The Evolving Pharmaceutical Value Chain: Forecasting Growth for Small and Large Molecules

BIG PHARMA historically has focused its efforts on the development and commercialization of small-molecule drugs, defined as drugs with a molecular weight of <500 daltons, which are typically orally available. To date, these products always have acted as the main driver of sales growth for the pharmaceutical industry. This trend, however, is set to change over the remainder of the decade as roughly 60% of revenue growth for Big Pharma is projected to come from biologic products through 2010. Biologics are protein-based therapeutic agents. In keeping with this trend, major pharmaceutical companies are seeking to enhance their positions in this emerging pharmaceutical value chain.

Growth in small molecules stagnant

Although small-molecule drugs continue to account for the majority of revenues generated by Big Pharma, sales for this product type continue to grow at a much slower year-on-year rate than either biologics or vaccines. Toward the end of the current decade, this discrepancy in growth rates will become increasingly apparent. Based on Datamonitor forecasts (1), Big Pharma's sales generated by small-molecule products between 2007 and 2010 will be flat with a compound annual growth rate (CAGR) of 0.0% as leading small molecules become restricted by heavy generic competition (see Figure 1).

Figure 1: Compound annual growth rates for small molecules, therapeutic proteins, monoclonal antibodies, and vaccines.

It therefore is imperative for the major pharmaceutical companies to implement diversification strategies and invest in the biologics market. Some players, most notably Roche, have been much quicker to identify the potential of biologics, while other companies remain firmly on the hunt for mergers and acquisitions in a bid to play catch-up.

Biologics versus small molecules

The movement of Big Pharma into biologics understandably has had a direct effect on the relationship between the industry's elite players and the emerging biotech sector. There are now few biologic products that have reached a late stage of clinical development or have reached the market already that have not, in some form or another, been licensed to or acquired by Big- Pharma players. As a result, a network of licensing deals and technology partnerships overlaps these two subsectors of the pharmaceutical industry.

Shifting corporate focus into biologics can have significant implications for Big-Pharma players as the molecular differences between small molecules and biologics have far-reaching consequences for the industry structure. Small molecules are typically orally available and are prescribed at primary-care physician offices. In contrast, biologics are focused toward the hospital sector, are driven by the specifics of the therapeutic area, and have nonoral administration. In addition, small molecules are considerably cheaper to manufacture than biologics, which require more costly and complex production capabilities.

Although the integration of biologics into a Big Pharma company's portfolio clearly requires some restructuring, it appears to be a strategic move of vital importance for those companies seeking to maintain sales growth through 2010. During the period 2004–2010, Datamonitor forecasts that Big Pharma's sales of biologic products will grow by a CAGR of 13.0% (1). In contrast, sales of small-molecule products will grow at a CAGR of just 1.0% over the same period (see Figure 1).

Mixed outlook for therapeutic proteins and monoclonal antibodies

The two main types of biologic products, therapeutic proteins and monoclonal antibodies, will record disparate CAGRs through 2010, at 7.3% and 20.8%, respectively.

Therapeutic proteins can be viewed as the first wave of products to emerge from the biotechnology sector and have had a market presence for the past two decades. This product technology represents a substantial source of revenue growth for Big Pharma, which has successfully managed to acquire marketing rights for many of the world's best-selling therapeutic protein drugs.

Nonetheless, a rapidly slowing growth rate through 2010 for therapeutic protein sales (a CAGR of 23.1% in 2001–2004 versus 4.6% in 2007–2010) indicates that the market is moving into a period of maturation. Improved second-generation versions of older therapeutic proteins are responsible for driving sales growth rather than new product launches. Although this market will continue to outperform the market for small molecules, growth will be driven increasingly by effective product life-cycle management.

In contrast, the market for monoclonal antibodies is one of the most dynamic and commercially attractive segments within the pharmaceutical industry. First-generation monoclonal antibodies continue to dominate new product launches. The first true second-generation monoclonal antibody product—MedImmune's "Numax" (motavizumab), a follow-on to "Synagis" (palivizumab)—is not due to be launched until 2008. "Avastin" (bevacizumab), launched by Genentech and Roche in 2003, has been hugely successful and is expected to record stellar growth through 2010 because of its efficacy across a broad range of cancer types (1). Within the Big-Pharma peer set, monoclonal antibodies will contribute additional revenue of roughly $17.9 billion in 2010.

Technology life cycles vary for small molecules and biologic products types

At this stage, it is worth considering why there are observed differences in the sales-growth rates for small molecules, therapeutic proteins, and monoclonal antibodies. A plausible hypothesis is that each drug is positioned at a different point along the technology life cycle, when viewed within the 2001–2010 time window. This technology life cycle can be viewed as similar to a product life cycle, but applies to an entire technology or generation of technology. Furthermore, a technology life cycle is the summation of the individual product life cycles for all products of a particular drug type.

A typical drug-technology life cycle follows an S-shaped curve, the key characteristic of which is an accelerating sales-growth rate to a maximum rate, or inflection point, subsequently followed by a decelerating growth rate. The S-shaped curve is accounted for by Everett Rogers's Diffusion of Innovation Theory, which dictates that new technologies initially experience a lead-in phase to build support before sales-growth rate can accelerate (2).

Summarizing this theory, as applied to the pharmaceutical industry, the technology life cycle therefore can be broadly split into three phases: a lead-in phase characterized by a slow buildup of sales as new technology products seek to gain market acceptance; a take-off phase characterized by rapid growth as acceptance of new technology is gained as efficacy and safety of drugs is proven; and a maturity phase characterized by decelerating growth as other new drug technologies assume market share and the threat of generic competition emerges, eroding sales growth for some products.

Applying the technology life cycle to the four product types in the Big- Pharma peer set leads to the conclusion that small molecules, therapeutic proteins, monoclonal antibodies, and vaccines are each at different positions in the technology life cycle (see Figure 2). Monoclonal antibodies recently have progressed beyond inflection point (peak growth), but remain within the take-off period. Within the context of the Big-Pharma peer set, therapeutic proteins are approaching the maturity phase, while small molecules have progressed a considerable distance into this phase and are the most mature product type within the peer set by a significant margin.

Figure 2: Idealized growth curve for small molecules, therapeutic proteins, monoclonal antibodies, and vaccines.

Between 2001–2010, Big Pharma's sales growth attributable to monoclonal antibodies reached its inflection point, or peak annual growth rate, of 47.0% in 2003–2004. While monoclonal antibodies will continue to record robust year-on-year sales growth through 2010, the annual growth rate will be recorded at a slowing pace (1).

In comparison, however, therapeutic proteins are positioned further along the technology life cycle, and year-on-year sales growth has decelerated to a greater extent as a result. Although strong current and medium-term growth in monoclonal antibodies will be driven by innovative drug launches, Datamonitor forecasts that growth in therapeutic proteins primarily will be driven by existing brands through to 2010. Furthermore, the more advanced positioning of therapeutic proteins along the technology life cycle is defined by this drug technology representing the first technology wave of product output from the biotechnology sector, while monoclonal antibodies represent the second technology wave.

Generic competition: critical in growth of biologics over small molecules

Several competitive factors are at play that will dictate stronger growth for biologics, and monoclonal antibodies in particular, versus small molecules. These factors include exposure to generic competition, access to suppliers of biologic drug technology, and drug-pricing leverage with healthcare providers.

Exposure to generic competition is arguably the most important of these competitive forces. Biologics, in general, face minimal exposure to generic competition going forward to 2010, while monoclonal antibodies in particular do not face a realistic prospect of generic threat for some years beyond this point, owing to both time (i.e., patent expiry) and technical barriers (i.e., difficulties in replicating a cell line). Biosimilars are clearly an emerging threat, as demonstrated by the recent US Food and Drug Administration's approval of Sandoz's growth hormone "Omnitrope" (somatropin [rDNA origin]). FDA, however, approved the drug with several crucial caveats that seemingly will mean that the US market will not be awash with biosimilars, making this form of competition only a realistic short- to medium-term threat to early-generation therapeutic protein products (see Figure 3).

Figure 3: Factors affecting the compound annual growth rate for small molecules, therapeutic proteins, monoclonal antibodies, and vaccines.

Second-generation therapeutic proteins will benefit from greater insulation, thanks in part to prolonged patent protection. Datamonitor believes that monoclonal antibodies will be protected from any generic exposure in the foreseeable future because of the complexity of these products and the related difficulty in creating inexpensive bioequivalent copies.

In contrast, small-molecule products face heavy exposure to generic competition, most graphically illustrated by the recent loss of patent protection for Merck's cholesterol-lowering blockbuster "Zocor" (simvastatin). According to early sales figures, it appears that the availability of generic simvastatin has not only affected sales of Zocor, but also other branded statin drugs with which it competes (1). Heavy generic erosion is the principal driver behind Datamonitor forecasts of negative sales growth for small molecules through 2010 (see Figure 3). Generic competition will continue to be the most damaging force to sales growth for Big Pharma for the foreseeable future, and erosion of sales from generic competition effectively will negate the majority of sales growth generated by new drug launches and existing product franchises. The small-molecule market for Big Pharma is running to stand still.

A secondary factor driving growth for biologics and monoclonal antibodies, in particular, is the pricing leverage that the manufacturers of these products extract from healthcare providers (see Figure 3). In the case of monoclonal antibodies, this price advantage primarily is driven by the positioning of these products in the oncology and autoimmune and inflammatory diseases (AIID) markets.

In various cancer indications and for rheumatoid arthritis, monoclonal antibodies offer patients a level of efficacy that is not available via treatment with older small-molecule products. Within the cancer market in particular, demonstrated survival benefit has rapidly emerged as a benchmark by which these products are evaluated. The chief threat to oncology monoclonal antibodies in terms of direct competition—currently there is minimal direct competition—is the prospect of small-molecule-targeted cancer therapies such as Novartis's "Gleevec" (imatinib). At present, drugs of this nature within research and development pipelines that could threaten the dominance of monoclonal antibodies appear few and far between. Given the oral availability of targeted small molecules and the relatively cheap cost of manufacture, they remain a threat nonetheless.

Big Pharma seeks to build its position in monoclonal antibodies

Access to biologics among the Big Pharma peer set is a key element of this story. Although many Big-Pharma companies have acquired some access to the therapeutic proteins market, only a relative few companies have gotten their hands on monoclonal antibody products. The leading player from Big Pharma in monoclonal antibodies is Roche. Roche effectively has a stranglehold on monoclonal antibodies from its 1990 merger with the leading monoclonal antibody developer in the United States—Genentech (see Figure 3). By collaborating with Genentech some years before the emergence of key monoclonal antibody drugs on the market and, crucially, by locking in exclusive access to Genentech's research and development pipeline, Roche has locked out rival Big-Pharma players from the market. This is most notable within the oncology sector, where Roche has established a dominant market position. Roche has held this position gained by its early relationship with Genentech, despite selling its share of the company in 1999–2000.

The other Big-Pharma players with a notable presence of monoclonal antibodies have acquired their positions from penetration of the AIID market. Having established its lead in oncology, Roche now appears poised to follow this lead into AIID via the launch of "Rituxan" (rituximab) for rheumatoid arthritis.

As a result of its strong position in the biologics market, Roche is forecast by Datamonitor to be the strongest performing Big-Pharma player through 2010 (1). It is increasingly evident that other Big-Pharma players are seeking to replicate Roche's biologics-centric growth strategy. In recent months, both AstraZeneca and Merck & Co. have made acquisitions of biotech companies specializing in the development of monoclonal antibodies: Cambridge Antibody Technologies Group in the case of AstraZeneca, and Abmaxis and GlycoFi, in the case of Merck. Meanwhile, GlaxoSmithKline and Pfizer have hinted at product-acquisition deals that will involve biologics.

Looking forward

Clearly, a revolution is afoot involving the underlying product technology that drives sales growth for Big Pharma. It is therefore increasingly important that those players—large or small—within the peer set that do not already hold a strong hand in biologics do not get left behind in this value chain.

Simon King is senior pharmaceutical market analyst, Datamonitor PLC, Charles House, 108-110 Finchley Road, London, NW3 5JJ United Kingdom, sking@datamonitor.com

References

1. "Big Pharma Turns to Biologics for Growth to 2010" (DMHC2190, Datamonitor PLC, London, May 2006).

2. E. Rogers, Diffusion of Innovations (Simon & Schuster, New York, NY, 1995).