Adios 2003: A Top Ten List

In Vivo closes out 2003 with a round-up of the top ten stories in the medical industry, including: Medicare drug coverage, the battle in drug-eluting stents, cut-price drugs imported from Canada, the financing climate in medical devices and biotechnology, the triumph of large molecules, Merck's Phase III failures, consolidation in orthopedics, and other hotly-discussed issues.

1) Medicare drug coverage. Thanks to its $400 billion prescription drug benefit, the new Medicare bill dwarfed other stories in importance. Hardly the end of the pharma business, as some had predicted, the final package--thanks in no small part to an enormous lobbying effort--got industry nearly everything it wanted: no price controls, private regional purchasing entities designed to spur competition, and the preservation of existing drug importation laws. And it could provide cover from the pervasive criticism about drug companies' pricing policies, while also satisfying senior citizens who have been clamoring for Federal drug coverage. The devil, however, is in the details. The legislation won't become effective until 2006, and big rule-making issues need to be resolved in order to implement the new law. In short, the legislation's real impact won't be known for a few years.

2) The battle begins in drug-eluting stents. Over the last two years, the biggest story in medical devices was the advent of drug-eluting stents. It's primary beneficiary: Johnson & Johnson . No longer: Boston Scientific Corp. (BSC) arrived on the DES market, with extremely good results from its Taxus trials. Guidant Corp. and Medtronic Inc. are still several years away at least from joining the fray. J&J isn't taking the competition lightly. Its REALITY trial will be the first head-to-head comparison of the J&J and BSC stents. For J&J, the challenge is not to repeat the missteps it made in bare metal stents, when it lost 90% of a business it had virtually owned to fast-followers. In other words, it's time to stop dreaming and start marketing.

3) Cut-price drugs imported from Canada. Long a feature of the European industry, parallel imports exploded into the US in 2003, as un- and under-insured Americans bought more of their drugs, usually over the Internet, from Canadian pharmacies. Now cash-strapped state governments are likewise trying to take advantage of the huge US-Canadian pricing differential by setting up state-sponsored purchasing programs. And they're doing so despite the efforts of the FDA, federal prosecutors, and drug companies. The agency has denounced the state initiatives and could commence legal action next: prosecutors are cracking down on importers, and many drug manufacturers are limiting Canadian supplies. Re-importation indeed could slow if Canada's drug supply shrinks or if Americans consume contaminated or counterfeit products. But this will hardly stem the new states' revolution to get control over drug prices, an issue Big Pharma can't handle simply by cutting back on drug supplies.

4) Device financings grow richer as M&A remains strong. The evidence is largely anecdotal, and the absolute number of dollars invested was actually down, but VCs are showing more interest in medical device deals than at any time since the early 1990s. They see something they really like: faster and more predictable exits, if somewhat smaller than those in biotech. At the same time, after two consecutive years of decline, the total number of acquisitions and the value of those deals both went up substantially last year, reaching figures we haven't seen since 2000. The two are related: notwithstanding a moribund IPO market for device companies, the strong acquisition figures provide a rationale for the new investor confidence in devices. (For more on device M&A, see related articles in this month's IN VIVO and Start-Up.)

5) While the biotech IPO window inches open—then shuts again. After more than two years of brutal markets, investors came back to biotech. Stocks gained dramatically over the first nine months and follow-on offerings were relatively plentiful. IPO candidates lined up to take advantage of the mood shift. Seven companies went public—but their dismal after-market performance virtually closed the window for everyone else.

6) The triumph of large-molecules. More than two decades after the biotech revolution began, Big Pharma has finally seen the large-molecule light. The most spectacular evidence: really, really big payouts for early-stage, large molecule-targeting specialist markets. Among the standouts: Aventis SA 's $125 million up-front payment for a Phase I fusion protein from Regeneron Pharmaceuticals Inc. that targets a pathway no other approved drug targets [See Deal]. And Pfizer Inc. won the bidding—at $1.3 billion--for Esperion Therapeutics Inc. , with its four large molecules, the most advanced of which has finished a single 47 patient Phase II trial [See Deal]. Even AstraZeneca PLC took the plunge with a major antibody development deal with Abgenix Inc. [See Deal]

7) Merck's Phase III failures. Merck & Co. Inc. was famous for the predictability of its Phase III programs. The failure of two of its most important Phase III products—an anti-depressant and its dual PPAR for diabetes—was thus the latest, but perhaps most disheartening, in a series of events that have shaken what was once the industry's most prestigious company: its besting by Pfizer in the all-important statin and Cox-2 markets, its first major layoffs, and public calls for the CEO's resignation. But the Merck problem is also industry's, within the context of its highly innovative set of first-in-class compounds: if even Merck can't be sure of its late-stage opportunities, who can?

8) In boom times, orthopedics pushes consolidation: Orthopedics companies had another great year in 2003, which, given their recent track record, isn't news. But this year, the good times also brought several big deals: Zimmer Holdings Inc. 's acquisition of Centerpulse AG [See Deal], Synthes-Stratec 's purchase of long-time partner Mathys Medical Ltd. [See Deal], and a host of big spine deals—indeed, the buzz around spine sometimes made it seem the only thing anyone was interested in. It wasn't: big news in orthopedics came this year also in minimally invasive procedures. For those who see the glass half full, the deal activity was further proof of orthopedics' strong hand; for those who see it half empty, the deals suggest that companies are beginning to position themselves for tougher times ahead.

9) AAA's blow up: The triumph of drug-eluting stents and the hot market in spin companies obscured the darker side. This year's poster child: abdominal aortic aneurysm (AAA) grafts. Guidant pled to felony complaints about its AAA business before deciding to drop out, and Edwards Lifesciences Corp. announced it was getting out. Medtronic remains as does Cook Group Inc. , Boston Scientific, and WL Gore & Associates Inc. , as well as a handful of start-ups. But this past year suggests both how difficult this segment has been and the risks inherent in trying to get in on a promising technology early. Indeed, virtually all of the leading cardiovascular companies bought an AAA company before the technology was proven, underscoring the risk of making early bets on untested new approaches.

10) Pharma suckerpunched with reformulations. While Pfizer Inc.'s billion-dollar hypertension drug—amlodipine besylate (Norvasc)—was still protected by a patent extension, Dr. Reddy's Laboratories filed an NDA for a derivative salt form of the drug (amlodipine maleate) and then asked the FDA to use Pfizer's data on the besylate salt to gain approval. Reddy's ploy succeeded—so far: Pfizer's appealing and suing the FDA. Nonetheless, the Reddy case shows how generic firms can exploit different but arguably equivalent formulations to cut in on the sales of Big Pharma's largest product franchises. Biotechs may also need to worry about the same 505(b)(2) alternative regulatory route for making determinations of safety and effectiveness—the FDA may use it to approve biogenerics next.