Article

The profits in pharmacogenomics

Can pharmacogenomics translate into profits? Bain research suggests that it can, adding an average of $85m in profit to a drug developed using the new approach.

By Jochen Duelli & Ashish Singh

First published on Μαΐου 17, 2002
min read


Pharmacogenomics has already proven that it can deliver safer and more effective drugs. But can the promising new drug therapy translate into profits when the products work because they target a smaller number of patients? Bain research suggests that it can, adding an average of $85m in profit to a drug developed using the new approach. So far, the pharmaceutical industry's largest players have hedged their bets on pharmacogenomics, or PGx, in part because the profit picture was blurry. Against the promise of drug therapies tailored to smaller groups of patients, the big pharma companies balance the high cost of screening patients using genotyping, a necessary step to relate the genetic characteristics of an individual to the efficacy and safety of a drug. They worry as well that segmenting patients more narrowly will destroy the value of blockbuster drugs already on the market or in development. And they fret about a scenario where they will be forced to develop multiple variations of their pharmaceutical products to fend off niche players. Yet Bain analysis shows that the higher profitability of PGx drugs outweighs lost revenues due to smaller numbers of patients. How? PGx drugs can be developed faster and for less money. And by screening out patients who might react adversely (or not at all), pharma companies can expect premium prices and higher penetration for PGx drugs. Bain arrived at this conclusion after looking at 340 current and future drugs of the top ten pharma companies. The average annual turnover of a conventional drug is $338,000 compared to $285,000 for drug developed using PGx techniques; and peak sales for a conventional drug average $664,000 compared to $560,000 for a PGx drug. But when you run it out 30 years, the typical lifetime for a drug, and include development costs, the net present value of drugs developed under PGx turn out to be about $85m higher on average than that of conventional drugs. By our estimates, pharmacogenomic techniques can cut development times for drugs by one to two years and reduce development costs by up to 20%. The biggest savings come through more precise selection of patients for clinical trials based on genetic profiles, which can reduce the number of participants required to prove statistical significance. What's more, the cost of genotyping is coming down. The precision and effectiveness of PGx therapies also contributes to their profitability. Approximately 35% of patients who use conventional drugs don't respond or worse—they react adversely. Indeed, adverse drug reactions are the fourth-leading cause of death in the United States. Given the proven efficacy of PGx therapies and the lower risk of adverse reactions that results from matching drugs to patients, pharma companies can reasonably expect a price premium of 10% for PGx drugs. Adoption of PGx therapies will be gradual. Primary cancers will be among the first, based on the high cost of treating those diseases and high rates of adverse drug reactions. PGx drugs will also begin to show up where drug response monitoring is difficult or expensive, as it is for Alzheimer's, or where the outcomes of chronic conditions are acute and expensive, such as cardiovascular diseases and obesity. The impact of genetic variability on drug response has already been proven for a number of drugs. At least 30 drugs currently on the market are known to have their therapeutic outcome determined by genetic variations. The PGx drug Herceptin, developed by Genentech, is one such drug. Herceptin is a chemotherapy agent for treatment of metastatic breast cancer. However, it is only effective with patients who have multiple copies of the HER-2/neu gene—about one-quarter of all breast cancer patients. In an early example of the way PGx is likely to foster close cooperation between pharma companies and diagnostics companies, Herceptin is marketed together with a diagnostic produced by Vysis and aimed at identifying those 25% of likely responders. Other pharmacogenomic tests are finding their way into clinical practice. Several leading oncology centers routinely use genotyping or functional assays to tailor medical regimens for their patients. St. Jude Children's Research Hospital in Memphis, TN, for example, uses genotyping or functional analysis of a specific enzyme to calibrate individual dosage of thioguanine in chemotherapy treatment. The strategy chosen by GlaxoSmithKline to test the safety of its anti-HIV drug, Ziagen, demonstrates how pharma companies can use pharmacogenomics cost-effectively. The test is intended to identify the 5% of patients treated by Ziagen who are developing severe, potentially fatal hypersensitivity reactions. The company expects to submit the test for FDA approval within the next three to five years. The conclusion Bain draws is that pharmacogenomics is inevitable—and profitable. Drug companies should embrace it, not fight it. With so much of their business in flux, the big pharma companies need to begin structuring now to take advantage of the technology. The blockbuster model eventually will be supplanted by a "portfolio view" of a given condition or therapeutic area. In the near term PGx may hold potential for new or modified patents on expiring blockbusters, by bringing more targeted and effective versions to market as follow-on therapies. In the longer term PGx offers a strategy for market "laggards" to find new life for failed drug candidates by targeting specific sub-classes of patients. Pharmacogenomics will also redefine industry dynamics. Companies will outsource pharmacogenomics R&D to an emerging enabling industry of PGx drug developers, knowledge providers and technology companies. Bain also sees a convergence of the value chains in the pharmaceutical and diagnostic industries, with close cooperation in R&D, FDA approvals, and sales and marketing of PGx drugs. What remains to be seen is the speed of adoption. Realistically, it may take ten years for the industry to embrace pharmacogenomics, although in specialties like oncology, PGx may penetrate sooner. For pharma companies coming to terms with the limits of scale, however, PGx will be an important source of profits and growth. * Jochen Duelli is a Bain & Company director based in Munich. Ashish Singh is a Bain vice president based in Boston. Both are leaders in Bain's global health care practice. Manager Andreas van de Locht assisted with this article. Source: Contributed to the EIU ebusiness forum by Bain & Co.

Pharmacogenomics has already proven that it can deliver safer and more effective drugs. But can the promising new drug therapy translate into profits when the products work because they target a smaller number of patients? Bain research suggests that it can, adding an average of $85m in profit to a drug developed using the new approach.

So far, the pharmaceutical industry's largest players have hedged their bets on pharmacogenomics, or PGx, in part because the profit picture was blurry. Against the promise of drug therapies tailored to smaller groups of patients, the big pharma companies balance the high cost of screening patients using genotyping, a necessary step to relate the genetic characteristics of an individual to the efficacy and safety of a drug. They worry as well that segmenting patients more narrowly will destroy the value of blockbuster drugs already on the market or in development. And they fret about a scenario where they will be forced to develop multiple variations of their pharmaceutical products to fend off niche players.

Yet Bain analysis shows that the higher profitability of PGx drugs outweighs lost revenues due to smaller numbers of patients. How? PGx drugs can be developed faster and for less money. And by screening out patients who might react adversely (or not at all), pharma companies can expect premium prices and higher penetration for PGx drugs.

Bain arrived at this conclusion after looking at 340 current and future drugs of the top ten pharma companies. The average annual turnover of a conventional drug is $338,000 compared to $285,000 for drug developed using PGx techniques; and peak sales for a conventional drug average $664,000 compared to $560,000 for a PGx drug. But when you run it out 30 years, the typical lifetime for a drug, and include development costs, the net present value of drugs developed under PGx turn out to be about $85m higher on average than that of conventional drugs.

By our estimates, pharmacogenomic techniques can cut development times for drugs by one to two years and reduce development costs by up to 20%. The biggest savings come through more precise selection of patients for clinical trials based on genetic profiles, which can reduce the number of participants required to prove statistical significance. What's more, the cost of genotyping is coming down.

The precision and effectiveness of PGx therapies also contributes to their profitability. Approximately 35% of patients who use conventional drugs don't respond or worse—they react adversely. Indeed, adverse drug reactions are the fourth-leading cause of death in the United States. Given the proven efficacy of PGx therapies and the lower risk of adverse reactions that results from matching drugs to patients, pharma companies can reasonably expect a price premium of 10% for PGx drugs.

Adoption of PGx therapies will be gradual. Primary cancers will be among the first, based on the high cost of treating those diseases and high rates of adverse drug reactions. PGx drugs will also begin to show up where drug response monitoring is difficult or expensive, as it is for Alzheimer's, or where the outcomes of chronic conditions are acute and expensive, such as cardiovascular diseases and obesity.

The impact of genetic variability on drug response has already been proven for a number of drugs. At least 30 drugs currently on the market are known to have their therapeutic outcome determined by genetic variations.

The PGx drug Herceptin, developed by Genentech, is one such drug. Herceptin is a chemotherapy agent for treatment of metastatic breast cancer. However, it is only effective with patients who have multiple copies of the HER-2/neu gene—about one-quarter of all breast cancer patients. In an early example of the way PGx is likely to foster close cooperation between pharma companies and diagnostics companies, Herceptin is marketed together with a diagnostic produced by Vysis and aimed at identifying those 25% of likely responders.

Other pharmacogenomic tests are finding their way into clinical practice. Several leading oncology centers routinely use genotyping or functional assays to tailor medical regimens for their patients. St. Jude Children's Research Hospital in Memphis, TN, for example, uses genotyping or functional analysis of a specific enzyme to calibrate individual dosage of thioguanine in chemotherapy treatment.

The strategy chosen by GlaxoSmithKline to test the safety of its anti-HIV drug, Ziagen, demonstrates how pharma companies can use pharmacogenomics cost-effectively. The test is intended to identify the 5% of patients treated by Ziagen who are developing severe, potentially fatal hypersensitivity reactions. The company expects to submit the test for FDA approval within the next three to five years.

The conclusion Bain draws is that pharmacogenomics is inevitable—and profitable. Drug companies should embrace it, not fight it. With so much of their business in flux, the big pharma companies need to begin structuring now to take advantage of the technology. The blockbuster model eventually will be supplanted by a "portfolio view" of a given condition or therapeutic area. In the near term PGx may hold potential for new or modified patents on expiring blockbusters, by bringing more targeted and effective versions to market as follow-on therapies. In the longer term PGx offers a strategy for market "laggards" to find new life for failed drug candidates by targeting specific sub-classes of patients.

Pharmacogenomics will also redefine industry dynamics. Companies will outsource pharmacogenomics R&D to an emerging enabling industry of PGx drug developers, knowledge providers and technology companies. Bain also sees a convergence of the value chains in the pharmaceutical and diagnostic industries, with close cooperation in R&D, FDA approvals, and sales and marketing of PGx drugs.

What remains to be seen is the speed of adoption. Realistically, it may take ten years for the industry to embrace pharmacogenomics, although in specialties like oncology, PGx may penetrate sooner. For pharma companies coming to terms with the limits of scale, however, PGx will be an important source of profits and growth.

* Jochen Duelli is a Bain & Company director based in Munich. Ashish Singh is a Bain vice president based in Boston. Both are leaders in Bain's global health care practice. Manager Andreas van de Locht assisted with this article.

Source: Contributed to the EIU ebusiness forum by Bain & Co.