Specialty pharmaceuticals: The shifting focus of care and the players driving change

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1 Specialty pharmaceuticals: The shifting focus of care and the players driving change Introduction Greater numbers of regulatory approvals and higher spending costs than traditional drugs have contributed to the success of specialty drugs. As specialty drugs continue to command a greater share of the pharmaceutical market in terms of spending, it is crucial to understand the motivations and key characteristics of the pharmaceutical companies responsible for these products. This white paper aims to provide an introduction to specialty drugs, as well as a logical categorization of the various competitors involved in developing and bringing these drugs to market. Specialty pharmaceuticals An overview What classifies a drug as specialty? The term specialty drug does not have a standard definition, and it has been broadly defined in various venues; however, they are generally described as prescription drugs (often complex, large molecule biologics) that are difficult to manufacture and require special handling or administration, have limited distribution, target a narrow group of chronic diseases, are costly (both in total and on a per-patient basis) and require ongoing clinical support. Furthermore, payers have been struggling with their own definitions of what is classified as specialty. For example, Medicare Part D mainly uses price (minimum monthly threshold of $600) to For the first time in 2010, the FDA granted more specialty drug approvals than those for traditional drugs. This trend has been continuing year on year, and in 2014, 27 of the 51 drugs approved by the FDA were classified as specialty. determine whether an insurer may classify a drug as specialty, while other payers may set their own thresholds. Open-ended definitions, as discussed above, are indicative of the nature of the specialty market, which appears to be free from the constraints imposed on traditional pharmaceuticals. Bolstered by laws and regulations that have incentivized the production of specialty drugs, manufacturers have been treating under-represented patient populations that had once been completely ignored. Laws such as the Orphan Drug Act of 1983 have accelerated the development of innovative specialty treatments for people who once had no hope for relief. Orphan drugs, which are an important subset of the specialty market, are strictly defined as drugs that treat a disease affecting less than 200,000 American citizens; however, because not all specialty drugs are classified as orphan drugs, this report will only focus on a top-level analysis of the specialty market as a whole. For the first time in 2010, the FDA granted more specialty drug approvals than those for traditional drugs. This trend has been continuing year on year, and in 2014, 27 of the 51 drugs approved by the FDA were classified as specialty. To date, various sources estimate that there are over 900 specialty drugs in development. Parallel to the rise in approvals, spending on specialty drugs has been outpacing traditional pharmaceuticals at an alarming rate.

2 Specialty drugs commanded 32% of the total prescription drug spending in 2014, yet only 1% of all prescriptions written were for specialty drugs (Figure 1). Furthermore, the growth rate in spending for traditional medications was a meager 6.4% in 2014, while spending on specialty drugs grew by over 30%, even though only 3.6% of the commercial population actually uses them. To understand why specialty drugs have become such a major force in pharmaceuticals, driving prices that appear to have no bounds, it is necessary to examine the manufacturers contributing to the growth. Figure 1. Total prescription drug spending and total prescriptions written for traditional and specialty drugs in 2014 The rise of the specialty pharma model It was becoming evident that the verticallyintegrated business model was not providing a sustainable return on investment. The sudden rise of specialty pharma companies over the last several years can be partially attributed to several major shifts in the dynamics of the pharmaceutical market. First, big pharma, generally defined as large cap pharmaceuticals, has been grappling with productivity issues. Though R&D investments have doubled over the last decade, new molecular entity approvals have sharply declined. Compounding big pharma s troubles were, and still are, the looming patent cliffs and intense competition from generics companies. It was becoming evident that the vertically-integrated business model, wherein big pharma carries out the entirety of the work from the beginning of product discovery through worldwide distribution and marketing, was not providing a sustainable return on investment. To fill the gap being created, the specialty pharma business model began to establish a foothold within the pharmaceutical market. As the specialty pharma business model gains popularity and more companies adopt it as their primary business strategy, the characteristics that define what a specialty pharma company is continue to expand in scope. The term specialty pharma is now being used interchangeably with terms such as development-centric pharmaceutical or biopharmaceutical companies. Others

3 Some generalizations can be drawn from the specialty pharma business model. have applied the term to companies that focus on developing generics, reformulating drugs already on the market, or targeting niche patient populations. Therefore, specialty pharma can be broadly defined as being inclusive of all healthcare-related companies that are neither big pharma nor medical device and diagnostics makers. Some generalizations can be drawn from the specialty pharma business model. Where big pharma may be involved in developing drugs across five or six therapeutic areas, specialty pharma may initially dedicate resources to only one or two. These areas typically have specified physician populations, allowing the companies to downsize their sales forces and shift resources away from traditional marketing and educational strategies to new support programs, tools and mobile solutions that are targeted directly at patients. Furthermore, specialty pharma companies may have small R&D operations and commercial infrastructures, tend to contract out clinical trials and manufacturing to contract research organizations and contract manufacturing organizations, enter strategic partnerships with other healthcare players and develop specialty medicines that are mostly injectable cold chain products. The specialty pharma company categories Now that the specialty pharma business model has been defined, and the Each category has a set of unique characteristics that define how the companies operate within the specialty market. common strategies linking specialty pharma companies have been explored, the model can be divided into several categories, which have been adapted from Sumanth Kambhammettu s analysis of the specialty business model 1. Each category has a set of unique characteristics that define how the companies operate within the specialty market. The categories give insight into the stratification that has taken place within the market, and the various directions that the decision-makers within these companies have chosen as they move farther away from the traditional vertically-integrated big pharma business model. A summary of the categories presented below can be found in Figure 2. 1 Kambhammettu, S. (2007). Evolving paradigms in the specialty industry. Frost & Sullivan Market Insight.

4 The niche marketers Typically founded by professors with industrial entrepreneurship acumen, individuals with backgrounds in business and finance, or MDs weary of everyday medical practice, these companies have been finding success in targeting niche markets. Some companies have emerged as a result of frustrations faced by academics, stemming from the bureaucracy involved in Breakthroughs in genomics and improvements in genetic testing have accelerated the development of targeted therapeutics. the application of federal and state laws governing ownership rights to intellectual properties generated by university faculty. Breakthroughs in genomics and improvements in genetic testing have accelerated the development of targeted therapeutics and have allowed niche marketers to compete with mid- and large-cap pharmaceutical companies. Furthermore, niche marketers have proven that company size is not indicative of the success of its R&D productivity. Instead, good judgment in selecting which compounds to advance past proof-of-concept, as well as having a close physical proximity to key science hubs, have been identified as key factors responsible for the success of these companies. An example of a company that possesses the aforementioned characteristics is Alexion Pharmaceuticals, which has seen immense success in focusing solely on developing specialty drugs for rare diseases. Its first drug, Soliris, was launched in 2007 for the treatment of a rare cause of anemia. By 2012, the drug was bringing in more than $1.1 billion in revenue, and propelled Alexion to a market capitalization of $20 billion. Other examples of niche market success stories include Actelion Pharmaceuticals, BioMarin, Exelixis, Lundbeck A/S, Sarepta Therapeutics, and Vertex Pharmaceuticals. The in-licensers In-licensers can be characterized by their small R&D departments relative to their revenues; they instead dedicate resources to their business development units. As R&D productivity began to fall and regulatory agencies began to apply more scrutiny during the drug review process, some companies recognized the risk of having an R&D unit that was too large. Therefore, in-licensers can be characterized by their small R&D departments relative to their revenues; they instead dedicate resources to their business development units. This allows the companies to seek out developmental candidates and bring earlyto late-stage molecules into their portfolios. These molecules have often been abandoned by big pharma, taken in by in-licensers, and advanced through the development process. Celgene, Forest Labs (acquired by Actavis), Gilead Sciences, Shire Laboratories and Valeant Pharmaceuticals are examples of companies that have bolstered their businesses through various in-licensing strategies. Shire in particular has been very successful in building a product portfolio comprising in-licensed molecules disposed of by big pharma, specifically in the central nervous system and gastroenterological therapeutic areas. As late-stage in-licensing opportunities have become scarce, companies have

5 shifted upstream in acquiring entire R&D capabilities for the discovery and early development of specialty candidates, as Shire did with Human Genome Therapies (HGT) in HGT s focus was on rare genetic diseases for populations with a high unmet need, and Shire used the acquisition as an opportunity to set up a dedicated specialty drug development unit within the company. As at January 2016, Shire has acquired Baxalta, further strengthening its position within the specialty and rare disease market. The specialty generics giants As patent cliffs continue to chip away at the revenues of big pharma s most lucrative products, the demand for cheaper drugs becomes ever greater. Supported by positive reforms enacted by governments, and policies that promote cost-conscious prescribing by payers, several generics companies have become major forces in the pharmaceutical industry. Companies such as Hospira (acquired by Pfizer), Mylan, Sandoz, Ranbaxy and Teva have evolved from simple generics manufacturers, relying solely on a strong active Several generics companies have become major forces in the pharmaceutical industry. ingredient base, to branded-generics juggernauts. These companies have been adopting complex vertically-integrated strategies that allow for greater control in all aspects of their operations. Teva is the world s largest generics company, and its top product, glatiramer, is a specialty brand medicine. Glatiramer (Copaxone) accounts for close to 50% of Teva s profit, and although its patent has recently expired, it has helped establish Teva as a dominant player in the specialty drug market. Specialty medicines have been a major boon for Teva, and as such it has established a Global Specialty Business Unit within the company, developing a wide range of complex specialty generics for a number of therapeutic areas. Furthermore, Teva made two important acquisitions in 2015, Representaciones e Investigaciones Médicas, S.A. de C.V. (Rimsa), a Mexicobased manufacturer, as well as Allergan s generics portfolio. Both acquisitions have greatly expanded Teva s portfolio of branded and specialty generics products. Sandoz has also taken a pioneering role in the specialty generics category with its 2015 launch of Zarxio (Amgen s Neupogen), the first biosimilar marketed in the United States. The drug administration experts Companies in this category specialize in reformulation and line extension of drugs that are approaching the end of their patent exclusivities. Treatment regimen compliance depends on the ease of use of a product and overall patient convenience, and plays a major role in the adoption rate of drugs. This is especially important for specialty drugs, which have complex treatment regimens, at times requiring frequent visits to doctors offices or to out-patient service centers. These factors have been identified as potential contributors to the high costs associated with specialty drugs. Therefore, drug

6 administration experts focus on enhancing the therapeutic application, risk/benefit profile and overall convenience to the patient. Overall patient convenience plays a major role in the adoption rate of drugs. Mylan, the third largest generics company in the world, also has roots in the specialty drug delivery area. Its specialty pharma division markets EpiPen, an injector that delivers a measured dose of epinephrine. Mylan is also involved in transdermal drug delivery, being the first company to receive regulatory approval for generic versions of nitroglycerin, estradiol, clonidine, and fentanyl transdermal patches. In addition to Mylan, Actavis became a dominant player in the specialty topical skin therapeutic area following the acquisitions of Theratech and Forest Laboratories, with products such as a testosterone patch, an estradiol cream, a progesterone gel and a nitroglycerin ointment. Companies that specialize in drug delivery also include Aegis Therapeutics, BioCardia, Halozyme Therapeutics, and MannKind. Actelion Alexion BioMarin Exelixis Lundbeck Sarepta Vertex Niche Marketers R&D centric TA focused Strong leadership In-Licensers Limited R&D Strong business development Product acquisition centric Celgene Forest Gilead Shire Valeant Drug Administration Experts Specialty Generics Giants Aegis BioCardia Halozyme MannKind Mylan Product reformulation centric Ease-of-use centric Strong active ingredient base Strong manufacturing base Hospira Mylan Ranbaxy Sandoz Teva Figure 2. A summary of the specialty pharmaceutical company categories. Categories adapted from Ku, M. S. Recent trends in specialty pharma business model and Kambhammettu, S. Evolving paradigms in the specialty industry.

7 Conclusions and future outlook Specialty pharmaceuticals have greatly expanded treatment options for underrepresented and rare diseases. Spurred by the industry s shift towards personalized medicine, as well as laws and regulations incentivizing drug development, pharmaceutical companies have moved away from developing blanket treatments for the largest patient populations to developing complex drugs that target specific, often niche, disorders. These once untapped sources of revenue have proven lucrative for companies, and those who have made it first to market with a treatment often find themselves cornering the market for that particular disease. This lack of competition has allowed companies to set prices at unregulated levels, which has started a discussion in the United States amongst payers, patients and the government on the issue of high-cost lifesaving drugs. Regardless, specialty medicine will continue to be at the forefront of strategy and developments amongst all levels of the pharmaceutical industry. As mentioned above, big pharma companies are not included within the scope of the specialty pharma definition; however, big pharma s recent play into the specialty market cannot be ignored. Big pharma is beginning to command a dominating role in specialty medicine, especially in the orphan drug subset. Big pharma companies have been relying on tactics such as acquisitions, in-licensing and partnerships in order to bring in relevant developmental capabilities and potentially lucrative specialty compounds. As the shift away from the traditional drug development towards a more targeted and personalized approach continues, it will be important to keep a close watch on the strategic plays made by big pharma and the shifting balance of power in the specialty market. Prescient Market Access Marcus Healey and Maksim Zorich February 1, 2016 References 1. Issue Brief: Specialty Drugs-Issues and Challenges July. 2. Grom, T. Speciality Pharma on the Rise December (PharmaVoice): Kambhammettu, S. Evolving paradigms in the specialty industry. Frost & Sullivan Market Insight Kirchhoff, S. M. Specialty Drugs: Background and Policy Concerns August 3;R Ku, M. S. Recent trends in specialty pharma business model. J Food Drug Anal 2016/01;23(4):

8 6. Musciacco, M. Orphan disease specialists find home with Big Pharma January. 7. Premier Research. Orphan Drug and Rare Disease Development: Understanding the U.S. and European Regulatory Landscape Tam, R. Small group of specialty drugs could make up half of total pharmacy spending by October 20(PBS NewsHour). 9. UnitedHealth Center for Health Reform & Modernization. The Growth of Specialty Pharmacy - Current Trends and Future Opportunities April.