claims. Not surprisingly, the European market is driven on the basis of these health claims since they are harder to get. Still, there is variability from country-to-country within the EU when it comes to product claims and recommended daily allowances (RDAs). As a result, a coalition of Europe’s nutraceutical companies, including CRN, Merck, DSM and BASF, created the Food Supplements Europe (FSE) to work with regulators to ensure quality and “to shape a positive regulatory environment for the future.”

Other International Regulatory Agencies & Polices

The shift in raw material supply from the US and Europe to China and India has altered the regulatory paradigm. Without a global agency for oversight, the nutraceutical industry operates under a patchwork of national agencies with different standards and regulations. Rather than trying to police the world, national regulatory agencies generally focus on the practices and products found in their own markets while requiring local manufacturers to establish specifications for identity, purity, strength and composition for imported ingredients. However, global regulatory bodies are becoming increasingly influential within the industry. Such bodies include Codex Alimentarius, the World Health Organization (WHO) and the Food and Agriculture Organization (FAO). From the industry side, the International Alliance of Dietary/Food Supplement Associations (IADSA) works closely with international and local bodies to ensure that the views of the food supplement industry are considered in the development of policy.

Now we’ll take a closer look at the regulatory environment from key global nutraceutical markets.


Japan is a thought leader in the manufacture and use of “Foods with Health Claims” – the preferred term for dietary supplements and natural nutraceuticals in Japan. The health-conscious Japanese have long embraced the benefits from nutraceuticals, and the country ranked third in per capita spend on nutraceuticals in 2008 according to World Health Organization (WHO) data, while others place Japan as the second largest individual consumer of nutraceuticals (behind the U.S.). For regulatory purposes, nutraceuticals in Japan are generally divided into two groups. The first group, “Foods with Nutrient Function Claims,” satisfy the standards for the minimum and maximum daily levels of twelve vitamins and five minerals. Aside from these daily standards, the labels are not heavily regulated. The second group is “Foods for Specified Health Uses,” or simply FOSHU. They contain dietary ingredients that have reported beneficial physiological effects and promote health. However, like most jurisdictions around the world including the US, disease risk reduction claims are not allowed.

At present, only Foods for Specified Health Uses (FOSHU) require pre-marketing approval. The multistep approval process begins when the Food Safety Commission examines the safety of the proposed product. This is followed by an evaluation of effectiveness by the Pharmaceutical Affairs and Food Sanitation Council, and the Ministry of Health, Labor and Welfare used to give official approval, allowing the manufacturer to carry the structure/function claims and mark on the product. However, in 2009, in order to meet increasing local demand, Japanese officials created the Consumer Affairs Agency (CAA), which assumed the Ministry of Health, Labour and Welfare’s (MHLW) responsibility for the implementation of laws relating to nutrition labeling and health claims approval. Nutraceuticals World provides a helpful overview of the approval process and the role of the CAA here, and points out that nutraceutical makers can choose to opt out of FOSHU registration on the condition that their products do not bear any health claims or claim physiological effects on the human body.


Israel is considered as a key innovation hub for the nutraceutical industry. The industry is driven by ingredient companies such as Solbar Industries, LycoRed Natural Ingredients, Adumim Food Ingredients, Enzymotec, Algatechnologies and Frutarom etc.  With a limited domestic market, a majority of Israel’s revenue is from exports to US and European markets. All drugs, dietary supplements and cosmetics require registration by the Ministry of Health (MoH).


China Health Care Association (CHCA), a government-appointed association that oversees the nutraceutical industry, estimates China’s domestic market at $15.8 billion based on 2011 sales. However, this figure only accounts for those dietary supplement products that were officially registered with China’s State Food and Drug Administration (SFDA).  The US-China Health Products Association (USCHPA) believes the number is actually closer to $20 billion with the difference coming from the USCHPA’s better account of nutraceutical imports.

There are three main entities involved in policing the industry. The first is the SFDA, which is in charge of dietary supplements and issuing the “blue hat” registration. Next is the Ministry of Health (MOH), which actually oversees SFDA, but its main influence in the dietary supplement industry is overseeing the approval of new novel food ingredients; and finally, the Administration of Quality Supervision Inspection and Quarantine (AQSIQ) controls all of the imports and exports passing across China’s borders.

China is making some efforts to improve its notification system for food supplements. During September 2012 meetings with IADSA, Chinese health officials discussed global product placement rules, the status quo of the existing registration, and a product notification system for health food in China. IADSA Board member, Michelle Stout, commented, “The registration system in China is at present lengthy and costly, and it is widely recognized that there is a need for a more accessible system to be introduced.”

However, a much anticipated overhaul of the Chinese regulatory system has remained stalled, and SFDA draft regulations have been collecting dust since 2009. Nutraceutical World offers these three areas in need of immediate improvement:

* Change the name of the industry to dietary supplement – this would align the terminology with the international community and properly exclude products (e.g., yogurts and food products) that are being miscategorized as food supplements.

* Reform the “blue hat” system into a notification system utilizing claims based on structure function.  Instead the SFDA continues to view dietary supplements akin to drugs. In doing so, its testing methods are looking for toxicity, efficacy and risk assessment, which include animal and sometimes human trials. Implementing a true notification system similar to the U.S. FDA’s DSHEA would be much easier for the government to manage. It would also be more transparent and less expensive for industry to abide by, thus increasing the amount of “blue hat” compliance and overall control of the industry by SFDA.

* Potency levels are another area that needs attention. The SFDA generally has potency restrictions that require most foreign companies to reformulate specifically for China prior to applying for a “blue hat” registration. Moreover, once the product is approved by SFDA, the formula cannot be adjusted without going through the whole two-registration process all over again. Unless backed by compelling scientific evidence, China should comply with global potency levels.


The manufacture, storage, distribution, sale and import of nutraceuticals in India are regulated under the Food Safety and Standards Act (FSSA) from 2006. The FSSA consolidated a collection of earlier laws (from eight different ministries) relating to food under a single set of rules relating to food and nutraceutical safety and standards. However, as this Nutraceuticals World report points out, the rules are still not in force and the government is still seeking suggestions on the draft.  Some of the suggestions from within the industry call for greater manufacturing oversight – similar to those provided by Indian Pharmacopoeia – so that manufacturers of nutraceuticals comply with their safety and quality standards, thereby establishing India as a reputable supplier of nutraceuticals – much like it has in the generics sector.  Like APIs for the pharmaceutical industry, India is well positioned to supply ingredients for the global nutraceutical industry, especially in the case of plant extracts and phytochemicals, where Indian companies are already establishing themselves as global suppliers. International industry group, International Alliance of Dietary/Food Supplements (IADSA), supports this view and believes India’s newly enacted regulations, when fully implemented, could boost foreign investment. In terms of domestic uptake, the Federation of Indian Chambers of Commerce and Industry (FICCI) notes in a recent nutraceutical report that an improved regulatory framework to validate product claims could drive consumer demand, but for now it still lists that lack of oversight as an industry headwind.


In Mexico, the National Association of Food Supplements Industry (ANAISA) was created in September 2011 to bring together companies in the country dedicated solely to the manufacture or marketing of food and dietary supplements. ANAISA cites a Euromonitor report that estimates the nutraceutical market in Mexico has grown by 25% in the last five years with total sales in 2011 totaling $293 million. Article 215 of the General Health Act defines dietary supplements as “herbal products, plant extracts, traditional foods, dehydrated or concentrated fruit added or not, vitamins or minerals that may arise in a pharmaceutical form and intended use is to increase total dietary intake, supplement it or replace some component of one’s diet.” According to Mexican health legislation (see COFEPRIS site), dietary supplements can not be composed solely of vitamins and minerals – in which case they are considered a vitamin drug, not a dietary supplement. Nutritional supplements may also contain substances with pharmacological action (natural or synthetic), for example, saw palmetto (plant), ephedrine, amphetamines, among many others.

As of February 2012, ANAISA consisted of nine member companies, both domestic and international, representing about 85% of the Mexican market. ANAISA works with the Mexican regulatory body responsible for food and food supplement regulation, The Federal Commission for Protection against Health Risks (COFEPRIS), and representatives of the influential scientific bodies, the National Institute of Public Health and the National Institute of Nutrition ‘Salvador Zubiran’ to oversee the advertising of food supplements. Health claims are generally not permitted for supplements, so ANAISA has worked to develop its own Code of Ethics in hopes of creating some dialogue with consumers.

COFEPRIS has recently turned its attention to non-compliant nutraceutical makers. In March 2013, health authorities seized 685,000 natural food supplements from Miracle Tonic Life companies, SRL, Natural Health and Naturism Jaguar, that made false claims about their effectiveness in curing cancer, diabetes, obesity and other diseases. In addition, COFEPRIS suspended commercial operations for not showing good manufacturing practices and failing to meet label requirements.


According to a report by Euromonitor International, the fortified and functional foods category grew by 11% in 2010 to a total of a little more USD$6.2 billion. Similarly, the vitamins and dietary supplements category experienced growth of 12% in 2011, reaching sales of USD$1.3 billion.  Also, Brazil, along with India, is the primary source for agricultural-based raw materials for many nutraceuticals, including soy for vegetable oils and soy protein.

Representing the nutraceutical industry in Brazil is The Brazilian Association of Foods for Special Purposes and Congeners (ABIAD).  It works along with The Committee for Scientific and Technical Assessment of Functional and New Foods (CTCAF) to advise and lobby the National Health Surveillance Agency (ANVISA) regarding nutraceutical-related issues such as registration and regulation of new products. ANVISA generally has a broad definition for nutraceuticals, for example by introducing low recommended daily allowance requirements, and the regulatory process – whether for nutraceuticals or pharmaceuticals – can be complex and time consuming. As a result, ANVISA has recently hired additional staff and implemented electronic filing processes with the goal of reducing the time to evaluate new products by 40%. As far as health claims are concerned, Brazil established an allowable list of functional claims in 2008 for eighteen nutrients/ingredients.

Rest of Latin America

According to this 2011 Nutritional Outlook report, Latin America presents a challenge when it comes to the classification of supplements either as a food or a drug. In Brazil and Venezuela, for example, supplements fall within the food category when their levels do not exceed the Recommended Daily Allowance (RDA). If exceeded, these are then treated as drugs. In Colombia, dietary supplements are treated as a different category from food and drugs. In Argentina, Chile, and Mexico, they are regulated as food. A second challenge relates to the different ingredient levels permitted in the Latin American countries, which in some cases requires different product formulas applied in order to comply with the regulations. As mentioned above, Brazil’s maximum levels are based on RDA amounts, which tend to be quite low, whereas in Colombia higher nutrient thresholds have been established. These differences make it difficult for multinational companies to penetrate the Latin American market as a whole.

The Latin American Responsible Nutrition Alliance (ALANUR) – together with the International Alliance of Dietary/Food Supplement Associations (IADSA) – have held a number of workshops throughout Latin America, most recently in Venezuela, to discuss trends in the regulation of food supplements in Latin America and worldwide, including classification and definition; the use of nutrition and health claims; the role of scientific risk assessment to establish maximum nutrient levels versus the use of Recommended Daily Allowances (RDAs); and the characteristic features of the registration and notification systems and monitoring of products once they are on the market across the globe.  In Venezuela, the workshop was attended by the National Institute of Hygiene “Rafael Rangel” (INHRR) and the Ministry of Health, which are currently drafting regulations for nutraceuticals and other products bordering the supplement category.


The introduction of good manufacturing practice (GMP) regulations in the US (21 CFR Part 111) ushered in a new era of regulation focused on safety and quality with the goal of identifying non-compliant suppliers, distributors and marketers through more active enforcement. With this new initiative, the impetus is on quality. As this Nutraceuticals World article points out, many nutraceutical companies are turning to audited, GMP-certified contract manufacturing firms, which have invested heavily in state-of-the-art facilities and quality infrastructure to ensure compliance. Greater enforcement of GMP regulations is a contributing force behind the current consolidation trends (see below figures) seen in the industry as nutraceutical companies seek the proper scale required to make the necessary investments to become compliant.


geographic distribution of MA deals



number of MA deals












Sidebar: Nutraceutical Labels, Claims & Marketing

With lesser oversight than pharmaceuticals, the nutraceutical industry has taken full advantage of the Internet to offer its products to the global market, while consumers have provided an endless stream of product reviews, testimonials and even reports of adverse events – whether valid or not. Together with the multi-jurisdiction nature of the nutraceutical business, this virtual forum has created an opportunity for aggressive marketers, and a daunting challenge for federal, state and international agencies.

In order to better understand the challenge, we’ll return to a definition of nutraceuticals – this time in the context of product claims. Under US law, nutraceutical claims generally fall into three categories:  health claims, nutrient content claims, and structure/function claims.  Disease-related claims are generally not permitted for nutraceuticals. Instead, nutraceuticals typically claim to improve health, delay the aging process, and increase life expectancy with the following disclaimer:

“These statements have not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease.”

And since nutraceuticals do not have to be approved by the U.S. Food and Drug Administration (FDA) before marketing (except for a new dietary ingredient (NDI)*), there are no clinical trials or safety data requirements, so development costs remain low as compared to the costs associated with pharmaceutical R&D. *Regarding NDIs, the FDA conducts a pre-market review for safety data and other information on new dietary ingredients (NDIs) before marketing. This is likely slowing innovation in the US since companies are required to submit safety information on any new dietary ingredient placed into products after 1994.

The minimal oversight related to nutraceutical labels and claims is perhaps the greatest difference between nutraceuticals and pharmaceuticals. The Dietary Supplement Health and Education Act of 1994 (DSHEA) restricted the regulation of label claims on dietary supplements by the FDA. Specifically, DSHEA allows dietary supplement labels to carry statements dealing with structure/function claims such as “supports the immune system.” However, any claims that are made must have adequate evidence to show that they are not false or misleading. The intent of DSHEA was to provide consumers access to more health-related information about dietary supplements. However, like most legislation, the Act is open to multiple lines of interpretation.

For example, what is the difference between a supplement “supporting” a normal body function as opposed to “treating a disease”? How does the FDA actually define “diseases”?

Obviously if new regulations are introduced that require the industry to prove efficacy of its products before they are marketed, the dynamics of the market would dramatically change with significant time and cost added to the development and manufacturing process.  However, product labels and claims do not appear (at this time) to be an emphasis for regulators. Instead, most attention is directed to good manufacturing practices (GMPs) and ensuring consumer safety, while oversight of marketing is still largely self-policed by industry groups such as the Natural Product Foundation.

The NFP’s Truth in Advertising Program works to educate manufacturers, suppliers and retailers to help ensure that the information available to consumers is truthful and not dangerous. In the last three years, NPF initiated more than 300 advertising case reviews and mailed 235 warning letters to companies responsible for marketing dietary supplements. In 2012, NPF mailed 100 warning letters to companies marketing dietary supplements with illegal drug and disease claims. Over the course of the program, two-thirds of all advertisers contacted by NPF brought their promotions into compliance. However, with the rapid global expansion of the nutraceutical industry, there is still concern that if the abusive, misleading practices of a few non-compliant players is left unchecked, it could lead to a regulatory backlash that wipes out the relatively modest oversight currently enjoyed by the industry.

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Biosimilars: Opportunity Amongst Uncertainty

This is intended to be a concise, high level overview of the current biosimilar environment in the U.S. with links to articles and other blogs that offer more detailed discussions with opinions and strategies that relate to the regulatory, legal and commercial environment surrounding biosimilars.

The review includes the following sections: summary, definitions, background, regulatory status, and industry trends & news, including recent transactions from the sector.

Executive Summary

While biosimilars and interchangeables present a huge commercial opportunity, the regulatory uncertainty and technical complexity surrounding the development of these follow-ons and the marketing skill that will be required to win over doctors and patients are already separating the potential winners from the losers with those willing to make the necessary high-cost, long-term investment best positioned to crack this highly lucrative market, which ultimately may pit innovator against innovator, rather than innovator against the traditional concept of a generic.


Biologic – refers to biopharmaceutical medical product created by a biologic process, rather than being chemically synthesized. Examples of biologics include  medicinal product such as a vaccine, blood or blood component, allergenic, somatic cell, gene therapy, tissue, recombinant therapeutic protein, or living cells.

Biosimilar – or follow-on biologic, refers to a product similar to a biologic product already approved for sale. Biosimilars comprise an active drug substance made by a living organism or derived from a living organism by means of recombinant DNA or controlled gene expression methods. From the Biologics Act, a biosimilar is a biological product that “is highly similar to the reference product notwithstanding minor differences in clinically inactive components” and for which “there are no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity and potency of the product.” Regulatory authorities have provided guidelines in an attempt to better define the above terms and criteria.

Interchangeable – refers to a product interchangeable with a biologic product already approved for sale. The criteria used to classify a follow-on as “interchangeable” are stricter than those for biosimilars. Therefore, an interchangeable can be expected to produce the same clinical result as the reference product in any given patient


* The worldwide market for biologics—therapeutic proteins and other biologically engineered drug products—now tops $175 billion a year1.

* These pioneering medications are expensive to develop and manufacture, but generally generate far higher revenues than traditional small-molecule drug products.

* Blockbuster biologics include such widely prescribed medications as Humira®, Rituxan®, Avastin®, Herceptin®, Remicade®, Lantus® and Enbrel® – all of which occupy a spot among the top selling drugs of all time with peak year sales all exceeding $5 billion2.

* Biosimilars, or follow-on biologics, refer to products similar to, or in some cases interchangeable with, biologic products already approved for sale. These biopharmaceutical medical products comprise an active drug substance made by a living organism or derived from a living organism by means of recombinant DNA or controlled gene expression methods.

* The molecular structure of biologics, compared to that of pharmaceuticals, is complex, and the data required to demonstrate biosimilarity, is also more complex than the bioequivalency requirements for pharmaceuticals3.

* However, biosimilars present a significant opportunity to reduce healthcare costs (e.g., top 5 Medicare expenditures are biologicals4), while also offering innovators, and their competitors, greater access to a biologics market that is likely to lead the pharmaceutical industry for the foreseeable future.

Regulatory Status – The Biologics Act

* The FDA gained the authority to approve biosimilars (including interchangeables that are substitutable with their reference product) as part of the Patient Protection and Affordable Care (PPAC) Act, or ACA, signed by President Obama on March 23, 2010.

* The Biologics Act, a subtitle of ACA, brings the U.S. in line with other jurisdictions that already have enacted similar measures. The European Union pioneered biosimilar legislation in 2005. India and China have also recently enacted laws governing the development of biosimilars.

* Although the Biologics Act granted the FDA authority to approve follow-on biologics theoretically through an “abbreviated pathway”, the agency has yet to approve a biosimilar, at least in part due to the complexity of biologics.

* Prior to the implementation of the ACA, only a few subsequent versions of biologics were authorized in the U.S. through the simplified procedures allowed for small molecule generics, namely Menotropins (January 1997) and Enoxaparin (July 2010), and a further eight biologics through the 505(b)(2) pathway.

* Non-patent exclusivity – The passing of ACA guarantees the reference biological a 12-year marketing exclusivity period from the time of FDA approval. During this time, the follow-on product cannot be launched – regardless of patent protection or a lack thereof. This includes a provision similar to the Hatch-Waxman Act that precludes the filing of an application for a follow-on biologic product until four years after the launch of the innovator’s product5.

Regulatory Status – FDA Guidance

* Last February, the FDA released initial drafts of guidance aimed at the implementation of the Biologics Act and reflect the agency’s current positions on certain aspects of its provisions6. However, great uncertainty remains.

* Much of the uncertainty revolves around the requirements for demonstrating biosimilarity, starting with extensive structural and functional characterization of the proposed and referenced product.  This characterization is the “foundation” of a biosimilar development program and informs the type and extent of additional studies that the FDA will require. The entire process may require applicants to account for variability associated with manufacturing, while also performing toxicity studies in animals and clinical trials in humans.

* The drafts leave several issues unresolved: The FDA did not address what standards would be necessary to demonstrate a follow-on biologic’s interchangeability with a reference product. The agency did not provide specific requirements, such as the scope, size, and number of clinical tests, or the quantity of production lots to be tested. Nor did the FDA address biosimilar naming conventions, with innovators arguing that biosimilars should have names that are different from those of the reference biologics. Finally, the guidelines do not address the exclusivity periods or patent dispute resolution procedures.

* In August 2012, the FDA conceded that its progress in completing and finalizing rules has been slower than it had hoped, and that it has still not provided the industry with many details. In particular, the FDA noted that it has not yet dealt with interchangeability.

* Although the FDA has not yet approved a biosimilar or decided whether a biosimilar is interchangeable with a brand-name biologic, this has not stopped more than a dozen state legislatures from considering bills that would allow substitution7. The states are being challenged by big biotechs such as Genentech and Amgen who aim to keep rivals from having easy entre to their lucrative markets.

Industry Trends

* Based on the guidelines provided by the FDA, together with the costly manufacturing processes, it is estimated the development costs for biosimilars could be between $75–250 million per molecule8.

* Biological brands with a total global market value of over $40 billion in annual sales are expected to lose patent protection by 2016.

* According to the PharmaExecBlog, the peak penetration of biosimilars over four years has been between 10 and 35% (although in Europe somatotropin and filgrastim have provided contrasting examples). The price erosion of the originator brand following biosimilar introduction has been modest — in the range of 20 to 40% in Europe. There is a tendency to price close to the originator and then to compete for share using institutional rebates and contracting rather than competing directly on price9.

* The Alliance for Safe Biologic Medicines, a group that includes Amgen, Genentech and the BIO trade group, wants clear lines drawn for substitution, such as giving physicians authority to specify “do not substitute” and that such an option should override any policy from payers or state law that would have substitution be the standard or default practice10.

* An October 2012 survey from BioTrends Research, showed oncologists in the U.S. and around the world indicated that 42-45% on U.S. docs would take a “wait and see” attitude toward prescribing biosimilar mAbs when they first become available. This contrasts with 25% docs in France and 33% docs in Germany for example11.

Industry News & Transactions

[2/20/13] FierceBiotech “Star-crossed Merck reorganizes troubled biosimilars effort around Samsung pact” Just two months after Merck dropped out of a snake-bit biosimilar development program for Enbrel, the pharma giant – which has experienced a number of setbacks in the field – has stepped back up with a new, high-profile partnership, teaming up with a new venture formed by the South Korean conglomerate Samsung and Biogen Idec. 

[2/20/13] Forbes “There’s Nothing Contradictory About Amgen’s Biosimilars Move” Making biologics is hard; Amgen is very good at it. That’s a reason to argue for making it very tough to get a biosimilar approved. It’s also an argument that if you’re really good at making biosimilars, it’s a good market to be in, because lack of competition will mean prices don’t drop as much and there will be fewer players to split the pie. Amgen would like there to be as few biosimilar manufacturers as possible. It also would like to be one of them.

[2/14/13] Pharma TimesBiocon buys Actavis out of biosimilar JV, teams up with Mylan” Mylan has stepped in to replace Actavis and partner with India’s Biocon on a set of three biosimilar versions for a trio of insulin blockbusters that currently garner $11.5 billion in annual sales.

[1/31/13] FierceBiotechGenentech flashes PhIII progress for prized Rituxan successor” In a way, Genentech is competing against itself and holding all the good cards in the development of GA101. Rituxan, the multibillion-dollar drug from Genentech and Biogen Idec ($BIIB), is the standard of care for CLL cases that express CD20. However, the blockbuster loses patent exclusivity in Europe in late 2013, and those developing biosimilar versions of the drug aim to grab market share from Biogen and Roche/Genentech.

[12/16/12] Press ReleaseCatalent and UMN Pharma announce collaboration for Biosimilar Development and Production in Japan” Catalent announced that it has signed a deal to provide biosimilar cell lines to Japan’s UMN Pharma, a development and manufacturing agreement designed to jump-start the CMO’s presence on the Asian market. Neither company disclosed the terms of the agreement, but the deal tasks Catalent with using its GPEx technology to produce high-yielding cell lines, and UMN, in turn, will recruit pharma outfits that want to partner on biosimilar development in Asia.

[10/31/12] Press ReleaseNovartis to start construction of new biotechnology facility in Singapore with an investment of over USD 500 million” Novartis announced the construction of a new state-of-the-art biotechnology production site in Singapore with an investment valued at over USD 500 million. The new facility will focus on drug substance manufacturing based on cell culture technology.

[10/19/12] ReutersActavis CEO: originators to have edge in “biosimilars”” “Biosimilars will have to be advertised and explained. That would be something relatively new to the generics industry,” Actavis CEO Albrecht told Reuters. “We will have to learn again to generate prescriptions.”

[10/17/12] The Korean TimesSamsung halts clinical tests for biosimilar” The South Korea-based conglomerate has halted development of a biosimilar version of the blockbuster biologic Rituxan/MabThera, with the path to develop the knockoff version of the protein drug appearing thornier than some people thought, The Korea Times reported. An unnamed company source told the Korean newspaper that recent regulatory guidelines from U.S. regulators could be partly to blame for the delay.

[10/4/12] FierceBiotechBiosimilars team at Teva/Lonza slams the brakes on Rituxan knockoff” Three years after Teva and Switzerland’s Lonza joined forces to create a new joint venture to develop a few blockbuster biosimilars, Teva announced that it has suspended its Phase III study of a biosimilar of Roche’s Rituxan. Both companies through unnamed sources indicated the decisions were made due to an uncertain regulatory environment.


1: Transparency Market Research – “Biologics Market – G7 Industry Size, Market Share, Trends, Analysis, And Forecasts 2012 – 2018

2: Forbes – “The Best Selling Drugs of All Time; Humira Joins The Elite

3: Biosimilars – “Scientific factors for assessing biosimilarity

and drug interchangeability of follow-on biologics

4: SKGF – “The New Biosimilars Act – Overview of the Legislation and IP Implications

5: Pharmaceutical Compliance Monitor – “Biosimilars vs. Generics – Major Differences in the Regulatory Model

6: FDA News Release – “FDA issues draft guidance on biosimilar product development

7: PharmalotOne Down, 13 To Go: A Biosimilar Bill Falls Flat

8: Pharmaceuticals – “Biosimilars: Company Strategies to Capture Value from the Biologics Market

9: PharmaExecBlog – “Biologics: The Next Patent Cliff

10: The New York Times – “Biotech Firms, Billions at Risk, Lobby States to Limit Generics

11: BioTrends Research Group – “Biosimilar Versions of Monoclonal Antibodies for Cancer are Forecast to Garner Sales of $4.9 Billion…

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Modernizing Pharma Markets in Brazil and Mexico

Key Takeaways

* Policies in Brazil and Mexico have been introduced that require generics to have bioequivalence data (i.e., drugs must demonstrate bioequivalence to their corresponding reference drug)

* These reforms are phasing out “similares” (non-bioequivalent copy drugs) that have been popular in both markets, thereby shifting the advantage away from branding/marketing to upstream manufacturers that comply with quality/bioequivalence requirements

* However, questions remain how much of the market will shift as local and foreign firms continue to invest in both branded sales forces and improved, complying manufacturing facilities

Latin America as an Emerging Pharma Market

According to a March 2012 Deutsche Bank market research report1, the Latin American pharma market is worth more than $60 billion per year, which is equivalent to 7% of global pharma sales.  The market has always presented a challenge for pharma companies due varying demographics and a diversity of political and economic systems.  However, healthcare reforms are changing the landscape in Latin America’s two largest markets – Brazil and Mexico – as governments aim to reduce healthcare costs by phasing out similares (branded generics that lack bioequivalence data) in favor of generic drugs (whether branded or unbranded).  Governments also hope these reforms will provide the regulatory framework and market incentives necessary to promote investment in local drug manufacturing operations that meet the high international quality standards required for pharmaceutical exports.  A similar trend was seen in India – which often serves as the model for said reforms.


According to a report from Cutting Edge Information2, Brazil is on the verge of emerging into a world power, perhaps even surpassing the other BRIC countries (Russia, India, and China).  It is already the largest pharma market in Latin America (accounting for more than a third of regional pharma sales), and ranks seventh globally due in part to the following:

  • a fast-growing and increasingly wealthy middle class,
  • favorable demographics (aging population with associated chronic medical conditions),
  • high out-of-pocket or private funding (20% of Brazil’s 200 million people have private insurance),
  • developing regulatory and patent systems,
  • high healthcare spend (8% of GDP), and
  • a stable political environment.

With pharma sales growth expected to remain the 11-13% range3 in the years ahead, IMS Health4 forecasts Brazil’s pharma sales to climb to sixth globally by 2015.

Brands Entrenched in the Brazilian Market

The pharma market in Brazil has been driven predominantly by growth in the branded drugs segment (including off-patent brands and branded generics), which are preferred by both out-of-pocket payers and prescribing physicians. A closer look at the market shows that only 4% of sales comprise unique, patented drugs (usually in niche areas), while unbranded generics account for 17% of the market (albeit this is the fastest growing segment – as will be discussed later).  That leaves nearly 80% of the market made up of off-patent branded generic drugs (e.g., innovator brands that have lost patent protection, third-party branded generics, and “similares”).  This branded proportion has only fallen slightly in recent years, from 84% in 2007, due in part to the large sales forces on the ground targeting physicians (and in some cases pharmacists) in an effort to preserve market share for the well-entrenched branded generic drugs.  Also, aggressive pricing has lowered branded generic costs to levels approaching unbranded generics – so, in this sense, government efforts to reduce drug costs are working despite the high prevalence of branded drugs still dominating the market.

The situation in Brazil is similar to much of the rest of Latin America where physician-driven, branded generics, including similares, have dominated the market. Similares were largely introduced before patent regimes were enforced or bioequivalence standards were introduced, and are sold under a brand name rather than an international non-proprietary name (or INN).  As a result, these branded, copy drugs became entrenched in the market, especially in Mexico where it’s common for patients to purchase drugs without a prescription, in which case pharmacists may advise on substitution.  Also, because generic quality has been uncertain in the past, brand has played an important role in generic choice, and led to further brand competition.  Government policies aim to change these market forces.

Phasing out of Similares

In 1999, the Brazilian government introduced and passed the Generics Act – legislation that requires a higher standard for the manufacturing of generic drugs – as well as bioequivalence data for said generics.  The aim of the legislation was twofold: increase consumption of generic drugs (compared to expensive branded originals), thereby reducing healthcare costs; and foster the development of a domestic pharmaceutical industry. Under the Act, registration of new similares was banned after 2003, and existing similares, launched prior to 1999, were required to pass bioequivalence tests by 2014 to remain on the market.  The cost of bioequivalence studies varies depending on the complexity of the molecule, but it is generally considered to be prohibitively expensive for some of the country’s smaller firms.  Furthermore, some firms lack the expertise or equipment to conduct bioequivalence studies, and, in any case, some products may not be bioequivalent. As a result, many companies could potentially exit the market or discontinue certain product lines as the 2014 deadline approaches.  According to the Brazilian regulatory agency ANVISA5, around half of all marketed similares have yet to demonstrate the requisite bioequivalence.

Impacts of the Generics Act

The Generics Act has fostered an era of ‘technology-based competition logic’6, under which Brazilian firms are modernizing their production facilities and developing innovation capabilities. For instance, between 2000 and 2003, generic producers in Brazil invested nearly a billion dollars in the construction and modernization of units7.  About 1,140 new pharmaceutical products were granted marketing approval between 2000 and 2005 – many of which are generics8. The increase in market size has clearly benefited Brazilian firms.  According to Osec9, there are 270 private and 20 state-owned pharmaceutical laboratories in Brazil, and many have started to make their mark – at least locally.  As mentioned above, this growing business has been driven by the government’s industrial policy, enhanced regulations, and the introduction of generics.  Many pharma companies, whether local or multinational, see the Generics Act as an opportunity to take market share left by companies/products exiting the market, and to acquire assets at a discount from struggling, non-complying companies.  While the Act requires higher fixed costs of production to meet the new standards with respect to drug quality, local firms that comply have been able to enter the growing generics market – both locally and abroad.

In addition to the Generics Act, the Brazilian government has also launched a campaign to inform the public about the quality of unbranded generics (i.e., those sold under an international non-proprietary name), while also rolling out the “Farmacia Popular” program, which provides access to free medicines for chronic conditions like hypertension and diabetes.  These policies and programs – together with many popular branded drugs coming off patent – have been key factors contributing to the increase in market share of locally manufactured, unbranded generics.  Also, as Brazilian officials had hoped, the spend on expensive branded products within the country is decreasing while local generic players are growing stronger thereby forcing innovators to move into niche segments or invest in mature lines with strong brands.  As the population has become increasingly more comfortable with the quality of generics, the larger domestic manufacturers – which primarily market branded and non-branded generics – have taken market share (from multinationals) through aggressive promotion, heavy discounting, and exploiting relationships with pharmacists and physicians.  This trend is also being driven by large retail pharmacies, especially in Mexico, where multinational players like Walmart are quickly gaining control of the retail market through aggressive promotion of less expensive non-branded generics readily available through their existing supply channels.

Multinationals are also making inroads further upstream as Brazilian pharma companies seek global partners in an effort to comply with federal regulations and preserve existing value in their similares brands.  At the same time, multinationals see an opportunity to take advantage of consumer choice and brand loyalty by buying or partnering with reputable, recognizable local firms. For example, Pfizer took a stake in Teuto Brasileiro, while Sanofi’s Medley generics business is investing in a similares sales force to leverage existing brand loyalty for its well-known products.  In addition to acquiring local pharma companies for their brands and sales forces, numerous global pharmaceutical companies are starting to use Brazil as a production platform, and, in some cases, investing in R&D opportunities in the country.  Other examples of pharma-related M&A transactions in Brazil – both local and international – are listed in the table below with deal values provided when available.

Brazil M&A Transaction Table

A Similar Situation in Mexico

Mexico represents the second largest pharma market in Latin America – worth $11.4 billion in 2010, which ranks fourteenth globally according to Deutsche Bank – while a Russell Reynolds Associates report ranks Mexico as the tenth largest global market for healthcare products. It is largely a self-pay market with government spending limited primarily to a short list of formularies for the poorest of the population.  The pharmaceutical market has grown to its present value from about $7 billion in 2004 despite a severe economic recession in recent years.  IMS predicts the market will continue to grow at a compound rate of 6% per year over to reach around $13 billion in 2014.  While noting the reluctance of government plans to include any new therapeutic advances on formularies, a recent Deutsche Bank market research report cites several companies that are optimistic about Mexico, including Sanofi, which recently rolled out its successful Brazilian generics brand Medley there.

Like Brazil, there is an emphasis on branded drugs, which has resulted in limited unbranded generic penetration.  Even in the public sector, non-branded, substitutable generics account for less than 10% of pharmacy sales (with Business Monitor International putting the number as low as 4% of total pharmacy sales).  However, the generics industry trade body, Asociacion Mexicana de Fabricantes de Genericos (AMEGI), believes that generic consumption in the private sector will accelerate in the coming years due to the expiry of patents on a number of high selling drugs, and, more importantly, the introduction of legislation – like that seen in Brazil – that requires bioequivalence data.  The 2005 reform, issued in Article 376 of the General Health Law, requires the interchangeable-generic designation for drugs to be sold as generics.  These new rules mean product registration is no longer unlimited – instead now only lasting for a five-year period, and drugmakers must demonstrate bioequivalence and therapeutic efficacy prior to initiating the production of any new drug.

Whether these rules will lead to a shift away from the dominance of brands remains to be seen.  Some pharmacies are so married to their similares brands that they maintain physicians on staff to offer free medical services for customers, who in return are given scripts for similares brands offered by the pharmacy.  However, shifts in the market similar to those seen in Brazil – that is the relatively fast growth of unbranded generics from a low base but with branded generics and off-patent branded originals continuing to dominate prescribing – are already taking shape.  In both countries, a first meaningful step has been taken: the regulatory framework is in place to change consumer perception of generic drugs and incentivize investment in world-class drug manufacturing facilities. Pharmaceutical manufacturing firms are opting to pursue bioequivalent generics – or partner with those who can. Even manufacturers who have opposed tougher bioequivalence requirements now see legitimate generics as the only way to secure market position domestically and in the regional marketplace in the long-term.

Perhaps more than pharmaceutical manufacturers or distributors driving change in the Mexican pharma market, it’s the large, chain retail pharmacies (often part of multinational retail stores like Walmart – which was opening nearly a store a day in Mexico during 2011) that are increasingly introducing cheap interchangeable generics or their own private-label generics to the market in a model favored by cost-conscious U.S. consumers and payers.  Those local players, whether on the manufacturing or retail side, with antiquated operations that are slow to adapt to the evolving market are being targeted by equally slow to adapt large pharma companies that view acquisitions as the only way to maintain market share.

M&A Activity in Latin America: Evidence of Change

Mexico has not experienced the same M&A deal volume seen in Brazil; however, both Opko Health and Valeant Pharmaceuticals, two active players in the Latin American market, have made purchases during the last three years.  See “Mexico M&A Transaction Table” below.  Valeant’s acquisition of Tecnofarma S.A. de C.V., a producer of generic pharmaceuticals which has a number of manufacturing sites including a new 160,000 square foot manufacturing plant, allowed its Latin America business to reduce its dependence upon third-party manufacturers.  Also, through the transaction, Valeant acquired 80 registered products – many of which were introduced into their branded generic platform in Mexico.  More recently (April 2012), Valeant agreed to acquire certain assets from Atlantis Pharma, a branded generics pharmaceutical company in Mexico with products in the gastro, analgesics and anti-inflammatory therapeutic categories, for approximately $71 million. J. Michael Pearson, chairman and CEO at Valeant, said of the deal, “Atlantis Pharma’s well-known brands in Mexico, and the potential to expand our export business to Central America and the Andean region, make this a strong addition to our current operations in Mexico.”  Meanwhile, Opko Health added an ophthalmic brand and other pharmaceutical products through its acquisition of Pharmacos Exakta, a privately owned Mexican pharmaceutical company.

Mexico M&A Transaction Table

With bioequivalent generics at mere 4% of total sales in Mexico and an improving regulatory environment for generics, many global pharma companies, especially Indian generics (e.g., Wockhardt, Ranbaxy, Dr.Reddy’s, Glenmark and Torrent), have increased their presence in Mexico with the expectation that bioequivalent generics will grab a significant share of the market in the next few years.  For example, Torrent Pharma has launched six products in Mexico from its CNS portfolio with a sales force of 35 people. It is planning to launch more products from its cardiovascular portfolio in the near term.   The company ultimately hopes to expand to 30 products with a sales force of 200 people.


Recent healthcare policies in both Mexico and Brazil represent steps in the right direction towards modernizing the pharma markets in both countries such that competition is based, at least partially, on technology rather than branding and marketing.  While there’s a clear shift towards lower-priced generics (including interchangeable, non-branded generics) as similares are phased out of the market, it’s still too early to say if Mexico or Brazil will become the next India in terms of generics exports.  At the very least, the high M&A deal volume in Brazil suggests the necessary investments are being made to support the required innovation – even if these deals are initially motivated by grabbing branded market share.  Perhaps a similar increase in Mexico can be expected as the political and economic situation there stabilizes.


1 Deutsche Bank – Market Research “LatAm Field Trip – Key Takeaway”, March 28, 2012

2 Cutting Edge Information – Emerging Markets Clinical Trials: BRIC Countries (PH143), 2010

3 Deutsche Bank – Market Research “LatAm Field Trip – Key Takeaway”, March 28, 2012

4 IMS Health, PharmaVOICE Report, January 2011

5 Agência Nacional de Vigilância Sanitária (ANVISA)

6 Frenkel, J., 2001. O Mercado Farmacêutico Brasileiro: A Sua Evolução Recente, Mercados E Preços. In: Brasil: Radiografia Da Saúde. Negri, Barjas, Di Giovani and Geraldo (Eds.). IE/Unicamp, Campinas.

7 Oliveira, M. A., et al., 2004. Pharmaceutical Patent Protection in Brazil : Who Is Benefiting. WHO/PAHO Collaborating Center for Pharmaceutical Policies, National School of Public Health Sergio Arouca and Oswaldo Cruz Foundation, Rio de Janeiro.

8 Guennif and Ramani. Catching up in pharmaceuticals: a comparative study of India and Brazil. United Nations University. October 2011

9 Osec. Brazil’s Pharmaceutical Industry, Opportunities for Swiss suppliers. June 2010

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The Medical Device Excise Tax (MDET) – Ramifications for Device Makers

* The Medical Device Excise Tax is a 2.3 percent tax based on the sale price of certain medical devices sold in the U.S. by the manufacturer, producer or importer of the device.

* The tax goes into effect on sales made after December 31, 2012, and revenues from the tax will be used to help finance the Affordable Care Act.

* Those in the industry argue the tax will lead to the elimination of jobs, cuts to research and development budgets, and roadblocks in the development of new therapies.

* The largest impact may be on private payers – who will likely absorb much of the cost associated with the new excise tax.

*  With the excise tax introducing further price pressure on an already fragmented industry struggling to maintain innovation in the face of reimbursement cuts, the device space may see more acquisitions – especially those that introduce benefits of scale and diversity of product offering while achieving cost synergies.


Medical device makers are rallying to oppose a new “sales tax” that they argue will have broad implications for innovation and the sustainability of medical device manufacturers in the U.S.  The new tax, referred to as the Medical Device Excise Tax (MDET), imposes an excise tax on sales of any “taxable medical device” by the manufacturer, producer, or importer of the device, in an amount equal to 2.3 percent of the sales price.  The MDET, which goes into effect January 1, 2013, is forecast by the Office of Management and Budget to raise $20-30 billion over a 10-year period, and will help finance the Affordable Care Act that was signed into law in March of 2010.

Resistance from the Medical Device Industry

Faced with the new fees, the medical device industry has organized a campaign aimed at repealing the excise tax.  In a letter to Congressional leaders urging the repeal of the legislation, a coalition of over 400 medical device companies notes that it invests close to $10B in research and development annually. Outside of a few big players like Stryker, Medtronic and Boston Scientific, the medical device sector is largely a start-up and small business industry with over 80 percent of medical device companies employing fewer than 50 employees. Only two percent employ more than 500.  The letter goes on to say the device tax will have the greatest effect on many of these small to mid-sized companies, which may owe more in taxes than they generate in profits since the tax is applied to total sales revenue.  This, the coalition argues, would result in the elimination of jobs, cuts to research and development budgets, and roadblocks in the development of new therapies.

Among those voicing concern is the Medical Technology Alliance (MTA) and its regional associates such as The Massachusetts Medical Device Industry Council (MassMEDIC) and MichBio.  These groups have descended on Washington armed with data and worst-case scenarios from the industry to support their claims that the new tax while have far reaching effects on device makers.  Their arguments include a recently published survey from MassMEDIC that polled forty-two senior industry executives who are planning a variety of moves to keep the 2.3 percent excise tax from hurting their bottom lines.

Key findings of the survey include:

• As of February 2012, 10 months before the tax goes into effect, only 25 percent of responding companies have put systems into place to comply with the MDET.

• 44 percent of respondents stated that their companies would pass the cost of the new tax on to end users such as hospitals, clinics, purchasing organizations and doctors. This would result in higher costs for medical devices sold in this country.

• 39 percent of respondents stated that their companies would assume the cost of the MDET, implementing internal cost reductions to meet revenue losses, taking the following actions:

− 50 percent will cut R&D operations

− 25 percent will implement workforce reductions

− 25 percent will outsource manufacturing to lower cost areas

The survey also found that 49 percent of respondents said that the MDET would have a ‘significant impact’ on their company’s operations.

“We warned two years ago that medical device companies would be forced to deal with this tax by preparing for job cuts and reductions in R&D spending,” said Tom Sommer, President of MassMEDIC. “The U.S. leads the world in developing and manufacturing medical products, it doesn’t make sense that on one hand the government is promoting exports and manufacturing jobs, while on the other hand it is implementing policies that will cut jobs in this sector and harm its competitive advantage – the development of innovative medical technologies.”

These feeling were echoed by Stephen Rapundalo, head of the industry association MichBio, in a recent Xconomy article that also explores the impacts of the MDET. Rapundalo says the medical device tax is already forcing companies to reduce costs—which usually involves cuts to R&D—so they’ll have the money when the first tax bill comes due on January 1, 2013.  Stryker, based in Kalamazoo, Michigan, pre-emptively cut its worldwide workforce by 1,000 people last fall, which Rapundalo says was in preparation for paying the excise tax.  Another possible outcome he predicts is that companies will look at moving their operations to lower-cost areas overseas.  A much cited study financed by AdvaMed, an industry trade association, alleges that the tax would cause 10 percent of device manufacturing to move offshore, leading to the loss of 43,000 U.S. jobs.  However, this argument is debatable since the tax will only apply to medical devices sold in the U.S., including those that are imported, but does not apply to devices that are manufactured and sold abroad.  According to The Economist magazine, the effect of the excise tax on the medical device industry will be “trivial compared with other shifts,” such as “scandals, recalls, stingy customers, [and] anxious regulators,” all of which have left the industry in a “rut.”  Read the whole article here.

In a recently published white paper, the Center on Budget and Policy Priorities (CBPP) takes on other claims made by members of the medical device lobbying campaign, namely it’s effects on innovation and consumer spending.  According to the CBPP, the excise tax is not likely to have a large effect on innovation in the medical device industry, despite claims to the contrary. The CBPP cites work done by PricewaterhouseCoopers that identifies five pillars of medical technology innovation: financial incentives, human and physical resources, a favorable regulatory climate, demanding and price-insensitive patients, and a supportive investment community.  The CBPP argues the excise tax will only have a small effect on one of the pillars – financial incentives.

The CBPP also argues the effect of the excise tax on consumers’ costs for health care and health insurance will be minimal.  The CBPP goes on to explain that spending on taxable medical devices represents less than 1 percent of total personal health expenditures, so a small increase in their price would have non-material effect on health insurance premiums.

Many proponents of the health care reform law, including the CBPP, justify the MDET and other new sources of tax revenue arguing that medical device companies will experience an increase in revenue as a result of millions of newly insured citizens. However, if Massachusetts, with its universal health care law, serves as an example, opponents to the tax will point to the MassMEDIC survey that shows none of the responding device makers reported an increase in unit sales in Massachusetts since 2006.

Analysis – the real costs of the excise tax on medical device makers

On February 3, the IRS issued proposed regulations that provide guidance on the 2.3 percent excise tax that will be imposed on the sale of certain medical devices by a manufacturer, producer or importer.  The new law provides that any device defined in §201(h) of the Federal Food, Drug, & Cosmetic Act (FFDCA) that is intended for humans will be taxable. The FFDCA is written broadly to include instruments, machines, implants and in vitro reagents, among others.  However, consumer devices like hearing aids, eyeglasses, contact lenses and devices determined by the Secretary of HHS “to be of a type which is generally purchased by the general public at retail for individual use (the retail exemption)” will likely be exempt.  There is also an exemption for devices that are labeled as “Research Use Only” if they are not listed with the FDA. Less clear is whether durable medical equipment like wheelchairs, prosthetics and orthotics will be subject to the tax.  PricewaterhouseCoopers offers an in-depth look at the new IRS and Treasury rules here.

In addition to the uncertainty as to which medical devices will be taxable under the new rules, determining the incidence of this tax will be further complicated because government programs likely will not increase reimbursements to cover it, and, according to an Ernst & Young report, the federal government pays for more than half of all medical devices through Medicare, Medicaid, the Veterans Administration, and the Department of Defense.  There is also uncertainty when, or at which point in the manufacturing and sales process, the tax should be levied. Medical device companies have multiple units in the manufacturing process – meaning that determining where an actual sale occurs still isn’t clear. For example, a medical device manufacturer may have several of its products or components outsourced to engineering and design firms during the manufacturing process.

To better understand the potential costs of the MDET, including their materiality, we have provided a table with trading comps for seven leading medical device companies, as well estimates for the expected after-tax impact of the excise tax:

Medical Device Trading Comps

Estimated Excise Tax

The excise tax amounts provided in the “Estimated Excise Fee*” column were determined using the following assumptions: U.S. Sales and Net Income were determined using actual FY 2011 CapIQ data, and 80 percent of those U.S. Sales are taxable at the full 2.3 percent excise tax rate.

Two Seeking Alpha** articles provide estimated MDET liabilities for Medtronic and St. Jude Medical.  The writer estimates, for Medtronic, the after-tax impact of the excise tax to be $87 million, based on U.S. sales of some $9.1 billion, about 80 percent of which he estimates to be impacted by the tax. He goes on to explain that while the tax rate is 2.3 percent, the model assumes some offset from price increases or other mitigation factors so that the final impact is 1.5 percent before tax.  For St. Jude Medical, the after-tax impact of the excise tax is estimated to be $25 million, based on the company’s U.S. based revenue and an incidence of tax of 50 percent which contemplates that the company may be able to raise prices marginally in the wake of the excise tax.

The last column (“Company Estimates”) provides MDET estimates disclosed by Medtronic and Stryker during interviews or other disclosures.  For example, former Stryker CEO Stephen MacMillan estimated the tab on the medical device tax at $150 million when the company announced layoffs and restructuring efforts to reduce costs by more than $100 million.  Medtronic Chief Financial Officer Gary Ellis, provided his company’s estimate of $125-175 million during a recent conference call with investors.

Beyond the estimates provided above, many in the medical equipment industry are coming to realize that the tax may be even more expensive according to a recent MASS Device article.  Most of those costs will be soft, such as the opportunity cost of diverting staff from other projects. Others will be more tangible, such as having to hire accounting, IT and other specialists.  While the larger companies in the industry have the bandwidth and cash to easily absorb a few more consultants, there is concern that the many small medical device firms across the country, which make up the majority of the industry, will not be equipped to properly deal with the new tax and consolidation within the industry may result.

Ramifications for the Industry

Given the uncertainty associated with the new excise tax, there may be opportunities to restructure operations, especially related to a company’s supply chain, to better navigate the new tax laws.  In a November 2011 Ernst & Young Tax Practice presentation entitled “Making Sense of the New Excise Tax on Medical Devices”, it’s authors Christopher J. Ohmes and Michael Udell point out that while the tax might merely be added to the invoice price of taxable medical devices and passed along to customers in a manner similar to, for example, the manufacturers excise tax on tires, this scenario is unlikely because Medicare and Medicaid, the Veterans Administration, and the Department of Defense pay for the majority of the medical device sales and uses in the United States.  In this scenario, it is likely private payers that will bear the brunt of any price increases introduced to offset the MDET.  Manufacturers may try to push the tax back onto their suppliers or try to reduce their operating costs in response to this new tax.

Also, there may be pressure to limit taxable medical device sales as companies seek to unbundle arrangements consisting of both the use of property and services and to modify the item defined as a medical device to determine whether component parts can be excluded from the medical device definition. By way of example, Ohmes and Udell ask if a keyboard used to initiate the operation of a procedure could be excluded from the definition of a medical device. This response could be complicated, because the act of unbundling some components to avoid federal excise tax may expose a previously exempt medical device to additional state and local sales taxes.

In some cases, medical devices that are profitably manufactured in the United States may no longer be sold profitably. The profitability of some rental arrangements likely will be substantially reduced. It is also possible that captive U.S. manufacturing arrangements may become uncompetitive in comparison with the importation of a similar good. As the January 1, 2013, effective date of the tax approaches, medical device manufacturers may need to consider that the MDET may simultaneously create tension within distribution channels and supply chains.

A Final Note on Renewal of the Medical Device User Fee Act (MDUFA)

The second issue facing the medical device industry is the renewal of the MDUFA, which creates a new user fee agreement negotiated between the medical device industry and the Food & Drug Administration (FDA). It provides new guidelines for how companies will pay for their product-approval submissions, as well as the timeline the FDA has to conduct those product reviews. These changes are generally welcomed by the industry since they offer more stringent terms for “pay-for-performance” expectations – something that is sorely lacking at the agency.  It seems in this case, the industry is content to pay higher fees since it is puts a greater importance on the FDA acting quickly, and a more equitable way to measure approval times.

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Strong Fundamentals and “Eagerness” Likely to Drive More M&A Deals in 2012

According to an Ernst & Young report released last week (12/9/11), strong fundamentals, led by an increased focus on growth, should generate an uptick in deal flow in 2012 compared to 2011, which has been flat YTD in terms of the number of deals.

  • 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 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.


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


“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.


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

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Pharma R&D Productivity Continues to Fall

Drug developers are facing a development drought that persists despite greater R&D spending, consultants at Oliver Wyman find in a new report.  Specifically, the report claims the value generated by a dollar invested in pharmaceutical R&D has fallen by more than 70% in recent years.

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.


The Bourne Partners Team

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