Pfizer, Merck’s Bavencio flop illustrative of shattered Pharma model. Is industry’s collapse just around the corner?

The News:

Pfizer Inc. (NYC) and its German part­ner Merck KGaA (Darmstadt) have run into a brick wall in their race to ex­pand the mar­ket for their PD-L1 check­point inhibitor Baven­cio (avelumab).

Re­searchers on Tuesday (November 28, 2017) con­ceded that the check­point med–one of 5 now clambering to ex­pand their mar­ket share in the mega-block­buster global on­col­ogy busi­ness–failed to sig­nif­i­cantly im­prove over­all sur­vival for ad­vanced gas­tric can­cer pa­tients com­pared to best stan­dard of care, according to Reuters.

Bavencio, or avelumab, did not meet the primary goal of prolonging overall survival in patients whose cancer had returned or spread despite two prior treatment rounds, the two companies said in a statement on Tuesday.

Bavencio this year won regulatory approvals against a rare and aggressive type of skin cancer and against bladder cancer. First trial results in lung cancer, its largest commercial opportunity, are not expected before next year.

The drug is a late entrant to a fast-growing class of drugs called PD-L1 or PD-1 inhibitors that help the immune system attack cancer by blocking a mechanism tumors use to evade detection.

Rival drugs Keytruda by Merck & Co. (Kenilworth NJ), Bristol-Myers Squibb Co.’s (NYC) Opdivo, Roche Holding AG’s (Basel CHE) Tecentriq and AstraZeneca PLC’s (London) Imfinzi are seen as having bigger blockbuster potential by analysts.

Evercore ISI analyst Umer Raffat said initial expectations were low because Bavencio/avelumab was tested against chemotherapy and not against an ineffective placebo, as was the benchmark in earlier comparable studies involving rival drugs in the same class.

“We are confident that our broad clinical development program in both monotherapy and combinations across a range of cancers will continue to bring new potential treatment options to patients,” Chris Boshoff, Pfizer’s head of immuno-oncology, said in the statement.

As the two drug partners were quick to point out, third-line gastric cancer “is a particularly hard-to-treat and heterogeneous disease,” FiercePharma reports. But it’s also a significant market opportunity; gastric cancer is the fifth most common type of cancer, with 950,000 new cases recorded in 2012, but it’s the third most common cancer killer.

In September, Merck’s PD-1 powerhouse Keytruda picked up an FDA nod in gastric cancer patients who’ve received at least two prior rounds of therapy and whose tumors express PD-L1. And earlier that month, Bristol-Myers’ Opdivo got a Japanese green light for patients who have progressed after chemo.

Steve’s Take:

If you’re like me, hardly a week goes by where you’re not confronted with new terms like PARP inhibitors, CAR-T cell therapies, checkpoint inhibitors; names like Opdivo, Keytruda, Kymriah and Gleevec, just to name a few. And are they expensive? Novartis’s Kymriah has a cost of $475,000. And that’s just a mid-range price among the entire bunch.

The latest batch of promising “cures” for dreaded illnesses include Bavencio, Tecentriq and Imfinzi. The point is that the eruption of new cancer drugs that’s occurred over the past decade includes major superstars that have registered some early, eye-watering results in clinical trials.

I wrote a piece last month about researchers at prestigious King’s College London and the London School of Economics who decided to hit the pause button and examine 68 cancer indications approved in Europe over a 5-year period through 2013.

To their surprise and my and others’ dismay, they found that such indications were endorsed on only tenuous data resulting from unreliable trial designs. At least 10 of these approvals have never demonstrated any real benefit for patients.

How did we get to this point where television ads routinely hype this new era of personalized medicines–at stupendous cost–many of which begin with promising, temporary remission from a dire illness, only to prove a failure later when the underlying malady recurs?

Indeed, I agree we are in a new era. However, I and others refer to it (generally) as, “Pharmas shattered business template: An industry teetering on the brink of collapse.”

Like many in­dus­tries, Pharma’s busi­ness model fun­da­men­tally de­pends on pro­duc­tive in­no­va­tion to cre­ate value by de­liv­er­ing greater cus­tomer ben­e­fits, notes Kelvin Stott, contributor to Endpoints News.

Fur­ther, sus­tain­able growth and value cre­ation de­pend on steady R&D pro­duc­tiv­ity with a pos­i­tive ROI to drive fu­ture rev­enues that can be rein­vested back into R&D. In re­cent years, how­ever, it has be­come clear that Pharma has a se­ri­ous prob­lem with de­clin­ing R&D pro­duc­tiv­ity, Stott posits.

He argues that a sim­ple, new method to mea­sure R&D pro­duc­tiv­ity/IRR (internal rate of return) of Pharma’s busi­ness model es­sen­tially in­volves mak­ing a se­ries of in­vest­ments into R&D and then col­lect­ing the re­turn on these in­vest­ments as prof­its some years later, once the re­sult­ing prod­ucts have reached the mar­ket.

How­ever, the sit­u­a­tion is com­pli­cated by the fact that both in­vest­ments and re­turns are phased over many years for each prod­uct, and not all prod­ucts make it to mar­ket; in fact, most prod­ucts fail to reach mar­ket at all and they fail at dif­fer­ent times and costs dur­ing their de­vel­op­ment.

As it hap­pens, the av­er­age in­vest­ment pe­riod is rel­a­tively sta­ble and well-de­fined, as it is largely dri­ven by a fixed stan­dard patent term of 20 years, as well as a his­tor­i­cally sta­ble R&D phase last­ing roughly 14 years from first and 10 to the goal line.

Therefore, the av­er­age in­vest­ment pe­riod is about 13 years, from the mid­point of the R&D phase after 7 years, plus an­other 6 years to reach peak sales be­fore loss of ex­clu­siv­ity.

There is one po­ten­tial ar­gu­ment against this method, Stott cautions, which is that the later phases of R&D tend to cost many times more than the ear­lier phases. How­ever, Pharma realizes it must in­vest in many more projects at the earlier phases than at the later phases, due to nat­ural at­tri­tion within the R&D pipeline. Thus, the total R&D in­vest­ment is ac­tu­ally dis­trib­uted fairly evenly through­out the de­vel­op­ment time­line.

Stott says be­fore applying this sim­ple method to cal­cu­late the re­turn on in­vest­ment, there is one additional but im­por­tant de­tail to re­mem­ber: The net re­turn on R&D in­vest­ment in­cludes not only the re­sult­ing prof­its (EBIT), but also the fu­ture R&D costs. This is be­cause fu­ture R&D spend­ing is an op­tional use of prof­its that re­sult from pre­vi­ous in­vest­ments.

The most alarming aspect about this analy­sis, Stott suggests, is just how ro­bust, con­sis­tent and rapid the down­ward trend is in re­turn on in­vest­ment over a pe­riod of over 20 years.

So, what is dri­ving this trend, and why hasn’t Pharma been able evade it?

Law of Di­min­ish­ing Re­turns

Many dif­fer­ent causes and dri­vers have been sug­gested to ex­plain the steady de­cline in pharma R&D pro­duc­tiv­ity, in­clud­ing ris­ing clin­i­cal trial costs and time­lines, de­creas­ing suc­cess rates in de­vel­op­ment, a tougher reg­u­la­tory en­vi­ron­ment, as well as in­creas­ing pres­sure from pay­ers, providers, and in­creas­ing generic com­pe­ti­tion. How­ever. there is one fun­da­men­tal principle at play that dri­ves all these fac­tors to­gether: The Law of Di­min­ish­ing Re­turns (LDR).

The recent explosion in the immuno-oncology field exemplifies how the LDR is fundamentally inescapable.

As each new drug like Keytruda and Kymriah im­proves the cur­rent stan­dard of care, this only raises the bar for the next drug, say Bavencio, mak­ing it more ex­pen­sive, dif­fi­cult and un­likely to achieve any in­cre­men­tal im­prove­ment, while also re­duc­ing the po­ten­tial scope for im­prove­ment.

Steve's Take: Law of Diminishing Returns is shattering current #Pharma business model Click To Tweet

Thus, the more Pharma im­proves the stan­dard of care, the more dif­fi­cult and costly it be­comes to im­prove fur­ther. Companies continue spending to get di­min­ish­ing in­cre­men­tal ben­e­fits and added value for pa­tients which re­sults in di­min­ish­ing re­turn on in­vest­ment.

Stott concludes his analysis by saying what is clear is that Pharma (and Bio­pharma) will not be around for­ever and will begin to contract within the next 2 or 3 years. He believes Dar­win’s the­ory of evo­lu­tion ap­plies to com­pa­nies and in­dus­tries just as much as it ap­plies to the species of life, namely, “It is not the strongest of the species that sur­vives, nor the most in­tel­li­gent, but the one most adapt­able to change.”

I think Stott’s timing about the collapse of Pharma is off by at least a decade. But his reasoning, founded on the hallowed Law of Diminishing Returns, cuts like a scalpel through the industry’s massive and effective advertising and PR apparatus. Like a beam of light speeding through the cosmos, the truth is shining through.

Pharma’s halcyon days are not immeasurable, as some observers and all product promoters predict.

The dawn of a new pharma era is already upon us.