The Senate’s Foreign Earnings Reinvestment Act, like a related bill in the House of Representatives, would reduce tax rates for CROs and biopharmaceutical firms that repatriated money earned overseas. With the money they saved, companies could hire staff and invest in research, ACRO argues.

WinAmerica, an interest group supported by various firms, says that the bill would repeat the success of a 2004 repatriation tax break. Citing information from the Bureau of Labor Statistics, the group observes that average annual private-sector employment increased by 4,385,000 jobs from 2000 through 2007, and that 98% of the increase occurred during the years when the tax break was in effect (2004 through 2006).

The tax break did not benefit the entire private sector, however. It primarily helped pharmaceutical and technology companies, according to a report by Senator Carl Levin (D-MI). Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson, Merck, and Pfizer were among the top 15 repatriators that time around. After bringing $155 billion in overseas earnings back into the country, these 15 firms reduced their overall US workforce by about 21,000 jobs and spent slightly less on R&D. Instead of creating jobs, the companies used the extra money to repurchase stock and raise their top executives’ pay by about 28%—despite express prohibitions against using the money for these purposes.

The increase in employment that WinAmerica cites seems to have occurred in industries other than those that benefited from the tax break—and for other reasons. The law that granted the previous tax break did not include a means of monitoring compliance. Unless the Foreign Earnings Reinvestment Act can do this, and can impose penalties for noncompliance, it will not create jobs for those who need them. I hope Congress takes heed of Senator Levin’s report as it considers the new bills.

Eli Lilly signed agreements with the private investors Care Capital and NovaQuest Capital to establish BioCritica, a newly formed and privately held biotechnology company. BioCritica will initially focus on the continued US development and commercialization of Xigris (drotrecogin alfa (activated)), Lilly’s drug to treat severe sepsis. As part of a licensing agreement, BioCritica will acquire the US development and commercialization rights to Xigris and also will receive the rights to potentially acquire several critical-care compounds currently in preclinical development at Lilly. The collaboration also includes a supply agreement, a services agreement, and an option for BioCritica to potentially acquire the development and commercialization rights to Xigris outside the US at a later date. In return, Lilly will receive royalties on future US sales of Xigris and also will also receive an equity stake in BioCritica.

The move to establish BioCritica is consistent with Lilly’s strategy of finding alternative mechanisms for select drug-development and commercial projects. Earlier this year, the company reported on Mirror Portfolio, which establishes investment funds for early-stage research. Lilly has committed to invest up to 20% of the capital for these funds, or a total of $150 million. In addition to financial resources, Lilly will offer to out-license molecules to these funds. For its investments of time and capital, Lilly will receive preferential access to molecules managed by the funds. Lilly retains the rights to purchase all molecules licensed from Lilly via the Mirror Portfolio as well as to evaluate and acquire a limited number of externally sourced compounds, all at fair market value.

The Mirror Portfolio will work with Lilly’s Chorus, a small, multidisciplinary drug-development group established by Lilly in 2002 that conducts early-stage development work using a virtual model in an effort to improve time and cost deliverables in drug development from candidate selection to clinical proof-of-concept. Using this approach, Lilly says Chorus has been able to reach decisions about 12 months earlier and at about half the cost of current industry models. To date, Chorus has delivered data on 17 molecules, six of which resulted in positive proof-of-concept clinical data. Lilly “cloned” the original Chorus (now known as Chorus Premier) with the establishment of Chorus Resonance in Indianapolis, Chorus Europe in the United Kingdom, and Vanthys, a joint venture in India. Lilly will make these drug-development groups available to the funds as a fee-for-service offering, although other alternative drug-development organizations may be used.

Mirror Portfolio’s emphasis on early-stage development and Biocritica’s initial focus on a drug that is later in its product life-cycle (Xigris was approved in the US in 20o1) shows the different approaches that pharmaceutical companies can consider in managing their pipelines and commercial portfolios. These mechanisms certainly will not replace traditional research and development or commercial models but demonstrate the increased flexibility and resourcefulness that can be applied for select projects.

The BIO/BioMedTracker study showed that the overall success rate for drugs moving through clinical trials to FDA approval from late 2003 to the end of 2010 is nearly 1 in 10; historical data had showed the rate of drug approvals to be 1 in 5 or 1 in 6. The study covered more than 4000 drugs from large and small bio/pharmaceutical companies, both publicly and privately traded, for companies conducting development on drugs for approval in the US to examine the recent probability of success by treatment type, phase of development, and therapeutic area. The study found that overall success rates from Phase I to FDA approval is nearly 9%. This number is comprised of lead and secondary indications. When separated, lead indications have close to a 1 in 7 rate of approval, and secondary indications have a success rate of 1 in 30; the study also showed that clinical trials that address secondary indications tend to be far less successful on average as shown in all phases of clinical development as well as in all disease areas. Also, the study showed that large-molecule drugs are twice as successful in gaining approval than small-molecule drugs.

So what are the implications for drug research and related strategy? In short, the study further underscores the well-chronicled need for the pharmaceutical industry to improve R&D productivity. Re-inventing the drug R&D engine is a challenge faced by the pharmaceutical industry as a whole and particularly by the large pharmaceutical companies, many of which are facing strong generic-drug incursion. We see companies trying to improve R&D productivity not only scientifically, such as through intensification of biopharmaceutical development, but by creating innovative business models.

As a case in point, Eli Lilly reported this week on its approach in directing venture capital, both internally and externally raised, to finance drug-development costs. The company issued a press release to explain the concept behind its Mirror Portfolio, which establishes investment funds for early-stage research. Lilly has committed to invest up to 20% of the capital for these funds, or a total of $150 million. In addition to financial resources, Lilly will offer to out-license molecules to these funds. For its investments of time and capital, Lilly will receive preferential access to molecules managed by the funds. Lilly retains the rights to purchase all molecules licensed from Lilly via the Mirror Portfolio as well as to evaluate and acquire a limited number of externally sourced compounds, all at fair market value.

The Mirror Portfolio will work with Lilly’s Chorus, a small, multidisciplinary drug-development group established by Lilly in 2002 that conducts early-stage development work using a virtual model in an effort to improve time and cost deliverables in drug development from candidate selection to clinical proof-of-concept. Using this approach, Lilly says Chorus has been able to reach decisions about 12 months earlier and at about half the cost of current industry models. To date, Chorus has delivered data on 17 molecules, six of which resulted in positive proof-of-concept clinical data. In its release, Lilly says it has “cloned” the original Chorus (now known as Chorus Premier) with the establishment of Chorus Resonance in Indianapolis, Chorus Europe in the United Kingdom, and Vanthys, a joint venture in India. Lilly will make these drug-development groups available to the funds as a fee-for-service offering, although other alternative drug-development organizations may be used.

It is said that necessity is the mother of invention. Let’s see if innovation in the business of pharmaceutical R&D will bear some of those fruits.

According to preliminary figures, the US Food and Drug Administration approved 21 new drugs in 2010. This number is not much better than the industry’s recent low of 18 new drugs in 2007. Several high-profile drugs failed to get approval during 2010, causing embarrassment for Big Pharma. FDA asked AstraZeneca for more information about its blood thinner Brilinta, and the delay in approval hurt the company’s share price. FDA also rejected a long-acting version of Byetta, a diabetes drug manufactured by Eli Lilly and Amylin Pharmaceuticals, saying that more clinical data were necessary.

Competition from generic drugs will only heighten the importance of successful R&D efforts for innovators, and we can be sure that companies will try various strategies to boost the return on their research investments. We could see a continued increase in outsourcing in 2011, which would help drugmakers share the risk of developing new drugs with service providers. Outsourcing also might help companies lower the costs of drug development and improve the management of their resources, which now seem more precious to many companies. It’s also possible that manufacturers will dedicate more effort to developing monoclonal antibodies, which are potentially quite profitable and increasingly in demand.

Changes are already underway at Merck & Co. New CEO Kenneth Frazier told investors that the company would make “tough” R&D spending decisions and stop the development of less-promising drugs more quickly. To prevent drugs with weak commercial prospects from entering expensive late- stage development, the company has tied researchers’ compensation to the three-year return on invested capital. Time will tell whether this market-based approach will improve the notoriously idiosyncratic R&D process.

I give Frazier credit for recognizing the importance of innovation to Merck’s prospects. Other companies are already coming up with their own approaches to discovering more approvable drugs. For the health of the industry, and of patients worldwide, let’s wish them luck.

John Lechleiter, Lilly’s chairman and chief executive officer, told analysts during a conference call that acquiring small and medium-sized companies will continue to be part of the company’s strategy, according to the Indianapolis Star. His audience didn’t seem to be convinced that this plan would work.

“I think the prevailing consensus among investors is that given some of the big expirations that lay ahead, at some point, Lilly will have to do a larger acquisition to fill the gaps,” said Tim Anderson, a drug analyst at Sanford Bernstein, according to the Star. He also suggested that Lilly could seek to be acquired.

Lilly expects a “trough period” to begin in 2014, when several patents will expire before the company can launch new major drugs. Derica Rice, Lilly’s chief financial officer, said that the company plans to pursue growth opportunities in overseas markets to help it through difficult times, according to the Star.

Lilly’s situation is emblematic of the problems Big Pharma faces right now. AstraZeneca (London), GlaxoSmithKline (London), Merck (Whitehouse Station, NJ), and Pfizer (New York) all face patent expirations in the coming years. Companies have tried to remain profitable by cutting costs and laying off employees. We’ve also seen Pfizer gobble Wyeth (Madison, NJ) and sanofi-aventis (Paris) pursue Genzyme (Cambridge, MA) to gain access to new drugs and increased revenue. And Lilly is not alone in trying to find new and emerging markets for its products. But I think these tactics treat the symptoms rather than the underlying problem.

What the industry needs is innovation. Without fresh investment in research and development, companies will not discover new drugs that could become the top products of the future. Of course, discovery and development are difficult processes, and setbacks are common. Lilly itself recently abandoned developmental drugs to treat diabetes and Alzheimer’s disease that had failed to live up to their promise.

Although the development process may be tougher now than before, I think it is still the industry’s best route to profitability. After a while, drugmakers will run out of employees to lay off, small companies to buy, and emerging markets to exploit. On the other hand, patients still have medical needs that could be met with new therapies. Companies that redouble their effort and investment in discovery will be more likely to survive the trying times ahead.

“Regional innovation clusters are taking root across the country, sharing many common elements but building on the unique strengths and resources of their communities,” said Lechleiter, according to an Eli Lilly press release. “Driven by a combination of civic engagement and enlightened self-interest, leaders from industry, academia, philanthropy, and state and local government are collaborating to create new enterprises, jobs, and economic growth.” He pointed to the success of Indiana’s regional cluster, largely due to the 2002 launch of BioCrossroads, a public–private initiative designed to serve as a regional connector among Indiana’s life-sciences research institutions, corporations, philanthropies, and state government.

Lechleiter pointed to the “micro” role for federal policy as essentially the two-pronged approach outlined in President’s Obama’s 2011 budget: first, identifying and sharing information on successful clusters and their characteristics; and, second, providing grants that support and strengthen clusters to promote economic development and job creation. He said the “macro” role of federal policy should be to create an environment where innovation can thrive. Part of that environment involves fiscal policy. He said that the United States should make the federal R&D tax credit permanent and that the US corporate tax system should better encourage business investment in the US.

“We need a business tax system that levels the playing field for America’s worldwide companies, which currently face a higher corporate tax rate than their global competitors, and, unlike those competitors, must also pay taxes on their foreign earnings. We need a corporate tax system like the rest of the world–one that encourages, rather than discourages, investment in the United States,” he said.

Lechleiter addressed ways to foster innovation as a whole in the US earlier this year, which included some of the same suggestions he has in advancing regional innovation centers: namely, tax policy favoring innovation and building a research infrastructure within academic and government laboratories. He also called for immigration laws that allow and encourage top scientists to choose to work in the US and broad improvement in science and math education in grade schools and high schools.

With respect to improvement science and math education, the Biotechnology Institute, announced earlier this month a new program, “Scientists in the Classroom,” to improve the quality of US life-science education in response to President Obama’s “Educate to Innovate” campaign to improve the performance of America’s students in science, technology, engineering, and mathematics (STEM) education. The Biotechnology Institute is an independent, national nonprofit organization involved with the present and future impact of biotechnology. The announcement was made at a White House event announcing the creation of a new broad education coalition, “Change the Equation,” which consists of CEOs from various industries.

The Scientists in the Classroom initiative will train and deploy scientists from 40 companies in collaborations with teachers and students on laboratory projects in high schools as a means to advance life-science education at the national and local levels. The program will be launched in communities this fall in 10 states, including California, Florida, Georgia, Kansas, Maryland, Massachusetts, Minnesota, New Jersey, New York, and Pennsylvania, reaching a run-rate of 1000 life scientists assisting in schools and a goal of having 250,000 high school students from all 50 states in the next five years. With the announcement, the Biotechnology Institute also launched a fundraising campaign to support the initiative with a goal of raising at least $10 million in cash and in-kind contributions during the next two years. The campaign already has received the support of sanofi-aventis, Momenta Pharmaceuticals, Acorda Therapeutics, Alnylam Pharmaceuticals, Sangamo BioSciences, and Vertex Pharmaceuticals. In addition to their support as founding members of the campaign, scientists from these companies will collaborate with high school teachers and students over the coming months to develop life science-focused projects for stimulating students’ interests in scientific careers.

Supporting STEM education and laying a groundwork for businesses to invest more in innovation is always a promising consideration for the bio/pharmaceutical industry. It will be important to watch the progress of this specific program and related policy developments.

While the “US is the undisputed leader in medical advances,” he said, he cautioned against the “danger that we are losing what has been America’s greatest competitive advantage: our genius for innovation….Despite all this progress, despite all these gains, the evidence is mounting that we are facing today nothing short of an innovation crisis in America’s life-sciences sector.”

He cited a study by the think tank, the Information Technology and Innovation Foundation, which ranked the US sixth among the top 40 industrialized nations in innovative-based competitiveness (Singapore, Sweden, Luxembourg, Denmark, and South Korea ranked first through fifth, respectively), but which rated the US last, or 40th among 40 industrialized countries, in what these countries are doing to become more innovative in the future. The study was based on 16 metrics based on indicators involving human capital, innovation capacity, entrepreneurship, information-technology infrastructure, economic policy, and economic performance to evaluate current and future global innovation-based competitiveness.

Lechleiter outlined four policies that he thinks are necessary to sustain and build innovation in the US:

• Broad improvement in science and math education in grade schools and high schools

• Immigration laws that allow and encourage top scientists to choose to work in the US

• A well-funded basic research infrastructure within academic and government laboratories

• Tax policy that fosters innovation, which would include: making the federal research and development tax credit permanent; a federal investment tax credit to provide early-stage financing of innovation-based companies; and the adoption of tax and economic incentives to boost manufacturing and export-related job growth.

Starting a dialogue on tangible ways in which scientific innovation can be fostered is valuable, but too often it is a debate that does not receive the amount of attention that it deserves. Of course, in theory, no one is against using science as a tool for economic advancement. But the devil is in the details, and the approaches, not just in public policy, but also in business strategy and practices, need to be examined to assess how to best mutually support the goal of increasing innovation-based competitiveness.

The job cuts are part of the company’s restructuring program that began after the merger with Schering-Plough (Kenilworth, NJ). Certain manufacturing facilities and research and development (R&D) operations will be consolidated, but the company has not yet said which. In addition, positions that are considered “duplicative” will be eliminated.

Job cuts such as these, although unfortunate, are commonplace after mergers. For example, Pfizer (New York) has eliminated positions as part of its own restructuring program since it acquired Wyeth (Madison, NJ). But terminations are occurring even at companies that have not merged with or purchased any competitors.

One case in point is Eli Lilly (Indianapolis, IN), which will cut 5500 jobs worldwide. The cuts are intended to reduce costs and dodge the one-two punch of upcoming patent expirations and competition from generic drug companies. In 2009, the value of Lilly’s stock fluctuated widely and ultimately fell by 11%. The compensation of John L. Lechleiter, Lilly’s top executive, increased, however, by as much as 44%, depending on how you look at the numbers.

And, as I noted previously, AstraZeneca (London) will cut 3500 R&D jobs by 2014 to achieve “flexibility” and “effectiveness.” The company is hunkering down and cutting costs for reasons similar to those given by Merck.

Lean workforces seem to be the order of the day for Big Pharma. As a cost-reduction strategy, job cuts might be effective. Some manufacturing operations might be larger and less efficient than they could be. Yet the industrywide terminations do make me worry about the industry’s future. The cuts to R&D operations are particularly troubling, considering the industry’s recent history of lackluster pipelines.

I hope we are not witnessing Big Pharma cutting its nose off to spite its face. And I hope that laid-off employees can find rewarding work elsewhere and can continue to pursue pharmaceutical innovation.

In a speech last week to the City Club of San Diego, John Lechleiter, chairman and chief executive officer of Eli Lilly, offered very candid remarks about the state of innovation in the pharmaceutical industry, saying that the engine of biopharmaceutical innovation is “broken.” His comments may be a bitter pill to swallow in light of escalating investment in research and development (R&D), but his frankness may just be the remedy the industry needs to reinvent itself.

“At a time when world desperately needs more new medicines—for everything from H1N1 to Alzheimer’s disease—we are taking too long, spending too much, and producing far too little,” said Lechleiter. “Repowering pharmaceutical innovation is an urgent need not only for our company and our industry but for our nation—and for communities like San Diego and Indianapolis [the headquarters of Eli Lilly] that have a huge stake in the life sciences. We remain dependent on a society that welcomes and values new ideas, and public policy that enables innovation to be rewarded for the value it creates. But we also know that we need to change.”

Lechleiter outlines three major challenges for the industry. These include: a loss of trust in product safety and in the honesty of pharmaceutical businesses, for which he said, “we mostly have ourselves to blame;” a risk-averse policy and regulatory environment that has led to hurdles for new drugs; and the pressure of the healthcare system, where the pharmaceutical industry has become an attractive source for policymakers to seek cost savings, even though prescription-drug spending accounts for only 10% of healthcare spending.

Lechleiter suggested using the three “C’s” for pharmaceutical innovation: collaboration among the large pharmaceutical companies with smaller companies, academia, and government; competency by advancing scientific tools to better understand human biology; and culture by developing a mindset that places patients and improved outcomes at the center of the research process. On a company-specific note, Lechleiter said that Eli Lilly is espousing those philosophies. He points to the company’s fully integrated pharmaceutical network (FIPnet) model as a vehicle for external collaboration; the company’s use of advanced analytics and clinical trial designs; and cultural changes to create a greater focus on the patient.

It is clear that the pharmaceutical industry is at a moment of change. In 2008, the US biopharmaceutical industry spent a record $65.2 billion on R&D, according to a report by the Pharmaceutical Research and Manufacturers of America (PhRMA). At the same time, however, the the level of innovation has not appreciably improved. The average number of new drugs approved in the US (as measured by the number of NMEs and new biologic license applications approved by the US Food and Drug Administration’s Center for Drug Evaluation and Research) between 2005 and 2008 was 21. Moreover, only 2 of 10 marketed drugs ever return revenues that match or exceed R&D costs, according to the PhRMA report.

Some pharmaceutical majors have turned to a proven formula in seeking to improve near-term and long-term results, namely building critical mass through mergers and acquisitions (M&A). Pfizer’s $68-billion acquisition of Wyeth, Merck’s $41-billion pending acquisition of Schering-Plough, and Roche’s $47-billion acquisition of Genentech are three large-scale acquisitions in 2009. What remains to be seen is whether the new R&D structures announced by these companies will be able to succeed in improving R&D productivity.

In announcing its integration with Wyeth, Pfizer said it will operate through “patient-centric” business units in its two major areas: biopharmaceuticals and diversified businesses. It formed two R&D groups in biopharmaceuticals, one focused on small molecules and related modalties (the PharmaTherapeutics Research Group) and one on larger molecules and vaccines (the BioTherapeutics Research Group). The individual units within these two research organizations are led by chief scientific officers, who will act as single points of accountability for delivering proofs-of-concept for development.

In acquiring a full stake in Genentech earlier this year, Roche said it hoped to continue its successful relationship with Genentech in drug innovation by allowing Genentech to operate as an independent research and early-development center within Roche, seeking cross-fertilization of technologies and expertise between the two companies as a vehicle for innovation.

As it waits for its acquisition of Schering-Plough to be finalized, Merck announced a new structure for Merck Research Laboratories. Merck says the structure is designed to foster innovation and create greater accountability at all stages of research and development through two core functions: (1) discovery and preclinical development and (2) clinical development and regulatory affairs. In addition, a new central franchise structure focused on portfolio management will be aligned with the company’s global human health division. Also, the new Merck Research Laboratories will include a worldwide licensing group.

The impetus behind M&A activity often leaves companies in a “Catch-22” situation, a problem not unique to the pharmaceutical industry. On one hand, greater critical mass is required to fund product development, but as organizations increase in size, size itself can stifle innovation. Let’s see if the pharmaceutical industry is up to the task in overcoming that challenge.

UnitedHealth Group, a Minneapolis-based healthcare company, recently announced that it would soon provide a price break to members who correctly use certain asthma and antidepressant drugs. The news was reported in a Wall Street Journal article by Peter Loftus of Dow Jones Newswires.  

To get the $20 copay discount, members must refill their prescriptions within about 30 days after their last prescription runs out. Eligible drugs include GlaxoSmithKline’s Advair, AstraZeneca’s Symbicort, Eli Lilly’s Cymbalta, Wyeth’s Effexor XR, and Wyeth’s Pristiq. The discount applies to members who have a normal copay of $50 on these drugs, meaning the new copay would be $30, according to Loftus’ article.

The idea of rewarding patients who adhere to their prescribed medications is a win-win situation. The patient is able to continue his drug regimen and get the treatment he needs—while saving some money. In the current economy where some patients are discontinuing their prescriptions because of cost, this financial motivation is especially important. The insurance company is able promote the patient’s health and, theoretically, save money in the long run by preventing the patient from becoming more sick and then requiring additional medical care or medication.

Asthma and antidepressant drugs make perfect sense for this type of plan because a lack of necessary medication or a gap in a medication regimen can negatively affect the patient’s health. If this plan works, UnitedHealth and other health insurance companies may consider expanding the program to those individuals on medication for diabetes and other long-term conditions that need to be controlled in order to reduce the risk of complications.