Oncology Market: Drivers and Challenges

As pharma celebrates its 16-year high NME approvals, productivity of certain disease areas including oncology certainly fall behind. Oncology diseases are the most complex in terms of research and development. At the research stage, target identification has been a major challenge due to the high toxicity of potential drug candidates. At the development stage, pharma has failed to add significant value in terms of safety and efficacy. Complexity of cancer diseases is proven by the low approval rates as opposed to other therapeutic areas (Figure 1; Kola and Landis, 2004).

Figure 1: Success rates – Oncology vs. All therapeutic areas

Figure 1 shows that the overall success rate of Oncology drugs is half of that of all other areas (on average). Although oncology approval rates are low, according to IMS Health oncology market has the largest share compared to other disease areas ($US 42 bn, ~7% of global pharma market) with compound annual growth rate (CAGR) of 10,5% (Figure 2).

The global market for pharmaceuticals (all areas) is estimated to experience a CAGR of 6.3% (Figure 3). Prescription drugs that were active in the market between 2007 and 2011 were found to be ~5,700 in number. Similarly, the number of oncology drugs was ~500.

Figure 2: Global Oncology Market (2007 - 2011)

Figure 2: Global Oncology Market (2007 – 2011)

Figure 3: Global Pharma Market (2007 - 2011)

Figure 3: Global Pharma Market (2007 – 2011)

Aggregate sales (in period 2007 to 2011) for oncology and all therapeutic area drugs was US$ 262 bn and US$ 3801, respectively. This results in average sales per product for oncology drugs US$ 524 mn (aggregate sales / # of products active in the market) and for all drugs $US 668 mn. Assuming even sales each year, oncology drugs achieved, on average, sales of $US 105 mn (per product per year) while other drugs, sales of $134 mn (per product per year).
The analysis above shows that both R&D and market productivity for oncology drugs is lower than other therapeutic areas. In addition, a thorough analysis from EvaluatePharma shows the oncology market outlook in 2014. What is interesting, is the dominance of Roche (with Genentech) in the market as well as AstraZeneca’s and Sanofi’s market share shrinking (projected – see figure 4).
Why does pharma continue to get involved in oncology? There are several market drivers that attracts  are:
  • Cancer prevalence: The main reason that the market is growing faster than other areas. Increased cancer prevalence is associated both with population growth as well as with increased life expectancy.
  • Early diagnosis: Due to emergence of advanced imaging techniques and computer simulations it is diagnosis has been more efficient and diseases can be detected earlier.
  • Academic collaborations and partnerships: Pharma and biotech companies, in order to reduce both the high R&D costs and risks related to cancer drug discovey, they form strategic alliances and partnerships with private academic institutions or funds. A high amount of government funded institutions are also involved in such deals. This is a major driver in the field of oncology.
  • Biotech: externalisation of R&D is becoming a major trend in pharma. Oncology drugs are commonly co-developed than developed in-house (due to their high R&D costs). Almost half of the drugs that are developed in-house at the preclinical stage, they end up as (out)licensed or co-developed at a phase III. In addition
  • Blockbuster presence: Although oncology drugs’ sales per product are lower than overall drug sales, approximately one sixth of blockbuster drugs are focused on cancer diseases, implying that oncology market profile is skewed towards high sales drugs. This makes oncology market more attractive for pharma companies.
  • Duration of treatment: As in other disease areas, drugs have succeded in extending patients’ life and therefore prescription of medicine is increased.
  • Emergence of targeted therapeutics
Apart from the attractive characteristics of the oncology market, there are also some challenges, including:
  • Cost containmentState funding for all industries has been reduced (U.S. and Europe) the past few years due to the financial crisis that has affected all areas including healthcare. As an example, the National Insitutes of Health (NIH) reduced R&D budget (compared to last year) for the first time in its history. This shows the efforts made to stabilise the upward trend of R&D spending. Moreover, the US$ 85 bn cut implemented by the US government is expected to decrease NIH spending by approximate 5% in 2013.
  • Barriers to entry: Lower approval rates for oncology drugs, makes the market of oncology riskier and more costly, raising barriers for new entries
  • Patent Cliff: Patent expirations between 2010 and 2014 put at risk at least US$ 100 bn and major oncology drugs are at stake.

Licensing agreements have proved to be more efficient from both a strategic and financial point of view, especially when it comes to oncology. A licensing deal made at a late stage will have high upfront values and low (development) milestones (high probability of approval). Instead a licensing deal involving a product at an early-stage will have a lower upfront value and higher milestones (low probability of approval).  Therefore, there is a reduction of value loss compared to the event where a company executes a project on its own. From a strategic point of view, every-day decision making and managers’ time and effort dedication (of the licensee firm) to clinical trial projects is not destructed, since only financial compensation is granted to the licensor depending on the outcome.

In my view, there are two ways to cope with the challenges of the oncology market. The first one is licensing agreements (as discussed above) which may make pharma companies more efficient by capitalising on biotech’s leading technology research platforms and scientists’ expertise. This suggested solution can reduce the effect of cost-containment as well as the major patent cliff faced by the pharma industry. The second solution would be to better understand oncology diseases and their complexity. This could only be achieved through a deeper dedication to research (drug discovery) in order to arrive to more optimised leads, which in turn it may result in more promising drug candidates.

Can biotech Mergers and Acquisitions save big pharma?

A question that seeks answer in view of the challenges that the pharma industry is currently facing globally and specially in Europe.

Pharma has to find ways in order to improve Research and Development (R&D) productivity by reducing development time frames, R&D costs and increasing the chances of success from pre-clinical phases to market launch. As these interdependent factors have remained stable or even worsen (cycle times and probability of success at each phase have not changed significantly while R&D costs have impressively increased since 1990s) pharma has to seek other methods in order to overcome these huge challenges.

In my view there are several ways to tackle these challenges:
i) Entrance to new therapeutic areas with unmet medical needs and large market potential can, in the long-term be a source of ensuring cash inflows. Adapting such entrance directly at emerging markets (BRIC) can prove successful.
ii) Filling the pipeline gap.
iii) The convergence of diagnostics with pharmaceuticals for efficient and effective drug delivery that can prove to be an additional revenue source which can then be re-invested for R&D purposes.
iv) Developing orphan drugs, not so much for financial reasons but for restoring industry’s damaged reputation.
v) Personalised medicine; need to say more?
From a company’s strategic perspective there are two main pathways for achieving these solutions: M&A and organic growth. M&A has been well-incorporated as a significant part of pharma companies’ strategy, mainly big pharma. But what are the major features of these deals in the different M&A waves? During the 1980s and 1990s there was a significant amount of pharma-pharma “mergers of equals” (at a national level) aiming at gaining knowledge about monoclonal antibodies and genetic engineering for drug discovery. In the post-merger period absorption was the most common integration technique. From the late 1990s onwards, particularly after the genomics boom, the investment community realised that there are many years ahead for the sequencing of the human genome to actually add value both financially and medically. From that point onwards, for pharma, issues such as clash of cultures, post-merger integration techniques and potential disruption of R&D, were secondary. The pharma industry performed many mega-acquisitions and hundreds of small acquisitions which had one key characteristic in common; most of the companies acquired were biotech companies present in different geographical areas (cross-border M&A). A preservational approach was used as a post-merger technique to avoid cultural clashes and financial risks as well as the time consuming and extensive process of due dilligence (which can strongly disrupt every-day decision making). The key drivers for this shift from national mergers in order to dominate, to acquisitions in order to fill the pipeline gap are mainly the intense competition from generics (70% of prescriptions in the U.S., see source 1), patent expirations (between 2010-2014 the revenue of the prescription sector is expected to be reduced will by approximately US$ 110 bn, source 2) and the pressure for lower healthcare costs (as buyers demand lower prices and reference pricing is a growing pricing strategy for public healthcare systems).
However, why did pharma choose biotech? As an industry expert had once told me “pharma missed the boat” and so it wants to catch up. But regardless of this historical explanation the main reason that big pharma focused on M&A of early and mid- stage biotech firms is biotech’s strong R&D platforms and high prospects (although having equity as the only source of funding and make little or no revenues). Pharma companies also have strong R&D focus but marketing and sales force effectiveness remain the number 1 in terms of resource and cost allocation. It has also been concluded that biologics have an overall higher chance of approval compared to chemical compounds. In addition, generics are an exact copy of branded drugs, while for biologics there are biosimilars. There is a much greater difficulty for developing biosimilars and hence, this can provide pharma companies by acquiring biotech firms, a “virtual” extention of market exclusivity.
Coming back to M&A trends; M&A intensity has remained fairly stable particularly after the beginning of financial crisis in 2008. M&A model of growth is shifting towards a hybrid model in which pharma companies form strategic alliances/partnerships or perform licensing deals with biotech firms paying them in tranches rather than up-front. In such performance-based approach pharma decides whether to acquire the biotech firm in the future or not based on its success or failure during the partnership.
The last model of growth is organic growth. This is the model followed by biotech companies up to the point which they are acquired from pharma (e.g. Sanofi-Genzyme, Roche-Genentech, AstraZeneca-MedImmune etc.). Companies that have grown organically are characterised by a high degree of autonomy and independence. But even Merck, the brightest example of such growth model, performed its first mega-acquisition by acquiring Schering-Plough in 2009. Organic growth for big pharma is not a solution anymore in such a mature and saturated market. For biotech firms, it can both be an exit strategy and a viable growth model to ensure their survival.
So can biotech M&A save pharma? In such an uncertain and ever-changing environment, the answer is: it depends. It depends on the type of M&A (horisontal or vertical, friendly or hostile), on the expectations and reactions of the investors and finaly it depends on post-merger financial strategies (do you follow the same straight-forward cost-saving strategy in R&D as in sales and marketing?). In my view, a hybrid model is required: performance based preservational M&A in combination with open innovation (in-licensing, out-licensing) and strategic alliance/partnership formation. Most big pharma companies have already started choosing this model realising its declining R&D productivity but its strong marketing and sales effectiveness; Incorporating biotech’s R&D focus and rational compound targeting and pharma’s marketing success can eventually prove to be a viable and successful business model.