Reviewing 2005: The Top Biopharma Stories

Among our stop stories from 2005: Safety and the FDA: decision by indecision; ahe Plan B kerfuffle; acquisition as the new exit strategy for private biotechs; TLRs-the hottest drug target; pricing revives vaccines; Pfizer's challenges and Genentech's triumphs. Among the predictions for the big stories of 2006: Medicare's impact, the oncology bubble, biogenerics and genomics' revival--via diagnostics.

The regulators are only two of the forces remaking the hierarchy of the pharmaceutical industry. The winners seem to be the creative iconoclasts.

By Ellen Licking and Roger Longman

The top stories of 2005 were chosen because, we believe, their implications go far beyond the past year: they set, or reflect, the industry's agenda for the next several years. We therefore dispense with stories that seemed company specific or which didn't unfold this year, but which will have a big impact in the next several years, like the Medicare Modernization Act.

And then there were the on-going industry trends—important but hardly specific to 2005.

For example: the increasing importance of hedge funds to the biopharma industry. Short-term, event-driven health-care specialists now control capital flows throughout US biotech, both on the public and private sides. Today's IPOs require the participation of hedge-fund managers, who generally won't play unless they pay venture prices for these new issues (and they often require the VCs to buy in the IPO as well). Thus the majority of biopharma IPOs now price well below their offering range which means that step-ups in value from private valuations to IPOs have been falling, cutting VC returns and changing the kinds of investments they're willing to make.

A 2005 story? Sure—but it was probably nearly as true last year.

Similarly, the big changes at Millennium Pharmaceuticals Inc. and Human Genome Sciences Inc. are emblematic of the frailty of the genomics dream—and more importantly the continuing primacy of products over technology. Millennium gave up the second leg of its business—the expensively acquired but underperforming cardiovascular operation--in order to focus on its oncology unit. At that point, the visionary behind Millennium's founding and growth, Mark Levin, stepped down as chairman and CEO, handing the CEO reins to a senior oncology executive from Novartis AG , Deborah Dunsire. The company continues to pare back the research group around which Levin had once assumed he would create a top 10 pharmaceutical company. It's still possible—but to survive Millennium is getting smaller, not larger.

HGS, Millennium's former arch-rival, even more completely ended its direct participation in early-stage research. Its visionary leader, William Haseltine, had left the company the previous year. But in 2005 its new CEO, Thomas Watkins, entirely pruned away the company's early-stage research, announcing its attention to spin it off into a new company, CoGenesys—run by HGS co-founder and former CSO Craig Rosen, PhD, and HGS' former CFO Steven Mayer. HGS will focus completely on its late-stage projects.

But these stories merely represent the last bit of air escaping the genomics bubble. Nearly every biotech company is now firmly focused on products, not the technology that creates them.

So—important, yes. But underneath, they're really well-told stories from previous years. Instead, what follows are our picks for the stories defined in 2005 and likely to have continuing effects for several years to come.

Safety and the FDA: decision by indecision

Equity analysts "are in the pattern recognition business," UBS Securities' Carl Seiden told attendees at the December FDA/CMS Summit for BioPharma Executives, sponsored by Windhover's RPM Report. "And a pattern I recognize is that everybody inside the FDA says nothing's changed, and everybody outside the agency says it has gotten worse."

Indeed. Safety worries squelched FDA decision-making and thus poisoned industry pipelines in 2005. The agency approved just 20 new drugs and biologicals, including two re-tread biologicals—basically generics—that it approved twice, each for two different sponsors. Deleting these, FDA approved the fewest NMEs since 1983. Meanwhile, it started up Drug Watch, an alert service in which regulators pass on to the public "emerging drug safety" information, without taking any particular position on a product's importance or validity. Industry critics saw it as a way to advertise the agency's heightened concern for public health--without making any hard decisions. (By the end of the year, agency officials were already backing away from the idea).

Moreover, safety seemed to trump efficacy in a number of instances, as the FDA either rejected drugs out of hand or asked for more information and trial data. Take Bristol-Myers Squibb Co. 's first-in-class dual PPAR, called muraglitazar (Pargluva). It is one of the first drugs developed to treat the various risk factors that make up metabolic syndrome. The drug sailed through the advisory committee, but was stopped dead in its tracks when three well-known Cleveland Clinic Foundation doctors published a study detailing the drug's potential cardiovascular risks. Days later, the agency asked for studies that would take years—virtually killing the project. Noted one Merck & Co. Inc. executive: the agency didn't feel any need to approve the drug because they "already had the single PPARs available." The drug, in short, wasn't medically important enough to offset its potential safety risks. Same with Pfizer Inc. 's lasofoxifene (Oporia) and Novartis AG 's everolimus (Certican). With other in-class products already on the market, why take more risks for what the FDA saw as merely incremental benefits? Pfizer got a non-approvable letter from the agency; Novartis was sent back by the advisory committee to do more studies.

What did the agency approve? One of the most important drugs, at least to the biotech industry, was NitroMed Inc. 's BiDil, a pill combining two extremely safe and well-studied generics, isosorbide dinitrate and hydralazine hydrochloride. Little room for unpleasant safety surprises there.

Moreover, a healthy chunk of the other approvals came with sometimes extensive risk-management packages, including Celgene Corp. 's lenalidomide (Revlimid) and the two Amylin Pharmaceuticals Inc. drugs, exenatide (Byetta) and pramlintide (Symlin). If Tysabri, from Elan Corp. PLC and Biogen Idec Inc. , gets back on the market—which by year-end looked likely for 2006—it too will come with an elaborate risk-management program. Already companies are learning to pre-emptively suggest risk-management programs to speed the approval process and circumvent FDA's indecision hurdles. (See "Building a Business in Drug Safety," The RPM Report, January 2006, (Also see "Building a Business in Drug Safety" - Pink Sheet, 1 Jan, 2006.).) And it's not likely that FDA is going to change any time soon--at least not before two safety policy studies are published and debated: one commissioned by FDA from the Institute of Medicine due in June; and one from the Government Accountability Office requested by Congress and expected early in 2006.

The Plan B kerfuffle

Drug safety wasn't the only issue thrusting FDA into the headlines in 2005. In August, the FDA refused to approve levonorgestrel (Plan B), an emergency contraceptive, for over-the-counter (OTC) use, despite recommendations by agency scientists and an FDA advisory panel to the contrary. Lester Crawford, FDA's Commissioner at the time, said the agency needs to think more about its legal authority to maintain the drug as prescription-only for younger consumers. But critics were quick to denounce the decision as politically motivated. Susan Wood, head of the FDA's women's health office, quit in protest. A media uproar ensued. Less than a month after announcing the FDA's decision--and just two months after his confirmation to the post—Crawford abruptly resigned.

But while Plan B's economic importance is relatively small—just $25 million annually for its maker, Barr Pharmaceuticals Inc. --the fall-out from the kerfuffle could be significant. Experts worry that the same political forces that torpedoed Plan B could complicate the launch of a much bigger commercial product: Merck's HPV vaccine Gardasil. More worrisome is the potential threat to the 2007 renewal of the Prescription Drug User Fee Act (PDUFA), which has meant faster and more predictable reviews of new drugs since its creation in 1992. Democrats will be tempted to hold up PDUFA's renewal until a final decision on Plan B is made. Equally likely is the prospect that the FDA will remain without a confirmed leader until the hullabaloo over Plan B dissipates. Let's hope acting-commissioner Andrew von Eschenbach, MD has a Plan C for Plan B.

Acquisition is the new exit strategy

Private biotechs chose acquisition over IPO as their exit route more often in 2005 than in 2004—and are likely to continue to do so. The public markets remained unforgiving and large and mid-sized drug companies saw acquisition as a relatively quick and inexpensive fix to pipeline troubles, thanks in part to attractive accounting rules. Management and VCs were only too happy to oblige (See Exhibits 2 and 3).

Paying for tolls: The year's hottest drug target

For Big Pharma in-licensers, no class of molecule was more in vogue in 2005 than the toll-like receptor (TLR) family, a group of immune modulators that precisely regulate the body's inflammatory response. There are now more than 20 TLR drugs in development, including 15 in clinical trials for diseases ranging from sepsis to asthma to cancer. And pharmaceutical companies proved in 2005 they were willing to pony up big money to get access to them—Pfizer and Novartis most generously. Since many companies are developing technologies against the same target, sorting out who owns the IP could be the challenge in 2006. Most believe that since TLRs are in the public domain, composition-of-matter and methods-of-use claims will ultimately determine the IP.

Drug companies weren't just gobbling up rights to TLRs in 2005. They also displayed a huge appetite for other unique drug targets, including cell cycle inhibitors, aurora kinases, and RNAi. Here's a list of some of the hot-target deals of 2005 (See Exhibit 4).

Vaccines—New pricing power enlivens a ho-hum business

Thanks to avian flu, vaccine makers are garnering big headlines in the mainstream press. But it's the possibility of big money—premium pricing in line with first-in-class drugs—that is generating pharma's renewed interest in vaccines. In 2005, both GlaxoSmithKline PLC and Novartis stepped up their vaccine-making abilities with big acquisitions. Back in April, GSK agreed to purchase Corixa Corp. for $400 million to get access to the biotech's adjuvant, a key component in GSK's vaccines against human papillomavirus (HPV) and herpes simplex virus (HSV) [#W200510091]. In October, Novartis agreed to pay a whopping $5.1 billion for the troubled vaccine manufacturer Chiron Corp. , whose pipeline includes novel vaccines for meningitis, hepatitis C (HCV), and HIV. [#W200510159] Just two months later, Novartis made an all-cash bid for Swiss vaccine maker Berna Biotech AG [#W200510209], possibly trumping the $451 million equity-based offer Crucell NV made just a week earlier. [#W200510202]

Why this deal-making flurry? Novel vaccines command high dollar values, and unlike other therapeutics, government power over their introductory pricing is minimal. Instead, the Centers for Disease Control & Prevention negotiates a discounted price—roughly 10% below the private sector cost—which states then use to purchase vaccines under the Vaccines for Children Program (see Exhibit 5). That's good news for Merck, which is expected to receive approval for Gardasil, a vaccine against HPV, sometime in 2006. Based on Wall Street's projections, sales of an HPV vaccine could reach $4 billion annually—that's half of the total $8 billion spent annually on vaccines worldwide right now. (See "The HPV Vaccine Race," IN VIVO, November 2005 (Also see "The HPV Vaccine Race" - In Vivo, 1 Nov, 2005.).)

I'd rather be sailing: Europe's mid-sized dilemma

The crisis affecting Europe's mid-sized companies has grown acute.

Take Altana AG . Only two years ago, it was a star in Europe's firmament, based largely on the promise of its asthma drug ciclesonide (Alvesco) and its COPD candidate roflumilast (Daxas). But Alvesco remains unapproved in the US; Phase III results for Daxas were unconvincing. Meanwhile, the company's basic profit engine, pantoprazole (Protonix), faces competition from generic omeprazole. Now the company itself, or at least the drug division, seems to be in play. Altana denies the sale rumors; in any case its shareholding structure--a majority is held by the founder's daughter--will complicate any acquisition, as is true for many mid-sized Europeans. (See "Will Pharma Split Spur Altana Into Action?" IN VIVO, October 2005 (Also see "Will Pharma Split Spur Altana Into Action?" - In Vivo, 1 Oct, 2005.).)

But while Altana denies the sale rumors, Serono SA confirmed its own intention to sell. Ernesto Bertarelli, the company's sailing-champion CEO and primary shareholder, put the company on the auction block when growing its share price any further got difficult. Serono is essentially a one-product company: its interferon beta-1a multiple sclerosis therapy, Rebif, accounted for half of its revenues and virtually all of its growth in 2005. Its number two drug, the fertility hormone follitropin (Gonal-F) is actually declining in sales. Beyond that, it doesn't have much in the pipeline. Its cancer program, almost entirely in-licensed, was hit with a huge blow when Phase III melanoma immunotherapeutic Canvaxin failed to show any meaningful extension of patients' lives. And the company's marketing practices have gotten it into $704 million worth of trouble—that's the amount it paid in fines in November for illegally promoting sales of the growth hormone somatropin (Serostim).

Serono's exit will be a big blow to European biotech investors. The largest and one of the most liquid of Europe's biotechs, its acquisition will mean less choice for European investors. Likewise, investors may lose other comparators—SkyePharma PLC put itself on the block after it received an unsolicited bid from fellow British drug-delivery player Innovata PLC and Cambridge Antibody Technology Group PLC is also rumored to be for sale.

The story isn't much happier at other European bellwethers. Schering AG is streamlining fast through its "focus" program. But the program masks the fact that the company, like Serono, badly needs further growth sources. Its own MS interferon product, also its largest single drug, faces increasing competition including, potentially from generics. Meanwhile, Schering's ramp-up in oncology—more a re-organization than an in-licensing splurge--has been hit by development setbacks. Still, takeover rumors during 2005—which mentioned Novartis--didn't gain much momentum; Schering's management insists it will remain independent.

All is not lost for Europe's mid-sized firms. Ipsen 's IPO on Euronext, valuing the company at about €2 billion ($2.37 billion), showed that capital is available for mid-sized European companies with pipelines and overseas ambitions—although patience is needed. [See Deal] Moreover, some firms were able to capitalize on the problems of their mid-sized cousins. Solvay SA bought troubled Fournier Pharma for a reasonable price, boosting its pharma margins in the process. [See Deal]

(See "Mid-Sized European M&A Fills Earnings Gap--And More?" IN VIVO, April 2005 (Also see "Mid-Sized European M&A Fills Earnings Gap--And More?" - In Vivo, 1 Apr, 2005.).)

Pfizer pfizzles

All Big Pharmas have been up and down on the wheel of fortune. All have had their disasters and near-disasters--but the impact of Pfizer's annus terribilis has gone further than any other to turn even the most vocal supporters of Big Pharma's investment thesis into agnostics.

Up until this year, analysts continued to recommend Pfizer's underperforming stock. Pfizer, the richest and largest drug company, epitomized the argument underpinning all of Big Pharma—enormous cash flows and global development and marketing infrastructures will power the industry through its current challenges.

But for all its breadth, Pfizer is dependent on just a few structural pillars. Thus the rofecoxib (Vioxx) disease—the Cox-2 problems and a super-safety conscious FDA--hit Pfizer harder than many people realized it could. Sales of its top Cox-2 inhibitor, celecoxib (Celebrex), plummeted 45% in the first nine months of the year. FDA didn't approve a single Pfizer drug, rejecting applications for its remaining Cox-2, parecoxib (Dynastat), and its osteoporosis candidate lasofoxifene (Oporia). And while inhaled insulin (Exubera) breezed through the advisory committee thanks in part to a brilliant presentation by Pfizer research executives proposing a decades-long safety follow-up program, the FDA still hasn't approved the drug.

These problems dramatically increased Pfizer's short- and medium-term dependence on existing products—in particular atorvastatin (Lipitor), which represents more than a third of its human health revenues and probably more than 50% of its profits. But that drug's US sales growth, heretofore apparently unstoppable, unexpectedly ground to a virtual halt in the third-quarter. With Lipitor sales increasing just 1%, Pfizer announced that it was cutting its earnings forecast for the year and withdrawing guidance for the next two.

The uncertainty was troubling—how could Pfizer not know its most important product was going to hit a major speed bump? The uncertainty raised new questions, bubbling about for several years, about Pfizer's financial reporting. Like many drug companies, Pfizer has never been a transparent business to many investors. But investors gave it a free pass because of its dominant marketing, sales, and financial positions, not to mention its huge R&D budget. But now they were looking at its reporting methods—in particular its insistence that investors focus not on net income but "adjusted diluted earnings".

In 1999, Pfizer's market cap, combined with its future acquisitions Warner-Lambert and Pharmacia, would have been worth, on a pro forma basis, $220 billion. A year ago, it was still worth more than $200 billion. Today, it's around $170 billion—up from about $150 billion before it won a nagging patent case filed against Lipitor.

The point isn't that Pfizer is having problems—but that even a company of Pfizer's size and power can be badly hurt by the same problems hurting nearly every other drug company. Almost all of them depend on a few products; R&D productivity is miserable throughout Big Pharma. And nearly all are opaque to Wall Street. The questions threatening the investment model in Big Pharma are whether the opacity masks even more fundamental challenges—and whether the people who run the companies recognize them.

Conflicts of interest: Stories that make you say, "Hmmm"

Conflicts of interest stories implicating virtually every player in the biopharma industry—from drug companies to doctors to investors—were front page news in 2005. As litigants pressed their cases linking the Cox-2 painkiller Vioxx to either personal injury or death, charges of data manipulation and scientific misconduct continue to dog Merck, the drug's maker. In early December, the New England Journal of Medicine reported that Merck undercounted the number of heart attacks suffered by patients in a clinical trial of Vioxx, downplaying the drug's potential cardiovascular risks.

A few days later, Eric Topol, MD, a leading cardiologist at the Cleveland Clinic Foundation who, as a witness in one of the lawsuits, criticized Merck's promotion of Vioxx, lost his title as chief academic officer at that institution's medical college. Clinic officials said that Topol lost his title due to an administrative restructuring, but Topol—himself the subject of various conflict of interest stories--claims otherwise. Indeed, according to an article in The Wall Street Journal, Topol had openly disagreed with his boss, Delos "Toby" Cosgrove, MD, CEO of the Cleveland Clinic, over Cosgrove's ties to device company AtriCure Inc. Since 2001, the Cleveland Clinic has used AtriCure's device to correct atrial fibrillation in more than 1200 patients who were unaware of Cosgrove's financial involvement with the company.

Adding fat to the fire, the Journal reported in mid-December that many articles in scientific journals supposedly authored by pre-eminent researchers are actually the products of ghostwriters who are on drug company payrolls.

But ethical conflicts weren't just the purview of the health care companies. In August, the Seattle Times documented 26 cases where doctors leaked confidential information about drug studies to hedge fund managers prior to the studies' publications. A congressional investigation of potential insider trading is now ongoing.

The spreading circle of blame shouldn't comfort drug executives. It ensnares companies more deeply into a web of negative public opinion, making the industry a more popular target for Congress federal prosecutors, and state attorneys general. The industry's image, in short, will end up as a balance sheet item—whether as liability or asset will depend on how proactively the industry attacks the conflict-of-interest problem.

Genentech: Winning year for the industry iconoclast

This year one company stands apart--and above--its competition: Genentech Inc. Its stock price is near its all-time high; its P/E ratio, at 86.60, is three times that of Amgen Inc. and more than twice Gilead Sciences Inc. 's. First Call/ Thomson Financial predicts the company will grow 31.5% over the next five years. With a market cap of nearly $98 billion, Genentech is more valuable than several much larger pharma companies, including Schering-Plough Corp. , Bristol, Merck, and Eli Lilly & Co. All this despite the fact that because of licensing agreements with Roche, Genentech only has one market: North America.

What makes Genentech so special? Reason one: the company's remarkable R&D culture. A belief in research's intrinsic value comes straight from CEO Arthur Levinson, who is a trained scientist and makes a point of attending company science seminars regularly. Reason two: the company has a knack for identifying key targets in oncology and immunology and mining them to develop multiple products for various indications. Not only do they focus hard on the target biology—not target number--but they also forsake first-in-class status and accelerated approvals in order to power their studies so improvements are statistically clear.

Consider their work on VEGF-A, a growth factor that promotes angiogenesis, or blood vessel growth, and is a key factor in tumor metastasis. The company's first anti-angiogenesis compound, bevacizumab (Avastin), was approved in early 2004 for metastatic colon cancer. Nearly two years later, the company expects to win FDA approval for Avastin in three additional cancer indications, and Phase III trials in seven other types of cancer are on-going. In addition, Genentech recently filed for FDA approval of the same growth factor inhibitor, developed under the name Lucentis, for age related macular degeneration. When Genentech's surprisingly powerful data came out it tanked the stock price of competitor Eyetech Pharmaceuticals Inc. , which makes pegaptanib sodium injection (Macugen), and may have spurred Eyetech to accept OSI Pharmaceuticals Inc. 's acquisition offer. [#W200510155]

The Stories to Watch in 2006

The Evolution of Medicare

The Medicare Modernization Act certainly made news in 2005, particularly the unexpectedly strong participation by managed care companies—54 of them—who proposed stand-alone drug insurance for Medicare beneficiaries starting in 2006. But it didn't make our top stories of 2005 because, in fact, it had little effect on the drug industry. Instead, its impact in 2006 and, particularly, 2007, will be huge—whether it works or not. Here's why: if it succeeds, MMA could lead to significant profit increases, at least in the first few years. If it doesn't, MMA will be the sword that slices prices.

First, the good news. Some 6.5 million Medicaid beneficiaries—reimbursed at deeply discounted levels—will now be eligible for Medicare drug plans, with drug prices generally higher than they are under Medicaid. Second, millions of Medicare beneficiaries who haven't had drug insurance will now have it, boosting total unit volume.

But insurers can make money on MMA, without crushing industry pricing, only if enough already covered seniors sign up, spreading out the total insurance risk. If they don't, then plans will fail or merge, leaving fewer, larger plans who will not only need to cut supplier costs but, given the market share they will wield, have the means to do so. Worse, if enough seniors don't sign up, and the Medicare program flops, Congress could look into price controls as an alternative—something specifically banned by the MMA legislation. So for 2006 we'll be watching the voluntary enrollment figures (so far on the anemic side) and managed care consolidation, two key indicators for whether MMA will be a gift to the industry or its worst nightmare.

One other likely Medicare-related story in the next few years: a step-up in federal prosecutions, the kind that result in huge fines (like Serono's $704 million Serostim settlement). Given the breadth of the new federal program, any frauds that involve managed care will also involve a false claim on the US government. Whistleblowers, incentivized by sharing in any settlements, will certainly help highlight cases that escape prosecutors' attention. (See "The Perils of Part D," The RPM Report, January 2006 (Also see "The Perils of Part D" - Pink Sheet, 1 Jan, 2006.).)

Biogenerics

We've said it before, but this time we mean it. This is the year biogeneric drugs will finally reach the marketplace, causing a major economic shake-up in the biologics market.

Payors want them. A recent report by pharmacy benefit manager Medco Health Solutions Inc. projects that biotechnology drug costs are growing twice as fast as traditional prescription drugs, and could reach $69 billion next year. And, the technology used to create and characterize biogenerics has continued to develop, so that a few companies are poised to seek regulatory approval for their biosimilar products—Momenta Pharmaceuticals Inc. , in conjunction with Novartis AG's generics unit Sandoz , for example, recently filed an ANDA for M-Enoxaparin, a generic version of Lovenox.

More important, politicians on both sides of the pond are finally evidencing the political will necessary to bring biogenerics to market. At a workshop at year's end, the European Medicines Agency (EMEA) reiterated that guidelines on the development and approval of biosimilars will be finalized before mid-2006. (See "Biosimilars: The Time Has Come," in this issue, (Also see "Biosimilars: The Time Has Come" - In Vivo, 1 Jan, 2006.) and "Biogenerics Are Happening: Slowly, Product-by-Product," The RPM Report, January 2006 (Also see "Biogenerics Are Happening: Slowly, Product-By-Product" - Pink Sheet, 1 Jan, 2006.).) There's also a growing desire in the US to make biogenerics a reality. Senator Orrin Hatch, a Utah Republican, is drafting legislation, which could be introduced as early as next month, creating rules for FDA to approve biogenerics after patents on the original proteins had expired. It would be the next step in the evolution of the Hatch-Waxman Act of 1984, which simplified the path to market for small molecule generics.

Genomics—Finally. But Not as Therapeutics

It sounds heretical, but you can make money in genomics. There's a caveat. The path to profitability will not lead to a fully integrated biopharmaceutical company. No, it's diagnostic companies, such as Genomic Health Inc. , Monogram Biosciences Inc. (formerly ViroLogic Inc.), and Ciphergen Biosystems Inc. that are likely to be the real genomic money winners.

These companies are developing genomic tests to diagnose disorders more precisely or to identify patients likely to respond to a specific drug—often in conjunction with pharmaceutical partners. A search of Windhover's Strategic Intelligence Systems showed that genomic diagnostic companies did more than 60 partnering deals last year. Expect that deal-making flurry to continue in 2006 since the FDA continues to encourage the use of pharmacogenomic data in the drug development process. Investors are taking notice: Genomic Health's IPO was relatively successful [See Deal] and other venture start-ups are waiting in the wings, such as XDx Inc. and CardioDx Inc.

An Oncology Bubble?

Celgene's announcement at the end of the year that it would price Revlimid at the annual equivalent of $50,000 highlighted a huge potential liability for the industry: its dependence on the strange economics of a single therapeutic category. Cancer is the most popular area of drug development because trials and marketing are relatively inexpensive while generous pricing, thanks to huge appetites for new products, creates large markets.

But is the market's appetite insatiable? Most of the new therapies are providing merely incremental improvements. Indeed, in order to develop them most cost-effectively, companies try for accelerated approvals, studying them in small populations of refractory patients, virtually assuring that their trials will end up showing only minor, although approvable, effects. (The FDA's oncology division head has already shown considerable irritation over the issue, apparently blocking some approvals, like vincristine sulfate liposomes (Marqibo).) Doctors will, as they always have, prescribe the new drugs off-label—a hugely important source of revenues for most oncology companies--but managed care will eventually balk and force larger co-pays onto beneficiaries: cancer therapeutics are becoming a huge part of their pharmacy budgets. As they crack down on what they're willing to pay, patients will make different choices—and the market will become less attractive.

We don't expect much of an effect in 2006, but particularly as Medicare regulations evolve, it would be wise to look for cracks in this foundation stone of the biopharma business.

The Most Innovative Dealmaker of 2005

Novartis was certainly active in 2005—it made big deals, both acquisitions and alliances, and plenty of each. But Novartis wins the dealmaking innovation award because its activities were stamped by such a singular strategic vision: that the pharmaceutical agenda will increasingly be set by governments and private payors. Reimbursement for the industry's usual chronic-care medicines will be constrained; for regulators, safety concerns will continue to trump modest advances in efficacy. The relative profitability of different industry segments will therefore change—and Novartis therefore needs to be in different businesses as a result.

Certainly Novartis felt the sting of regulators' focus on safety. The FDA sent back for additional testing two Novartis submissions—oral iron chelating agent deferasirox (Exjade) and anti-rejection drug everolimus (Certican)--because they didn't show enough difference to competitors to warrant the additional safety risks.

Novartis' strategy, which fully bloomed in its 2005 transactions, has therefore been to focus its deals for innovative therapies on those which largely have no competition from existing products while investing in a broader range of what have been historically low-profit product segments but which it expects will become comparatively richer.

Thus Novartis paid $6.2 billion to acquire three generics businesses, mostly in Europe, where it expects generics to increase their market share dramatically—not merely by taking share from brands which lose patent protection, but through therapeutic substitution as well. When Germany, for example, introduced "jumbo" reference price groups this year, Pfizer's Lipitor was put in the same price basket as other statins, including generics. Pfizer protested, and chose not to lower its price, suffering big sales losses as a result. Such new price pressures are also why Novartis paid $660 million to buy Bristol's US and Canadian OTC businesses [See Deal]: as managed care moves more patients to stepped therapy plans—first try an unreimbursed OTC product, then a generic, then a preferred brand—the importance and value of a consumer franchise should grow.

Meanwhile, Novartis is famously leading the way into biogenerics, with its stop-and-go development of generic growth hormone, Omnitrope, and its 2003 alliance with Momenta Pharmaceuticals Inc. to create a generic Lovenox. [See Deal]

Then there was Novartis' biggest deal—its $5.1 billion acquisition of the 58% of Chiron it didn't already own. Novartis isn't alone in recognizing the vaccine opportunity where margins will improve as demand from governments increase and as new technologies lead to novel, more efficient vaccines in unserved areas.

As for novel therapeutics, Novartis is spending its money where the new drugs will have the least substitutable competition, like next-generation large-molecule opportunities in aptamers and RNAi, and hot new targets, like toll-like receptors (yet another Top Story of 2005).

Meanwhile, our pick for "most changed dealmaker": AstraZeneca PLC , the year's best Big Pharma stock-performer (up more than 30%), edging out both Amgen and Roche (which was significantly buoyed by its majority share in Genentech). What had been the industry's most inwardly focused company signed a stream of deals, including deals for compounds in clinical trials—a radical break with long-standing company tradition. Indeed, it bought rights to compounds in Phase II and Phase III studies (from Protherics PLC [See Deal], Targacept Inc. [See Deal], and AtheroGenics Inc. [W#200520770], respectively)--the first time it's signed such late-stage deals, according to Windhover's Strategic Intelligence Systems database, since Astra and Zeneca merged in 1998. [See Deal] It even stepped up and bought a company, privately held KuDOS Pharmaceuticals Ltd. [See Deal]), likewise a first for post-merger AstraZeneca.