	In early June, more than 30,000 cancer specialists and more than 400 exhibitors are expected to gather in Chicago for this year’s American Soc. of Clinical Oncology (ASCO) meeting. The event, one of the largest of any medical professional events, will be a showcase of new therapies, research advances and therapeutic innovations. Everyone from hospital administrators, to Wall Street analysts, to patient advocates will be hanging on news coming out of the meeting.

	Oncology is a big business. Nationally, cancer care consumed $124.6 billion in 2010, according to the 2011 Medco Drug Trend report; global sales of oncolytics was $76 billion in that year, according to Decision Resources Pharmaview, and will rise to $98 billion in 2015.

	Society is getting something back for all those expenditures: While cancer remains the second leading cause of death in the US (heart disease is No. 1), ending the lives of 1,500 Americans daily, the survival rate has been rising. About two-thirds of patients survive for five years or more after initial diagnosis—up from 49% in the period 1975—77, according to the American Cancer Society. A growing cohort of patients is able to manage their disease as a chronic condition: By 2020, the number of estimated cancer survivors living in the US is expected to reach 18.1 million (up from 13.8 million in 2010), further driving demand in oncology.

	Nevertheless, the many diseases that fall into the category of “cancer” remain a grim prospect for most patients, especially in cases where the survival rate has remained stubbornly low despite all the therapies available. “Cancer can involve every organ system in the body, and the therapy options available may employ every modality available, including surgery, radiation, chemotherapy, biologics and targeted therapies (such as targeted small molecules, monoclonal antibodies, antihormonals, targeted immunotherapies and gene therapies), photodynamic therapy, laser ablation, bone marrow transplants, and radioisotopes,” says Jane Quigley, RN, senior principal at IMS Health (Plymouth Meeting, PA).

	The high mortality rates of many cancers ensure that it will continue to be a well-funded research arena, and the scientific advances in both pharmacology and chronic care remain high. Fully 28% of all drug research is targeted at cancer, according to Decision Resources (Fig. 1); PhRMA counted 887 drugs in Phase I—III development last year, including 108 for leukemia alone, 98 for lung cancer, and 91 for breast cancer. Key research directions include the development of clinical endpoints (surrogates for identifying a positive outcome); alternative delivery routes (oral drugs vs. injectables); and combination and adjuvant therapies (which combine multiple molecular entities as a single therapy).

	The growing list of commercialized cancer therapies (Fig. 2)—many of which represent a thrilling new lease on life for cancer patients&mdash;are the justification for the hundreds of additional drugs in development. But that commercial success creates its own problems: paying for the therapies, and realigning the economics of how drugs are made available to patients. A 2009 study in the New England Journal of Medicine (NEJM, 2009, 360:626—633) found that the median cost of newly approved cancer medications had increased more than 4.5 times in the preceding decade &mdash; up from $1,553 per month for the period 1995–1999 to $7,112 for 2005–2009 (constant 2007 dollars). At the same time, oncology service providers are still adjusting to reductions in Medicare reimbursements instituted in 2005. Community-based oncologists, like most independent physician practices, are undergoing a wave of business realignments that connect them (or outright sell them) to hospital systems and integrated delivery networks. And that, in turn, affects how manufacturers can gain access to the market.

	“With the average cost of cancer care rising from $53,000 per patient per year a decade ago to $150,000 per patient per year now, the trend is literally unsustainable,” says Burt Zweigenhaft, CEO of OncoMed (New York, NY), a specialty pharmacy. “We can no longer say we don’t care about formulary cost considerations or we don’t have to actually collect patient co-pays or carry out comparative-effectiveness studies.”

	Over the past few years, FDA has raised the bar for approval, and private and government payers have been more aggressive about scrutinizing their coverage policies related to oncology and instituting cost-control measures. These include stricter requirements for prior authorizations and adherence to FDA label indications, and limiting the off-label use of anti-cancer treatments to Medicare-approved compendia listings. “With this heightened scrutiny, payers often have a higher expectation of clinically relevant benefit compared to the level of clinical response that is required for the drug to gain regulatory approval in the first place,” says Debbie Warner, VP, commercial planning, at Kantar Health (Horsham, PA). “For instance, payers frequently cite a minimum of six-month improvement in overall survival before they feel a treatment is ‘worth’ its cost. While approved drugs that deliver significantly lesser clinical benefit may still be covered, they may face a much higher level of scrutiny in the prior authorization process to help control costs.”

	Concerns like these hung up Provenge (sipuleucel-T), the innovative cancer “vaccine” for prostate cancer, for its maker, Dendreon, in 2008—09, until FDA relented and approved the drug in 2010. More recently, Genentech’s Avastin (bevacizumab)—a blockbuster that has been on the market since 2004 (and approved in 2008 for breast cancer)&mdash;had its approval for breast cancer revoked because later studies showed insufficient life extension or improvement in quality of life. (The drug is still approved for other cancers, and is being used off-label by some breast cancer patients).

	Deciding which indication or indications to pursue (when the agent has shown preliminary effectiveness in several tumor types and hematologic disorders) is anything but straightforward. When a promising oncology compound has several potential target indications in different cancers or tumor types, it’s up to drug companies to decide how broad a therapeutic footprint to pursue, and identify which indications may represent the most realistic or lucrative opportunity — a niche vs. more comprehensive market opportunity. The decision involves tradeoffs between clinical and commercial considerations. “It’s common to see a fierce internal struggle within a given drug company, as some stakeholders want to follow the science and let clinical drivers guide the decision, while others would prefer to let commercial issues (related to market size, potential ease of regulatory approval, and potential for high pricing) guide the process,” says Wen Shi, practice executive for Campbell Alliance (New York, NY), the consulting arm of inVentiv Health.

	While large patient populations have traditionally been the primary focus in many disease categories, focusing on areas of unmet medical need in oncology may offer better prospects in terms of rapid regulatory approval and more attractive payer reimbursement. Too often, aiming for a larger population can backfire in oncology, because the efficacy data becomes diluted when highly specific therapies fail to work on a certain percentage of patients, and this can undermine both insurer and prescriber support. In these cases, the ability to segment and focus the patient population—often through the use of biomarkers&mdash;for the sake of a stronger value proposition can make all the difference.

	“Population size can certainly influence the decision, with larger populations offering a potentially more lucrative opportunity,” says Stephanie Hawthorne, PhD, a director at Kantar Health. “However, if multiple agents with the same mechanism are being developed in one indication, it may prove difficult to differentiate your agent, especially if you are not first-to-market; this could drive development toward a less competitive alternative indication.”

	“By targeting an area with few or no effective treatments, a manufacturer can potentially accelerate the time between discovery, approval and commercialization, and accelerate the uptake in the targeted area,” adds Adrian Barfield, GM of the pharmaceutical and biotech group of Cardinal Health Specialty Solutions (Dublin, OH).

	“An increasingly common approach is to obtain initial FDA approval in an orphan indication and then access the larger populations via compendia-supported off-label utilization in larger tumor types,” says Doug Neely, CMPE, MHA, senior director for Xcenda, a business unit of AmerisourceBergen Consulting Services (Valley Forge, PA). However, “that can set up unique pricing challenges,” adds Loreen Brown, MSW, an SVP at Xcenda.

	“The indication of first launch will set the price of the drug for that tumor type, but it could have repercussions for later line extensions if a significantly higher dose (which may prove too expensive) or a lower dose (which may undervalue the product) is approved,” adds Hawthorne of Kantar Health. “Meanwhile, in some indications, particularly those with no therapeutic options and high unmet need, oncology products may obtain accelerated regulatory approval based on limited data, such as a single arm Phase II trial or interim data for a surrogate endpoint—with the goal of getting an active agent to market more quickly.”

	“Paradoxically, while regulators may be willing to fast-track certain anti-cancer agents—as much as 37% of all oncolytics, according to Xcenda&mdash;they are also increasingly calling for more proof of definitive overall survival gains during the regulatory review, especially when other treatment options already exist for that indication,” says Kantar Health’s Warner.

	It’s rare to see a cancer drug in evening-television DTC ads, for the simple reason that their utilization is a complex interplay of cancer types, biomarkers, genetic mutations and step therapies. At the same time, oncologists are renowned for being the most demanding of relevant clinical data in making therapy decisions (Pharmaceutical Commerce Mar/Apr 2011, p. 1). For these reasons, oncology product managers are in continuous contact with oncologists themselves, and that leads to the group purchasing organizations and practice-management companies that serve oncologists and hematologists.

	Traditionally, the “buy-and-bill” model has dominated the oncology drug sales channel; and today, more than 95% of distribution in oncology flows through a handful of GPOs, including Oncology Supply (part of AmerisourceBergen Specialty Group, and the largest dedicated oncology GPO), VitalSource GPO (owned by Cardinal Health Specialty Solutions), McKesson and others. “GPOs facilitate better pricing through aggregated purchasing from manufacturers as they are able to negotiate with manufacturers to create volume- and market share-based incentive contracts,” says Bruce Feinberg, chief medical officer, oncology for Cardinal Health Specialty Solutions. Related practice-management businesses at these companies include P4 (now owned by Cardinal) and ION Solutions (AmerisourceBergen Specialty Group).

	The oncology GPO not only aggregates purchase demand to lower prices for its member physicians, but it can also be an aggregator of data about the behavior of those same member physicians, says Feinberg. For instance, valuable pharmacy data, outcomes data, and information about side effects and adverse reactions can be aggregated at the practice level and linked with patient medical information, adds Michael (Mick) Koerner, RPh, a senior director at ION Solutions.

	Feinberg says that analyzing patterns of care and purchasing trends can help to identify rates of new therapy adoption, areas of significant variance in treatment and more; and such data can then drive clinical trial development and comparative-effectiveness research. “In our view, the GPO of the future will be much more like a trusted advisor and consultant that can provide competitively priced medications.”

	Practice-management groups are centrally involved in one of the other distinct trends in oncology market access: clinical pathways. Driven mostly by payer pressure, the practice networks work with oncologists to develop preferred treatment progressions based on the type of cancer and the patient’s response. These standardized protocols are published and regularly updated by the National Comprehensive Cancer Network (NCCN), ASCO, Innovent Oncology and other stakeholder groups. Today, some payers offer incentives or more advantageous reimbursement strategies when the course of treatment follows an approved treatment pathway. “Similar to getting a drug on formulary, manufacturers need to work collaboratively with providers and payers to ensure that their product is positioned appropriately/favorably within the relevant pathways,” says Brown of Xcenda.

	In addition to dispensing oncology drugs, oncology-oriented specialty pharmacies and GPOs provide an increasingly broad range of services, including advanced clinical support to patients, support with side effect management, improved compliance support, and administrative assistance in gaining insurance coverage or identifying additional financial assistance for patients (such as drug-company-sponsored patient assistance programs for those who need it).

	However, under the buy-and-bill model, “oncologists face increased risk that they will have administered a high-cost therapy only to find that their charge is denied payment or payment is significantly delayed, and a growing number of patients are unable to afford their portion of the bill,” says Warner of Kantar Health.

	In 2005, CMS implemented significant changes in the way it pays oncologists for physician-administered drugs and related services—changes that continue to influence the landscape in oncology today. At that time, Medicare changed its policies to set payments for covered drugs at the Average Sales Price (ASP) rate plus 6%, which is based on actual transaction prices and, basically, less than the previous setpoint, Average Wholesale Price (AWP). “Prior to 2005, it was not uncommon for oncologists to make more than 50% markup on a class of drugs that was already growing at 25% per year, so when patients were not able to pay their co-pays, it didn’t really matter,” says OncoMed’s Zweigenhaft. “The earlier CMS rules, which allowed for huge margins, set up a whole set of perverse economics, rather than economics based on sound outcomes data,” says Zweigenhaft. “Cancer is still not managed that way&mdash;but it should be.”

	With current reimbursement rates dramatically reduced, many physicians would be forced to operate at a loss if they were unable to collect the patients’ co-payment. “In certain situations, it is becoming increasingly common for patients to be referred to the hospital out-patient setting, so that their anti-cancer medications can be billed through the often-more-generous medication benefit, rather than the pharmacy benefit, portion of their coverage, due to these financial dynamics,” says Warner of Kantar Health.

	In an effort to eliminate some of the financial incentives tied to drug administration in the buy-and-bill model, some payer plans now require that oncologists order their infused drugs on a patient-by-patient basis from a specific specialty pharmacy. The pharmacy delivers the drugs to the practice at the time the patient has their infusion visit. “In this newer model, the payer pays the specialty pharmacy directly for the drugs and the physician only bills the drug administration fee,” explains Warner of Kantar Health. “While this eliminates the profit incentive, this model can result in significant drug waste if the patient is not able to receive their intended chemotherapy because the drugs cannot be returned or used for a different patient.”

	Not surprisingly, it is also “very unpopular” with oncologists, Warner adds. “The greatest advantage of the traditional buy-and-bill model is that a large inventory is maintained at the oncologists’ practice setting, so physicians are able to tailor the exact dose and combination of drugs to patients as they arrive for their visit.”

	Altos Solutions, a Los Altos, CA-based IT and oncology consulting company, performs a National Oncology Practice Benchmark annually. In its 2011 Benchmark (published in the November issue of J. of Oncology Practice, an ASCO publication), it reports that drug revenue as a percentage of total practice revenue has declined from 85% in 2005 to about 66% in 2010, and that the drug margin (i.e., profit) has declined from 22% to 9% (as a percentage of total revenue) over the same period. Although drug margin is clearly not the only source of revenue for community oncology practices, it has been an important one. In a previous report (published in the September J. of Oncology Practice), the Altos authors conclude:

	“As the economic model for community practice transitions from one that relied on the profit margin from drugs, the question becomes what is the next economic model? … Clearly, appropriate use of [new diagnostics and sophisticated tumor typing] will demand more physician time, not less. … Although the benefits of new diagnostic and treatment tools are desired by everyone involved in cancer care—patients, providers and payers&mdash;they cannot be delivered in the existing community oncology economic business model.”

	Given the limited number of oncology agents available and the many types of cancers that are encountered, the off-label use of medications in cancer treatment has been widespread for decades. Today, estimates show that more than half of all uses of cancer-treating drugs are prescribed off-label, notes Brown of Xcenda.

	While having more options to choose from may offer an ongoing ray of hope for oncologists and patients who are running out of treatment options, “the quality of clinical evidence to support off-label use for a given patient may be weak, thereby exposing patients to ineffective and potentially toxic therapy, and creating unnecessary expenses for payers,” says Harish Dave, MD, MBA, VP of the Oncology Therapeutic Delivery Unit of Quintiles (Rockville, MD). As a result, to curtail healthcare costs, payers are actively working to curtail off-label prescribing in oncology.

	Today, the majority of cancer patients—roughly 60%&mdash;are on Medicare. When it comes to Medicare, coverage of off-label drug use in oncology is limited to those agents that are listed in at least one of four accepted compendia: 

	• American Hospital Formulary Service Drug Information

	• Gold Standard Inc. Clinical Pharmacology Compendium

	• National Comprehensive Cancer Network (NCCN) Drugs and Biologics Compendium

	• Thomson Micromedex DrugDex Compendium

	“Today, most private payers follow Medicare coverage policy when setting their own criteria. Thus, payers are increasingly refusing to pay for treatments off-label, unless they have a compendia listing or sufficient evidence to support their clinical value,” says Warner of Kantar Health. “For this reason, it’s in the drug company’s best interest to actively pursue a solid compendia strategy.”

	Yet another complexity of oncolytics is that the form of drug delivery can affect its affordability, patient acceptance and, indirectly, its efficacy. Traditionally, chemotherapy has been administered via intravenous infusion, but over the past decade, there has been a surge of newer oral and self-injected agents. Some are traditional chemotherapies, such as Xeloda (capecitabine), while others are targeted therapies, such as Gleevec (imatinib) and Sutent (sunitinib). Today, of the 125 drugs in Phase III clinical development for cancer, 38 are oral medications, according to Medco.

	For drug developers, the decision about whether to pursue the development of a compound as an oral or injectable therapy will be dictated by clinical and commercial considerations. If the drug’s side effect profile supports self-administration, there are some key benefits for the right patients, says Koerner of ION Solutions. These include the freedom for patients to take their medications at home (saving time and travel), and in some instances, increased insurance coverage, as the pharmacy benefit may be preferential to the medical benefit in terms of patient co-pays and administrative requirements for oral oncology medications.

	Meanwhile, the pursuit of self-injectable oncology meds is also garnering attention. For instance, Roche is currently developing subcutaneous reformulations of Herceptin and Rituxan (rituximab). The potential benefit for the patient would be shorter medical visits, as the subcutaneous injection (rather than the IV infusion) can be given in a few minutes rather than hours, or possibly at-home administration. “This is particularly attractive for these two agents when they are used in the adjuvant/maintenance settings with treatment lasting for more than a year,” says Kate Keeping, principal analyst at Decision Resources, a market research company. “From a commercial perspective, this also offers Roche the opportunity to offset the imminent threat of biosimilar competition to the intravenous formulations of these brands.” A subcutaneous formulation of Velcade (bortezomib; Millennium Pharmaceuticals) for multiple myeloma was recently launched, which not only offers more convenient delivery, but also reduced neurotoxicity, she says.

	There are drawbacks to self-administration: the risk of adherence and compliance issues, and failure to use the therapy as prescribed (in particular, missing doses) that can impact outcomes and result in premature emergence of drug resistance. And at-home administration reduces patient interaction with both physicians and nurses, which reduces opportunities for regular monitoring. US physicians, who receive a fee for administering intravenous drugs, may also resist the loss of that revenue stream.

	National studies confirm that overall noncompliance to oral drugs across all disease categories can run as high as 50% to 70%. “This presents a challenge in any disease state but can have a significant impact when it comes to chemotherapy,” says Koerner of ION Solutions. “In some instances, patients may have side effects or cost pressures, and decide not to take the drug or take the drug less frequently,” says Brown of Xcenda. “In others, the physician may opt to dose-reduce the patient to manage through certain side effects, but the patient may want to take the full dose to ensure they are getting the maximum benefit of the drug.” With many of these drugs costing as much as $7,500 a month, says Quigley of IMS, it serves nobody’s interest to have them be administered incorrectly or not at all.”

	As for distribution, oral oncology therapies often fall outside the traditional buy-and-bill model. In this realm, “Specialty pharmacy providers are taking on a much greater role in patient management, as office-based clinicians turn over the ongoing management for self-administered products to them,” says Doug Neely of Xcenda. “Payers are much more comfortable managing drugs through traditional pharmacy benefit management (PBM) systems.”

	“With the growing availability of oral options for oncology treatment, some larger oncology practices have opened dispensing pharmacies, so they can also dispense oral cancer drugs to patients,” says Warner of Kantar Health. However, this approach can bring significant business challenges for oncology practices, so it tends to be seen only in larger oncology practices. It is thought that less than 10% of practices currently dispense oral oncology drugs directly. “In oncology, payers in turn will continue to scrutinize the incremental value of new therapies, while experimenting with new approaches to manage overall costs, while maintaining access to quality cancer care,” she concludes. “Manufacturers need to evolve their clinical development, marketing and sales strategies in order to remain competitive in this complex arena.”

Articles

Oncology combines some of the most life-changing therapeutic events with the most complex commercialization pathways. Rising costs of treatments simply add to the tension

Navigating the tense, complex oncology market

	The US recession might be over, but the obstacles facing the biopharmaceutical industry are still plentiful. There’s the eurozone debt crisis, US healthcare reform, an inefficient FDA, and the list goes on. Combined, these factors create a landscape of uncertainty for biopharma companies. And unfortunately, “Uncertainty is the enemy of new project investment,” explains Mark Sweeney, senior principal of site selection firm McCallum Sweeney Consulting, Inc. (Greenville, SC).

	The numbers reflect that reality. Biotech venture capital investment in 2009 totaled $3.54 billion, representing an 18.5% decrease from 2008, according to the 2011 California Biomedical Industry Report, published jointly by the California Healthcare Institute, BayBIO and PricewaterhouseCoopers LLP. While final numbers for 2010 haven’t been released, the report explains that VC investments in biotech had reached $3.14 billion in the first three quarters of that year, “leading to expectations that 2010 would be on par with the 2009 levels.” California, home to three established life science clusters, led the pack in venture capital investment in life sciences in 2010, followed by Massachusetts, Washington state, New Jersey and Pennsylvania.

FIG. 1. iNDUSTRIAL INFO RESOURCES COMPILATION OF CAPITAL PROJECTS IN 2011.

	When it comes to actual project starts, the outlook is better. According to Industrial Info Resources (IIR; Sugar Land, TX), the US biopharma industry in 2011 kicked off $12.1 billion in 702 capital and maintenance projects (Fig. 1). “The number of projects increased, but the individual dollar value went down,” says Annette Kreuger, IIR vice president of research. “Rather than the $25-to- $50-million average enjoyed in the ‘golden years,’ the 2011 projects returned a still healthy average value of $17 million.” Early estimates from IIR put construction project starts for 2012 at $16 billion divided among 707 projects, which evens out to a per-project total of $23 million.

	So where are these dollars going? It’s no surprise that established life science clusters are seeing a lot of economic development. Known for their educated workers, sophisticated higher education systems, industry presence and access to venture capital, established clusters have all of the characteristics that are considered necessary for a biopharma company to innovate.

	What these established clusters are not known for is their low cost of doing business. In fact, companies located in established clusters pay a premium to be there—in the form of higher rent and other operating costs. But it’s worth the added cost to these companies, says Sweeney, whose firm worked with Daiichi Sankyo last year to find a site for its first US manufacturing and packaging operation.

	“Companies continue to locate in these established clusters because of the advantages of being with the industry,” he says.

	“Companies are able to offset the high costs of operating in established clusters with the increased odds of innovation due to deep, rich talent pools and infrastructure,” explains the 2011 Life Sciences Cluster Report from Jones Lang LaSalle (JLL; Chicago, IL), a global real estate services firm.

FIG. 2. THE BOSTON REGION IS WELL AHEAD OF MOST OTHER AREAS IN INFRASTRUCTURE AND OTHER ASSETS FOR LIFE SCIENCES, SAYS JONES LANG LASALLE

	Boston, which JLL ranked as the No. 1 established life science cluster in the US (Fig. 2), is one such hot spot of economic development activity. Novartis AG (Basel, Switzerland) is working on a $600-million overhaul of its Institutes for BioMedical Research (NIBR), near the campus of the Massachusetts Institute of Technology in Cambridge.

	Maya Lin, the architect who designed the Vietnam Veterans Memorial in Washington, D.C., designed one of the buildings in the complex. According to a December 2011 article in the Boston Globe, Lin’s building will have a “main entry and an interior courtyard filled with trees and meandering pathways.”

	“I wanted this to feel not like an isolated island, but something penetrable for everyone from MIT to walk around,’’ Mark Fishman, president of NIBR, told the Boston Globe. “We want people to mix there just as they would at a university.” Novartis expects to add 500,000 sq. ft. and 300 jobs by the project’s 2015 completion date.

	Meanwhile, Vertex Pharmaceuticals (Cambridge, MA), maker of telaprevir, a drug for the treatment of hepatitis C, broke ground on its new 1.1-million-sq.-ft. headquarters complex on Boston’s Fan Pier last summer. The $800-million project is scheduled to be complete in late 2013.

	In a battle of the clusters, Ipsen (Paris, France), a specialty pharmaceutical company, announced late last year that it would relocate its US headquarters from the Bay Area to Bridgewater, NJ, this spring, adding 100 jobs in the process.

	“New Jersey is the leading biopharmaceutical center in the US,” Sean McKercher, president and general manager, Ipsen North America, told Site Selection magazine in December. “This move was a natural choice for Ipsen, given New Jersey’s ready access to international travel hubs, deep pool of pharma talent and business incentives for the biopharma sector.”

	In addition to the established clusters, the JLL report identified nine emerging clusters in North America based on various criteria, including percentage of workforce devoted to high-tech research, venture capital funding and square footage of research facilities. Not surprisingly, many of the states where these emerging clusters are located are among the top 10 earners of life science venture capital funding, per the California Health Institute data.

	Indiana, one of JLL’s emerging markets, has had several project announcements recently. In January, NantWorks, LLC (Los Angeles, CA) announced plans to locate a new pharmaceutical manufacturing plant at the site of the former Pfizer facility in Terre Haute. Expected to be operational by 2014, the plant will produce critical-care injectable and oncologic drugs. The $85.5-million project is expected to create 234 new jobs.

	In late 2011, IntraPac Group (Toronto), a specialty packaging manufacturer, announced it would build an 80,000-sq.-ft. facility in Lawrenceburg, near Indianapolis. The company will move to Indiana from its current location in New Jersey. Other new projects include Quintiles’ (Durham, NC) $6.1-million contract research laboratory near the Indianapolis International Airport, and a $1.5-million headquarters expansion of biomarketing firm VMS, Inc., also in Indianapolis.

	“The life science sector has a $44-billion total impact on Indiana’s economy,” says Chris Eckerle, director of life sciences for the Indiana Economic Development Corp. “With more than $9 billion in exports in 2010, Indiana ranked third in the United States. Indiana also has a superior economic specialization in the drug and pharmaceutical industry, standing nearly three times above the national average. Continuing to build on this strength is certainly a focus of our office.” Eckerle says Indiana is gaining international attention for its strengths in the life sciences and regularly competes with locations around the world.

	When it comes to research and development, established clusters have a clear advantage. But the competition for other aspects of the pharma value chain can be aggressive. States, counties and cities boasting a lower cost of doing business and enticing government incentives continue to make a go at pharmaceutical companies for several reasons, one of which is the high-paying jobs a new project can bring. The annual average income of a biopharmaceutical worker was $118,690 in 2009, compared to $64,278 in the overall economy, according to The U.S. Biopharmaceuticals Sector: Economic Contribution to the Nation report published by Battelle Technology Partnership Practice in July 2011.

	It’s a strategy that should pay off, says Norbert Vnek, principal at KLG Advisors (New York, NY), a boutique consulting firm that advises on location strategy. Vnek says pharmaceutical companies could benefit from looking at lower-cost locations to house their back office operations, like accounting and HR, and redeploy those operating costs into core components of the business, like R&D.

	“For whatever reason, the pharma industry seems to be behind the curve on this practice,” says Vnek, whose company advised Pfizer before and during the merger with Wyeth. “That’s a curiosity, given the way the industry is changing. Every industry has its own culture and momentum for doing things, but there are some real driving forces in the industry that have very big revenue implications. Whenever revenue is threatened, you have to look at cost containment.”

	Sweeney of McCallum Sweeney Consulting says one example illustrating the increased interest in cost containment is the economic development occurring in the South. Last August, Osmotica Pharmaceutical Corp. (Wilmington, NC), a drug-delivery technologies company, announced it would open an R&D and manufacturing plant in Marietta, GA. The facility plus 156 new jobs represent a $20-million investment over the next four years. Last fall, generics manufacturer Nephron Pharmaceutical Corp. (Orlando, FL) announced that it would bring a $313-million project—including a new manufacturing plant and 707 jobs&mdash;to Lexington County, South Carolina.

	Leveling the playing field even more, Sweeney says, is a softer stance some states are taking on government incentives. “We have seen a noticeable difference on offers,” he says, pointing to Pennsylvania as one example. “These states still have tools in the toolbox, they just don’t have as much ammunition. Some of the programs aren’t quite as valuable as they used to be.”

Biopharma remains a bright spot in US and international economic activity, even while the overall outlook remains cloudy

2012 site selection report

	Ernst & Young’s annual exercise in high-level thinking about healthcare trends, the 

 report, has two interesting changes: the scope of the report has gone from the biopharma industry to life sciences overall; and the conceptual focus is what E&Y calls “the third place”: the patients themselves, and not the doctor’s office or the hospital. The concept is also borrowed from Starbucks, which has promoted its cafés as the “third place” (besides home and work) where social interactions occur. In a healthcare context, E&Y suggests that the third place is wherever the patient happens to be—at home, in transit, or at a healthcare setting; the idea is to provide the resources patients want (such as information delivered electronically, as well as medicine or services) when they are concerned with their well-being.

	In identifying the patient as the focal point, E&Y is encompassing longstanding trends like patient-centered outcomes and the healthcare consumer as a force in the marketplace. But it also highlights the trend toward healthy behaviors—diet and exercise programs, smoking cessation, better medication adherence&mdash;that are becoming the stick, rather than the carrot, in how health insurance and employer benefits are structured. The third place concept also builds on E&Y’s previous Progressions reports, which have defined a “Pharma 3.0” theme, in which the biopharma industry realigned around outcomes, patient outreach and new business models in drug development that bring the payer into the picture.

	What will drive Third Wave life sciences businesses? E&Y sees three noteworthy examples:

 which combine today’s fast-evolving social media channels with online intelligence to identify patterns and trends

• “Gamification” of patient healthcare involvement

—picking up on the value of game-playing as a motivator and incentive for consumers to be engaged in their healthcare activities

• The “medicalization” of consumer devices,

 and the “consumerization” of medical devices—highlighting the increasing trend of using devices like smartphones as a healthcare connectivity component, or medical devices in the home that monitor and communicate health status to caregivers.

	One of the flies in the ointment of this patient-empowered, hyperconnected future is the reluctance of many consumers to engage with life sciences businesses about their health status—the heavily built walls around patient privacy. But Patrick Flochel, E&Y life sciences leader, EMEA, says that the biopharma industry already has a model to follow&mdash;the close collaboration between manufacturer and patients that occurs in rare disease development, where patients have a hand not just in demonstrating outcomes of a product’s use, but also in how rare diseases are researched, and a drug for them developed. “Change will come from consumers themselves wanting to engage with life sciences companies, rather than a regulatory change,” he says.

	The third place is a high-concept notion that is not straightforward to put into practice. But E&Y suggests that there are at least five unifying themes when thinking about commercial transformations to accommodate it:

	• Providing products and services in nontraditional settings

	• Building new business models that create lifelong relationships with customers and improve outcomes

	• Organizing around patient populations

	Already, healthcare is adjusting to new business environments, such as retail clinics at drugstores, or telehealth accessed in the patient’s home. Particularly for chronic care, there is already movement toward relationships between patients and life sciences companies; getting more refined expression of this leads to the concepts of delivering healthcare to patients in the segments (newly diagnosed, acute care, maintenance, etc.) in the disease state they occupy. Behavioral economics shows up in the “gamification” theme, with potential value for medication adherence.

	E&Y also puts in a plug for Treato, a new venture from First Life Research, Ltd. (Yehud, Israel), which is deep-mining social media sites to develop patient feedback from therapies, adverse events, off-label use, and other medication-specific or general-health themes. “Technology platforms such as Treato are leveraging the “wisdom of crowds” to provide more meaningful real-time data on patient experiences with medical interventions,” writes Itzik Lichtenfeld, PhD, cofounder of the company. The concept can be thought of as outcomes research on steroids—by providing real-world data, very quickly, on patient well-being. The company plans to generate revenue by partnering with healthcare vendors, including pharma companies.

	The Progressions report is available at http://www.ey.com/GL/en/Industries/Life-Sciences/Progressions-2012---Health-care-everywhere---Overview

Latest annual Progressions report highlights the shift to healthy behaviors

Healthcare's 'third place--patient-centered healthcare--is life sciences' future business focus, says E&Y

	Over the course of human history, we have seen two big advances in health outcomes. The first wave, beginning in the mid-19th century, came from the adoption of modern hygiene practices, which sharply reduced medical infections and improved post-surgery survival rates. The second wave, which lasted for the better part of the 20th century, was enabled by breakthrough drugs and devices—products that have successfully waged war on numerous diseases, from smallpox and polio, to cancer and HIV.

	Today, we stand on the cusp of the third big wave of improvements in health outcomes—driven not just by new products, but by behavioral change. We are moving to a world in which more and more emphasis will be on gathering evidence to identify the interventions that are most effective at improving health outcomes, and then realigning the behaviors of all stakeholders&mdash;patients, providers, manufacturers and others&mdash;around these interventions.

	So far, life sciences companies essentially have had business-to-business (B2B) models, a reflection that their primary customers have been healthcare providers and pharmacies supplied by wholesalers and agents. But as healthcare moves toward a more patient-centric, healthcare-everywhere future, companies will need to move not just to business-to-consumer (B2C) models, but in some sense to more complex “B2ManyCs” versions as well. They will need agile, distributed and consumer-centric models to meet the expectations of patients seeking healthcare that is convenient and matched to their individual lifestyles.

	How will life sciences supply chains be disrupted as patients drive this shift from product-centric to patient-centric models? And how will value be measured by patients, payers and businesses themselves? Four imperatives are in play:

	• A different portfolio of products and services. The product is no longer an undifferentiated molecule that works for every patient—instead, products will be differentiated by technology and the services that are bundled around them. Dosage, frequency, test results and cost/credit will all allow life sciences companies to work with several differentiated supply chains to deliver healthcare anywhere, anytime.

	• New delivery models. Borrowing a page from the consumer products sector, life sciences companies will be faced with the challenge of packing products and their component parts, and delivering them to wherever customers are. Customers will be at the center of the value chain.

	• Tiered services. Supply chains will deliver products in ways that make execution more complex and time-sensitive. Depending on patient needs and the perceived value of the product, different delivery methods will be offered. For example, companies may differentiate between high-volume/low-cost and highly tailored/low-volume products with different delivery methods and levels of service. Batches of products could be uniquely identified and shipped, whether weekly or daily, based on the tier of service matched to clinical need and the economics of the channel.

	• Focused business models. As incentives change, some life sciences companies could become niche players, choosing to execute on strategies that match their products, company values and strengths. For instance, some firms may focus on large teaching hospitals, where increasingly urbanized patients have access to the most leading-edge therapies. Other companies may outsource functions to create new exchanges where multiple product owners can scale delivery to targeted customers.

	Patients remain at the center of this transformation, driving change throughout the health ecosystem as they seek information online, increase self-awareness about their own health, and form communities through social media. As they make more empowered decisions, creating or maintaining health will be seen as a valued commodity, as opposed to simply treating illnesses.

	In recent years, food manufacturers have shifted away from wholesalers to bulk-ship to a  retail distribution center, and book retailers have begun offering real-time delivery of digital books to customers anywhere, anytime. By the same token, life sciences companies will find themselves valued on how well they can adapt their supply chains to meet the preferences and needs of individual patients.

Mark Yeomans is an Advisory Services Partner at Ernst & Young LLP responsible for supply chain strategy in Europe. Mark has worked in the consulting industry for over 25 years and was previously a Partner at IBM and PwC. This article is excerpted from Ernst & Young’s Global Life Sciences Report, Progressions: 2012 The third place: health care everywhere. The report is available online at 

Tomorrow's healthcare market, driven by consumer choice and outcomes-driven economics, will create new supply chain models

Supply chains for a patient-centric world

	The Federal Trade Commission has closed its investigation of Express Scripts, Inc.’s proposed acquisition of Medco Health Solutions. As a result of the evidence collected during an intensive eight-month investigation, we conclude that the proposed transaction is not likely to substantially lessen competition in violation of Section 7 of the Clayton Act.

	This was not an easy decision. At the outset of the investigation, we were concerned that this proposed $29 billion merger between two of the country’s three largest pharmacy benefit managers (“PBMs”) might represent a three-to-two merger in the market for the provision of PBM services to large private employers and other plan sponsors. We also recognized that the merger could be viewed as presumptively anticompetitive because the PBM industry is concentrated and the market share of the merged entity would be more than 40%, even using the broadest market definition. Another question, raised by retail pharmacies and consumer groups, was whether the combined firm could exercise monopsony power, driving drug dispensing fees so low that they would threaten the important services offered by local pharmacies. Specialty pharmacies also expressed concern that the combined firm would engage in exclusionary conduct. …

I. The merger is unlikely to result in anticompetitive effects for PBM services to employers

	The Commission analyzed the effects of the Express Scripts/Medco merger in the market for the provision of full-service PBM services to healthcare benefit plan sponsors, including public and private employers and unions. …

	The market for the provision of full-service PBM services to healthcare benefit plan sponsors is moderately concentrated and consists of at least 10 significant competitors. Our staff’s investigation revealed that competition for accounts is intense, has driven down prices, and has resulted in declining PBM profit margins—particularly in the large customer segment. The transaction will reduce the number of significant competitors to nine (plus a fringe of several dozen smaller firms) and give the merged company a market share of just over 40%. …

A. Unilateral effects for PBM services are unlikely

	One concern with a merger of direct competitors is that the elimination of a close competitor may allow the merged entity to unilaterally impose anticompetitive price increases on consumers. This merger is unlikely to have these effects. Indeed, the vast majority of customers believe that there would be adequate competition post-merger to ensure continued competitive pricing, and many believe that the merger will lead to lower prices for PBM services.

	Analysis of bidding data produced by the parties and by large, national PBM consultants demonstrates that Medco and Express Scripts are not particularly close competitors, and that other PBMs often compete successfully for employers, including large employers. …

B. Coordinated effects for PBM services are unlikely

	Another concern with horizontal mergers is that the reduction in the number of independent competitors may allow the remaining firms to collude, tacitly or otherwise, to the detriment of consumers. For many of the same reasons that the merger is unlikely to give Express Scripts unilateral anticompetitive power over price, the merger is unlikely to result in any coordinated anticompetitive effects.

	Successful coordination usually requires that firms be able to reach agreements and monitor adherence to those agreements. The multifaceted and opaque nature of price competition in this market suggests that coordination on price would be difficult. Pricing terms for PBM services are complicated and difficult to compare because each contract includes numerous pricing components, including separate administrative fees, rebate pass-through, discounts, retail and mail-order pricing for branded and generic drugs, plan design, and ancillary services. Only after the bidding is concluded do PBMs learn, by debriefing the consultants, who they are bidding against; rarely do they even know how their proposal compared to that of the competition. …

II. The merger is unlikely to lead to the exercise of monopsony power for the retail dispensing of prescription drugs

	The Commission also considered whether the proposed acquisition would confer monopsony power on the merged company when it negotiates dispensing fees with retail pharmacies. As a general matter, transactions that allow firms to reduce the costs of input products have a high likelihood of benefitting consumers, since lower costs create incentives to lower prices. Only in special circumstances does an increase in power in negotiating input prices adversely impact consumers. … The Commission examined this concern closely but found that the proposed transaction was unlikely to create or enhance monopsony power.

	Most importantly, the proposed transaction would produce a firm with a smaller share of retail pharmacies’ sales—approximately 29%&mdash;than is ordinarily considered necessary for the exercise of monopsony power. … Furthermore, for contractual and competitive reasons, it is likely that a large portion of any of these cost savings obtained by the merged company would be passed through to the PBMs customers. Although retail pharmacies might be concerned about this outcome, a reduction in dispensing fees following the merger could benefit consumers by lowering healthcare costs.

III. The merger is not likely to result in anticompetitive effects with respect to specialty drugs

	The specialty pharmacy market is substantially less concentrated than the overall market for PBM services to healthcare benefit plan sponsors. Several dozen specialty pharmacies currently operate in the United States. At the national level, those include, but are not limited to, Express Scripts, Medco, CVS Caremark, United, Cigna, Humana, Aetna, SXC, AmerisourceBergen, Diplomat Specialty Pharmacy, and Walgreens.

	According to manufacturers of specialty drugs, they are the ones who are seeking limited and exclusive distribution arrangements today. Indeed, the decision to enter into an exclusive relationship is rare and largely a function of the size of the patient population for the particular drug or a drug’s special safety requirements. Manufacturers of exclusive distribution drugs stated that with small patient populations or certain safety concerns, they often prefer to consolidate distribution in one specialty pharmacy to achieve uniform quality service, ensure safety, and maximize the efficacy of the course of treatment. Overall, exclusive distribution arrangements represent only a tiny fraction of specialty drugs and account for a small portion of total drug expenditures. Manufacturers of specialty drugs are not concerned that the combined firm would be able to force them to enter into arrangements limiting the number of distributors. …

	While this transaction appears to result in a significant increase in industry concentration, nearly every other consideration weighs against an enforcement action to block the transaction.

	Our investigation revealed a competitive market for PBM services characterized by numerous, vigorous competitors who are expanding and winning business from traditional market leaders.

	Excerpted from the Statement of the Federal Trade Commission Concerning the Proposed Acquisition of Medco Health Solutions by Express Scripts, Inc., FTC File No. 111-0210, April 2, 2012, accessed at 

http://ftc.gov/os/2012/04/120402expressmedcostatement.pdf

Merger is not expected to affect specialty-distribution agreements negatively

FTC Approves Express Scripts/Medco Merger: Excerpts

* has just been published by the Bureau of Labor Statistics of the US Dept. of Labor. That news might be important if you have a college-age child who is doing some long-term career planning, or perhaps you’re in graduate school yourself and doing the same planning. The rest of us tend to deal with careers, and jobs, on a more day-to-day basis: What do I do if I am about to be laid off? Or promoted into another career path?—and there are some insights to be gleaned.  The biennial Outlook gives a ten-year projection (in this case, 2010 to 2020) of the US economy, employment and other macro trends. Digging into the Outlook is a real exercise in wonky statistical details&mdash;not everyone’s cup of tea, to be sure. But there are a couple important messages to convey.

	Before getting into that, though, a slight detour is necessary. BLS uses an econometric input-output model of the US economy to calculate trends, and factors in demographic data of the US population from various US Census Bureau surveys. All this is matched against a grid of the US economy organized around the North American Industry Classification System (NAICS, the replacement of the “SIC” codes of years ago). The “pharmaceutical and medicine manufacturing” category is NAICS 3254. (By the way, Census has kept pharma in the broader category of “chemical manufacturing,” and biotechnology is simply a subset of pharma. NAICS changes only gradually because, as a Census policy paper puts it, “Time series continuity is maintained to the extent possible.”)

	Here’s one piece of news: the employment in pharma in 2020 is projected to be 281,500. The actual employment in 2010? 276,500. And, going back a decade, employment in 2000 was 274,400. All these numbers are within a couple percentage points of each other. Which is remarkable stability over a 30-year period (if the projection holds up), and includes going from what was a high point of pharma business development at the turn of the century, to the slow recovery from the Great Recession of the past three years.

	This is a notable contrast from the steady drumbeat of gloom and doom coming from press reports of Big Pharma layoffs announced routinely since the mid-2000s. Outsourcing removes jobs, but many of them stay in-country.  I’m particularly bugged by the layoff reports from outplacement firms, who are able to count tens of thousands in layoffs, but only a few thousand hirings in the same time frame; if all the layoffs were the only change, the pharma industry would have utterly vanished years ago. To be sure, the relatively flat employment projection is not cause for celebration; average annual growth over the next decade is projected to be a full percentage point below the US economy as a whole, meaning that pharma will be a smaller part of the US labor force in 2020.

	Here’s the other piece of news: professional jobs in pharma, especially those involving science and technology, look positively rosy. In the Outlook, few jobs are specified as “pharmaceutical,” but the ones that would fall mostly into this category look good: biomedical engineering, up 62%, to 27,400 jobs in 2020; medicinal scientists, up 37% to 136,400. Pharmacists (some of whom trickle into pharma during their careers) will grow by 25%; and physicians and surgeons—the industry’s main “customer”&mdash;up 24%, to 859,300.

	There are problems with the BLS data; biotechnology research (as opposed to biotech manufacturing) is in another NAICS category, and as pharma service providers take on more functions for pharma manufacturers, those service jobs fall out of the 3254 category. (Another 

, from Battelle Technology Partnership last summer, counted employment in the “biopharmaceutical sector” at 674,000—quite a different number.) But here’s where the input-output modeling and that “time series continuity” becomes important: even if the absolute count in 2010 or 2000 is off, any relative change in the industry would be tracked into the next time period. The BLS numbers point to a stable, durable industry that’s going to employ lots of people over this decade.

	* Certain parts of the data here are drawn from the January Monthly Labor Review, accessible at 

Ten-year BLS projection sees a healthy industry ahead

Jobs and biopharma

In its annual summation of the pharmaceutical business in the US, the IMS Institute for Healthcare Informatics reports that total US sales (ex-manufacturer, not including discounts) was $320 billion, up 3.7% in nominal terms, but 0.5% in real terms (and accounting for population growth). On the plus side, 34 new molecular entities (chemical and biologic) were launched in the year—the most in the past 10 years, and some of these ramped up rapidly. On the minus side, $14.9 billion in branded product value was lost as major drugs went off-patent. This is offset to some degree by a rise of $5.6 billion in generic sales. Generics have now reached 80% of all prescriptions, and IMS’ calculation of the “generic utilization rate” (the actual use of generics compared to potential total substitution) was 94%.

	The macro trend that Michael Kleinrock, director of research development at the IMS Institute, emphasizes in reviewing these data is the flattening and decline of doctor visits and prescription fulfillments during the year, continuing a trend of the past couple years. Overall prescription usage fell by 1.1%, including a 3.1% decline among seniors, and a 2.0% increase among the 19—25 age group—which is attributable in part to the Affordable Care Act allowing young adults to remain on their parents’ health insurance. Doctor’s office visits declined by 4.7% (following a 4.1% decline in 2010). Conversely, emergency room visits increased by 7.4% (from a much smaller base than office visits).

“The combination of the bad economy of the past couple years, with rising copays for drug purchases, is changing patient behavior, and this has serious implications for the future of healthcare system costs,” says Kleinrock. “If patients are delaying treatment until conditions become more serious, or not updating therapy for chronic conditions, eventually this will contribute to more intensive care and higher healthcare costs in the future.”

	There’s one message that’s reinforced by the 2011 IMS data: chain pharmacy continues to grow, while most other channels are flat or declining. IMS Institute counted 31 million more prescriptions dispensed in 2011 over the previous year; all of those and more were taken up by chain pharmacy, which increased its count to 2.2 billion prescriptions. All other retail channels (independent, mail order, mass market) declined, while institutional prescriptions (hospitals, long-term care, home health and a few others) increased by 10 million. The dollar value of mail-order prescriptions rose by 6.4%, indicating perhaps some success in delivering higher-value specialties, but the number of dispensed prescriptions fell by 400,000.

Patient office visits, prescription usage continued to decline

US market for pharmaceuticals was $320 billion in 2011, says IMS Institute

The success in getting patients on therapy, and keeping them there for chronic conditions, is a well-known goal of both the biopharma industry and of healthcare providers and payers; better adherence is a win-win all around in better care and lower overall costs. Now, in a recently released study and an educational session held on Capitol Hill on March 1, NEHI (formerly known as the New England Healthcare Institute; nehi.net), a private-public policy consortium, is saying “the table is set” for managing better programs. Effective technologies and processes are becoming known, and the Patient Protection and Affordable Care Act is putting medication adherence on the priority list of quality measures by which providers will be evaluated.

	“Efforts such as medical homes, the ability to review all the medications a patient is on through the electronic health record (EHR) data, and funding for medication therapy management (MTM) by pharmacists show great promise,” says Tom Hubbard, senior policy director at NEHI. “Now the challenge is to connect these pieces in a coordinated manner.”

	Biopharma supports medication adherence directly, through coupon programs, patient support and education, and innovations in packaging. “Smart pillboxes and similar telehealth innovations can make a difference,” says Hubbard. He also cites the clinical research performed with pharma support to develop adherence estimators and screening systems to predict adherence problems. But overall, says the NEHI report, the heart of medication adherence efforts should reside among primary care providers and pharmacists, who can deal with specific patient needs and who can access details on the medical condition of the patient. (Left unsaid, but a factor in this dynamic, is the criticism pharma companies suffer from stakeholders who believe pharma’s motivation is simply to sell more pills, and from privacy advocates who believe that the pharma industry should not be a party to a patient’s medical care.)

	NEHI’s report, “Roadmap to Improved Patient Medication Adherence,” is available at NEHI’s website. The Capitol Hill session was held, in part, to support legislative efforts by Senator Kay Hagan’s (D-NC) bill, “Medication Therapy Improvement Act of 2011,” (S.274), currently in committee. Hubbard says that next steps by NEHI will be to develop policy guidelines for care coordination.

Pharma industry serves best as underwriter of healthcare providers' efforts

NEHI: Medication adherence needs better coordination among stakeholders

	The ongoing crisis in short-supply drugs, which went from background noise to a top-level problem for many hospital networks over the 

 has not been “fixed,” by any means. The 

, available at the Am. Soc. of Health-System Pharmacists,* has 213 entries. But there is some movement, with a new company, Covis Pharmaceuticals (Cary, NC), solidifying supplies for some of the drugs. The company announced in late March that it is now supplying Zantac (ranitidine hydrochloride) for injection, and has aggressive plans to address other short-supply drugs.

	“We have a unique business model,” says Bill Collins, CEO of the company, which is the US arm of Covis Pharmaceuticals Sarl, in Zug, Switzerland. “We will acquire the rights to branded drugs that have gone off-patent, but remain critical therapies in acute-care markets.” The company has added Zantac for injection (introduced by GSK) to a list that includes Lanoxin (digoxin), Fortaz (ceftazidime) and Zinacef (cefuroxime), and is on the hunt for other brands.

	It is common for branded pharma companies, once a drug has gone off-patent, to continue to manufacture the branded formulation, but usually at a drastically reduced scale (and price) due to the generic competition. Over time, those brands become something of a neglected product, or one whose production gets shunted around as the branded company allocates resources for newer, higher-volume drugs. All this would be ho-hum business variations, except when the generic manufacturers run into their own problems.

	In Collins’ view, there are three components to short-supply drugs: a lack of attention by the originator company (when that company retains some market presence, and didn’t leave the market altogether for that drug); manufacturing issues or other supply interruptions at generic manufacturers; and the low prices that GPOs seek for products in contract negotiations. “We’ve been in continuous discussions with GPOs and hospital pharmacy directors, who are spending extraordinary time and resources to secure supply,” he says. “They understand that we have to make these products at a price we can afford.”

	For the drug shortage crisis overall, there is yet to appear any quick fix—or even a “slow fix,” if that can be conceived. Various legislative bills to require advance notification of production changes by manufacturers remain in committee in Congress&mdash;but even if that action were taken, it wouldn’t address unforeseen interruptions. FDA has a drug-shortage task force, which was beefed up by executive order in the fall, and they have been successful both in obtaining better notifications from manufacturers, and working to develop alternative sources of supply for some drugs. The Generic Pharmaceutical Assn (GPhA) floated the idea of a third-party information broker consolidating information about drug shortages and supplies, but little has been heard of that since.

	Finally, a group of Congressmen (Senators Tom Harkin and John Rockefeller, and Rep. Elijah Cummings) committee has investigated charges of drug hoarding or price gouging by secondary distributors, but aside from finding alleged irregularities such as self-dealing in drugs (which is illegal, depending on the jurisdiction in which the irregularity occurred), no smoking gun has been found.

Covis Pharmaceuticals' business model is to acquire distribution rights to low-volume drugs

Some good news on drug shortage--finally

	The global drug and pharmaceutical market continues to grow, but not all geographic locations deliver equal value. Incremental revenue from mature markets continues to decline, while emerging markets continue to grow. This trend is creating a change in how companies think about the deployment and location of facilities, including those that support the unique needs of functional groups, such as research, development, clinical trials, manufacturing and distribution operations.

	The process of selecting locations has evolved into a sophisticated discipline. More senior executives now recognize that location choices have a significant impact on operational performance, particularly when combined with improved corporate governance in the decision-making process. Consistent analytics that allow governance to be applied to the research process fall into a two-step investigative framework that includes (1) a Rigorous Phased Quantitative Analysis and (2) a Multi-Dimensional Quantitative Trade-Off Analysis.

Step One: Rigorous Phased Quantitative Analysis

	This is a four-step process that utilizes increasingly detailed levels of data:

	a. Frame — The multidisciplinary development of project specifications, decision criteria, fatal flaws and prioritization of location objectives

	b. Phase Two: Assess — Quantitative assessment of location choices utilizing desktop research, survey instruments, and interviews framed on the criteria developed above

	c. Phase Three: Validate — Application of primary research and validation of data to confirm the merits of a location and identify issues that require resolution

	d. Negotiate — Active negotiation of business terms and conditions associated with the structuring of a direct investment project.

Step Two: Multi-Dimensional Trade-Off Analysis

	This second component of the framework for location option evaluation considers financial, non-financial and risk considerations independently and in combination, as follows:

	a. Financial — Quantitative analysis, including commonly accepted measures of financial performance such as net present value, free cash flow, and return on invested capital

	b. Non-financial — Analysis of the prevailing business climate including labor, infrastructure, regulatory, legal, supply chain, site and timing considerations

	c. Risk — Analysis of risk considering intellectual property, political, economic, financial, disaster, human, timing and other operational considerations.

	While effective in the evaluation of location options, both approaches require adaptation to identify requirements for different functions. Following is an exploration of key site-selection considerations for research, development, clinical trials, manufacturing and distribution operations.

	The success of the broader enterprise is fundamentally connected to the success in discovering and commercializing new medicines, regardless of company size, placing a particular emphasis on the importance of choosing the right research location. But the “right” location is likely to be different for established vs. start-up operations.

	For example, smaller companies commonly place a high level of importance on the opportunity to access venture capital dollars, and on low occupancy- and overhead-cost locations typically made available by a university or public-private partnership. In contrast, larger companies enjoy greater access to capital, but their higher cost of failure drives location decisions focused on access to talent capable of discovering and adapting compounds and molecules with specific medical application or blockbuster potential. A favorable regulatory environment and strong intellectual property protection are also important considerations to large operations, which helps to explain why high-cost locations, such as the San Francisco Bay Area; Boston; Cambridge, England; Basel, Switzerland; and Munich, Germany continue to see investment despite competition from lower-cost jurisdictions.

	Research location site-selection key considerations include:

	Determining where to invest in drug development and where to scale up production requires an assessment of time, cost and risk associated with transferring a study subject (e.g., a molecule) from the research bench to a new facility, and in turn, transferring the new scaled-up manufacturing process into commercial production. The pool of scientists with the highly technical skills needed to support drug development processes numbers less than 10,000 globally, according to some industry watchers, so location decisions are highly sensitive to proximity to scientists with development expertise.

	Development location site-selection key considerations include:

	Concern that new basic science discoveries are not quickly yielding more effective, more affordable and safe medical products is leading companies to raise performance expectations during clinical trials. A compound entering Phase I testing often represents more than 10 years of preclinical evaluation, and offers a nominal 8% chance of reaching market. For this reason, companies are increasing focus on rapidly demonstrating the safety and effectiveness of new products, and at lower costs. This trend has seen an increasing level of attention on locations such as India that are rich in science and mathematical talent and offer low structural operating costs.

	Clinical trial location site-selection key considerations include:

	In addition to an extensive set of location criteria, each product revenue model (including patent status and profit margin) influences manufacturing location options. Companies manufacturing a patented product will typically seek tax-advantaged locations known for strong intellectual property protection, such as Ireland, Singapore or Switzerland. This combination of factors has typically allowed companies to reduce corporate income tax to very low rates utilizing a low statutory rate or income-tax-based incentives tied to direct investment and an interest in fostering the technologies in question. Off-patent products or generics characterized by low gross margins typically result in location strategies designed to reduce overall production costs, and are often focused on India, China, and, increasingly, Eastern Europe.

	Manufacturing location site-selection key considerations include:

	A few of these site-selection factors should be considered in more detail:

 — Due to increasing levels of manufacturing investment across the world, many markets face a shortage of qualified engineers, or will in the years to come.

 — There is a shortage of sites in emerging markets, due to regulatory issues concerning ownership, agricultural-to-industrial land transfer, poor physical infrastructure and other considerations. Many governments are struggling to respond quickly to the demand for infrastructure.

 — Water, natural gas and electrical shortages are common in many emerging markets that are otherwise attractive for manufacturing. While there is an abundance of data available, it is not always applicable to all regions, and specifically may underestimate the reliability of utilities within designated industrial zones featuring strong utility-supplier agreements.

 — Site selection is affected by regulations covering tax on the importation of raw materials or equipment; international regulatory agency participation; foreign land ownership; protection of domestic industries; and general permitting. Recently, regulations requiring market presence in exchange for market access have become more frequent – examples include Indonesia and Brazil.

 — Foreign direct investment in manufacturing locations often represents a large capital investment, new sources of employment and new tax revenue. To encourage these positive impacts, many times governments offer significant long- and short-term financial incentives designed to attract new facilities. Inducements can include government grants to cover land, construction costs and infrastructure costs as well as tax deferrals.

 — At least in part due to this industry’s strong regulatory demands, all pharmaceutical manufacturing locations must have the ability to demonstrate the presence of, or the ability to train employees familiar with, Good Manufacturing Practices (cGMP). In many cases, the development of a cluster is driven and perpetuated by the presence of training facilities and programs able to guarantee a consistent supply of such skills.

	The location of distribution facilities is driven by the need to optimize product shipment logistics. For example, products requiring maintenance at a certain temperature rely on access to robust cold supply-chain capabilities. This, combined with the preference for late pickup times for overnight delivery, drives companies to select sites proximate-to-package freight hubs for those products. A location with favorable inventory taxes is also critical, particularly for high-value products like biologics or implantable devices.

	Distribution location site-selection key considerations include:

	As we have discussed, the location selection process varies significantly by value chain component and product profile. Layer in company-specific nuances and preferences, the typical size of investment required in the pharmaceuticals industry, and risk of failure, and the process can become a complex, challenging, high-stakes endeavor. Experience has shown that a strong and consistent decision-making framework will positively impact the value any company can derive from its location decision-making, particularly when the process is fully transparent and executed by a multidisciplinary team.

]  (+1 571.215.5118, matt.jackson@am.jll.com), Matt Highfield [

] (+1 612.308.5765 or matt.highfield@am.jll.com) and Shannon Curley (+1 571.232.1575 or shannon.curley@am.jll.com) are part of the leadership team in the Business Consulting Group at Jones Lang LaSalle. They help companies tackle global location footprint challenges in Life Sciences and other industries and have worked in more than 40 countries.

Applying a consistent framework to choose locations can help optimize R&D and drive cost reduction for pharmaceutical companies of all sizes

A scientific approach to site selection

	There might have been a time when mail lists of doctors was just another database that pharma marketers, and their ad agencies, reached for when assigning sales reps or preparing a direct-mail campaign. And maybe some pharma companies still have a relatively casual approach to the task. But increasingly, driven by tighter regulations worldwide, and by the urgency to maximize resource allocations in sales efforts, maintaining these “master data lists” has become a critical operational function. Some of the largest multinational pharma companies are consolidating worldwide master data lists, creating the vision of being able to tap into any doctor’s office in most parts of the world from a desktop.

	Without question, the newest driver for this activity is the aggregate-spending rules, aka the “Physician’s Sunshine Act,” which will go into force (after a delay from January) later this year. The regulations, part of the Patient Protection and Affordable Care Act of 2010 (PPACA), which put on a national level the state rules that have been implemented in Vermont, Massachusetts and a few other states (Pharmaceutical Commerce, Nov/Dec, p. 1). Under agg spend rules, pharma and medical device manufacturers are required to compile nearly all payments or “transfers of value” to many types of healthcare providers (HCPs), and report aggregated sums to CMS, which will publish the amounts and HCP names. When CMS eventually got its regulatory guidance for the Sunshine Act published in December, it decided to delay the beginning of the reporting period to this summer, and has yet to announce how much of 2012’s activity will need to be reported by March 2013. (Adding unpleasant uncertainty to all this, if the Supreme Court decides to throw out PPACA in its entirety, the legal and regulatory structure will have to be re-legislated.)

	Many pharma companies have already been realigning their internal compliance resources in anticipation of the agg spend rules, and similar programs are coming into force in the UK, France and elsewhere. “The implementation delay has allowed industry to take a pause in its preparations, but there’s a general recognition that this is not going away,” says Theresa Greco, VP at Health Market Science (King of Prussia, PA). “Our master-data business targeted at agg spend compliance has quintupled in the past year.”

	Over the years, data providers have thrived on providing necessary documentation for the sample accountability programs required by the Prescription Drug Marketing Act (PDMA—see Pharmaceutical Commerce, July/Aug, p. 18). But under the newer agg spend rules, sample accountability gets rolled up (like many other “transfers of value”) to one more reporting requirement to states and to CMS.

Compiling and maintaining lists of healthcare provider contacts is a bigger and more important task than ever

Pharmaceutical Commerce - May/June 2012