Licensing, Selling and Finance in the Pharmaceutical and Healthcare Industries

The Commercialization of Intellectual Property

Martin Austin

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317105305
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Industria farmacéutica, biotecnológica y sanitaria

Licensing, Selling and Finance in the Pharmaceutical and Healthcare Industries is an assessment of the turbulent state of pharmaceutical and biotechnology markets as we enter the second decade of the 21st Century. At the same time, the book offers a cautionary evaluation of the future financing of innovation in terms of what's gone wrong and how to succeed in the future. Martin Austin explores the challenge that the pharmaceutical (and related) industries face in terms of balancing short term, cost containment and expenditure control in areas such as internal research and development; whilst embracing in-licensing and the acquisition of innovative therapies to counteract their impending portfolio weaknesses in the mid to longer term. The first part of the book provides an engaging and convincing perspective on the context in which the industry currently finds itself; the second part is a pragmatic guide to commercialising your intellectual property; including how to recognise and value what you have as well as the new ways of working that you will need to adopt when negotiating, collaborating and contracting in partnership and alliance with others. Commentators have described in great detail the cocktail of commercial, clinical and social issues that threaten to overwhelm the pharmaceutical industry; Martin Austin's book offers a very distinctive perspective on these issues and their solution.

PART I
The Challenge

This first part presents the case for overhauling the policy structures and current standard of practices which have grown up to support innovation in healthcare with a particular focus on the European situation. However there is clear relevance to practices elsewhere in the world which are adapting to changes in the market in the USA where many of these practices originated and, for instance, China, where there is such a pressure to join the race to create new medicines for the domestic and world markets. All of these groups are attempting to bring an orderly process to the transfer of technologies invented in academic laboratories to commercial use in society.

The origins of technology transfer as we see it today as a more formalized way of conducting the exchanges between scientists in academia and technologists in industry is variously credited to the CRADA Cooperative Research and Development Agreement system developed for instance at the Chicago University and the Argonne Laboratory which was one of the first means used to partner academic development with public institutions. Later at MIT a more systematized process again was developed and communicated as ‘best practice’ to other universities in the USA through the Association of University Technology Managers (AUTM), an organization intended to share practices between public organizations.

Similar practice guidelines were adopted by many universities in Europe during the 1990s and beyond to bring more of the value generated by spin-out and licensing transactions back to the institutions where they were invented rather than the individual inventors named on the patents who were having to negotiate each deal themselves with little experience and no comparative data against which to judge the correctness of the offers they received.

As these activities progressed, however, the capital markets have gone through massive changes including the boom and bust of 1999–2001 and the long drawn out recession which has developed since. The practices which had evolved were based on the American model and historical precedents of value, structure and value sharing which are largely no longer valid. Moreover, the objectives and means to externalize technologies have not kept up with the pace of change in the market. Adaptations to the thinking behind how to best achieve effective technology transfer need therefore to be accelerated.

1
Novel Market Challenges

What Has Gone Wrong?

Healthcare as an industry is one of the most costly and profitable activities in commerce yet it is filled with risk. Pharmaceuticals in particular can bring products to market which individually can generate billions in income. The reward this can bring to the successful are huge profits but this is only achieved at the expense of massive losses in failed research and development efforts. The necessarily tight regulations that govern the development of drugs, medical devices and diagnostics are there to protect patients from errors which can cost people their lives. The testing required to satisfy the regulators is exhaustive and so is also hugely expensive and requires companies to either use their profits to cover the expense or to raise money in the capital markets to make good. Safety is the first concern in every case.

In contrast, while the capital markets have also been generators of vast wealth for some people the level of regulation applied to generating new products such as derivative trading and the now infamous sub-prime debt market have revealed the shortcomings of a lack of regulation and the current continuing crisis in the capital, equity, gilt, bond and foreign exchange markets and shows the fragility that this has brought to the stability of society.

There is, however, a major overlap between these industries and drivers of the global economy and the ills affecting one cannot fail to spill over into the other. At a time when the industry side is also facing major patent expiries and as a consequence huge stresses on their ability to fund the acquisition and development of innovation it, as a major client of technology transfer, is undergoing great upheavals in its freedom to operate ‘business as usual’ and this in turn will affect the working environment for technology transfer from innovators to industry.

Moving counter to these trends, however, governmental policies designed to stimulate growth are pumping money into early-stage research and demanding that the resulting inventions are monetised to generate jobs and wealth. The long-term nature of healthcare innovation is though poorly served by clients with funding restrictions, volatile capital markets and slow-moving policy initiatives. At the interface is the technology transfer office and this is where the battle must be fought.

However, using pharmaceuticals as an example, the maintenance and continuation of earnings growth is a source of concern to many financial institutions including pension funds and insurance companies who have for so long relied upon these stocks and their dividends as a steady source of income. Right now these so-called ‘blue-chip’ stocks, held in their portfolios, are struggling to maintain their earnings status and their stock price. The level of these stock prices and the relationship between earnings per share growth and the consequent ability of these companies to borrow against their market capitalization underpins the pricing of licensing deals and acquisitions throughout the healthcare industry. This results in the benchmarking of deal valuations against this pricing ‘barometer’ and in turn sets the expectation for exit values among the early-stage companies. To use the analogy of the ‘perfect storm’ made famous in the movie, when the greatest drivers of growth amongst the largest companies, the so-called blockbuster drugs, move as a group towards a patent expiry ‘cliff’, the whole industry will be at risk. When this is allied to a market-wide risk aversion amongst financial lenders it might be concluded that this could lead to a serious reduction in the willingness of these pharmaceutical and medical technology companies to invest in the future by way of acquisitions and licensing – a tactic which would severely curtail the justification of investments that early-stage innovation needs. Despite these pressures most industry leaders have recognized that defensive strategies must be twofold. While effecting stringent cuts in expenditure on internal research and development (R&D) and other cost containment measures, the chief executive officers (CEOs) of many of the largest corporations have in fact embraced in-licensing and the acquisition of innovative therapies to counteract their impending portfolio weaknesses in the mid to longer term.

Among medical device companies the economic pressures have less to do with patent expiries than with the general economic climate which encourages restrictions in overall healthcare expenditure. In common with the pharmaceutical industry, yet also for its own reasons, the result has been an increase in company consolidations and a concentration of portfolio interests towards larger-scale indication areas such as cardiovascular applications, the central nervous system and drug-device combinations to augment their market platforms. The principal need of the major device companies is to find products which can achieve large market share and this is intended to produce the cost efficiencies of large-scale production. As with pharmaceuticals, there is a need to provide users with significant evidence of cost benefit for each product in order to achieve reimbursement by insurers and health services. Every product used for healthcare is now required to prove its value to the payor in order to qualify for financial support for the patient. An alternative would be to sell directly to the consumer but these products would then of course compete with other essential items for the public’s discretionary expenditure.

The counterpoints to these constraining issues are the healthcare policy changes of most developed nations. Here there is a pronounced move towards the prevention of disease to try and avoid the immense costs of long-term care of chronic diseases. Great strides have been made in, for instance, reducing the numbers of heart attacks through treatment of high blood pressure and high cholesterol levels. The incidence of acute myocardial infarction has begun to fall and with this so should the future costs of treating patients with failed hearts and epidemic use of coronary care units. It is to be hoped that the current research emphasis on Type II diabetes, obesity and neurodegenerative diseases will have a similar effect on the anticipated cost of healthcare provision. As a result, when one looks at the late-stage development portfolios of most of the major pharmaceutical companies today, the concentration of effort given to these particular therapeutic areas holds out considerable hope that these disease processes can be modified during their development and so prevent or delay the onset of symptoms.

In order to achieve this, objective methods and techniques of diagnosis have become the focus of much new research. Integration of new materials, information technologies and detection technologies have brought new sensitivity to many old methods and, by the lowering of detection thresholds, has permitted newly identified classes of protein and other compounds to be used as the ‘biomarkers’ of impending disease. The advent of these technologies promises to change the approaches which can be used in the management of diseases. The ambitions for Disease Management as a new paradigm were set out some 20 years ago yet it is only now that these new technologies are becoming available that its true promise may be realized. However, wide adoption of this approach has yet to be seen. An indication of the investments in this area are the great many articles, advertisements and discussions in technical journals dealing with these technologies, concentrating on this new area of biomarkers. There is an increasing call from the regulatory agencies for such biomarkers to be used in the drug development process despite the fact that in many cases validations of specific markers have yet to be adequately demonstrated. The promise of this area of research and its ability to deliver products which can change the approach of medical practice to disease management is sufficient to attract both funding and investment in product development. In principle at least, the idea of being able to monitor changes in the up-regulation and down-regulation of gene functions in an individual’s tissues where a gene abnormality has been identified (achieved merely by the measuring of peripheral blood protein levels) is an attractive proposition for healthcare providers.

The future of healthcare is therefore, as usual, in something of an uneasy balance. On the one hand the tradition of the last 20 years where huge individual products sales have driven growth of major corporations is now thought to have a more limited future. The disease areas with the largest incidences and prevalence have been or are being addressed by current research. As each major area becomes treatable with successful products available in generic form, the healthcare industry will either have to pursue multiple smaller disease areas through an innovative medicines strategy (each having high impact at the level of the individual and so commanding high prices per treatment) or will have to address the more common diseases at high volumes but with a lower unit cost per treatment. The penalty for patent exclusivity is that once a product with a superior activity loses its protection its technical superiority, yet low price, becomes a barrier to further innovation as the hurdle it sets can be too high to justify the costs of investment in marginal improvements in comparison to more innovative targets. Thus several therapeutic areas such as dermatology and pain management have been comparatively ignored over the last 20 years while more promising opportunities such as oncology have been developed. This too will hopefully change in the coming years.

Strategically the industry is consolidating into different camps. At the top end the major multinationals have reduced in number from the 50 or so who used to dominate the markets to around a dozen in pharmaceuticals and three or four in medical devices. Outside this elite, specialist companies, such as Actelion, which have evolved around individual medicines and platforms, are now reaching a point of critical mass in their own right (yet in so doing becoming the target of acquisition). These are complemented by the so-called specialty pharmaceutical companies whose expertise is focused on the repurposing and reprofiling of known chemical entities to produce new modalities of use, changing the utility and applicability of these compounds. Shire is an example of such a company which has reached a competitive ‘critical mass’ through this kind of specialty strategy. Each of these groups, on reaching their new level of maturity, now faces its own challenge in how to continue to grow especially in the new economic circumstances.

No one can ignore the events and consequences of the upheaval in the financial markets which for so long have supported healthcare and have themselves become the cause of dramatic structural changes. Two of the most significant features of this change have been the virtual elimination of a consistent initial public offering (IPO) market for biotech stocks, and resulting from that in the reduction in availability of investment from private equity, either from institutions or venture capital (VC). It is well known that there is a marked geographical difference in the impact of these effects as in the US there is clearly a higher level of risk tolerance among retail and institutional investors meaning that biotech IPOs do still occur, albeit at a much reduced frequency and value than at the last peak. In Europe both retail investors and institutions have by and large turned their back on biotech. The European VC industry finds it harder and harder to raise money and so funding is less readily available than it was five years ago and fund sizes are generally smaller. This means the entrepreneur in an early-stage development company in Europe needs to realign their business plans towards a different customer base. It is rare nowadays to see a company funded all the way through its development plans by private equity and a subsequent market flotation. Of late, the majority of business cases in healthcare markets rely upon some form of partnering, either through licensing by direct acquisition by a larger company, the so-called trade sale, and this is being seen much earlier in their development than previously. These trends are now becoming self-reinforcing as the lack of liquidity in the capital markets, which is a consequence of lower discretionary funds in the hands of private investors, restricts the flow of cash to the professional VC investment community and in turn its ability to support a broad portfolio of companies. Because there are fewer opportunities for exits as a result of the consolidation of major companies, the market for intellectual property (IP) is seeing a reduction in the prices companies are willing to pay in upfront payments and beyond. They are generally tending to rely instead on higher royalty rates to compensate their partners and, as a result, more projects are being left on the shelf. The biotech industry press is now full of stories of headcount reductions, abandonment of programmes and insolvency of companies. It is fair to say that the industry will face yet more retrenchment as a result of the economic climate coupled with its own intrinsic evolutionary cycles of popularity. On a brighter note, and as mentioned above, there is an emergent trend towards screening and monitoring of biomarkers both among treated patients, where tests can be performed to identify best responses to therapies and so optimize treatment, and among the general population, where modification of lifestyle, diet and exposure to risk factors can avoid or postpone the onset of disease. The economics of this new area will of course be quite different to the current market. It will offer significant opportunities to innovators for value creation at its own scale as the economic benefits are recognized by healthcare policy makers.

Alongside the scope of this discussion of the industry’s woes a different dynamic exists and that is public investment in healthcare. All over the world national, regional and local governments are investing in infrastructure and support for healthcare research. Examples of success in generating a community of high-value companies have been shown in cities such as Boston, Singapore and Cambridge, UK amongst others. The provision of funds for start-up companies founded in a cluster associated with larger healthcare companies, universities and support industries has been seen to fuel economic benefit to the whole region. Governmental funding is not subject to the same constraints as industrial or institutional financial concerns as its agenda is focused on job creation and economic activity surrounding an industry to the benefit of the population, its electorate, rather than profit per se. Healthcare clusters have created some of the most productive investments of this kind as the infrastructure requirements of biotechnology are much less than, for instance, heavy industry. Consequently, attempts are being made in many countries to establish biotech clusters following this model.

Successful clusters have, by and large, achieved their success, as a result of the support given to innovations of university invention, mediated through structured financial support in the early stages from government agencies. It must be noted though that this model was established during a very different financial era when IPOs offered an exit to investors long before products were brought to market. Because of this exit model, private equity and VC money was available to take companies into the clinical development stage and to achieve a clinical proof of concept (POC) before partnering commenced. The changes which have taken place over the last few years put considerable challenges in the path of this model. In the absence of significant private funding to follow on from the initial financing of a start-up there is now a major concern that too little money will be available for even the best candidates. Governments, whether national, regional or at local level are not generally equipped to manage and direct the development of a clinical or commercial-stage companies. As a corollary, in the absence of private money in Europe, funding is being put forward through projects such as the Innovative Medicines Initiative and the EU Framework Seven programme and now Horizon 2020, mediated by the European Investment Fund and other agencies, which put money into the hands of venture funds to perform that role on their behalf. This may produce some conflicts between the aims of the parties as public funding by its very nature is not normally intended to produce profits and bonuses whereas the private equity industry has been developed using precisely these tools as incentives. During this awkward period there will probably be some misalignments of interests which will have to be overcome, yet without this intervention a great deal of the public investment in early-stage research would likely go to waste.

This new financial environment and its consequences for the translation of medical research into products will undoubtedly be challenging for many companies. Adapting a business model created in the terms of reference derived from an earlier economic age to be able to deal with these new realities will require a different mindset to be applied to a number of different aspects of the task. There could well be a call to examine the motive for research funding at the most fundamental of levels. Other than basic research, which is not intended to create applications, project proposals which seek to create IP will need to be examined in the light of their potential for profitable development using a different yardstick. It remains to be seen how well grant funding bodies in academia will adapt their thinking to these challenges. Traditional approaches will need to be revisited and new benchmarks established for the evaluation of novel technologies or new medicines.

Reimbursement

There is another issue which is evolving and gathering pace daily which will irreversibly change the market for healthcare products and this is the introduction of price controls in major markets in Europe and latterly in the US. The omens for price controls are clear as the price of pharmaceuticals has for a long time, and by tacit agreement, included a major component of reward for risk. The level of risk in healthcare should not be underestimated as the likelihood of failure in developing and marketing drugs is extremely high. Normally these risks would deter investors, attracting the funding required to undertake these research-based activities has thus had to offer commensurately high rewards. As the population of most nations has increased since the middle of last century so too has the demand for advanced medical care. Surgical procedures, medical devices and, most prominently, pharmaceutical treatments for a very broad range of diseases are required. Patients have eagerly adopted the new therapies resulting from pharmaceutical research to alleviate a broad range of symptoms. The providers of healthcare were originally tasked with providing improved basic medical services and extending this provision to whole nations. The basic care that was available in, say, the 1950s provided a limited range of drugs and these addressed only a relatively narrow spectrum of diseases. The medical systems of today are funded by the public purse and by insurance schemes which have become unable to cope with this insatiable demand for treatments. Since the 1970s and 1980s, many governments have introduced schemes which attempt to limit the range of drugs available. In Europe, various black and white lists were developed, restricting the use of ineffective or older drugs which were not a suitable and justifiable use of public funds systems were also put in place to ensure companies could not increase drug prices without agreement from the purchaser. Price regulation schemes were introduced at national level and were often matched to the contribution which the companies made to the economy of the host country. However, the freedom of international trade resulting from the development of the European Union and other trading bloc agreements meant national boundaries became less relevant. The price differences between nations began to cause problems for pharmaceutical companies and payors alike as low-price schemes, such as that which existed in Belgium, made so-called parallel importing an attractive and lucrative activity for many wholesalers. Inevitably then, an equalization of price levels across Europe came about and, with that, rec...