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©2013 CFA Institute This publication is designed to provide accurate and authoritative information with regard to the subject matter covered as of the date of publication

It is distributed with the understanding that the publisher is not engaged in rendering legal,

or other professional services

If legal advice or other expert assistance is required,

the services of a competent professional should be sought

ABOUT THE AUTHOR Marietta Miemietz,

is a cofounder of and director of pharmaceutical advisory services at Primavenue


she spent 13 years as a sell-side analyst of the European pharmaceutical and health care industries and was consistently rated among the top 10 pharmaceutical analysts from 2006

Miemietz holds an MBA with a concentration in finance from WHU–Otto Beisheim School of Management and the Belgian Diplôme d’Etudes Spécialisées in biotechnology from Université Libre de Bruxelles


CONTENTS Introduction 1 Industry Overview

The Drug Discovery,


Intellectual Property: Patents,

Regulatory Exclusivities,

and Other Forms of Protection 18 Business Models Industry Consolidation  Notable Trends 

22 23 25

Financial Statement Analysis Forecasting Drug Sales and Company Profits 

Valuation of Pharmaceutical Firms Portfolio Considerations

Industry Resources Regulatory Agencies  Other Resources  Major Medical Conferences 


INTRODUCTION Among the most distinctive features of the pharmaceutical industry are the complexity and length of the product development cycle and the independence of pharmaceutical companies’ operating performance from industry trends

The earnings outlook of individual companies is determined,

by the products they develop and market


the industry is characterized by exceptional heterogeneity that notably complicates peer group analyses and often entails divergent share price performance

These unusual characteristics are attributable to the fact that the prospects of each player are linked to the prospects of the drugs to which it has full or partial commercialization rights

Drugs are approved by regulatory agencies for specific indications,

and their peak sales potential depends on the prevalence of the conditions they are intended to treat,

In this context,

it is worth noting that the conditions a medicine is intended to treat are often narrowly defined

a drug that is licensed for the treatment of colorectal cancer is unlikely to compete with a blood cancer drug,

and even two different blood cancer drugs might be targeted at separate patient populations

These dynamics have profound implications for pharmaceutical industry analysis and investing

Top-down analytical approaches based on overall market growth rates and market share development,

often a good starting point in other industries,

add limited value at best and may often be misleading

The quality of bottom-up analyses that take into account the clinical utility,

and economics of individual drugs is typically the main success factor in selecting pharmaceutical and biotechnology stocks

Following a brief overview of the industry,

this primer delineates the determinants of success in drug development and marketing and then reviews the implications for financial statement analysis and forecasting,

as well as valuation and portfolio considerations

Unless noted otherwise,

analysis is confined to branded drugs for human use,

and conclusions may not apply to other areas of health care,

such as consumer and animal health care products or generics

The aim of this report is to provide a general understanding of the complexity of pharmaceutical industry analysis and the main issues involved

It is designed to enable the reader to critically appraise research,

and other communications with respect to drugs,

It is by no means exhaustive

Myriad issues may arise— issues that are deeply ingrained in the scientific aspects of a molecule,

the clinical considerations pertaining to a particular disease,

regional clinical practice and regulatory legislation,

or specific patents—that must be reviewed on a case-by-case basis


INDUSTRY OVERVIEW Given that introduction,

it should come as no surprise that the pharmaceutical market is large and highly fragmented

In 2012,

the global market for human prescription pharmaceuticals was valued at more than $850 billion

The four largest market categories—the central nervous system,

metabolic and gastrointestinal diseases,

and cardiovascular disorders—accounted for slightly more than half the market in terms of value

each of these categories can be subdivided into numerous conditions that require separate treatment approaches

As depicted in Figure 1,

the largest players hold mere single-digit market shares,

and many of them are active in other segments of the health care market (note that revenues from activities other than health care are not shown)

Successful drug development today requires a unique skill set that cannot be transferred to other industrial activities


many of the leading pharmaceutical players are exposed to other areas of health care for historical reasons and with a view to smoothing out the growth profile and cash generation on the group level as well as exploiting the modest synergies with regard to,

research and development (R&D),

ze Ro r c'N he M ova er r ck s'& Gl Co ax oS San m ofi Jo As ithK hn tr lin so aZ e n en & e Jo ca Br h ist ns ol on

Figure 1

 Branded Human Prescription Drugs: Key Players

Pharmaceucals (human branded prescripon drugs excluding vaccines) Other healthcare Pharmaceucal market share (RHS)


Industry Overview

These ancillary health care activities primarily include consumer health,

As noted previously,

the dynamics of the market for patented prescription drugs for human use are such that drug-specific attributes are a far more important determinant of success for individual companies than are general industry trends

In most of the key pharmaceutical markets of the developed world,

the majority of patients are able to obtain the drugs they need

their treatment is paid directly or reimbursed by third parties,

although restrictions often apply (e

mandatory generic substitution or requirements to initiate therapy with the lowest-cost medicines)


the pharmaceutical industry is among the least cyclical of industries,

but recessions may entail such austerity measures as drug price cuts,

and dwindling consumer confidence may,

result in fewer physician office visits by patients or “drug holidays” (discussed later)

Most innovative drugs enjoy a period of market exclusivity—because of either patents or regulatory exclusivities—that may span many years,

implying that a new molecular entity will have monopoly status for a certain period

a pharmaceutical company that is commercializing a highly effective,

patent-protected drug in a therapeutic area of high unmet need may be able to generate strong sales growth in the same year that a competitor faces a rapidly declining top line—for example,

owing to patent loss and ensuing generic competition or as a result of emerging branded competition or safety concerns about its main products

Under the pharmaceutical industry’s cost structure,

positive revenue developments translate into significant operating leverage

Companies incur substantial R&D and marketing expenses that are largely fixed in the short term

the variable cost of producing and distributing higher volumes of any given drug is comparatively low


the accuracy of forecasts of a pharmaceutical company’s profits hinges on the analyst’s ability to predict the future sales of each drug in the company’s portfolio and pipeline

Substantial errors in forecasting a company’s top line will almost invariably lead to even greater errors in forecasting the bottom line and,

a thorough analysis of a company’s drug portfolio,

which frequently requires expert knowledge in various therapeutic areas,

In addition,

various megatrends and industry-specific themes affect the dynamics of the industry to a meaningful extent

In light of the pronounced changes in pharmaceutical business models that have been implemented over the last five years,

a brief history of the pharmaceutical industry is in order before reviewing its dynamics

Although the discovery of the first drugs was largely the result of serendipity,

increasing levels of insight into disease biology and the mechanism of the action of drugs on the molecular level resulted in ever more targeted drug discovery efforts,

The latter part of the 20th century saw ©2013 CFA INSTITUTE

CFA Institute Industry Guides: The Pharmaceutical Industry

step changes in medical innovation

given the dearth of effective drugs available at the time to treat such widespread conditions as diabetes and hypertension,

many newly launched drugs became blockbusters,

attaining peak sales of $1 billion or more

The pharmaceutical industry enjoyed high earnings growth,

and the investment community’s expectation that the industry would continue to innovate at the same pace was reflected in the industry’s valuation: P/E multiples often reached the high teens or greater

Many companies put in place significant production,

and administrative infrastructure in an effort to maximize the top line

some of the most successful primary care drugs were each promoted by thousands of sales representatives in the United States alone

Most major pharmaceutical firms dedicated substantial resources to such life-cycle management (LCM) activities as the development of new formulations of existing drugs or clinical trials in additional indications or patient subgroups,

all with a view to extending the lives of the drugs’ patents

Although pharmaceutical companies generally do not disclose the proportion of their R&D expenses attributable to LCM as opposed to the discovery and development of new molecular entities,

evidence suggests that LCM activities proved to be highly lucrative

The decline in new-drug approvals observed through much of the last decade,

despite rising absolute R&D spending,

may be attributable in large part to the focus on product LCM

Other possible contributory factors include rising hurdles for some of the largest indications,

such as diabetes and hypertension,

in which improving on existing drugs has become increasingly challenging,

as well as a delay in the adaptation of R&D and business models to a changing regulatory and payer environment

At the beginning of the new millennium,

the industry placed much emphasis on the development of primary care drugs with billion-dollar sales potential in order to leverage their existing infrastructure and replace older drugs that were approaching patent expiration

To minimize the perceived risks of the costly clinical development phase of new drugs—whereby pharmaceutical firms test the efficacy and safety of new-drug candidates in hundreds,

of patients over many years—many firms developed new molecular entities that displayed only modest structural variation and only minor therapeutic advantages over existing drugs

In referring to these products,

critics used the derogatory term “me-too” drugs

Shifts in the regulatory and payer environment eventually derailed the industry

In particular,

the US Food and Drug Administration (FDA) displayed heightened risk aversion in the wake of the withdrawal of Merck’s painkiller Vioxx from the market in 2004 owing to side effects,

thus raising the bar for the approval of newdrug candidates targeted at non-life-threatening conditions

Payers grew increasingly reluctant to reimburse for expensive new drugs that offered only a modest perceived benefit over older drugs,

which were losing their patent protection and 4


Industry Overview

becoming available generically at much lower cost,

a trend that was exacerbated in the financial crisis of 2008


all these trends resulted in high attrition rates for new-drug candidates as well as some commercial failures

Toward the end of the last decade,

many large pharmaceutical stocks were trading on single-digit forward P/E multiples as “patent cliffs” loomed and investors’ confidence that the industry’s R&D engines would yield novel agents to offset the imminent revenue loss plummeted

The realization that the past strategy might no longer be viable,

coupled with the market’s disenchantment,

triggered the industry’s quest for a new commercial model

Large pharmaceutical corporations recruited managers who were industry novices but possessed extensive experience in such fields as marketing and operational excellence

The major players embarked on large-scale cost-reducing initiatives to ensure acceptable levels of profitability beyond the patent expirations of key blockbusters

many companies reduced their cost base by billions of dollars in a matter of years

Although some of these cost reductions were attributable to synergies in the context of “megamergers,” various companies achieved multi-billion-dollar savings in the absence of material M&A activity

This outcome was achieved in part by scaling back primary care field forces in Western markets,

a step that was accompanied by changes in the commercial model: Firms relied increasingly on key account management to drive the top line and shifted their R&D efforts toward specialty care

The relative attractiveness of specialty care over primary care lies in the fact that it can be served by a smaller sales force and thus at a smaller fixed cost

clinical and regulatory success rates tend to be higher for drug candidates that target underserved niches of debilitating and potentially life-threatening indications,

Previously neglected aspects of cost control were also addressed,

including excessive procurement bills that resulted largely from a lack of coordination of group-wide purchasing activities


the industry reduced fixed costs,

especially those related to R&D,

by outsourcing various activities

It proactively identified incremental business opportunities

many companies rediscovered ancillary activities (consumer and animal health) that are less prone to patent loss and notably increased their presence in emerging markets

Although the drug industry is global in nature—regulatory approvals all over the world can usually be obtained for drugs that have proved safe and effective in the treatment of the targeted conditions—many pharmaceutical firms have focused primarily on Western markets in the past

And although Western markets continue to dominate in absolute terms—with the United States estimated to account for approximately 40% of the global pharmaceutical market in 2012—much of the majors’ growth is now coming from the emerging markets

Many pharmaceutical companies have made steady progress toward replenishing their pipelines,

partly by tapping into external innovation provided,

to a large ©2013 CFA INSTITUTE

CFA Institute Industry Guides: The Pharmaceutical Industry

by midsize and biotechnology companies

In the aggregate,

pipelines comprise numerous molecules with novel modes of action that target medical areas of high unmet need and are tailored to well-defined patient populations,

thus implying that a genuine market opportunity is likely to materialize for compounds that prove safe and effective

In fact,

many recently launched drugs and compounds in development are so highly targeted that a debate has ensued whether “personalized medicine,” one of the most extensively discussed megatrends of the health care sector,

represents an opportunity or a risk for the pharmaceutical industry

Proponents argue that the more clearly a drug’s target population is defined and the more easily it is identified—for example,

by the use of biomarkers that confirm the presence or absence of a mutation—the higher the chance that such a drug can be developed

This approach may,

increase the chance of successful clinical trials and save the firm the considerable expense of conducting negative trials

Although skeptics are concerned that personalized medicine might shrink a drug’s target market to relatively small patient subgroups,

proponents contend that highly targeted drugs may gain traction rapidly in the treatment of conditions characterized by a significant genetic component,

such as tumors that bear certain mutations,

whereas patients suffering from such multifactorial illnesses as diabetes may be more difficult to stratify

personalized medicine should not be regarded as a threat per se to profitability

drugs that are more narrowly targeted and thus more effective have a higher chance of obtaining regulatory approval as well as reimbursement at attractive price points,

which may compensate for the potential volume tradeoff


payers are increasingly embracing value- and outcome-based pricing models

For instance,

health technology assessment bodies assign grades to a drug’s benefit in certain indications and patient subgroups,

and some pharmaceutical companies have agreed in some regions to refund the cost of drug treatment if the patient does not benefit meaningfully,

suggesting that they have nothing to gain from the administration of medicines to patients who are unlikely to respond

In this context,

it is worth noting that disease prevalence is only one of the factors that determine a drug’s peak sales

A drug’s efficacy,

both in absolute terms and relative to competing drugs,

and the severity of the condition it is used to treat have a significant impact on its price point as well as its penetration rate


the notion that the aging population in Western markets will be a key driver for the pharmaceutical industry is a fallacy

A drug designed to treat conditions that arise more frequently in old age,

will not necessarily achieve greater commercial success than a drug aimed at severe illnesses that may manifest themselves earlier in life (e

Some senior citizens may be well controlled on generic drugs or considered too frail for intensive treatment,


Industry Overview

a young patient suffering from a devastating disease may receive an expensive drug for extended periods in the absence of generics

Effective treatments for some of the most debilitating conditions frequently associated with old age,

such as Alzheimer’s disease,

Price pressure is another trend that has persisted for many years and has accelerated recently as government-linked payers have felt the brunt of austerity while private payers have been affected indirectly by austerity and recessionary tendencies

Although one or more price increases a year remain the norm for many effective drugs marketed in the United States,

price cuts and concessions occur with some regularity in many other regions

Pharmacoeconomic studies that demonstrate an overall cost benefit to the health care system are gaining in importance

Although they raise the cost of drug development and may be fraught with methodological challenges,

they also allow for the price differentiation of highly effective new drugs

Recent and upcoming expirations of blockbusters’ patents are expected to result in tens of billions of dollars in savings for health care systems globally,

thus providing some flexibility to reward innovation in areas of high unmet need

Austerity notwithstanding,

it thus appears fair to assume that a safe and highly effective drug for the treatment of a serious,

such as Alzheimer’s disease or heart failure,

would likely achieve peak sales well in excess of $1 billion

Where clinical differentiation is lacking,

price pressure is likely to intensify further

For example,

are increasingly tender driven,

with significant negative effects on price and profitability

In the United States,

where substitution of generics is common,

generics companies rely heavily on first-to-market strategies that afford short windows of opportunity to maintain relatively high prices until the onset of multi-source generics

The rising price premium of truly innovative drugs that address medical areas of high unmet need over interchangeable products and those conferring only a modest benefit has resulted in increasingly focused strategies,

with the most innovative pharmaceutical companies pursuing differentiation rather than cost strategies in Western markets

only a few of the pharmaceutical majors have significant generics operations in developed markets because the key determinants of success—including time to market,

and logistical capabilities—differ markedly from the core competencies required in the branded pharmaceutical space

With respect to general industry dynamics,

the relative lack of seasonality and cyclicality is worth noting

With the exception of some categories (e

allergy treatments and flu vaccines),

most drugs are prescribed and administered yearround

The months of summer vacation as well as the holiday season are typically somewhat lighter than other times of the year

To the extent that there is an element of patient self-pay,

drug sales may be moderately cyclical

For example,

patient co-pay requirements per drug pack may induce some patients to take “drug ©2013 CFA INSTITUTE

CFA Institute Industry Guides: The Pharmaceutical Industry

holidays” in a tough economic climate,

while those patients who have to pay part of the fee for physician office visits out of pocket may postpone a health checkup and,

the purchase of medicines for the treatment of conditions they are unaware of

Where employers are a key source of private health insurance,

rising unemployment rates may negatively affect consumption

Self-medicating individuals may replace expensive over-the-counter (OTC) brands with white label products in times of declining consumer confidence


all these factors tend to have only a very modest impact on industry sales

rarely do they visibly affect any sets of quarterly results

Health care reform,

usually in the form of price cuts,

typically represents the main fallout from a bleak macroeconomic picture

In recent years,

many companies have experienced low- to mid-single-digit annual price pressure across their European drug portfolios in the wake of austerity measures implemented by various governments

The US market is dominated by private health insurance and has thus been largely immune to government initiatives in most years

Beginning in 2010–2011,

the US Affordable Care Act reduced companies’ US drug sales by a low single-digit percentage as a result of increases in the mandatory Medicaid rebate rates and similar measures

It remains to be seen whether improved access to health insurance will have a positive effect on industry growth rates in the longer term

Two key considerations in forecasting the impact of health care reform are worth highlighting

reform measures usually need to be ratified by legislatures and their implementation can be time consuming

it is possible that the first impact on the industry will not be felt until a year or more after the first observation of a decline in macroeconomic indicators


the sensitivity of branded drug sales to reform measures rarely differs among the majors

although some drugs may be more negatively affected than others,

the drug portfolios of the industry majors tend to be sufficiently diversified for the net effect on branded human drug sales to be similar across companies

Of course,

exposure at the group level is partly determined by diversification into areas other than patented human prescription drugs


care must be taken when assessing the impact of any reform measures on small and midsize players,

which may face substantial exposure with respect to a particular drug or region

In extreme cases,

health care reform has the potential to negatively transform the earnings of such companies




AND APPROVAL PROCESS Prior to launching a new drug,

the pharmaceutical company or companies that own the rights to the compound) must extensively evaluate its efficacy and safety in order to obtain approval from the appropriate regulatory authority in each jurisdiction where it intends to market the drug

For example,

US approval must be obtained from the FDA

European approval is usually obtained from the European Medicines Agency (EMA)

and Japanese approval may be granted only by the Japanese Ministry of Health,

The drug development process is lengthy,

Concerns over a compound’s efficacy,

or commercial viability may emerge at any point in the process

if such concerns are sufficiently serious,

the company may decide to terminate development,

which implies that the investment in the compound’s development will never be recouped

Pharmaceutical analysts regularly revise their forecasts in response to R&D-related news—notably revising sales forecasts for drug candidates to reflect their launch probability (which rises as drugs progress through development),

the expected commercial positioning in light of emerging scientific data,

and any potential changes to launch timelines

The progression of drug candidates to the costly advanced stages of development may also have a bearing on short- and medium-term R&D expenses

Since continuous rejuvenation of the drug portfolio is of paramount importance to a pharmaceutical company’s profitability,

a thorough understanding of the drug discovery,

and regulatory process is crucial to the accuracy of forecasts

This section explains the basic drug development process and the regulatory process in key geographic regions

Special emphasis is placed on the key US market,

where the regulatory process is highly transparent and usually relatively speedy

Drug discovery generally starts with ideas for a drug target and a lead molecule

The choice of target (e

a cell surface receptor involved in sending messages into the cell nucleus or a messenger molecule that binds to receptors as a ligand) is typically driven by a company’s understanding of the biology of a particular disease

For example,

a tumor might express cell surface receptors that are absent in healthy tissues,

and a pharmaceutical company might endeavor to develop a medicine that selectively targets this receptor

Although many pharmaceutical majors work on elucidating disease mechanisms,

substantial outside work—performed,

CFA Institute Industry Guides: The Pharmaceutical Industry

by academic institutions—is taken into account when choosing a target

Translational medicine is the branch of science concerned with the clinical applications of basic research

Once a target has been identified,

the company’s scientists study various approaches to blocking or modulating the target to reduce or ablate disease activity

For example,

they may use a compound that binds to and blocks the cell surface receptors found on cancer cells,

thereby preventing them from receiving further growth signals

The compounds identified as having potential utility are classified as leads

Leads must satisfy various requirements—for example,

they need to interact effectively with their target,

but interaction with other molecules in the human body should be kept to a minimum in order to avoid side effects that may arise from off-target activity

Leads are often identified by screening molecules from existing “libraries” against the target

Optimizing the most suitable compounds identified in this manner typically requires substantial knowledge of chemistry or biochemistry

Owing to the complexity of the process,

it is not feasible for any company to identify and study each target and lead compound in-house


co-operations between firms are announced with some regularity

For example,

one pharmaceutical or biotechnology company may supply the library to be tested against a target supplied by another company,

or two companies that have identified drug candidates targeting the same pathway may join forces to develop these compounds together

Collaborations between the industry and academia are also common


pharmaceutical companies frequently in-license drug candidates that originated at biotechnology companies

the larger company thus bolsters its pipeline while providing financing as well as clinical and regulatory expertise and marketing prowess

Once a lead compound has been identified,

it proceeds to the pre-clinical stage,

which comprises various tests in vitro as well as in relevant animal models

Testing in humans,

also known as the clinical stage,

requires approval from ethics committees,

which is granted only after a compound has been fully characterized in the pre-clinical setting

Clinical trials are designed to fully elucidate a drug’s safety,

and key characteristics in humans

the design of clinical studies and the scope of the program vary with the type of compound being studied and the condition it is intended to treat


the clinical trial process may be divided into three phases

In phase I,

the compound is typically tested in healthy volunteers

Phase II studies enroll patients and are usually designed to give preliminary evidence of efficacy and safety while determining the best dose(s) to test in phase III

Phase III trials are designed as pivotal,

trials and are powered to yield statistically significant results on a drug’s efficacy and safety

Although regulators review the totality of the data (including the full safety database available at the time) before approving or rejecting a new-drug application,


The Drug Discovery,


andIndustry ApprovalOverview Process

successful completion of phase III is usually a prerequisite for approval

Once a drug has been approved,

its safety is monitored regularly and the sponsor may be asked to fulfill post-approval commitments

this post-marketing phase is sometimes referred to as phase IV

Exhibit 1 outlines the basic process of getting a drug to market

Exhibit 1 presents a conceptual framework

the drug development process may vary substantially

For example,

most cancer drugs are too toxic to be given to healthy volunteers

Drug candidates for the treatment of conditions with a poor prognosis may receive regulatory approval after a pivotal phase II study

An adaptive trial design (e

a phase II study is rolled over into a phase III trial if certain criteria are met) is increasingly being used for some diseases

Regulators frequently provide sponsors with guidance and feedback on trial design in an effort to minimize the risk of inadequate trial design

Clinical trials are often large,

with hundreds of patients typically enrolled in phase II studies and thousands,

occasionally tens of thousands,

the cost of clinical development is high: Depending on the therapeutic area under study,

phase II trials may cost tens of millions of dollars,

and the bill for a phase III program often amounts to hundreds of millions of dollars

The increasing focus on “outcomes” trials (discussed later) puts further upward pressure on the cost of clinical development


the industry has concluded that the cost of failure in phase III is unacceptably high and has put in place extensive measures designed to identify potential problems in phase II or earlier

Although the industry now appears to Exhibit 1

 Getting a Drug to Market Drug discovery and pre-clinical phase

Phase I

Phase II

Phase III

Target and lead identification

testing in vitro and in vivo (animal model)

Tests in healthy volunteers

Efficacy and safety in patients

Registration studies to establish safety and efficacy

Multi-year process

Cost: millions of dollars

Cost: millions of dollars


Duration: months

Duration: typically >1year Cost: at least tens of millions of dollars

Duration: about 2 years (varies)

Regulatory review Duration: typically 1year

expedited review maybe available

Within days or weeks of approval if reimbursement negotiations are not necessary

Cost: often hundreds of millions of dollars

CFA Institute Industry Guides: The Pharmaceutical Industry

appraise the clinical and commercial potential of drug candidates in early- and midstage development more critically than in the past,

the possibility of failure in phase III can never be ruled out

It is therefore prudent to risk-adjust sales forecasts until a drug has passed phase III and,

Owing to the high cost of clinical development,

studies are typically sponsored by the pharmaceutical firms themselves


investigators or cooperative groups may sponsor trials based on their own hypotheses

Although these studies may occasionally produce intriguing results,

caution is warranted because they are not always comparable in size and quality to industry-sponsored trials and are often unsuitable as registration trials

Because share prices tend to react to the results of pivotal trials,

it is worthwhile to briefly review the design of typical phase III trials and touch on the interpretation of results

Many pivotal studies are designed as global trials,

with clinical centers across the United States,

Eastern Europe,

Asia Pacific,

Latin America,

The FDA usually requires the inclusion of a meaningful number of US patients in the pivotal study,

whereas other regulators may accept data from a smaller local study in addition to the pivotal data in order to ascertain that the drug is safe and efficacious in the local patient population

Generally speaking,

the patient population enrolled in the clinical program must be representative of the patient population that will receive the drug after its approval because such factors as ethnicity and standard of care may have a bearing on patients’ responses to a drug

a phase III program consists of two studies

regulators frequently accept a sole pivotal study,

notably for indications that require large and complex trials

For other indications,

it may be advisable to conduct more than two phase III studies in order to demonstrate the drug’s compatibility with other frequently used drugs in different patient populations—diabetes being a prime example

The study sponsor typically selects one primary endpoint,

although co-primary endpoints are occasionally chosen in complex settings,

The primary endpoint is usually an efficacy endpoint and reflects the main hypothesis that the trial has been designed to test

For example,

the primary endpoint of a diabetes trial may be a reduction in blood sugar or a composite score of heart health

Trials that assess a drug’s impact on the mortality and morbidity (M&M) of the patient population are often referred to as “outcomes” trials

Endpoints related to M&M are considered “harder” than so-called surrogate endpoints,

which merely measure changes in a marker of disease severity,

such as blood glucose or blood pressure


M&M trials tend to be lengthy owing to the requirement to enroll a very large number of patients and to follow them for a long period in order to observe statistically significant differences in rare events,


they are not usually part of the initial registration package

In addition to the primary endpoint,

the sponsor chooses secondary endpoints,


The Drug Discovery,


andIndustry ApprovalOverview Process

Simply put,

a study is considered positive if the primary endpoint is met— that is,

if the main hypothesis is proved and the result is statistically significant

Although a positive study bodes well for approval of the drug,

the regulators evaluate the totality of the evidence and may reject a drug for other reasons,

such as observed safety signals or weak results on secondary efficacy endpoints

If the primary endpoint is not met,

the study is considered negative,

making regulatory approval extremely unlikely

Choosing the primary endpoint well and optimizing other aspects of the trial design are thus of paramount importance to the success or failure of a drug

Secondary endpoints are generally considered merely supportive,

and even resounding success with regard to each secondary endpoint usually does not make up for failure to meet the primary endpoint

Some drug candidates have been doomed by poor trial design rather than by an intrinsic lack of efficacy or safety

Other aspects of trial design that may have a bearing on a drug’s chances for approval include whether the design is for an open-label trial or a double-blind trial (in which patients and physicians do and do not know,

whether they are receiving the study drug,

the choice of comparator (a placebo or an active comparator that is commonly used to treat the disease)

the inclusion and exclusion criteria

Once the full clinical development of a drug candidate has been completed,

the sponsor usually submits the entire dossier to the relevant regulatory authorities in the jurisdictions where it intends to market the product

Submission in the United States,

and Japan is now virtually simultaneous for many drug candidates,

although timing differences can arise from minor or major variations in regulatory requirements with respect to either the clinical development plan or the data analysis

The regulatory review process starts upon receipt of the dossier by the agency

From the public’s point of view,

the FDA offers the most transparent process


the agency formally accepts an NDA (new-drug application) file for review shortly after its submission

On the rare occasions when a dossier is rejected— usually for technical reasons—the sponsor typically resubmits within a relatively short period

Under Prescription Drug User Fee Act (PDUFA) regulations,

the FDA’s standard review time is 10 months,

although the agency may extend the review period by up to 3 months if it requires more time to consider the vast amounts of data that generally need to be analyzed as part of an NDA review

Expedited review procedures may be available for drug candidates that target a medical area of very high unmet need,

such as rare and lethal forms of cancer

Irrespective of the type of review process,

also known as the drug candidate’s PDUFA date,

by which the agency must communicate its regulatory decision

The FDA may either approve a drug or send a Complete Response Letter (CRL) stating that a drug application cannot be approved in its present form

On some occasions,


CFA Institute Industry Guides: The Pharmaceutical Industry

the deficiencies raised in the CRL may be addressed fairly quickly and the drug may be resubmitted for approval within a relatively short space of time

In other cases,

new clinical trials may be necessary to establish a compound’s efficacy and safety to the FDA’s satisfaction,

which can delay the product launch by years

Before making a regulatory decision,

the FDA may convene a panel of experts (also known as an advisory committee) who publicly share their views on the drug’s efficacy,

The amount of drug-specific data and other information made publicly available in the context of advisory committee meetings typically far exceeds the amount of data that can be gleaned from any other source

Extensive briefing documents are posted on the FDA’s website,

usually 48 hours before the start of the panel’s meeting

These documents contain the FDA’s questions to the panel (tough questions have,

both the sponsor’s and the FDA’s detailed review of the data,

and a preliminary assessment by the FDA reviewer—all spread over hundreds of pages

The meeting itself typically lasts a full day,

with presentations by the sponsor and the FDA as well as questions by the panel to both the sponsor and the FDA

The meeting also includes an open public hearing—where other stakeholders,

such as patients and patient organizations,

may express their views on the suitability of the drug for the targeted patient population—and a debate by the panel members on nonvoting questions,

followed by yes/no/abstain votes on the voting questions

Typical voting questions seek to ascertain whether the drug’s efficacy and safety have been established and whether the drug should be approved

The entire meeting is usually webcast and provides not only a glimpse of the FDA’s main concerns and the likelihood of approval but also a general sense of factors that may have a bearing on the drug’s commercial potential


the outcome of an advisory committee meeting should be interpreted with caution


the FDA retains ultimate responsibility for the approval of a drug

a positive “adcom” vote does not guarantee approval,

nor does a negative vote necessarily herald rejection

Pharmaceutical companies usually issue a press release on the voting results shortly after the panel adjourns

the votes may not give a full picture of the panel’s views on a drug

It is therefore advisable to watch the panel itself and to note the explanations of panel members for their votes

Some yes votes may be heavily “caveated,” while some no votes may relate to concerns that are easily addressed

The panel members’ opinions may not reflect those of attending physicians in the field

the panel members represent different areas of expertise and may include statisticians and practitioners of other disciplines who would not necessarily prescribe the drug after approval

Conflicts of interest,

such as extensive consulting agreements with the pharmaceutical industry,

may keep some of the most renowned opinion leaders off the panel


the committee is merely expected to weigh in on the compound’s approvability in general terms 14


The Drug Discovery,


andIndustry ApprovalOverview Process

and does not consult directly on the label,

although panel members periodically point out that they struggle to discuss the issue of approvability in a vacuum

For example,

if a panel member believes that a drug should be withheld from patients with renal failure and that it should be approved if appropriate monitoring of renal function is mandated,

that panel member would be expected to vote in favor of approval and to rely on the FDA to address contraindications and requirements for monitoring on the label


but a restrictive label may effectively relegate it to later lines of therapy and thus limit its peak sales potential

The approval process of the European Medicines Agency (EMA) differs from that of the FDA with respect to various administrative aspects and is often less transparent to the public

Many drugs are submitted to the FDA as part of the centralized authorization procedure,

which results in a single marketing authorization that is valid throughout the European Union,




national approval procedures may be chosen—either the decentralized procedure,

whereby sponsors may file simultaneously in more than one country,

or the mutual recognition procedure,

whereby a drug is approved in one country with an option to subsequently request recognition of that authorization in other EU member states

Like the FDA,

the EMA formally accepts or rejects the dossier

The actual review process takes up to 10 months

questions from the EMA to the sponsor trigger “clock-stops” until receipt of the answers

These interruptions are not formally communicated to the public,

making the timing of the EU decision on the approval of a new drug difficult to predict

If the EMA’s queries cannot be addressed in the time frame specified,

the dossier is typically withdrawn and later resubmitted

The EMA’s Committee for Medicinal Products for Human Use (CHMP) convenes monthly,

usually after the 20th day of each month

Unlike FDA panel meetings,

CHMP meetings are nonpublic to shield the committee from any lobbying efforts on the part of stakeholders

Following completion of the process,

the EMA issues a European Public Assessment Report (EPAR),

which summarizes its conclusions with respect to a compound’s risk–benefit profile

At the end of the review process,

the CHMP issues a recommendation to the EU to approve or reject the drug

The EU generally follows this recommendation within three months of issue

Whether the regulators,

have become more exacting and possibly more politicized is a subject of intense debate

The FDA might be forgiven for being gun-shy,

having taken flak from the US Congress in the wake of post-approval safety concerns that have led to product withdrawals

In contrast,

the EMA appears to be relatively insulated from politics

The ethical dilemma faced by regulators is inherent in their mandate to make new drugs available to patients to halt or slow down disease progression and reduce sequelae while shielding them from druginduced harm

Even the largest clinical trials may not unearth all the side effects ©2013 CFA INSTITUTE

CFA Institute Industry Guides: The Pharmaceutical Industry

and imbalances in serious adverse events observed in clinical trials between patients receiving a study drug and those on a placebo or other comparator could either signal a potential safety issue or merely reflect the play of chance

Ruling out unacceptable safety risks is thus one of the main challenges of both drug development and regulatory review

Regulatory guidance documents that lay down the specific requirements to establish a drug candidate’s safety to the agencies’ satisfaction have greatly clarified the statistical aspects of trial design and interpretation

For example,

in the wake of concerns over heart risks associated with anti-diabetic agents,

the FDA established clear rules on demonstrating the absence of unacceptable cardiovascular risk

Another point of contention is the responsibility that regulators are expected to assume for protecting patients from themselves

Although the EMA appears largely to trust physicians to prescribe drugs to suitable patients only and patients to take their drugs as prescribed,

the FDA’s role in this regard appears more ambiguous

The question of whether FDA advisory committees ought to base their recommendations,

on the risks that may arise from off-label use and drug overdose has cropped up repeatedly but has never been met with a definitive answer

The extent to which sponsors are wary of FDA concerns in this regard is illustrated by the availability of safety studies of drugs intended for use in chronic obstructive pulmonary disease (COPD) in asthma patients,

who might conceivably be prescribed the drug for off-label use

It is important to note that the mandate of both the FDA and the EMA encompasses only the assessment of a drug’s clinical risk–benefit

Economic considerations are outside the scope of the regulatory review process,

and regulatory approval does not guarantee that a drug will receive reimbursement at a price acceptable to the sponsor

The drug discovery,

and approval process is lengthy: More than 10 years can elapse between the first description of a potential drug target in the literature and the launch of the first drug to interact with that target

Clinical development alone is a multi-year process

the duration depends on the scope of the clinical and analytical work to be performed,

drug firms’ decision processes,

and possible delays caused by such things as problems with the stability of a drug’s formulation or having to put a trial on “clinical hold” while an observed imbalance in adverse events is being investigated

Although timelines may vary widely as a function of various requirements,

the following guide may be used as a starting point: Phase I studies can usually be conducted and analyzed in a matter of months,

whereas a full phase II program can rarely be completed in less than a year because it often comprises multiple studies,

with treatment durations of up to six months relatively common and even longer durations under certain circumstances

The phase III program usually lasts at least two years,

with treatment durations of at least one year 16


The Drug Discovery,


andIndustry ApprovalOverview Process

and additional time for patient accrual,

It may take significantly longer in the case of very large trials for which patient recruitment takes a long time or in the event of very long treatment durations or the need for extensive patient follow-up

But pivotal trials can also be much shorter (e

for anti-cancer drugs targeted at particularly lethal tumors)

Most clinical trials that are relevant to the analysis of the pharmaceutical industry majors are listed at http://clinicaltrials

where expected timelines are usually provided

The regulatory review process may amount to six months or less if an expedited or priority review is granted—for example,

for drugs that have received the FDA “fast track” or “breakthrough therapy” designation

Standard review processes tend to take approximately one year in most key territories

In the event of a rejection based on major clinical deficiencies,

it may take years to address the regulators’ concerns

Although a drug may be launched within days or weeks of approval,

a delay of one year is not uncommon in regions known for drawn-out reimbursement negotiations




AND OTHER FORMS OF PROTECTION As discussed in the previous section,

discovering a drug and getting it to market is a lengthy and resource-consuming process

Manufacturing and distributing a drug are relatively straightforward by comparison,

although pharmaceutical production has its own challenges,

notably in the context of the industry’s shift toward biopharmaceuticals,

which are typically produced by genetically engineered cells

To perform the significant amount of pre-clinical and clinical work required to establish a drug’s safety and efficacy,

originators of new drugs require incentives in the form of periods of market exclusivity during which they can earn a return on their investment


there are two levels of protection: patents and regulatory exclusivities

These forms of protection run in parallel—that is,

an off-patent drug may not be copied by generics players while regulatory exclusivities are in place,

and generics companies must demonstrate that existing patents are invalid or not infringed by their product if they wish to launch a generic once regulatory exclusivities run out

The rules and legislation around both forms of protection are exceptionally complex,

and readers should be aware that the following discussion merely scratches the surface

Patents are issued by patent offices

The strongest protection is typically afforded by the patent on the active ingredient by which a drug exerts its biological effect

So long as the active ingredient is protected,

any drug containing a different active moiety would be considered a different drug,

and would need to complete a full clinical program before obtaining approval


substance patents tend to be the first to expire in the patent estate surrounding a drug

Although substance patents have a life of 20 years from the date of issue,

they are normally granted at an early stage of the lengthy drug discovery/development process

By the time a drug launches,

the active-ingredient patent is often less than 10 years from expiration

In the event of severe delays in the drug development process,

a substance patent can even expire prior to launch

Various provisions allow drug makers to extend their drugs’ patents by a number of years

For example,

products marketed in Europe may receive supplementary 18


Intellectual Industry Overview Property

protection certificates (SPCs) that add up to five years of protection

under the Hatch–Waxman Act patent term extension provisions,

US patents may be extended by up to five years to compensate drug firms for some of the time that compounds spend in development or registration

Even so,

the active-ingredient patent is likely to expire earlier than weaker forms of patents,

A generics company may be able to circumvent these other patents—for example,

by changing the drug’s excipients or key steps in the production process

Use patents,

which preclude generics from being used in certain disease settings,

For completeness,

trademarks are worth mentioning

Although they do not play a pivotal role in the protection of most drugs against erosion by generics,

they may add an extra level of protection in some cases,

especially for drugs administered in a device,

such as an injection pen or inhaler

Over time,

patients may become loyal to their device and balk at the notion of having to use a generic that comes in a device with a different “look and feel

” It is incumbent on the sponsor of a generic to assert that its product is not infringing any valid patents

For example,

when a company submits an abbreviated new-drug application (ANDA),

the application must contain either a paragraph III or a paragraph IV certification

In the case of a paragraph III certification,

the FDA holds off on final approval until all the patents listed in its Orange Book database have expired

a paragraph IV filing reflects the generic sponsor’s conviction that unexpired Orange Book patents are either invalid or not infringed

The branded drug company is informed of all paragraph IV filings that are based on one of its brands as a reference product and may sue a generics company within 45 days of such notification if it concludes that its patents are valid and would be infringed by the generic

In the event of a lawsuit,

the FDA is banned for 30 months from approving the generic unless there is an earlier court decision in favor of the generic’s company

This stay is often referred to as a Hatch–Waxman stay

The validity or invalidity,

as well as the infringement or non-infringement,

of patents is determined by the courts

A court may invalidate patents on such grounds as obviousness or prior art,

or it may rule that a patent is unenforceable owing to inequitable conduct

If a court finds patents to be valid and enforceable,

the generic may be launched only if it does not infringe them

The court’s ruling may be appealed

If a generic is launched while litigation remains ongoing,

the launch is considered “at-risk,” meaning that the generic’s company may be liable for damages if it is later found to have infringed any valid and enforceable patents

Owing to the high level of uncertainty around the outcome of litigation,

it is not uncommon for the makers of the branded drug and the generic to settle their litigation

Settlements typically result in a launch date for the generic that ©2013 CFA INSTITUTE

CFA Institute Industry Guides: The Pharmaceutical Industry

falls somewhere in between the assumed launch dates under various hypothetical court judgments

Settlement agreements must be structured so as to ensure that the health care system or consumer is not disadvantaged

in which the branded drug maker pays the generic’s company to hold off on a launch and delay the legitimate entry of its generic,

are unacceptable because they deprive the health care system of potential savings

A pharmaceutical company that embarks on the discovery and development of a new drug thus faces substantial uncertainty about its patent estate

The post-launch life of the active-ingredient patent may be difficult to predict,

and there are no guarantees that the company’s patents will be upheld in court or that key patents will not be circumvented by generics companies

This uncertainty might conceivably deter the drug maker from investing in large-scale clinical trials,

especially if the patent estate appears relatively weak (e

in the case of a molecule that was discovered and patented early),

with the result that the active-ingredient patent might expire before or shortly after launch


a drug maker might refrain from developing drugs for niche indications if there is a high risk that the drugs’ sales might be too low to earn an adequate return on investment before their patents expire

Of course,

decisions against the development of drugs that hold promise from a medical perspective risk being detrimental to patients who might face a dearth of treatment options

Regulatory exclusivities offer intellectual property protection independent of patents in order to incentivize drug firms to invest in drug candidates

A plethora of regulatory exclusivities are available

the following discussion