Searching for a Cure

Blockbuster Blinders

"We see a lot of opportunity, but the industry is at a crossroads," says Sam Barnett, a Philadelphia-based IBM Business Consulting Services partner who specializes in pharmaceutical R&D issues. "The blockbuster model, in which one or two good drugs can make a company, is not going to work nearly as well in the future as it has in the past. For example, Prilosec built Astra, which is now AstraZeneca. And Celebrex saved Searle before it was acquired by Pharmacia, which was acquired by Pfizer."

The effectiveness of the blockbuster model, as Barnett hints, has been diluted by consolidation within the industry. Subtract the costs of discovering, developing, testing, manufacturing, distributing, marketing, and selling one new perception drug from its future sales returns, and you have a figure "that's not enough to support the stock price," says David Blumberg, North American managing partner of Accenture's pharmaceutical & medical products industry group, in Philadelphia.

The Tufts University Center for the Study of Drug Development estimates that, on average, it costs $802 million to develop a new prescription drug, factoring in the cost of R&D on abandoned compounds. A similar Tufts study more than a decade ago pegged that cost at $231 million. Tufts Center director Dr. Kenneth Kaitin attributes much of the increase to soaring clinical costs. Additional analysis shows that certain improvements within the drug development can greatly reduce costs. Kaitlin reports that preclinical screens that, for example, boost clinical success rates from the current one-in-five rate to a one-in-three one would lower the average cost of bringing a new drug to market from $802 million to about $560 million.
Another part of increasing development costs stems from the fact that the science of discovery has grown even more complicated. R&D consultants point out that new findings based on enzyme-inhibitors may have run their course. Although breakthroughs related to unlocking the human genome may eventually prove fruitful, those days appear to be close to a decade away.
The humanistic and scientific benefits of the industry's recent drug development progress have been hugely beneficial. In the past decade, we've seen new drugs that treat depression and anxiety, tame high cholesterol, and alleviate hypertension. But "now we have to work more difficult categories of disease, and the science is very difficult, to be perfectly frank," Barnett says.
Besides wrangling with regulatory challenges, the need to inject better efficiencies and cost controls into the drug development process marks the most significant consulting opportunity in life sciences. Many business practices suitable for periods of high sales and high growth must be reined in and made to fit an era of much slower growth. "There are opportunities for consultants to help these companies streamline operations," Blumberg says, "and to cope with noncore functions more efficiently and more effectively."
As a result, consultants now focus on helping their life sciences clients achieve operational excellence through new sourcing models. Blumberg, for example, encourages clients to consider outsourcing significant chunks of administrative back office as well as sales and marketing on products that no longer drive competitive advantage.

Consultants also deliver supply chain expertise. "They can no longer afford to have plants running at 20 percent and 30 percent capacity, which many of them do," says Jim Pendergast, a Philadelphia-based partner in IBM Business Consulting Services' life sciences practice who specializes in pharmaceutical supply chain issues, and provides a lean-manufacturing solution that applies components of the Toyota model to the pharmaceutical industry and its unique regulatory demands.

Consultancies also help companies prioritize within their drug portfolios via analytics and methods of shortening development times while lowering R&D costs. "Most recently, we've seen a lot of money going into the discovery stage," says Mark Kolb, chairman and CEO of Taratec. "If you have new chemical entities, you'd like to make quicker decisions regarding which ones are promising and which ones are not. You want to get the dogs out earlier, because putting a new chemical entity through six years of clinical testing and then scrapping it is incredibly expensive."

The FDA Gets Busy

Instilling that discipline into the drug-development process is difficult, given the industry's recent rah-rah days and growing pressure from regulatory agencies, primarily the FDA. Plus, life sciences companies thrived while throwing money at "whatever it takes" projects such as Year 2000 and e-commerce initiatives. Now, faced with do-or-die compliance mandates from the FDA, the industry can no longer afford to respond with similar abandon.
"A lot of managers have never managed through a recession, so they need help budgeting, estimating, and controlling," says Van Ness. "Even as the economy starts to recover, how do you put spending back in without going back to that era of 'whatever it takes to get it done'? I think that's a tremendous opportunity for consultants."

Given the FDA's actions in the past 12 months, consulting opportunities around financially disciplined compliance management strategy are bound to continue. "The FDA has become such a formidable business risk in life science operations that manufacturers now acknowledge that they have two customers: the consumer and the FDA," reports Roddy Martin, research services director of consumer product groups and life sciences for AMR Research in Boston. "They need to take a coordinated and top-down approach to regulatory compliance that will intensify as manufacturers use more IT to improve productivity through automated processes, electronic record management, and integration."
Life sciences and health care consultants, particularly those with 20-plus years of experience, say that they have never seen such an active FDA in terms of its enforcement activity. "I've seen a year-on-year increase in the vigilance exercised by the FDA," says Chris Kelly, a New Jersey–based partner in IBM Business Consulting Services' life sciences practice who specializes in IT issues. "The pace and intensity with which regulatory compliance has been enforced have been consistent and persistent."

Firms focus their compliance activities on HIPAA, the Health Insurance Portability and Accountability Act, and its mandate for administrative simplification, in the health care space, and on 21 CFR Part 11, an FDA regulation that sets standards for systems containing electronic records and electronic signatures, on the manufacturing side. Compliance management will remain a top industry priority, and a major consulting avenue, because of the complex nature of regulations like "Part 11" (see "Bigger than Y2K") and the fact that most pharmaceutical companies have significant progress to make to even begin to comply.

In his point of view on the subject, "Project-Manage Your Way Out of Regulatory Compliance Woes," Martin identifies a litany of problems plaguing the compliance management practices, including: fragmented and disconnected bottom-up compliance efforts across the organization; a reactive attitude to the FDA; poor governance and standardization processes; lack of executive visibility; weak alignment between IT and business priorities; and "a reactive culture that is only starting to see the business benefits of building regulatory compliance into operations as a basis for sustainable business performance, rather than trying to add in measures when it is too late."
RFID, PR, and HC

Consulting opportunities in areas such as collaborative business models, persistence and compliance, workforce development, public relations, and direct-to-consumer (DTC) strategy occupy rungs below compliance management, operational efficiency, portfolio analytics, and supply chain optimization on the life sciences needs hierarchy.

Although greater collaboration, between pharmaceutical and biotech firms or even between competing pharmaceutical companies, can generate greater supply chain efficiency, regulatory issues loom as a major obstacle to those gains because most internal compliance procedures differ significantly.

Radio frequency identification (RFID) technology, Kelly and Barnett point out, has a role to play in compliance, which describes the degree to which patients complete the consumption directions on their prescriptions ("Take all 10 days of the antibiotic or your sinus infection might return"), and persistence. That term qualifies the degree to which those who suffer from chronic or degenerative diseases abide by their prescriptions for years or even for as long as they live. Smart pill bottles, which sound a reminder when it's time to take medicine, and perhaps even biodegradable chip technology, are two RFID-equipped solutions in the works. PDA applications, such as plug-in diabetes monitoring devices that can analyze blood samples and wirelessly transmit the information to health care providers, are also on the horizon.
"If the industry could help people persist in their medication, that would, first, provide tremendous help to the patient and, second, make up the deficit of all the products that are coming off patent in the near term," says Barnett. "Persistence and compliance are a huge problem. Drugs are deemed not to work because people are not terribly compliant."

Over the longer term, workforce-planning issues, namely finding sufficient managerial and clinical testing talent, also must be addressed. Even with rising unemployment, companies have difficulty finding new employees with clinical testing expertise in pharmaceutical and biotech areas like northern New Jersey and Boston. "We see [pharmaceutical] companies here concerned about the age profile of their demographics," says Douglas Hachenburg, a consultant with Watson Wyatt Puerto Rico, Inc., in San Juan. "Companies want to make sure they will have enough talent in the future."

The transfer of industry and institutional knowledge from managers in and nearing retirement age to future leaders remains a major human capital challenge among Hachenburg's clients. If that's a concern in Puerto Rico, where 16 of the top 20 highest-selling prescription drugs are produced (and whence 25 percent of all pharmaceutical products manufactured in the U.S. are shipped), then it should rate highly on top pharmaceutical and medical device companies' priority lists.

Public relations strategy may not rate as a strategic priority with life sciences companies, or with most consulting firms, but recent front-page newspaper articles suggest that it should. "Many of the companies in the industry do a very good job at helping underprivileged and economically challenged countries in the fight against disease," says Ken Lacy, London-based global managing partner of Accenture's pharmaceutical and medical products industry group. "However, I think the industry has been on the wrong side on a couple of issues, such as the cost of AIDS drugs in South Africa, and has recently received some negative public relations. There are a number of areas where the industry can do a better job in terms of their public relations."

Given the growth of DTC sales and marketing, life sciences often attracts the interest of U.S. legislators, particularly when issues like prescription drug cost increases resonate with voters. "It's a political lightning rod," Kolb agrees. "Democrats and Republicans alike take shots at it because it's an easy sell to say, 'These drugs cost too much money, we can get them cheaper in Canada, Mexico, or Europe.'" Federal legislators recently have made noises about regulating drug prices and regulating the amount of money companies spend to market their products.
Those types of links, to revenue generation and marketing capabilities, elevate public relations to a strategic level that some consulting firms may want to address with their clients. Direct-to-consumer marketing, which originally made its splash with Rogaine and Claritin advertising campaigns, has been enormously successful. Kelly points out that roughly 40 percent of individuals exposed to an advertisement for a drug that addresses a condition they suffer from ask their doctor about the product. And half of that group receives a prescription to treat their malady. Kelly and others also agree that DTC, given its benefits, is likely here to stay, although those types of marketing practices may face stricter regulations.
In the past 12 months, pharmaceutical companies have discovered that investors also cut them less slack by responding forcefully to any news of bumps along the drug development path. ImClone's stock price swooned in the weeks following the FDA's rejection of Erbitux, its proposed cancer drug, in late December 2001 — before any allegations of insider trading surfaced. Sam Waksal, ImClone's former CEO, pleaded guilty to insider trading and other charges in October 2002. Although he broke SEC rules, Waskal understood the new rules of his roadblock-plagued industry all too well.

Sidebar: Bigger Than Y2K

Messier, more expensive, and longer-lasting than Y2K.

That's how several life sciences analysts and consultants describe the Food and Drug Administration's Regulation 21 CFR Part 11, affectionately known as "Part 11," which requires that regulated electronic records and e-signatures have the same integrity and security that paper records and signatures possess.

An Excel spreadsheet containing batch records from a manufacturing site, for example, runs afoul of Part 11 because there is no way of determining if, when, or how often the data in that Excel sheet has been altered. All FDA-regulated data contained in any application throughout the organization — in R&D, the clinical space, the manufacturing space, certain parts of distribution, and even parts of the sales and marketing systems — must provide a clear audit trail to meet the electronic records integrity and security facet of the regulation. This far-reaching mandate presents significant knowledge management, document management, and security consulting opportunities.
"There are pockets of data all over the organization that have to be accounted for under Part 11," says Mark Kolb, CEO of Taratec Development Corporation, a life sciences consulting firm in Bridgewater, NJ, that counts 18 of the top 20 pharmaceutical companies as clients. The company, and its 141 consultants, now offer two compliance-management software solutions closely aligned with its existing consulting services to help clients comply with Part 11. Other consultancies and software companies, including IBM Business Consulting Services and Business Engine, offer their own software/consulting solutions. "This is between a $10 billion problem, according to the FDA, and a $20 billion problem," Kolb adds. "We believe that it will cost the industry more than Y2K."

Y2K actually gave pharma companies some breathing room, as the FDA enacted Part 11 in August 1997 but held off on enforcing it until after pharmaceutical companies resolved their Year 2000 issues. At the time of enactment, the pharmaceutical industry estimated compliance would take 10 years. "Too bad," the FDA's warning letters have recently communicated to several companies.
"The FDA is active on enforcing Part 11," Kolb says, "but it's also not unrealistic." Instead, the FDA expects to see that companies have a plan in place and are actively moving toward full compliance, a path that varies significantly from organization to organization, given the unique manner in which regulated data is — or isn't — managed at life sciences companies.