As the era of blockbuster drugs draws to an end, the pharmaceutical industry is looking to fresh markets and new models of drug development while facing legislative changes as well as economic threats. Sarah Hanson looks at what lies ahead for the industry in 2012.
2012 looks set to be the year when pharmaceutical companies face their scariest outlook: peering over the brink of a patent cliff. Major pharmaceutical companies are realising that they can no longer rely on a broken business model that is dependent on blockbuster drugs, and are looking for alternative ways to maintain profits and cover the loss of revenues due to patent expiry. This throws up a host of commercial, legal and regulatory challenges.
Entering new markets
Major structural shifts are taking place in R&D and how intellectual property is financed, meaning that the life sciences sector is providing a rare bright spot in the pervading economic gloom. Over the last decade, there has been almost US$700bn worth of deals in the pharmaceutical sector, which remains one of the prime industries in terms of M&A activity. Now we are likely to be at the start of a fresh cycle of M&A activity in the industry, with a particular focus on emerging markets (BRIC, South-East Europe and Turkey) where the portfolios of many pharma companies remain weak.
Japan has enjoyed a particularly busy year in terms of pharmaceutical M&A: across all sectors, cross-border acquisitions by Japanese companies nearly tripled relative to 2010. Liquidity among Japanese pharma companies remains strong, as does demand for prescription medicines from an ageing population, enabling Japanese companies to enter into deals at a time of intense competition for intellectual property in the industry. In 2011 Takeda, the largest Japanese pharmaceutical company, completed its €9.6bn (debt-free, cash-free) acquisition of Swiss drug company Nycomed. On the back of this transformative deal, we expect the industry to undertake more M&A activity in Japan in 2012. Factors such as the economic climate, demography and the state of R&D pipelines should see more Asian acquisitions of European patented drugs.
Emerging markets also continue to receive significant life science private equity (PE) investment, with China and India gaining the most. Historically, the risk involved in R&D has led PE firms to avoid large pharma companies and the biopharma industry in general. However, recently some small deals have linked PE and venture capital with biotechnology, and we are seeing investment in a number of diverse projects in different life science areas. This growing trend is already playing out in Europe – according to the European Private Equity and Venture Capital Association, the total investment in life sciences in Europe increased from €3.4bn in 2009 to €5.7bn in 2010, while the total venture investment in life sciences accounted for 30% of the total investment in Europe in 2010. Such funding is likely to increase as the cash-rich life sciences sector is seen to be ’recession proof’.
A helping hand for R&D
Pharmaceutical companies looking to weather the storm of patent expiry on key products are also looking to diversify their pipelines and develop replacement products. With most companies struggling to make a return on high R&D costs pumped into prospective pipelines, additional support is vital.
In the UK, the Government hopes its new Patent Box legislation will give a welcome boost to research and development. When it comes into force in April 2013, the Patent Box will reduce UK corporation tax on patent profits to 10%, encouraging R&D activity and providing incentives for companies to retain intellectual property in the UK. This will make the UK competitive with other European countries such as Ireland, Switzerland and Hungary, which have had similar systems in place for years. While the existing system of R&D tax credits has given some relief for R&D expenditure, there has until now been no similar incentive for businesses to retain their IP in the UK once it has been created.
Legislation such as Supplementary Protection Certificates (SPCs) will also play a significant role in assisting companies facing the expiry of major patent portfolios and provide more protection for companies investing heavily in R&D. EU patent offices have long been able to grant SPCs where there has been a large gap for a company between filing a patent application and getting authorisation to market a drug. However, legal issues surround how SPCs apply to medicines that contain more than one active ingredient. In a landmark case in November 2011, the Court of Justice of the EU said that there is no reason why an SPC may not be granted for a single active ingredient that is specified in a patent where the marketing authorisation also contains other active ingredients. This (and other recent cases regarding SPCs) is likely to have further ramifications in battles between generic and pharmaceutical companies into 2012.
New legislation: help or hindrance?
New legislation coming into force will also have an impact on the pharma industry in the year ahead. Whether the expected IP and regulatory legislation will help or hinder pharmaceutical companies in this challenging climate remains to be seen.
A number of significant regulatory issues are being debated in Europe. A Directive is being developed to improve the EU pharmacovigilance system, simplify regulatory decision-making, provide a legal basis for more proactive pharmacovigilance by both regulatory authorities and the industry, and involve patients more closely in reporting adverse drug reactions. Though it was adopted in 2010, compliance is not compulsory until 2012. The legislation will bring about the most profound change to the legal framework since 1995, when the EMA was set up. The European Commission, EMA and Member States have been carrying out work to implement the legislation, but companies still lack clarity on many of the new obligations. It is likely that the new requirements will be introduced in phases beyond the original July 2012 implementation deadline.
At a time when social networking continues to grow and become part of the daily routine of many working lives, pharmacovigilance is particularly important. The pharma industry must recognise that social networking and reporting are taking on a rapidly-increasing significance in the marketing, discussion and exchange of information concerning drugs. There are pharmacovigilance obligations at all stages of the life cycle of a medicine and the process of drug monitoring; the pharmacovigilance system will need to take account of this, not least because the increasing use of social media also poses interesting questions around geographical legal jurisdiction.
Discussions continue about the introduction of a Directive that would require substantial changes to the regulation of clinical trials. In March 2010, the Chancellor of the Exchequer announced that the Government would review the UK’s implementation of the Clinical Trials Directive in order to reduce perceived gold-plating and to increase the proportionality of the system. The MHRA has stated that it intends to wait for the outcome of the European negotiations before reviewing and amending the UK legislation.
2012 may also herald significant changes in the way drugs are marketed. EFPIA in particular will be under the spotlight this year as the implications of amendments to the advertising of medicines become apparent. Currently, the advertisement for a medicine must be in line with the product’s Summary of Product Characteristics (SmPC). Hence off-label promotion is not allowed. EFPIA has approved an amended Code of Practice on the promotion of prescription-only medicines to, and interactions with, healthcare professionals.
The changes to the Code make allowance, for example, for the provision of a limited number of samples to healthcare professionals for a limited time (Art. 16). Previously, following EU Directive 2001/83/CE, the provision of samples was not allowed (due to concern over inducement); but in accordance with national and/or EU laws and regulations, a limited number of medical samples may now be supplied on an exceptional basis and for a limited period. A reasonable interpretation of this provision is that each health professional should receive, per year, not more than four medical samples of a particular medicine that he/she is qualified to prescribe for two years after he/she first requests samples of that particular medicine.
A landmark year
Last year saw significant developments for the pharma industry – and for lawyers – which look set to continue through 2012. With deals such as Takeda’s acquisition of Nycomed in 2011, we expect the trend of commercial and economic power shifting eastward to continue. Increased diversification, coupled with regulatory hurdles, will set a challenge for the pharma industry. Whether companies will survive and thrive on this challenge remains to be seen as the year unfolds, but the structural upheaval felt as a result of life beyond the patent cliff is already being witnessed.
Sarah Hanson is a partner at CMS Cameron McKenna: the UK branch of CMS, a leading European provider of legal and tax advice.