PiF: Please describe what your role is.
DS: My role is President and General Manager of Pfizer's established products business unit. To put that in context, Pfizer - post Wyeth integration - has nine global business units. Each one has P&L responsibility. These are split into two segments. One is worldwide biopharmaceuticals businesses which includes my established products business, an emerging markets business unit and three patent-protected business units in the developed markets: primary care, specialty and oncology. So that's five of the nine on the biopharma side. There's a set of diversified businesses of which there are four which include animal health, consumer health (primarily OTC products), nutritionals in which the current focus is infant nutritionals and Capsugel which is the largest market-share maker of capsules. My established products business unit focuses on the off-patent segment of the worldwide pharmaceutical market.
PiF: You've recently announced a deal with Strides to take injectable drugs used in cancer. Can you give us a rundown on the rationale behind that deal?
I'll step back and give the context within which that deal sits. Our business unit was created to maximise opportunities for Pfizer and serve societal needs in this off-patent market. What we saw was that the needs are primarily around quality and supply reliability at an affordable price. There's a lot of companies that are serving the affordable price segment of that equation but we're seeing more and more issues with quality and supply reliability and we think that's where Pfizer has a unique proposition to play. Now, we are completely accustomed to and experienced in bringing a high quality, affordable offering from our legacy portfolio. What's new is being able to give the same warranty of quality and supply reliability even for non-Pfizer products.
And so we look at our growth strategy in that area around channels to the market. We have a retail-based solid oral dose channel, a hospital-based channel which is primarily sterile injectable products - of which the Strides deal and the oncology piece is one piece of that - and we see that as a piece of a broader strategy we call niche products that are hard to make, hard to manufacture, hard to hold the high quality standards where we are uniquely positioned.
We have another strategy around doing better with our assets as they move through the exclusivity period - so I'll move that last one to the side.
The first two - the retail-based solid oral dose strategy and the steriles strategy - the key to those is portfolio expansion, moving beyond our own legacy-based products to bring in products from other companies' legacy labs in the generic environment with our warrants of quality at an affordable price. So we have three channels to do that, three alternative approaches to doing that. One is we can license the product from partners; the second is we could make the product ourselves and create regulatory dossiers and do the manufacturing in house or third we could do acquisitions to fill it in.
We tend to do our first pass by looking at what we can make in-house. So we have some specific API capability and manufacturing capability for steriles that are unique and we've got about 12 projects running to develop products ourselves. There's a set of products in our strategic portfolio that we need where where don't have that unique capability and some external companies are very strong in that, Strides in particular on the steriles side. We screened almost every company that operates in that space and we found Strides to be one of the best and when we started talking they actually built their business model to source products to companies like ours and that's how we did the tie up that drove that deal.
PiF: How long have you been talking to them?
DS: We started talking to them - this is roughly, I don't have a precise date - but it would have been middle of the year 2009 to the end of the third quarter 2009. We signed our first deal with them which covered the US market in the fourth quarter of last year and we had actually settled on this extension - the deal that you saw announced was an extension of that original deal and we had agreed to that some time before the announcement - so the prime period of meeting, discussing, negotiating and then coming to an agreement was in the third and fourth quarter of 2009.
PiF: The Strides deal is in addition to your arrangement with Aurobindo which also adds to the established products portfolio. Do you anticipate more such deals in the future and, if so, when and who with?
DS: First of all, let me out Aurobindo and Strides in perspective with one another. Aurobindo is a foundational partnership primarily focused on solid oral does form products, Strides is a foundational partnership primarily but not exclusively focused on sterile injectables. We do have some of the Aurobindo products that we license that are sterile injectables. The reason for that is they are in the penicillin/cephalosporin range of products where Aurobindo is vertically integrated all the way into API so they have a very strong competitive advantage on that front. So that's those two and how they sit together.
Around your question of what else we could expect, first is we spend a lot of time researching these partners, negotiating with these partners and actually implementing some of the products and selling some of the products that we license. Our quality people are working hand in hand with these sites so we can honour that warranty of Pfizer quality - that they're up to our standards. The partners appreciate us working with them. Our people are enjoying working with the partners. So, one of the first steps is taking all that effort that's gone in and extracting the most collateral benefit we can out of each of those partnerships. So I would expect to see more. Whether they're publicised or not, there'll be more and more with these particular partners.
Then, at the same time, we have built and are continuing to revise our strategic portfolio needs - one for solid oral dose, one for sterile injectables. So, to the extent that we have products that emerge on that list that we don't already have licensed, we then have to go through and say of those products, are we benefited by making them in our own plants, if no, can we collaterally leverage one of these partnerships, if no, then there'd be a third partnership. So I don't look at companies and say, oh, that's a very interesting company, I want to partner with them. It's more, what do we need, what's the best way to get what we need and if we can get it through and existing partner we prefer to go that way. If we can do it at our plants at a good cost, that's our number one priority. If not that, then through one of these two partners. If not them then we look for a third partnership.
PiF: So, by the sound of it, it's all founded on that basic portfolio that you want to have of these established products?
DS: Yes. And that's a moving thing too. Our countries learn a little bit more. New market dynamics come up. For example, we'll find out that a product that wasn't on our radar screen, we find out that it's very difficult to make and there may only be a few competitors and one of them is having significant quality issues. All of a sudden that could become a strategic product for us that we would want to bring out.
PiF: So is that strategic portfolio under constant review?
PiF: Are you able to say what proportion of total revenues for Pfizer is contributed by the established products business at the moment and what it's expected to contribute in the future, particularly after the expiry of the Lipitor patent?
DS: I can give you the first part. The second you can triangulate. The reason I can't give you the second is that I don't want to give any kind of projection of how we look at the erosion curve of Lipitor post LOE (loss of exclusivity).
On the first one, you can get it from our quarterly releases but I'll give it to you. In the developed world, established products as a percentage of Pfizer's total - so this is everything but emerging markets - would be approximately 20% of the total sales of Pfizer Inc. In emerging markets itself, the established products portion of emerging markets is about 40% of their total.
So it's a pretty significant piece already and it will grow as LOE events occur and products move over.
PiF: Is the picture in Australia similar to that in other developed markets?
DS: Yes, it is. It's similar. We do find the market characterisations a bit different. Comparing the US for example: in the US there's an adjudication process after the LOE event that so much incentivises the dispensing of a generic product that even if the brand were to match the price, the brand would not be dispensed because the financial incentives at the pharmacy level are completely against it. Here we're seeing [in Australia] that it is possible for a brand with the right price to have more of a possibility to be dispensed at the pharmacy level which makes the dynamics of how we engage a little bit different.
PiF: So, in terms of the dispensing of generic products, by the sound of it, Australia is a slightly easier proposition than the US at the moment.
DS: I wouldn't say it's easier but I actually think it's a better model than the US. I think the US had good intentions of incentives higher generic utilisation rates that would deliver savings to the healthcare system but what happened was... the objective got morphed a little. The objective wasn't just to get savings, the objective was to get generic utilisation, but generic utilisation for me is really a means to an end. In Australia I'm seeing the end being clearer, more clearly identified. Now, I'm not a master of PBS reforms but I'm seeing the savings being pretty clearly defined by the healthcare system and the government but the path to it is more open to judgements of physicians and pharmacists what actually get dispensed than what the US system was.
I don't find it easier. This is a tough, competitive market in the off-patent space. We fit it in the same type of market archetype as the US, what we call a commodity market but I actually like this one better as a healthcare environment than the US one.
PiF: Does Pfizer's willingness to form partnerships with generics makers indicate that it's determined to become a major player in generics as the patent cliff approaches?
Generally, yes, but let me be more specific. We're not unilaterally focused on being the leader of the generics industry. For example, we're a company that's had its history based on research and innovation and that's going to continue to be a raison d'etre of a company like Pfizer. So, we have capital allocation constraints. We have so much investment capital we can deploy and how we deploy it is a very strategic question for the company. Now if one were to tell me that every segment of the global generic market had a low risk profile and the opportunity for operating margins that were as high or higher than Pfizer's current standard, I would tell you, yeah, our goal is to be the number one generics company worldwide.
The reality is that it's not like that and markets are changing over time. They're getting more and more difficult. So I would phrase it as we want to become and we're committed to becoming a leader in the difficult-to-make, higher-margin segments of the global generics market and we will sacrifice our margins to the extent that our customers need it but it's not an area that we want to approach just from a commercial standpoint. It would only be through customer needs and customer requirements that we would want to engage deeply in, let's say, the lower margin segments of the business.
PiF: Are you able to say how the established products strategy is playing out in Australia?
DS: The established products business unit started in 2008 as a US business unit. Now we're sitting in about the middle of 2010, we have two and a half years of experience in the US so we have deployed a lot of the strategies, we've launched in-licensing products, we've launched a sterile injectables business at the hospital level and we've aligned market response to that; we've seen that evolve and we understand what's going on.
For Australia and Europe, it was started in 2009 so they've got about one year, a little more than one year, under their belt. Korea and Japan it's just this year it's started so I'm going to make the comments about Australia in that context.
They're very early into their evolution into this business unit but I think they're implementation is very strong and it's very strong for as couple of fundamental reasons. One is they are looking at the market from the context of what the market's needs are and what Pfizer's strengths are. Another way to look at it is, where can Pfizer's strengths really add value and competitive advantage in this type of market? That's not an easy question to answer and the level of debate, analysis, testing - actually running pilots to see how the market reacts - that's been done in Australia, for that cadre of countries that started in 2009, it's the most advanced I've seen.
PiF: Australia has a reputation for being a tough reimbursement environment for pharmaceutical companies, and our government - with industry cooperation - has just committed to further cuts in what it pays for generic and off-patent drugs. Are you able to give me a broad view of Pfizer's position on Australia as a market for established products in the future?
DS: Yes, in the context that the future reflects the current PBS reforms and there's not another wave where things change and there's more therapeutic groups.
PiF: Perhaps I can rephrase the question to say, if the Memorandum of Understanding with Medicines Australia comes into force and is adhered to by whatever government we have in power after the next election.
DS: So the future as the MoU outlines: in that context, taking a price hit at any point in time is unpleasant, however, when one steps back and goes out over time and puts this in context we recognise that the government has to manage its finances and there's got to shared sacrifice along the journey to do that. The thing that, if I daresay, I like about this is that there appears to be clarity in the reforms and the way in which the reforms will be deployed. I'm still learning a bit about price disclosure and how price disclosure's going to play out and the technical elements of price disclosure - what's included as a discount that would go against the selling price - but, notwithstanding, assuming there is some clarity of answers on those questions, then its a pretty clear path forward and one I daresay (I mentioned this earlier) not as negative as what I think the US market has evolved into where, independent of healthcare practitioner, consumer or independent pharmacist desire, brands would not be dispensed because the financial incentives not to were so incredibly high.
If I understand correctly the MoU, it seems to be that if brands are priced at the right level, they're not negatively disadvantaged. So, if you can make the economics on the pricing work, the original brand has a fair chance competing against the generics. I think that alone is fundamentally more sound than I've seen in some of the markets that have pushed generic utilisation high. As I mentioned, I don't think the point is to push generic utilisation, the point is to generate cost savings for the system in the off-patent market.
PiF: In your view, have the days of big pharma consigning off-patent products almost to the scrapheap and leaving the field relatively open to generic specialist business, have those days gone and are we now in an era of more aggressive participation from originator pharmas in that area of business?
DS: I can speak for Pfizer. I can't speak for the other companies. What I learnt today is that the number of competitors in the generic landscape in Australia is much less than what we would see in the US. I'll give you a US example and ask you to keep in mind that if it's played out in Australia, it appears to be even more likely that it could play out in Australia. In the US, we've stayed in the game even at low market-share levels in the generic business through our Greenstone subsidiary and even at those low market-share levels what we see is there are competitors who have quality issues and sometimes these competitors that have the quality issues have a vast majority of the US market alone with one company.
When they go out you've got the whole trade channel of wholesalers and chain drug stores going to the legacy company and saying our supply is out, we need you to help. Now, by us being in, we have production runs that are capable of making those products still and thus far we've been able to - sometimes through miracles of our manufacturing division - to shift capacity allocations on a dime and within weeks supply 100% of the US market. But imagine if we weren't in, we didn't have activated dossiers; we didn't have API and drug products that at least have small batch runs that could be thrown up. What happens in the case that there's one and they have a quality issue in the market. The market could be left completely unattended.
So I think there's a bit of a societal safety net or insurance policy impact of multinationals staying in the game on these products beyond a commercial objective.
PiF: I'd be interested to know whether established products is perhaps one of the faster or fastest growing parts of Pfizer.
DS: Right now - not counting products like Lipitor that will move over after the LOE event which looks like growth for us but for Pfizer Inc it's not growth it's just a shift from one business to the other - so, moving away that kind of a 'cheap win' via an aberration of growth, we're still, as a global organisation in developed markets, we're in a negative growth period still.
In 2011, we've committed on - this is not on the Wyeth products coming in but on Pfizer's legacy basis - we've committed to the company and externally year on year growth in 2011 compared to 2010. So we will be in a growth period. How it compares to total Pfizer is a good question. I don't know but I reckon it's not going to be the fastest growing. Emerging markets would still be. 2012 compared to 2011 when we're seeing an uptick in growth, if you ask the question will we be one of the faster-growing segments of Pfizer, I daresay yes but out in the 2012 range not in 2010-11.
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