Evolution of the blockbuster model:  Q&A with John Rhodes of Deloitte Consulting	August 2007

The traditional blockbuster may still have a role in the pharmaceutical industry’s future, but the definition and the role of blockbusters may evolve significantly, according to John Rhodes of Deloitte Consulting. Mr. Rhodes spoke with Med Ad News about the future of the blockbuster, and how industry may need to change development and marketing strategies to keep up with a shifting environment.

by Joshua Slatko

JS: What is the future of the traditional blockbuster drug model?

JOHN RHODES: I myself don’t necessarily believe in the death of the blockbuster. You’ll see an evolution of the blockbuster. Part of that is, what is a blockbuster and how do you define it? Historically, a blockbuster was a billion-dollar product that was vastly consumed in the primary-care market … that was one definition. When people talk about the death of the blockbuster, some of the reason is that a lot of the easier-to-cure diseases that had wide-place application in the marketplace have already been attacked to some degree. So that is true, and it’s true that the way pharmaceutical companies will need to sell, either in the primary-care space or to physicians in the future, is changing.

You’re not getting time with physicians to sell these kinds of drugs on a broad basis. A lot of the selling is direct-to-consumer, through a more intelligent consumer understanding better what they think they want, and less push coming through the primary-care market. But also, the easier to treat diseases are evolving to, how do you treat them better? While everyone thinks there’s been a great treatment for diabetes, and there has, there’s another generation of diabetes drugs that are coming forth. If that actually happens, I’m not sure the death of the blockbuster is absolutely on the doorstep, but it’s an evolution. The evolution is, those kinds of products may still be widely used and generate fairly substantial sales, but how they will be marketed could be different. Their pricing could be different too, given changing reimbursement situations in the U.S. and abroad. So the blockbuster evolution is in terms of what’s next for the generation of blockbuster products that were out there.

For example, can I get a better treatment for my cholesterol? That’s a wide application, of course, but how it gets to the consumer will be different. Also, the natural evolution is there’s much more evidence that better or premium or longer pricing can come through some of the harder-to-treat diseases. So, for example, if you look at the rheumatoid arthritis market now, a number of treatments exist that are of a biologic background. Some of those drugs sell more than a billion dollars. Is that a blockbuster? Absolutely, it’s a blockbuster not only in revenue generation but also in terms of the medical advancement. But you and I don’t pick up a bottle and take it twice a day. It could be a doctor-administered injectable, it could be a self-administered injectable. That’s an evolution.

You’ll continue to see a mix of large contributors of revenue to pharmaceutical companies that may be concentrated in a product or two products, but it’s how the product gets to the consumer that’ll be different. In some cases, getting to the consumer definitely segments the revenue potential. If it’s through a doctor or through some other means, sometimes it does add up slower in terms of your market potential. That’s the biggest change I see. When people talk about biotech drugs, personalized medicine, some of the other aspects of treating really tough-to-treat diseases, that’s all very true, but it does not mean that they don’t have potential to be a so-called blockbuster. And a lot of times you see a contrarian view to that. When people say death of a blockbuster, right away they focus on how pharmaceutical companies will have to market differently. I agree with that, but it doesn’t mean that blockbusters won’t be prevalent, or a reasonable contributor to a company’s growth.

JS: It sounds like the two paths to blockbusters that you are suggesting are advances on drugs that are available already for the broader market disorders like diabetes, and attacking some of these tougher-to-treat diseases, and thus being able to ask a more premium price, so there is a little less volume, but the product still generates blockbuster revenue.

JOHN RHODES: That’s basically what I was getting at. The other change is, some companies had their entire portfolio pegged to the so-called blockbuster or small molecule.

JS: What of the concern that’s out there that many of the large companies have put too many of their eggs in one basket, have a large majority of their revenue stream dependent on two or three compounds, and are focusing on the same sorts of compounds in their pipeline?

JOHN RHODES: Some of that is, this wasn’t as well thought out in the go-go days. The big products came along, and companies kind of ended up there. It wasn’t a conscious effort to pursue blockbusters. As they got into some of those disease treatments, it was a whole new world, and they ended up in that world, and now that they’re there, they have to decide what comes next. Well, what’s next will be, by necessity, more of a mix of, say, one big drug and five or six smaller ones. As you see companies moving into more specialty therapeutic areas, the revenue is less dependent on one single product and more dependent on five or six. There is a shift from, ‘We’re only a blockbuster company,’ to having a blockbuster and six or seven or eight smaller products that make up for the other blockbuster a company used to have. That’s part of the evolution. The blockbuster won’t go away completely but companies won’t be totally dependent upon them either.

JS: Research and development productivity seems to be dropping over the last couple of years. The bigger companies have been spending more money and getting fewer drugs approved. What do you feel is the issue with big company R&D productivity, and how can companies deal with it?

JOHN RHODES: That’s probably the holy grail for companies now. The research productivity, if you just take a pure numbers approach, may have stalled because companies are looking for something harder to find, and once they find it, it’s harder to get it approved. That combination has made the cost of development go up substantially, just because we’re in a transition mode of how research is done and what the requirements are for approval. If I look at the criticism that is levied against FDA when something happens, it could lead me to believe that this is a more cautious environment, but the types of drugs that are being sought for approval are harder to understand. In terms of the submissions, it would be fascinating to see how much more voluminous in terms of the types of data that goes to the FDA is now for a new Alzheimer’s drug or a new cancer drug than it would have been years ago. Those are all cost drivers. The other factor that’s driving cost is an acknowledged shortage of resources in the scientific community. You have fewer available talents, and that’s only going to drive salaries up, which is another cost component.

JS: So it sounds like productivity hasn’t changed, but the environment has changed.

JOHN RHODES: The environment is much different, yes.

JS: So the drop in apparent productivity is not necessarily a sign that the sky is falling just because companies are having to spend more money to bring fewer drugs to market.

JOHN RHODES: Let me draw an analogy. This is not unlike what drives the cost of a gallon of gas that we put in an auto. There are a number of natural components that go into that price. One is refining capability. They say the U.S. capacity for refining oil is below where it needs to be. The parallel there to the pharmaceutical industry is the researchers. Pharmaceutical researchers are productive; we just don’t have enough of the right ones. And then from the other end, the discovery, it’s a lot harder to find oil now than it was when it shot out of the ground in Pennsylvania years ago. And finding the cure to these diseases is more difficult when you’re trying to solve something that’s harder to cure, or cure it for the first time. Then there are all the other variables in between that drive marketplace demand, like crisis in Nigeria or other oil-producing countries. In the pharmaceutical and biotech industry, the parallel is regulatory cost and the shifting popularity of the industry. Both industries have a high cost of compliance, whether with environmental laws or safety. People wouldn’t necessarily say that oil exploration has become less productive.

JS: Many of the large pharmaceutical companies seem to be either acquiring smaller biotechs, smaller specialty companies that have more targeted products, or forming partnerships with them. Is that because the larger companies are so much more focused on the blockbuster products that their own internal R&D just isn’t oriented towards smaller-market products?

JOHN RHODES: In some cases the companies wouldn’t have necessarily had a biotech division or a biotech history of scientists with that kind of training. Over the years, large pharma has tried to acquire talent, either by acquiring companies or partnering with companies to gain access to biologists. Clearly there’s been a transformation of the talent that you need to discover the products of the future. And so some of those acquisitions and partnerships have been pursued in order to access the talent, and some has been to access what’s been discovered and develop it into a potential product. Also, companies have had to either build or acquire the skill sets for the manufacturing end, once you have one of those [biotech] products.

JS: What other evolutions do you foresee arising out of this change in model for pharmaceutical companies?

JOHN RHODES: Some of the study and research we’ve done suggests that the evolution will require the pharma and biotech industry to work differently in the future with their regulator and their consumers. So as you see an evolution in the products, you’ve also got to evolve how you work with your customers and your regulator. If a company has these new products or this new way of discovery, what is that going to require in the way of going to market? And if companies aren’t going direct to the physicians through detailing, and that’s supposedly a dead model, it means they must find new ways to get to the consumer. That could be through better explanation of the benefits of your drugs, or broader disease management applications. That goes hand-in-hand with the regulator.

JS: Could you go into that a little more, about it being hand-in-hand with communicating with the regulator?

JOHN RHODES: Companies are better at stopping drug development on products that may not ever get to market earlier. That’s the internal side of it, but it seems like we go through this whole clinical trial process, and then throw it over the fence and hope that FDA approves it. It seems like there must be a better way to talk about what the problems were, not just in the form of an approvable letter, but a broader cost-benefit analysis of the drug, so certain potential therapies aren’t abandoned as a result. Interaction with the regulator could only serve to enhance that. That’s a touchy subject, because your regulator is your regulator. They have to walk a fine line between open discussion about approvals versus regulating, but there’s going to be a natural need for companies and regulators to come closer together.