Lifecycle: End Game - Pharmaceutical Executive
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`Lifecycle: End Game
`
`In their twilight years, old brands are increasingly being snapped up by specialty marketers rather
`than kicked to the curb
`
`Oct L 2G0 T
`By: Albert I. Wertheimer, Ellen F. Loh, Lawrence G. Poli
`f~: ! P.RMAC EU OC.AL EYE.CI..JTiVF.:
`
`Very few drugs live forever. Barring remarkable scientific advances and radical market dynamics,
`most drugs hit old age-and sharply declining sales-several years before their patent expires. But
`some drugs go out with a bang , not a whimper.
`
`Jl!llj:l!m.!lillllllll. Take Merck's Vioxx, for example, which was yanked from the
`'<:. _ ~- __ . • ;;;,.,;,";,:. ~~ scene because its reputation was ruined; even if it makes a
`1-cM~·="·t---·t--'·-r--1! comeback, it's unlikely to achieve the sales of its bright youth. And
`with the rise of generics-and their challenges not only to class
`competitors but to patents themselves-even blockbusters are
`- -.·- .;_-,n reaching their senior years earlier and earlier. The sales of such
`f--
`._.. _ ______ .._ __ _. champions as Pfizer's Lipitor and AstraZeneca's Crestor are being
`Top Seven Specialty Pharmas
`chipped away when the fi rst drug in the category goes generic, as
`was the case with Merck's Zocor late last year. Since then managed care organizations (MCOs) are
`increasingly fi lling stalin scripts with simvastatin, the generic version.
`
`The patent for NMEs (new molecular entities) begins at registration and goes for 20 years. After
`spending 12 to 15 years in development, testing, and government review, a drug has about five to
`eight left to recoup its investment and turn a profit. Drug makers have been predictably inventive in
`coming up with marketing and other strategies to maximize this potential.
`
`End-of-lifecycle products can continue to generate revenue , but
`companies usually have to revise the blueprint for these brands.
`Such established brands come in a variety of types: classic cash
`cow, merger fallouts, portfolio-burdened products, small brands,
`and products with lower-than-expected growth rates. Each, in turn, Top200 Drugs, 1975-1995
`requires its own specific revenue-producing programs: alternate forms of promotion, various
`approaches to pricing and contracting, strategic alliances as well as different tactics for
`manufacturing and operations. Many end-of-lifecycle products are a significant source of large(cid:173)
`pharma income because they require little effort and pose little risk. They can also be used as a
`hedge against the high risk of drug-development failures.
`
`In the past, there were two ways for companies to deal with an off-patent product: either by
`dropping it from the portfolio or keeping it as a "service product." Stopping it cold solves the problem
`of carrying a weak product, which can be very costly-and not just in the amount of uncovered
`overhead and outlay. There are hidden costs-an out-of-date reputation for the firm , an obsolete
`product that does not add prestige-as well as the burden of maintaining a drug that no longer fits
`the current product line. However, when a company decides to drop a brand, it has to make some
`additional decisions. If the product has strong distribution and residual goodwill, the company can
`probably sell it to another firm. If no buyers emerge, it must decide whether to liquidate the brand
`quickly or slowly.
`
`Moreover, dropping a product disappoints and angers some physicians and patients. To
`avoid this scenario, a company may choose simply to keep the product in its portfolio. A
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`Lifecycle: End Game - Pharmaceutical Executive
`
`Eit!~H number of products have been commercially successful for 40 years and counting, such
`as the Premarin brand of conjugated estrogens and the Synthroid brand of levothyroxine.
`
`However, since MCOs came to the fore in the '80s, the situation has become harsher
`~-.,.--;---.,~ because the so-called formulary effect makes the sales of end-of-lifecycle products
`decline even more steeply. MCOs, prizing cost containment, switch to generic equivalents
`as soon as a drug goes off patent. Given this, end-of-lifecycle products are hard-pressed
`lnnovalors of to attract new prescriptions. Increasingly, branded originator products lose as much as 90
`End-of-
`percent of market share to generics. As a result, companies are eager to get rid of many
`Lifecycle
`of these end-of-lifecycle products, saving the cost of maintaining them.
`
`Drugs
`
`The Move to Specialty Markets
`
`Today, branded pharmas are pulling enormous resources and effort into product lifecycle
`management. Commonly used tactics include creating new formulations, expanding
`indications, contracting with authorized generics producers, and switching Rx drugs to
`over-the-counter (OTC). Yet such tactics are all costly-and do not guarantee market
`success. For the large-cap pharmas with multibillion-dollar annual sales, products
`generating less than $100 million a year are rarely worth the effort. As a result, a niche
`market exists for those end-of-lifecycle drugs: specialty pharmaceutical companies can
`buy and continue to manage those products profitably, at least for a limited time (see "Top
`Seven Specialty Pharmas").
`
`~r";n~:~~~rs
`Life cycle
`Specialty pharmas usually focus most of their efforts on sales and marketing in one or two orugs
`therapeutic areas with tightly focused physician populations, such as psychiatrists, obstetrician(cid:173)
`gynecologists, or gastroenterologists. These specialists can be managed with smaller sales forces
`(often less than 300, but as few as 35). Numerous companies have been notably successful at
`focusing on managing end-of-lifecycle drugs as an important part of their business model, including
`King, Ovation, and Valeant pharmaceuticals.
`
`!Zili:J~IJ~;!J~·!II~ Another reason for jettisoning an old product is that it no longer
`---1.....:::.-+-~ jibes with the current image or identity of a firm's portfolio in a
`:=:t=:J~:ml particular therapeutic class. And more and more are coming to this
`Slatus of Branded Drugs, 2005
`niche market.
`
`Spotting the Trends
`
`In order to track the evolution in how the industry is dealing with the opportunities and challenges of
`end-of-lifecycle products, we started by recording the top 200 drugs annually published in Pharmacy
`Times for every five-year-interval from 1975 to 1995. (We stopped in 1995 because that cutoff
`allowed for a sufficient lifecycle for the originator company to sell the product-and for us to observe
`the pattern of sales and prices under the new owner, plot trends, etc.) Then we checked the 2005
`Red Book for the current manufacturers. This revealed how many of the drugs remained with the
`original manufacturers and how many belonged to a new owner in 2005. The year in which the
`ownership transfer took place was confirmed.
`
`At the beginning, a total of 1,000 drugs for every five-year interval between 1975 and 1995 was
`obtained. After screening out duplicates, 522 products were left. Of these, only 85 currently
`belonged to branded manufacturers other than their original inventors.
`
`The "Top 200 Drugs, 1975-1995" chart (page 107) reveals certain
`
`were still with the original manufacturer, while 38 were with a new owner, and another 91 had been
`discontinued.
`
`These findings are suggestive. The number of branded drugs that are still promoted by the original
`manufacturers in 2005 increased, from 56 in 1975 to 105 in 1995. An obvious explanation for this
`increase is that more-recent drugs have longer patent life remaining, so there is no compelling
`reason to unload them from the innovator's portfolio. Similarly, the number of branded drugs
`discontinued in 2005 decreased, from 91 (from 1975) to 13 (from 1995).
`
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`Lifecycle: End Game - Pharmaceutical Executive
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`Jz:E!~I;~ql~!ll .... ~ However, as of 2005, the number of branded drugs that were with
`a different manufacturer increased from 1975 to 1985-and then
`diminished. This may be because without further investment in
`sales force and promotional activities, revenues from end-of(cid:173)
`lifecycle branded drugs tend to decrease gradually and finally
`disappear. After a certain point, an old drug cannot make enough
`profits even for a specialty pharma and is dropped.
`
`The "New Sellers of End-of-Lifecycle Drugs" and "Innovators of
`End-of-Lifecycle Drugs" charts (both above) portray the distribution of the original manufacturers of
`old products as well as the specialty pharmas that took over ownership. Among the total 85
`products, the innovators were mainly large-cap pharmas: Wyeth was the number-one developer
`and owner, with 16 branded drugs, followed by Bristol-Myers Squibb and Eli Lilly, with 10 each. By
`contrast, the distribution of the secondary sellers spreads out widely. Most specialty pharmaceutical
`companies own three products or less-with the notable exception of Monarch, a division of King,
`which has 10 of the total. It is also rlikely that certain branded pharmas are more actively divesting
`end-of-lifecycle products than others. Wyeth, for example, sold a significant number, while Pfizer
`only parted with a few of its supply.
`
`The End-of-Lifecycle Business
`
`Why would a multibillion-dollar drugmaker decide to jettison a few end-of-lifecycle products with low
`sales? The most obvious answer is that limited profitability of such drugs makes streamlining the
`portfolio very attractive.
`
`But that is not the only reason . For a firm that wants to be thought of as a leader in new treatments
`or technologies, it is unwise to continue selling "old-fashioned" products like reserpine or thyroid
`extract. Or it may be that over the years, a company's R&D focus has shifted into other therapeutic
`areas, and maintaining a field force to support one drug in its own category is no longer cost(cid:173)
`effective.
`
`There are other financial reasons to drop products. The raw materials take up valuable warehouse
`space, as do the unsold finished goods. There may not be time for scheduling production, even
`though it may require a factory run of only one or two days a year. Still, that process involves
`changing and cleaning equipment, a potential for contamination, and preventing tableting of much
`more profitable lines. Moreover, industry experts estimate that the seller can expect to earn a fee
`from the new buyer that is three to four times that of the drug's current annual sales.
`
`A special situation may prevail in the case of a merger between two or more branded pharmas. The
`Federal Trade Commission could force the newly formed company to sell some of its existing
`products to avoid market dominance in a certain therapeutic area. This presents the big pharma
`with an opportunity to re-evaluate its top-selling drugs and pipeline, build a desired image as an
`innovator, and free itself of any undesirable not-so-profitable products.
`
`But if the economics driving the large-cap pharmas to divest of old drugs are plain enough, why are
`specialty firms so eager to acquire them?
`
`According to a recent study conducted by Rebecca Hellerstein, physician prescription behavior
`tends toward consistency, and some are likely to prescribe trade-name drugs for long periods of
`time. Such hard-won brand loyalty means that those end-of-lifecycle products can still generate at
`least modest sales, even when the specialty pharmas do not invest heavily in sales and marketing.
`Besides, such an end-of-lifecycle product can propel a specialty pharma to build a sales force in a
`certain therapeutic area. This, in turn, can help lead to establishing a reputation in the field ,
`especially if the firm has aspirations of eventually becoming an innovator.
`
`And when a specialty drugmaker reformulates an end-of-lifecycle product-either by means of a
`new dosage, a new indication, or some kind of line extension-the product can return to the market
`to capture more sales. King Pharmaceuticals, for example, has mastered this art. This Tennessee(cid:173)
`based company, founded in 1993, has steadily acquired more and more branded products.
`Currently it has a portfolio of 40-and although none were developed in-house, the company's 2005
`sales totaled $1.77 billion. The end-of-lifecycle firms may see their products maintain market
`viability as innovator pipelines go through a dry spell (see "New Drug Approvals") and as new
`products hit snags (see "Safety Drug Withdrawals").
`
`At the end of the day, the end-of-lifecycle is a viable market segment-and specialty pharmas that
`corner it show every sign of growing stronger in the future.
`
`Albert I. Wertheimer, founding director of the Center for Pharmaceutical Health Services Research
`at Temple University School of Pharmacy, can be reached at albertw@temple .edu
`; Ellen F. Loh, a research fellow at the Center for Pharmaceutical Health Services Research, at
`ellenloh@mac.com
`
`http:/ /www.pharmexec.com/pharmexec/PE+Features/Lifecycle-End-Game/ ArticleStandard... 5/21/2014
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`Lifecycle: End Game - Pharmaceutical Executive
`
`Page 4 of5
`
`; and Laurence G. Poli, a managing partner at the Center for Performance Excellence, LLC, at
`lgpoli@r><marl<eting.net
`
`Su~ssf~l £~~J!.9!.ll9p
`~-~j~_~no~tic lau~ch ··;
`
`~· SEE VIDEO zs
`
`ABOUT THE AUTHOR
`Albert I. Wertheimer
`Articles by Albert I. Wertheimer
`Ellen F. Loh
`Articles by Ellen F. Loh
`Lawrence G. Poli
`Articles by Lawrence G. Poli
`
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