The fog of war may soon give way to the cloud of the network, but that brings it’s own problems.

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Pharma's information space — rich and multi-faceted

Ian Grant

The information problem in the pharmaceutical industry falls,

broadly speaking, into two parts: one is to find the molecular needle in the haystack that will become the next billion dollar bestseller; the other is to preserve the quality and integrity of materials in the supply chain from raw material to patient, and thus ensure pa-tient safety and brand reputation.

Profits available from ethical drugs elicit envy from firms in other indus-tries. According to a 1993 study by the US Office of Technology Assessment, “economic returns to the pharmaceu-tical industry as (a) whole exceeded returns to corporations in other indus-tries by about two to three percentage points per year from 1976 to 1987, af-ter adjusting for risk among industries.”

The ability to track and trace ethical drugs through the supply chain is a vital issue for drug makers, healthcare regulators and workers, and consum-ers. The UK Department of Health is looking at possibly exploring the use of Radio Frequency Identity (RFID) technology. The US FDA has already said it wants an electronic ‘e-pedigree’, and hopes that RFID will enable it.

So far costs, technology and pri-vacy issues have made drug firms pause for thought. To justify the cost they are looking for more than just guaranteed provenance. They also want the e-pedigree to contribute to better stock control, lower cost, more accurate forecasting, fewer product

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c o v e r s t o r y

The $600 billion prescription drugs pharmaceutical in-dustry has a problem: no-one understands it fully, main-ly because its complexity produces information over-load. The result is a fractal — the patterns look familiar, but the details are all special cases. Ian Grant surveys.

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recalls and returns, and better insight into their consumers.

This requires a much greater inte-gration of the firm’s manufacturing systems with their business systems, with those of suppliers and custom-ers up and down the supply chain and with regulators, customs officials and other authorities. It also puts an absolute premium on the quality of information entering the system; gar-bage in, garbage out. It also places a premium on interoperable systems, and on a global scale.

An indication of how far this might go is that Britain’s National Infrastructure Security Coordination Centre, together with the Association of British Pharmaceutical Industries, has set up an information exchange system for the pharmaceutical sector. The aim is to detect and prevent computer-based attacks on the sector and indi-vidual companies. The US Department of Homeland Security is equally con-cerned, making the national drug and vaccine supply a high priority item in its national critical infrastructure plans.

However, a new global study of in-fosecurity practices by management consultancy PricewaterhouseCoopers and CIO magazine, found most drug firms reacting to events, especially legal and regulatory changes, rather than developing an infosecurity strat-egy that integrates with the corporate business goals. See table: 'Infosecurity in the Pharmaceutical sector, 2006'.

The US, which represents about half the total market and also pro-duces about half the new drugs, is key to the future development of infosecurity in the pharma sector. As the cost of bringing an effective new drug to market rises, the more gov-ernments will have to support their development. This means more funda-mental information should come into the public domain. That should make patent protection less important and reduce the threshold requirement for returns on investment, thus making drugs cheaper. Cheaper drugs will reduce the sector’s attractiveness to

criminals, thus making trace and trace less important for brand protection and law enforcement reasons, though not for internal quality and stock con-trol reasons. Given this, infosecurity in the pharma sector is likely to remain reactive rather than proactive.

Once out of patentWhen branded drugs lose their patent protection, there are scores of firms and governments eager to make ‘generics’ that capitalize on their hard-won ideas. Moreover, massive potential profits from counterfeit and arbitrage trading have attracted opportunists and criminals into the ethical drugs business.

Last year the OECD countries spent $450 billion on healthcare, more and more of it on prescription drugs. This, plus the rising cost of health insur-ance, smuggling, safety and potential terrorism, has alarmed the authorities. Meanwhile, the man in the street sees a healthcare industry that is meeting expectations less and less in terms of costs and benefits, and for which he partly blames the pharmaceutical industry.

PR problems aside, it is becom-ing harder to find effective new drugs. Jürgen Drews of Swiss-based International Biomedicine Partners reckons there are between 5,000 and 10,000 potential drug targets; this is “at least 10 times as many molecular targets that can be exploited for fu-ture drug therapy than are being used today.” Meanwhile, Harvard Medical School’s Richard Frank reckons 78% of candidate molecules never get to market because of concerns over clinical safety, toxicology, and efficacy. However, at least a fifth was ditched because of ‘portfolio concerns’.

Twelve years hardIt is common cause that tougher regulators are raising the bar for pa-tient safety and clinical effectiveness. This has lengthened the period from discovery to market, raising costs. The OFTA study found that it took on average 12 years and an average cost of $194 million to bring a drug

to market. A widely-quoted 2003 study by DeMasi et al. for the US-based Tufts Center for the Study of Drug Development put the average out-of-pocket cost at $403 million, but the economic (time value) cost at at $802m. Management consultancy Bain & Co reckons it comes to $1.7 billion if you include the first year’s market-ing costs. This is when firms spend up to 70% of the marketing budget in the hope of launching a ‘blockbuster’, a drug with sales of $1 billion/y.

The problem is, almost 80% of drugs launched are essentially line extensions that offer only marginal improvements in efficacy. In 2005, the US Food and Drug Administration (FDA) found that of 487 new products that received market authorisations in the US between 1998 and 2003, 78% were by and large similar to previously authorised medicines. Only 14% had a marked therapeutic improvement.

Patently protectedDrugs that reach launch are usually heavily protected by patent. In the US, patent protection lasts 20 years. For most industries this gives an ef-fective ‘patent life’ of 18 years or more; the long lead time to market for new drugs can cut the effective pat-ent life to five or six years. This makes massive profit margins essential if the firm is to recover its investment over the remaining protected period.

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Dr Merrill Matthews, the Institute of Policy Ideas

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However, Dr Merrill Matthews, writ-ing for the Institute of Policy Ideas (IPI), notes “The (US) government lets drug companies recover up to five years of the patent life they lose as drugs move through the FDA (Food & Drug Administration) approval proc-ess.” In addition, a drug firm can get an extra six months of exclusivity if it has the drug approved for children, and another 180 days if it is the first to announce its intention to make a generic version of a branded drug when it goes off-patent.

Makers of generic drugs have a big incentive to declare their intention to clone a protected branded drug. The owner then has 45 days to defend its product if it suspects that the generic maker is infringing its intellectual prop-erty. If it can prove this, it can keep the generic product off the US market for up to 30 months. It may however, be forced to do this for all markets where a patent for the drug has been applied for.

Despite the problems of develop-ing new drugs, there is no shortage of investors. IMS, a market researcher that specialises in the pharma sector, says more than 2,300 products were in development in 2005, up 9% on the year before. The British Pharmaceutical Industry Competitiveness Task Force (PICTF), part of the Department of Trade & Industry, found “venture capital invested … increased signifi-cantly in 2004”. Meanwhile, the DTI’s Technology Programme for Bioscience and Healthcare is funding an £8 million competition for new safety biomarkers of pharmaceutical development.

Market analyst IMS says of the 2,300 products in development, a record 27% are biologic. In addition, the market for biologics hit $52.7 billion, up more than 17% on the previous year.

The switch to biologics reflects a change in drug firms’ R&D strategy. Given the cost and risk of the discov-ery process, boards are keen to keep them from affecting share prices. More

and more turn to small, specialised and entrepreneurial labs for breakthrough products.

Many governments are happy to help sponsor this sort of research and devel-opment because they believe it makes their countries more competitive eco-nomically. The PICTF says that in 2004 the UK pharma sector had a positive trade balance of £3.7 billion, and con-tributed almost £7 billion to national in-come. For Europe the trade surplus was 38.5 billion. With the exception of the US, markets are slow to pick up new drugs, at least partly because of the tor-tuous way drugs reach consumers.

Drug pricing and reimbursement is a national issue. “Consequently there are 25 pharmaceutical price and reim-bursement systems…which often dif-fer greatly,” says Sabine Vogler, leader of a European Commission research project into the issue.

The present system has its origins in the 1957 Treaty of Rome, which set up the European Economic Community or Common Market. The treaty guaranteed parallel or grey market trade; members are allowed to source product from wherever they like and to sell it in their home market, provided they meet na-tional safety standards. As a result, there are opportunities for arbitrage; a third party can buy product in a neighbour-ing country for less than he can at home, import and resell it, and pocket the difference.

The US market is equally complex and getting more so. In a document for state legislators, the IPI notes that city, state and federal legislators have enabled local firms to import drugs from within the European Union. Their aim is to reduce the cost of drugs to their medical programmes and to reduce the risk of counterfeit drugs entering their supply chains.

It won’t work, says the IPI. “Last year 140 million drug packages were parallel imported throughout the European Union, and a wholesaler repackaged each and every one,” it says. “These ‘parallel traders’ are in the moneymaking business, not the safety business. And mistakes happen.”

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Leading Products by Global Pharmaceutical Sales, 2005

Leading Brands Maker 2005 Sales % Global % Growth (US$B) Sales Year-over-Year (Constant $)

Lipitor (atorvastatin) Pfizer $12.90 2.30% 6.40%

Plavix (clopidogrel) Sanofi-Synthelab 5.9 1 16

Nexium (esomeprazole) AstraZeneca 5.7 1 16.7

Seretide/Advair GlaxoSmithKline 5.6 1 19(fluticasone+salmeterol)

Zocor (simvastatin) Merck 5.3 0.9 -10.7

Norvasc (amlodipine) Pfizer 5 0.9 2.5

Zyprexa (olanzapine) Eli Lilly 4.7 0.8 -6.8

Risperdal (risperidone) Janssen 4 0.7 12.6

Ogastro/Prevacid TAP 4 0.7 0.9(lansoprazole)

Effexor (venlafaxine) Wyeth 3.8 0.7 1.2

Total Leading Brands* $56.90 10.10% 5.50% Source: IMS MIDAS®, MAT Dec 2005

All information current as of February 27, 2006.

*Sales cover direct and indirect pharmaceutical channel purchases in U.S. dollars from pharma-ceutical wholesalers and manufacturers. The figures above include prescription and certain over-the-counter data and represent manufacturer prices. Totals may not add due to rounding.

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It points out that drugs imported from Britain, probably via Canada, could have originated anywhere in the EU. “In fact, parallel traded medi-cines account for about one in five of all (800 million) prescriptions filled by British pharmacies. In the EU there is no requirement to record the batch numbers of parallel imported medicines, so if a batch of medicines originally intended for sale in Greece is recalled, tracing where the entire batch has gone is impossible.”

However, EU legislation empha-sises that repackaging must be a

necessity, and not motivated only by commercial interests. But it also gives the owner of the trademark rights, including the right to ask the importer to supply a specimen of the repackaged product so that he/she can check the condition of the product and its presentation.

Nevertheless, branded drug own-ers are determined to gain greater control and transparency of the sup-ply chain. They argue that it’s a safety issue; the parallel traders and the Commission suspect it is about not leaving money on the table.

In late September Pfizer’s UK arm announced it would distribute its pre-scription drugs through UniChem, a logistics company allied to the Boots chain of retail chemists.

This drew an immediate con-demnation by Boots’ competitor Lloydspharmacy. In a letter to the Financial Times, Lloydspharmacy’s “outraged” managing director Justin Ash accused Pfizer of looking after on-ly its own commercial interests. “It is a bitter pill that the world’s largest drugs manufacturer could be able to dictate the distribution economics and supply of medicines in the UK,” Ash wrote.

Pfizer’s managing director Olivier Brandicourt responded: “We are not surprised by this criticism from Lloyds as it is part of the same group of companies as AAH, a national wholesaler that has not been selected to participate in Pfizer’s new arrange-ments. However, we are surprised by its ‘outraged’ reaction to our model as we had been in detailed discussions and late-stage planning with them for the past 18 months, and at no point did it raise these unsubstantiated con-cerns about the impact of these re-forms on pharmacies, patients or the UK National Health Service.”

Religion and the Asian giantsTwo factors promise interesting new patterns in the pharma fractal. The first is the moral and religious objections to some research, such as stem cells. This will give a lift to less squeamish societies. Second is the rise of China and India as manufactur-ing giants and inevitably as producers of their own intellectual property.

However, the public health problems in the US and Europe — obesity, heart disease, cancer, mental health and geri-atrics — are likely to drive the sector. But the industry’s solutions are likely to require a more global execution.

Infosecurity will be high up the agenda.•Ian Grant is a freelance writer on business issues.

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Infosecurity in the Pharmaceutical sector, 2006

2006 2005 % %

Privacy issuesEncrypt data in transmission 59 54 Post privacy policies on external websites 42 37 Secure web transactions 56 53

New technologies Intrusion detection systems 48 44 Network security tools 59 55 Secure disposal of hardware 45 34 Tools to detect malicious code 38 31

Strategic issues Centralised infosec management 41 35 Overall security strategy 46 na Integrated security, privacy and compliance 17 na

Data integrity issues Encrypt data in storage 41 30 Security procedures for mobile IT assets 29 na Information classification by risk 70 na

Access issues Expected sources of attack Current or former staff 54 na Id management system 27 na Tiered authorization 26 na Monitor log files and gap reports 51 na Inventory of external parties with access 34 na Mandated policy agreement with third parties 44 na Security benchmarks 2006 2005 2004Security spending as % of IT budget 16.4 14.4 10.6Inventory of third parties using customer data 34 26 20Centralized infosec management system 41 31 31Check employee background 57 46 35Employ CISO or CSO 52 41 30

Source: PricewaterhouseCoopers/CIO, Global State of Information Security, 2006

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