Vladislav Gurin :: BioTech & Pharma consulting

After drawing on research from AMR Research, McKinsey & Company, I point to the widespread adoption of CRM technology solutions.
CRM (Customer Relationship Management) is the technology that tracks customer activity and tailors marketing pitches accordingly. Estimates of the size and growth of the CRM software market vary considerably. Nevertheless, the investment in this technology is both substantial and growing and an important focus of companies’ budget. The Gartner Group estimated that worldwide spending on CRM was already $23bln in 2000 and would grow to $76bln by 2005 (or about $100bln by 2007).
Two-thirds of all telecom operators in U.S. and half or more of all U.S. financial services, pharmaceutical, BioTech and transportation companies are either implementing or already utilizing such solutions. Across the USA and Europe, approximately 45% of the companies in the high technology, healthcare, aerospace, retailing and utilities sectors have invested in CRM systems.
Most large organizations dealing with a giant number of customers have adopted or will adopt one or more IT-based CRM solutions. Medium-sized and smaller organizations need to consider their existing and potential scale in relationship to the technology requirements.

Having analysed extensively CRM project management and using a range of sources I’d like to emphasize some of organizational prerequisites that make a company an ideal candidate for adopting an IT-based CRM solution:

• Do you have a large number of people in sales and service in direct contact with customers, say more than 30?
• Are you in a highly collaborative environment, with customer interaction requiring input from multiple players within each function (sales and service)?
• Do you sell complex products that require a high degree of configuration and customization?
• Do you have a large number of customers, say more than 10 000?
• Is a typical customer relationship worth a lot to you from a profit standpoint, i.e. will it cost you to lose one?
• Can your customers interact with you across multiple channels?
• Do you have frequent contact with large groups of customers, or all customers, across multiple channels?
• Is there a need to customize what you are saying to each customer through these channels?

I will try to provide several examples of a real option analysis in contractual relationships between two parties: a delivery contract for a service product with uncertain development time; a supplier contract for assets with short lead times such as fashion goods with market uncertainty; and a joint venture agreement to co-develop a new original drug with significant technical and market payoff uncertainty.
For instance, a joint venture on a product Research & Development program can be viewed as a sequential compound option whereby after the initial learning experience one of the partners makes an equity investment in the other partner.
Successful product development during the joint venture creates the option to expand the agreement to include sales or distribution rights and may ultimately create the incentive—and real option—to acquire the joint venture partner. These types of agreements are frequent in high-tech industries such as semiconductors, software development or biotechnology, which feature high R&D intensity and high levels of technical uncertainty.
A recent article in Financial Times alludes to Pfizer’s changing drug strategy to restructure R&D, which now involves a series of investments in start-up BioTech companies in exchange for equity. The size and research budget from Pfizer’s approximately $7bn in annual R&D spending and to be corrected later.
These examples also extend to other industries. Anheuser-Busch, the global brewery, within the past few years has initiated a novel strategy of growth option acquisitions by making small equity investments in local breweries in foreign markets. These investments given Anheuser both growth options as well as learning options: By participating in the small breweries, Anheuser learns quickly about the market structure, demand, and growth potential of these markets, thereby reducing much of the noise that would otherwise cloud assumptions about the attractiveness of these markets. This, in turn, facilitates informed decisions as to which of those growth options should be exercised by acquiring target firms in proliferating markets.
A joint venture creates the option to learn about technical and market uncertainty by preserving a stake in the development program. It provides the opportunity to participate in the upside potential while also sustaining enough flexibility to exit at low costs if the project fails. Those partner strategies that build on sequential investments constitute an important part of corporate strategies. They avoid the risk inherent in premature acquisition of some technology firm prior to obtaining a good understanding of the feasibility of the emerging technology and its market acceptance.
An agreement between two partners, be it to jointly develop a new product or to provide for product or service supply, should allow for sufficient embedded options and flexibility to sustain a fair and just allocation of obligations and rewards to each party for both the current conditions, under which the agreement is closed, and a set of future uncertainties. In other words, the agreement should create a Pareto optimal allocation of risks and reward in the face of uncertainty: there is no other allocation in which some other individual is better off and no individual is worse off. It implies that both parties can benefit equally from future upsides and are equally protected against downside risks. Contract embedded options that permit fair risk and reward sharing during the presumed lifetime of the agreement under a set of future uncertainties are likely to stabilize and sustain the relationship between the two parties.
One solution to the problem of future uncertainties is contingent contracts.
In a contingent contract, some of the deal terms are not finalized but are left open for future events, that is, the contingencies, to occur. Those contingencies may relate to uncertain market payoffs, the success of a joint project, or the costs it may take to complete a task. Real options are a great analytical tool to reconcile disparate assumptions and expectations in the structure of a contingent contract.
In other words, contract embedded options are constructed to make behavioral motives or penalize unwanted actions. These include delivery contracts with penalty clauses for delays or employment contracts that entail incentive options.

Given the large decline in expected sales that usually occur where generics enter the market, brand companies begin planning a strategic response to this entry in advance of the patent expiration of a commercially important product. These responses are typically referred to as Life-Cycle Management (LCM) strategies. The options used by brand firms:
1) the introduction of a new therapeutic class for the same indication;
2) the introduction of a new formulation (e.g., a new delivery system or a combination product) that has improved therapeutic benefits in terms of patient tolerance, compliance, safety or efficacy;
3) the introduction of an Over-The-Counter product.
Each of these strategies has been employed on a selective basis with some success by brand firms.
The most effective life-cycle management strategy seems to be the introduction of a new class of therapies. Competition evolves in pharmaceuticals by the introduction of new classes of entities with superior therapeutic properties to prior generations of products. Firms that have a commercially important product subject to patent expiration will frequently be conducting R&D on new therapeutic approaches for the same indication. However, there are no guarantees in this regard because the candidates for the next advance in therapeutics often span a large spectrum. Furthermore, the R&D process is subject to many technical, regulatory, and competitive uncertainties with long time durations.
Another life-cycle management option for the brand firm is the introduction of a product line extension such as a new delivery system. Under the Hatch-Waxman Act (1984), a new formulation involving additional clinical trials is eligible for a 3-year exclusivity period. Moreover, a new delivery mechanism or formulation may be covered by a new patent. One of the most successful cases in this regard was the introduction by Pfizer of Procardia XL, a once-a-day formulation of a leading calcium channel blocker for hypertension. The extended release Procardia improved the tolerability and the side-effects profile associated with the active ingredient.
As a consequence, Procardia XL appeared to be a much larger commercial success than the earlier formulation of Procardia. This life-cycle management strategy has been employed in several other situations with somewhat mixed success. The weekly formulation of Prozac, for example, has enjoyed only very limited success. The degree of therapeutic improvement is a key factor in the success of this life-cycle management strategy.
A third basic option available in the case of some therapeutic categories is to develop an over-the-counter version of a product subject to patent expiration.
The strategy has been employed for example for anti-inflammatory pain relievers such as Motrin and Naprosyn, anti-ulcer therapies such as the H2-blockers Tagamet and Zantac, proton pump inhibitors such as Prilosec, and in several other therapeutic categories. However, a shift to OTC status requires approval by the FDA that the drug is safe for self-medication (Juhl 2000; McCarran 1991; Schweitzer 1997). A company will normally need to submit new clinical trial evidence to that effect. If approved by the FDA, the company receives a 3-year exclusivity period for its OTC drug in recognition for the new clinical trial work.
A key driver of success in the OTC market is the ability to capitalize on the brand loyalty enjoyed by the prescription product. The number of category shifts to OTC status approved by the FDA has grown over time.
At the same time, there are many therapeutic categories where this is not as viable strategy because they would not meet the FDA’s requirement on safety for self-medication (e.g., mental health and cancer drugs). The FDA has also declined several product requests for shifts to OTC status, such as anticholesterol drug agents.

It is estimated that only 1 out of 10 drug molecules that are selected for development and undergoes various preclinical and clinical development activities ultimately reaches the market. Because of such an attrition rate, drug companies are often forced to conservere sources during initial development and bring a product to the market that may not have optimal pharmaceutical and clinical attributes. This approach also leads to faster availability of new therapies to patients. After the initial launch, further development activities leading to superior products, known as the product LCM, continue. The LCM may lead to new dosage forms and delivery systems, new dosing regimen, delivery routes, patient convenience, intellectual property, and so on. An LCM program is considered successful only if it leads to better therapy and patient acceptance. There are numerous examples of successful LCM through the development of prolonged-release formulations. Development of nifedipine (Procardia® XL, Pfizer), diltiazem (Cardizem CD®, Aventis), and bupropion HCl (Wellbutrin SR® and XL®, GSK) prolonged-release products that not only provided more convenient and better therapy to the patients by reducing dosing frequency but at the same time greatly increased sales of the products are well-known examples. Even old compounds like morphine and oxycodone were turned into important products by the development of more convenient prolonged-release formulations (MS Contin® and Oxycontin®, respectively; Purdue Pharma).
Many of the future LCM opportunities may come through bioavailability enhancement. Solid dispersion, microemulsion, soft gelatin capsule formation, solubilization, lipid-based DDSs (drug-delivery system), nanoparticle or nanocomposite formation, etc., are some of the common bioavailability approaches that can be utilized for LCM. Development of Lanoxicaps® by Burroughs-Wellcome in 1970s by encapsulating digoxin solutions in soft gelatin capsules is a classic example of LCM by bioavailability enhancement and better pharmacokinetic properties. The development of a microemulsion preconcentrate formulation by Novartis (Neoral®), where the variability in plasma and the effect of food were reduced greatly, is another well-known example.
Life-cycle management through the development of fixed combination products, where two or more drugs are developed or copackaged into a single entity, is gaining increased popularity. The fixed combination products often provide synergistic effects, better therapy, patient compliance, patient convenience, increased manufacturing efficiency, and reduced manufacturing cost. However, a clear risk/benefit advantage is essential for the successful LCM by combination products; mere patient convenience may not be sufficient.
Common justifications for the development of fixed combination products include improvement of activity such as synergistic or additive effect, improved tolerance by reduced dose of individual ingredients, broadening of activity  spectrum, improvement of pharmacokinetic properties, and simplification of therapy for the patient.
The development of oral dosage forms that disintegrate or dissolve in the mouth is providing LCM opportunities for pediatric, geriatric, or bedridden patients who have difficulty in swallowing. They are also being used by active adult patients who may not have ready access to water for swallowing tablets or capsules.

In an apparent attempt to determine whether the American taxpayer is getting fair benefits from research sponsored by the federal government, the Joint Economic Committee of the U.S. Senate has been considering this question. Historically, basic research has been funded by the NIH and various philanthropic foundations to discover new concepts and mechanisms of bodily function, in addition to training scientists.
The role of industry has been to apply the basic research findings to specific treatments or prevention of disease. This is the appropriate manner in which to proceed. The industry cannot afford to conduct sufficient basic research on new complicated biological processes in addition to discovering new drugs or vaccines. The government does not have the money, time, or required number of experts to discover and develop new drugs.
The process that plays out in real life involves the focus of pharmaceutical industry scientists on desirable biological targets that can be identified in disease states, and to set up the program to discover specific treatments that will show efficacy in human disease.
The compounds that are developed successfully become drugs on which the company holds patents. In this manner, the huge cost of discovering and developing a new drug (estimated at $800 million plus over a period of some 10 years) as noted above can be recouped by the founding company since no competitors can sell the product as long as the patent is in force. Without such a system in place, drug companies simply could not afford to bring new prescription drugs to the market.
In the course of reviewing the matter, the Joint Economic Committee examined a list of 21 major drugs, which was put together apparently as an example of drug products that might justify royalty to the government. One of these agents, captopril (trade name Capoten), was discovered and developed by E.R. Squibb & Sons in the 1970s. At that time, one of Squibb’s academic consultants, Professor Sir John Vane of the Royal College of Surgeons in London brought the idea of opening a new pathway to treat the so-called essential hypertension by inhibiting an enzyme known as the Angiotensin Converting Enzyme (ACE). This biochemical system was certainly known at that time but, in Squibb’s experience in the field of hypertension treatment, was not generally thought to play a major role in the common form of the disease, then known as “essential hypertension.” The company decided to gamble on finding a treatment that was not used at the time and that would be proprietary to the company. Professor Vane (Nobel laureate in medicine in 1982) had discovered a peptide in snake venom that was a potent inhibitor of ACE. Squibb decided to pursue the approach he espoused, resulting in the development of a unique drug for the treatment of this very prevalent and serious disease.
In the first phase of their research, Squibb tested a short-chain peptide isolated from the venom of the viper Bothrops jararaca, with which Vane was working in the laboratory, in human volunteers and showed that it did, indeed, inhibit the conversion of angiotensin I to angiotensin II after intravenous injection. The peptide was also shown to reduce patients’ blood pressure when injected. Since the vast majority of peptides cannot be absorbed from the GI (gastrointestinal) tract, Squibb scientists set out to prepare a nonpeptide compound that could be used orally and manufactured at acceptable cost. The design of a true peptidomimetic that became orally active had not been accomplished at that time. Squibb then carried out a full-blown clinical program on a worldwide basis, which led to FDA approval of Squibb’s drug Capoten (captopril), an ACE inhibitor. Mark also marketed an ACE inhibitor in the same period. This work opened a new area of research that has resulted in a class of new drugs that share this mechanism of action for use as antihypertensive drugs.
In the minds of pharmaceutical researchers and, hopefully, the public at large, the above example illustrates the unique role of pharmaceutical companies in making good use of basic research to discover new treatments for serious and severe diseases. The colossal costs to discover and develop a new drug could not be borne unless the companies knew that, if their gamble worked (which is not the case in the majority of situations), they would be assured of a good financial return (ROI) for their shareholders. This system has served the country well in many fields of endeavor, in and out of the drug arena, and should be retained as such.