How the Game Changed Against Big Pharma - Creating New Opportunities

In 1985 there was nearly universal agreement that investors should be heavily in pharmaceuticals.  Companies like Merck, Eli Lilly, Pfizer, Sanofi, Roche, Glaxo and Abbott were touted as the surest route to high portfolio returns.

Today, not so much.

Merck, once a leader in antibiotics, is laying off 20% of its staff.  Half in R&D; the lifeblood of future products and profits.   Lilly is undertaking another round of 2013 cost cuts.  Over the last year about 100,000 jobs have been eliminated in big pharma companies, which have implemented spin-outs and split-ups as well as RIFs.

From product creator to marketer

What happened? In the old days pharma companies had to demonstrate their drug worked; called product efficacy.  It did not have to be better than existing drugs.  If the drug worked, without big safety issues, the company could launch it.

Then the business folks took over with ads, distribution, salespeople and convention booths, convincing doctors to prescribe and us to buy.

Big pharma companies grew into large, masterful consumer products companies. Leadership’s view of the market changed, as it was perceived safer to invest in Pepsi vs. Coke marketing tactics and sales warfare to dominate a blockbuster category than product development.  Think of the marketing cost in the Celebrex vs. Vioxx war.  Or Viagra vs. Cialis.

The Pharma market shifted

But the market shifted when the FDA decided new drugs had to be not only efficacious, they had to enhance the standard of care.  New drugs actually had to prove better in clinical trials than existing drugs.  And often safer, too.

Hurrumph. Big pharma’s enormous scale advantages in marketing and communication weren’t enough to assure new product success.  It actually took new products.  But that meant bigger R&D investments, perceived as more risky, than the new consumer-oriented pharma companies could tolerate.  Shortly pipelines thinned, generics emerged and much lower margins ensued.

In some disease areas, this evolution was disastrous for patients.  In antibiotics, development of new drugs had halted.  Doctors repeatedly prescribed (some say overprescribed) the same antibiotics.  As the bacteria evolved, infections became more difficult to treat.

An antibiotic crisis

With no new antibiotics on the market the risk of death from bacterial infections grew, leading to a national public health crisis.  According to the Centers for Disease Control (CDC) there are over 2 million cases of antibiotic resistant infections annually.  Today just one type of resistant “staph infection,” known as MRSA, kills more people in the USA than HIV/AIDs - killing more people every year than polio did at its peak. The most difficult to treat pathogens (called ESKAPE) are the cause of 66% of hospital infections.

And that led to an important market shift – via regulation (Congress?!?!)

With help from the CDC and NIH, the Infectious Diseases Society of America pushed through the GAIN (Generating Antibiotic Incentives Now) Act (H.R. 2182.)  This gave creators of new antibiotics the opportunity for new, faster pathways through clinical trials and review in order to expedite approvals and market launch.

Additionally new product market exclusivity was lengthened an additional 5 years (beyond the normal 5 years) to enhance investor returns.

Which allowed new game changers like Melinta Therapeutics into the game.

Melinta (formerly Rib-X) was once considered a “biopharma science company” with Nobel Prize-winning technology, but little hope of commercial product launch.  But now the large unmet need is far clearer, the playing field has few to no large company competitors, the commercialization process has been shortened and cheapened, and the opportunity for extended returns is greater!

Venture firm Vatera Healthcare Partners, with a history of investing in game changers (especially transformational technology,) entered the picture as lead investor.  Vatera's founder Michael Jaharis quickly hired Mary Szela, the former head of U.S. Pharmaceuticals for Abbott (now Abbvie) as CEO.  Her resume includes leading the growth of Humira, one of the world’s largest pharma brands with multi-billion dollar annual sales.

Under Ms. Szela's guidance Melinta has taken fast action to work with the FDA on a much quicker clinical trials pathway of under 18 months for commercializing delafloxacin.  In layman’s language, early trials of delafloxacin appeared to provide better performance for a broad spectrum of resistant bacteria in skin infections.  And as a one-dose oral (or IV) application it could be a simpler, high quality solution for gonorrhea.

Melinta continues adding key management resources as it seeks “breakthrough product” designation under GAIN from the FDA for its RX-04 product.  RX-04 is an entirely different scientific approach to infectious disease control, based on that previously mentioned proprietary, Nobel-winning ribosome science.   It’s a potential product category game changer that could open the door for a pipeline of follow-on products.

Big Pharma keeps cutting costs, while new companies create new solutions

Melinta is using GAIN to do something big pharma, with its shrinking R&D and commercial staff, is unable (or unwilling) to accomplish. Melinta is helping redefine the rules for approving antibiotics, in order to push through new, life-saving products.

The best news is that this game change is great for investors.  Those companies who understand the trend (in this case, the urgent need for new antibiotics) and how the market has shifted (GAIN,) are putting in place teams to leverage newly invented drugs working with the FDA.  Investment timelines and dollars are looking far more manageable – and less risky.

Twenty-five years ago pharma looked like a big-company-only market with little competition and huge returns for a handful of companies.  But things changed.  Now companies (like Melinta) with new solutions have the opportunity to move much faster to prove efficacy and safety – and save lives.  They are the game changers, and the ones more likely to provide not only solutions to the market but high investor returns.

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Links:

Why the Abbott split-up was an obfuscation of the company's real problems

Why big pharma R&D produces so little for such a huge spend

How lock-in to old practices keeps companies from shifting with markets - bankrupting several