Resisting disruptive innovation : big pharma’s blockbuster medicine

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Resisting Disruptive Innovation

Big Pharma’s Blockbuster Medicine

Master Thesis Political Science International Relations

The Global Politics of Investment & Trade

Student: Yourick Untied

Student ID: 10222162

Supervisor: Professor Jeffrey Harrod

Second Reader: Dr. A-M Reyneards

Words: 20003

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List of Abbreviations

Biologics License Application (BLA) Contract Research Organizations (CROs)

European Federation of pharmaceutical industries and Associations (EFPIA) European Union (EU)

European Patent Office (EPO)

Food and Drug Administration (FDA – United States)

Food and Drug Administration Modernization Act (FDAMA) Generic Pharmaceutical Association (GPhA)

International Federation of Pharmaceutical Manufacturers (IPHMA) Investigational new drug (IND)

Merger & Acquisition (M&A) Multinational Companies (MNCs) National Science Foundation (NSF)

National Institute for Health and Clinical Excellence (NIFCE – United Kingdom) National Institutes of Health (NIH)

New drug applications (NDAs) New Molecular Entities (NMEs)

Pharmaceutical Research and Manufacturers of America (PhRMA) Research and Development (R&D)

United Nations (UN) United States (US)

United States Patent and Trademark Office (USPTO) US Government Publishing Office (GPO)

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World Bank (WB)

World Health Organization (WHO)

World Intellectual Property Organization (WIPO) World Trade Organization (WTO)

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Abstract

The pharmaceutical industry is a knowledge driven industry with a high share of investment in research and development (R&D). Although thousands of innovative pharmaceuticals pursue new lifesaving breakthroughs, this process has not disrupted the market share of incumbent pharmaceuticals. The unique dynamics of this industry construct an environment that enables pharmaceuticals to dominate the innovation process through merger and acquisition (M&A) and strategic partnerships, rather than through internal R&D. By examining the best performing drugs of 2015, this research shows that in most cases the leading pharmaceuticals play the role of investor and marketer in leading viable drugs to the market. Pharmaceuticals focused on R&D create monopolistic products that incumbent pharmaceuticals adopt and provide these companies market success. Leading pharmaceuticals resist disruptive innovation processes by dominating and exploiting them, which has enabled companies to survive the competitive market. As a result these incumbent firms retain their market position despite a relative low contribution to the innovation process and do not suffer creative destruction.

Chapter 1. Introduction

1.1 Introduction

1.1.1 Introduction to the topic

Most bestselling drugs are owned by one of the 15 largest pharmaceutical companies in the world while they find their origin in research and development (R&D) processes of other (smaller) companies. This research focuses on the innovation processes in the pharmaceutical industry through an examination of the best selling drugs and the best performing pharmaceuticals1. Innovation is a way to distinguish one from another and according to Joseph Schumpeter (1935) it is ‘the motor of economic change’. This process of innovation leads to ever improving technology and products (e.g. smartphone, transportation, drugs). Development Indicators from the World Bank (WB) show that productivity has increased,

1_{With pharmaceutical company this thesis includes all companies selling or developing drugs. The modern}

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less poverty and hunger exist, and, worldwide, affordable water and energy has become more and more accessible (World Bank 2015). Moreover, United Nations (UN) Millennium goals are reached due to new technologies and increasing capabilities in sectors like transport and health (United Nations 2015). One of the drivers in improving healthcare is the knowledge based, highly innovative pharmaceutical industry. This industry has one of the highest sectorial expenditures in R&D and is indispensable in current healthcare (PhRMA 2015; World Bank 2015; OECD 2015b). The market consists of life improving and lifesaving products, from which sales can reach billions. Due to pharmaceutical R&D, diseases like AIDS, hepatitis C and diabetes are no longer life-threatening (WHO 2016a). Life has become more pleasant for millions of people because of drugs for all kinds of cumbersome imperfections - from pain to erectile dysfunction.

Innovation, however, brings progress at the cost of constant disruption (Schumpeter 1942: 81-85; Charitou & Markides 2003: 1-2). Since disruption could harm their business and market share, incumbent companies feel pressure by innovation from outside. Companies in most sectors, especially highly innovative sensitive sectors, suffer the constant pressure to innovate in order to retain market share. The constant pressure of competition requires a progressive and flexible attitude toward new products and organizational structures. Therefore, in a well working capitalist market competition will make companies constantly innovate. In the drug market this competition forces pharmaceuticals to quickly produce new well performing drugs - from which the whole health sector profits. This is all done in order to meet the high expectation of shareholders. However, incumbents have incentives to avoid this competition in order to ensure durable profit and growth. They start strategic partnerships and use M&A next to R&D as a tool to get exclusive rights on well performing drugs. This enables companies to perform in a monopolistic manner. The cost to finance doing business in this way results in the high prices of drugs. According to the World Health Organization (WHO) and Oxfam Novib high drugs prices exclude two billion people in need of drugs (WHO 2016a; Oxfam 2016).

Schumpeter attempted to simplify this complex phenomenon by constructing the theory of ‘creative destruction’. This theory focussed on the consequences of innovation for incumbent companies caused by large disruptive shocks – like war (Schumpeter 1942). More recently, scholars (Christensen 1997; Charitou & Markides 2003; Christensen & Raynor 2003; Christensen et al., 2009) focussed on the forces of innovation affecting incumbents under ‘normal’ market conditions. By focussing on ‘disruptive innovation’ they seek to

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explain the status quo changing processes caused by competition; new products or production methods that result in a change of market distribution. Both these theories consider innovation as a status quo changing process that brings progress as well as demanding sectorial adjustment. Other than the neo-classical economists, they deal with innovation as an endogenous force in which politics and individuals have influence instead of an efficient allocation of scarce goods (Schumpeter 1942; Schilling 2005). The top pharmaceuticals are an exception to these innovation theories while they act in an industry with innovative sensitive products, insecure R&D successes and intense competition. Nevertheless, the top of the market remains relatively stable; none of the top companies went bankrupt or experienced a dramatic decrease in revenues in the last few decades.

1.1.2 Motivation ‘What may it cost to save a life?’

The domination of the market for blockbuster drugs by a small group of leading companies, and the fact that many of these companies have remained in the top for decennia, are in contradiction with the predictions of both creative destruction and disruptive innovation. According to these theories it is likely that incumbents lose market share and market leaders fluctuate because of all kinds of innovation. While drugs are highly innovative and to a large extent – 25% (Caballero & Jaffe, 1993: 16-17) - subject to creative destruction, the companies are not (IMS Health institute 2012). Two thirds of the market share has been dominated by a small group of pharmaceuticals for the last 25 years despite ‘patent cliffs’ and successful R&D by other companies. Leading pharmaceuticals have developed ways to become immune from competition, or at least they developed ways to stay in the top of the industry. Drugs largely affect society as they are not ordinary products, but life-saving products and are to a large extent funded and paid for by tax money.

In the context of unsustainable healthcare expenses the exploding pharmaceutical market (OECD 2015a), with records in M&A - 450 billion euro in 2015 (Vaessen 2016) - controversial lawsuits with enormous settlements (WSJ 2016), and the highest sectorial expenditure in lobbying (WTO 2015), the unnatural behaviour of the pharmaceutical industry seems rather odd. Drug prices are subject to high R&D costs resulting in high market prices (PhRMA 2016), however, meanwhile a trend in scaling back internal R&D and scaling up M&A and strategic partnerships occurs (Kaitin 2010: 360; Kinch, Haynesworth & Kinch 2014). Moreover, in the discussion of the inevitably consideration between money and health

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the underlying assumption of high drugs prices is accepted as a logical consequence from a sound market (Herderscheê 2016; Visser 2016a).

1.3 Aim of the research

The aim of this thesis is to find out how the pharmaceutical industry resist disruptive innovation. In doing so, the research aims on drawing a clear perspective on adjustment to underlying market forces. By showing how, rather than to what extent these disruptive processes are resisted it contributes to the understanding of sectoral economics in general and to the understanding of the pharmaceutical market in particular. Analysis of the uniqueness of the drug market as seen in its patents, clinical trials and even market share distribution will reveal a better understanding of this unusual blockbuster market, and the way this market structure cause conditions to control the blockbuster market. All together the above leads to an answer on the following research question: Why have the disruptive innovation processes

had little effect on large pharmaceuticals?

1.4 Methodology

1.4.1 General Methodology

The primary question will be answered from a combination of both inductive and deductive reasoning. From innovation theory and existing literature, specific conclusions are derived inductively. The primary research is mainly deductive; the results from existing patterns, market facts and processes lead to arguments and insights from which conclusions are derived. Secondary research provides the basis for these conclusions. This consists of information about property rights, clinical trials, drugs and companies. Primary sources regarding drugs and market distribution consists of annual reports from the largest pharmaceutical companies, the European Patent Office (EPO), United States Patent and Trademark Office (USPTO) and clinical trial reports. It further consists of news articles, jurisprudence, stock market information, documentaries, congress interrogations and reports

from WHO, WB, IPHMA, PhRMA, IMS Health institute, FDA, WIPO, WTO and NIH.2

2_{It is taken into consideration information the industry and organizations are mostly}

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The research on the distribution of the market is based on revenue, profit and R&D expenses from annual reports. To find out if blockbuster drugs were in some part of the development subject to M&A, a list of 53 of the bestselling brand name prescription drugs in the US through June 2015 was taken from Medscape – based on IMS Health data. Three drugs were added to the list for the relevance of this thesis and six more Pfizer owned drugs, not incorporated in this list, were examined for the Pfizer case study. The list corresponds with the top selling drugs worldwide. All the included drugs were examined on ownership, sales, patent information and development history. In order to do this, the above-mentioned sources were called upon. Often companies communicate through their financial documents to what drugs or R&D a specific merger of acquisition is related. Clinical trial registers include the sponsor for every drug. This sponsor should match with the current ownership of the drug to be a result from internal R&D. Although for most drugs it was clear whether they were subject to M&A or internal R&D. Some drugs were acquired somewhere in the clinical trials while still in development. For these drugs, related articles from NIH or specific academic articles were invoked and the development process was analyzed. Subsequently the assessment was made to what extent the licence was obtained from internal R&D. The R&D contribution should be more than just the finishing of an acquired breakthrough.3

1.4.2 Case Selection: Pharmaceutical sector – Gilead & Pfizer

As mentioned before, this research focuses on the blockbuster drugs in the biopharmaceutical market. These drugs are significant to the market for three reasons; firstly, the demand; these are the best performing drugs in their field and the disease they cure is widespread and chronic. Secondly, not only are the sales extremely high, but also most companies’ financial performance is dependent on just a few blockbusters (Gilead 2015; Abbvie 2015; AstraZaneca 2015). Lastly, most companies pursue the findings of blockbuster drugs, therefore most research is dedicated to specific symptoms.

After examining the findings of the market distribution and blockbuster drugs, two cases stand out. The first case shows the consequences of the structure in the sense of drug accessibility and pricing. Two hepatitis C drugs introduced to the market in 2013 by Gilead Inc were examined. The license was obtained by acquiring Pharmasset Inc. for over $11 billion and two years later almost tripled Gilead’s revenue (Reuters 2014; Financial times

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2014; Gilead annual report 2015). The second case shows how the structure enables to perform M&A and partnerships as successful business model instead of focussing on internal R&D. The company that stands out in this business strategy is Pfizer, most common for its drugs Viagra and Lipitor. Pfizer is an incumbent that has experience in reaching the market and has been an example for other companies’ business strategies (Annual report Pfizer 2015). Of Pfizer’s 10 bestselling drugs, only two – Norvasc and Viagra – are direct results from internal R&D. The other 8 are obtained through M&A or partnerships.

1.4.3 Structure of the Research

In chapter two the theoretical framework for innovation is set out. As explained earlier this research focusses on creative destruction and disruptive innovation; two innovation theories regarding trends and incumbent corporations. In chapter three the current character and the main aspects of what makes the pharmaceutical market special will be discussed in the context of the theories. Focus will be on institutionalization, different types of drugs and companies, and on patents and clinical trials. Furthermore, market aspects, like the development of drugs, lobbying business and other relevant or controversial aspects are addressed. Combined with innovation theory the characteristics of the pharmaceutical market form the basis for the outcomes of the primary research. The outcome of the findings from the examination of blockbuster drugs and distribution of top leading pharmaceuticals are shown in chapter four. This constructs a first indication of the answer to the research question. The above-mentioned case studies, substantively explain the meaning of the findings. Lastly the linkage of the findings and theory provide valuable generalizations about the pharmaceutical market.

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Chapter 2. Theoretical Framework, Creative

Destruction & Disruptive Innovation

2.1 Introduction theoretical framework

The general idea of critical innovation theory is that innovation brings progress at the cost of change. This change can be experienced negatively as it replaces markets, jobs and habits. This research uses theory as a framework to certify the influence of innovation and what consequences it has for the market. To understand the theory it should first be clear different types of innovation exist. Schilling (2005) and Schumpeter (1934), respectively, distinguish four and five types of innovation. All types of innovation differentiate in the way they cause change in the market, like the introduction of a (radical) new product, competence-enhancing, a new method of production, the opening of a new branch of manufacture, etc.. It should be clear that different types of innovation exist, but significance for this thesis is that the concept is synonym for change on both product and business level and could implement overall improvement but is not restricted by it. The focus of this thesis is on how change exists without being disruptive or destructive for incumbent pharmaceuticals.

This research is based on two critical innovation theories and combines the similarities to come to a general workable framework. The first theory derives from the pioneering work of Schumpeter. Schumpeter, often seen as the godfather of innovation theory, acknowledges the significance of innovation for the capitalist economy, but stresses the constant change, caused by large shocks – e.g. war, crisis, revolution - causes uncertainty and instability in daily life (Schumpeter 1942: 81-84). Therefore, capitalism, he argues, will undo itself ultimately through its own success. A more up-to-date version explaining the forces at the basis of creative destruction is disruptive innovation. It originally derives from Christensen’s theory on disruptive technologies, and, other than Schumpeter, focusses on disruption from new entrants and small innovative companies (1997). It is especially well suited to explain technological innovation – e.g. smartphone (Apple – Nokia), music (stream – mp3) – but also applied to other sectors, products and business models (Markides 2006: 2). According to Markides (2006), however, these innovations arise in different ways, have different competitive effects, and require different responses from incumbents. ‘Lumping all types of

disruptive innovations into one category simply mixes apples with oranges, which has serious implications on how we study disruptive innovations in the future’ (Idem: 2). This is a

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reasonable point that definitely should be taken into consideration. However, once again, since the aim of this research is to find out how leading pharmaceuticals resist disruptive innovation rather than what kind of innovation is disruptive, these differences between disruptive innovation are of small significance.

2.2 Innovation theory

2.2.1 Creative destruction

For Joseph Schumpeter creative destruction was an essential aspect of capitalism. Capitalism, he argues, is by nature a form or method of economic change and not only never is but never can be stationary. The problem for him is that it is usually being visualized how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them (Schumpeter 1942: 83). Schumpeter introduces the concept of creative destruction as follows (Idem: 82-83):

‘’The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, (...) the opening up of new markets, foreign or domestic, and the organizational development (…) that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.’’

This evolutionary character of the capitalist process, he argues, is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action (Idem: 83).4_{Usual commission reports and theorist}

papers lack to see that behaviour should be treated as a piece of past history and as an attempt to deal with a situation that is sure to change presently, as an attempt by those firms to keep on their feet on ground that is slipping away from under them (Idem: 84)5_{. Thus the}

conditions for particular behaviour are provided by the structure that is determined by

4 Since Schumpeter wrote this in the a time were (world) wars and revolutions occurred as game changers rather than less severe causes for drastic change he argued these were the times creative destruction was especially observable. Although he did acknowledged other processes also have their effect (1942: 83)

5 Schumpeter bases himself on the observation of increase in productivity since 1889 and especially a drop in hours of labour and the spectacular improvement of qualities (Schumpeter 1942: 81). Two general trends that are still major rationales in innovation theory.

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underlying forces, such as maximizing profit or satisfying shareholders, which affect individual business choices. As long as this is not recognized, the investigator does, according to Schumpeter, a meaningless job, and as soon as it is recognized, his outlook on capitalist practice and its social results changes considerably (Idem: 84).

Current research treat creative destruction as a process in which new goods displace old ones, earn profits for some period of time, and are then displaced in turn. Richard Foster and Sarah Kaplan, showed how creative destruction forces firms to transform. In 1923 the average time a company stayed in the S&P 5006_{was 65 years, in 1998 this reduced to 10}

years (Foster & Kaplan 2001). However, big differences between sectors exist. They show how for example the pharmaceutical giant Johnson & Johnson deviates from the observable trend. The Pharmaceutical sector as a whole performs ‘better’ than average despite drugs suffer a high rate of creative destruction - meaning a firm that does not invent sees its value relative to that of the industry erode – for drugs this rate is about 25%, compared to an average of 4% in all sectors per year (Caballero & Jaffe 1993: 16-17). In the process of creating new goods, inventors rely and build on the insights embodied in previous ideas; they achieve their success at least partly by what Ricardo Caballero and Adam Jaffe (1993: 16) call ‘standing upon the shoulders of giants’ in which ‘the public stock of knowledge that accumulates from spillovers of previous inventions is a fundamental input in the technology to generate new ideas’.

2.2.2 Disruptive Innovation

Similar to creative destruction, disruption innovation is not an event; it is a process which forces take decades to work their way through the industry. Incumbent companies could, according to Clayton Christensen and Michael Raynor (2003: 69) exploit a disruption only by creating a separate unit adapting the new innovation. While many economists assume the objective of companies is to maximize profit or shareholder value, Scholars from creative disruption assume survival can be the objective function of management. Instead of imitating disruptive forces incumbents could choose to destroy the disruption in order to survive rather than maximize shareholder value (Charitou & Markides 2003: 55-58). However, even if the disruptive innovation is not superior to the established business model, incumbents need to find a way to respond to it. This response could mean investing in their existing business

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model to become more competitive and immune to the disruptive innovation processes. Incumbents even in their turn could counterattack the innovators by trying to disrupt the disruptors (Charitou & Markides 2003: 61) Therefore disruptive innovation does not automatically mean it is successful in replacing incumbents and reforming the market.

Although incumbents have many capabilities and dominate existing markets, disruptive innovation and related technologies tend to be associated with the replacement of incumbents by entrants (Danneels 2004: 247). It is a popular romanticized image of start-ups, like Google, Airbnb, Uber or Apple, conquering and reforming old entrenched markets. Expel old established companies with little impulse for renewal by young highly innovative companies that introduce radical change. This radical innovation creates new-to-the-world products. The products are disruptive to consumers in the way these products disturb prevailing consumer habits and behaviours in a major way. At the same time, producers experience disruptiveness because the markets they created are undermined by the introduction of these new highly innovative products (Markides 2006: 22). The related competences and complementary assets on which incumbents had built their success, the basis for their business model needs to be revised and reformed. The disruptive character of these products to both consumers and producers make them special in the way they enter the market. This radical disruption is rarely driven by demand. Instead, it results from a supply–push process originating from those responsible for developing new technologies (Markides 2016 22-23). The combination of consumers that need to get used to it – and its values - and products that often will have to be improved before it can complete fully replacement of old products or markets makes this disruption a process not an event. However, it all depends on how desperately needed the innovation is, lifesaving products, like drugs are more in demand and therefore faster to be implemented than luxury goods. Life-saving innovation is always fast tracked.

2.2.3 Creative destruction and disruptive innovation combined

Christensen’s theory was partly based on Schumpeter’s creative destruction, although disruptive innovation focuses mainly on the causal process of creative destruction. By doing this Christensen proved parts of Schumpeter’s theory wrong, while Schumpeter for example focuses on large companies as motors of change, Christensen’s shows it is the smaller companies causing disruption to the larger ones. This research is in line with Christensen’s and Schumpeter’s work in the sense smaller companies cause disruption – and progressive

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innovation -, but large, incumbent companies in a way control the innovation process and determine the structure of the innovation process. However, three similarities between the theories are useful for this thesis: first, innovation is not a spontaneous occurring event, but a long enduring process. Second, both emphasize it is a constant process; there is no end in innovation, when an innovation wave replaces the old one, a new one is already being constructed. Third, both take to a large extent the market share of incumbents into consideration; incumbents are for both, although in a different way, the main players in the markets as they determine the norms rules and production process.

2.3 Conclusion chapter two

This chapter explains the theory regarding the effects of innovation to the market. Although comprehensive innovation theory is still to be completed, a general agreement can be formulated from concessions. In general the theory of creative destruction and disruptive innovation assume the economic structure causes disruption for incumbent companies. This process of disruptiveness could eventually replace companies, jobs and habits. While Schumpeter focussed on large disruptive shocks creating creative disruption, the theory of disruptive innovation shows new entrants and smaller companies could provoke this too. Incumbents could respond to the innovation processes but eventually, both theories agree, leading companies lose market share. These processes have accelerated and especially drugs are to a high extent subject to creative destruction. This thesis focusses on how the incumbents resist disruptive innovation and creative destruction and how this resistance affects the market. It aims to find the underlying conditions enabling large pharmaceuticals to dominate and exploit underlying forces to which existing markets adjust and, according to Schumpeter, eventually are by destroyed.

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Chapter 3. Biopharmaceutical Industry, Market,

Blockbusters and Limitations

3.1 Introduction

Chapter three will seek to show and explain the special character of the biopharmaceutical industry and at the same time the limitations and possibilities the current environment offers. Methods of production and new consumers’ goods come according to disruptive innovation theory from small companies. These innovations consequently are the fundamental impulse for capitalist engine that cause creative destruction; it revolutionizesthe economic structure from within, destroys the old and creates a new one (Schumpeter 1942; Christensen 2003). By examining the institutionalization, distinguishing different types of drugs, and framing pharmaceutical companies into four groups, the structure rather than the behaviour of the individual players causing disruptive innovation processes will become clear. Disruption of this structure is thus, according to the theory, what should be focussed on; the behaviour of players within the structure is a product of this structure. An overview of what interests and players affect the production and innovation processes in the market and the clinical trials, patents and related institutions are set out. The subjects addressed in combination with innovation theory form the basis of the findings.

3.2 The pharmaceutical market

Drugs are highly innovative products and the market value for these pharmaceutical products has nearly threefold last 15 year to one trillion dollar. Pharmaceutical spending now is the third biggest expenditure item in healthcare (OECD 2015b)7. The rise in healthcare expenses due to increasing expenses in pharmaceutical products affects countries. In the Netherlands, a country with one of the strongest public healthcare systems in the world, budget of hospitals are allowed to grow no more than one per cent a year. The costs of medicines grow faster, therefore 80% of the general Dutch hospitals lack the financial capabilities to afford expensive drugs (KRO-NCRV 2016). This causes situations where it needs to be considered whether the patient is sick enough and the medicine is effective enough. Furthermore the US spends by far the most on pharmaceutical products and is

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responsible for 40,5% of the total market (PhRMA 2015). Prescription drug spending increased 12.2% to $297.7 billion in 2014 driven up by new specialty drugs like hepatitis C - which will be discussed later in his research (CMS 2014). In 2008, in the US, government programs picked up the tab for $87 billion of the $234 billion that Americans spent on outpatient prescription drugs (Field 2013: 36). Per capita US spent 1010 dollar a year on pharmaceutical products, twice the average of OECD countries (OECD 2015a). It is a remarkable static correlation between being number one in pharmaceutical spending and the performance of the health system. The US do not make it to any of top third health indicators

of the OECD and is 26th_{in the WHO mortality list (OECD 2015a; WHO 2016a)}

The explosive growth of the pharmaceutical market indicates successful innovation and structural sectoral change. Opposite to the expectations from innovation theory the leading pharmaceuticals have grown proportionally with the market and retained a market share of around two-thirds since 2001. Although the performance of drugs keeps improving and diseases like cancer, hepatitis C and HIV/Aids are better treatable (WHO 2016b), profit for leading incumbents as a share of revenue has increased sharply, while the share of investment in R&D remained steadily. Meanwhile new developed drugs often come out as Blockbuster drugs, drugs with sales over a billion (Getz & Kaitin 2015: 7). Blockbuster drugs focus on chronic diseases with millions of patients, and R&D costs for these drugs transcend billions, it could be legitimize that these drugs account for billions of dollars a year in sales (Ibidem). However, it gets controversial when the price of well-desired drugs makes it inaccessible for many, especially when the competition over these drugs is not sound. In practice, of thousands of pharmaceuticals, only a few own all of the blockbuster drugs and companies accounting for billions of profit a year.

Part of the cause is the character of the market; clinical trials and patents contribute to the special character as it leads to a controllable and orderly market. Every year from thousands, only a few drugs pass the clinical trials and get marketed (see Appendix 3). Kennedy Kiaitin showed the time drugs are under development in clinical trials has not improved last decades (Kiatin 2010: 356). On average it takes around 9 year to pass the clinical trials (Getz & Kaitin 2015: 8-9) and 10-15 to make it from preclinical trial to the market (PhRMA 2015). Obviously, new drugs need to be tested and trusted but the process has not improved and the duration to develop a drug nowadays is nearly the same as four decades ago. Robert I. Field (2013), in addition, showed two-thirds of the new drug applications (NDAs) submitted to the FDA each year do not involve a new molecular entity (NME). Instead, most applications

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represent minor modifications or reformulation of existing drugs or requests for approval of new uses. On average years the US federal food and drug administration approves only about 20 drugs based on NMEs (Field 2013: 16-17). European Medicines Agency (EMA) shows similar numbers as the same pharmaceuticals operate globally (EMA 2016).

3.2.1 Institutionalization, Patents and Clinical Trials

Patents & TRIPS Agreement

The pharmaceutical industry is restricted and stimulated by laws and agreements and patents. Internationally its trade related aspects of intellectual property rights are protected through the WTO’s TRIPS agreement. Patents secure the intellectual property enabling companies to earn back their R&D costs. It obstructs competitors to stand on the shoulders of giants, as Cabalero and Jaffe call it, and benefit from spillovers of the R&D regarding the drug. The TRIPS Agreement of the WTO secures worldwide protection of intellectual property. Under the TRIPS Agreement the patent term is 20 years, however, it should be noted that the effective period patents run for NME is much less than 20 years. A large part of the 20 years these NME are in development, so before drugs complete clinical trials and become marketable the patent will already be partly expired (WTO 2015). This issue was raised in the Uruguay Round; companies demanded compensation for the long development time, but an obligation to introduce such a system did not pass (Ibidem). Developed countries and the EU therefore have introduced individual systems to secure a certain time of patent protection. US law, for example, includes exception regarding to the expiration of the TRIPS Agreement patent law: orphan Drug could expect a 7 years extent of the patent, New Chemicals (NCE) 5 years, and ‘other’ exclusivity 3 years ‘if criteria are met’ (GPO 1999). The WTO (2016) stresses the agreement is not simply about maximizing the level of protection for intellectual property: ‘rather, it emerged from a genuine negotiating process where the need for balance was very much to the fore’. This balance derives from the tension between incentives for R&D and making drugs available.

With exceptions in pharmaceutical patent agreement the WTO endeavours a balance as accurate as possible. Under these exceptions are the ‘regulatory exception’ also referred to as a ‘Bolar’ provision, and compulsory licenses. These exceptions respectively imply that the Agreement allows the use of patented invention for research purposes, officially: ‘where the aim is to understand more fully the invention as a basis for advancing science and

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technology’ (WTO 2015). In practice this means it permits and enables generic producers to develop a generic product to enter the market as soon as the patent expires. And under conditions, like financial compensation, the Agreement allows members to authorize use by third parties or for public non-commercial purposes without the authorization of the patent owner (Ibidem). In this way the spillover is not completely perished.

The clinical trials may be experienced as a bureaucratic inefficient process for drug manufacturers, but at the same time the process is largely responsible for the public’s confidence in their products (Field 2013: 13). Patents provide as a result acknowledged and respected monopolistic positions for pharmaceuticals. Depending on the competition over treatments companies can determine their own price based on their strategy regarding profit, market share and market domination. The pharmaceutical patents can lead to odd situations. For example when the cure to stop the HIV/AIDS epidemic was finally found the costs made it inaccessible for many countries. Even though these countries do not form a threat to the market because they lack a pharmaceutical industry – and disruptive innovation -, they are still expelled from the drugs because of the patent protection from the TRIPS Agreement (Chadha & Blomqvist 2005). It has been proposed to lower the patents for the developing world, without leading to disruptive innovation, but this has not been included in the TRIPS Agreement so far.

Waxman-Hatch act & the patent cliff

The contours of the drugs market are besides the TRIPS agreement supplemented by the Landmark Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act. The Hatch-Waxman Act created the framework for the remarkable success of the generic drug industry. The Waxman-Hatch act of 1984 reduced the barriers to generic entry by accelerating the approval process for generic drugs (Field 2013: 14; GPhA 2013). Before, generic drugmakers had to conduct their own lengthy and costly clinical trials. With the Waxman-Hatch act drugmakers only had to show the generic version was chemically and biologically equivalent to the original patented versions. This opened opportunity to introduce generic drugs immediately after branded drugs lost patent protection (FDA 2003). Because of the opportunities provided by the Waxman-Hatch act and the TRIPS agreement an (cheaper) alternative can relatively simple be introduced to the market. Therefore sales from blockbusters drop immediately when the patent expires, this leads to the so-called ‘patent cliff’ (see Appendix 1). In Pfizer’s annual report some direct consequences

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for sales are observable, like the drop in sales of Lyrica of $600 million. The patent cliffs of Plavix (clopidogrel), Lipitor (atorvastatin calcium) and Seroquel (quetiapine fumarate) together caused a drop in revenue of $33 billion (Mignani et al., 2016: 242). The patent cliffs force big pharmaceuticals to fill in their pipeline8, create consolidation purpose, achieve R&D cost reduction, produce synergies and create breakthrough innovations – but also savings through job cuts, like Merck cut 8500 job saving 2,5 billion (Ibidem). The disruptive impact of these patent cliffs on the causal business of pharmaceuticals is significant; the revenue of most leading pharmaceuticals depends for a large share on just a few of these blockbusters. For this thesis the main influences of the innovation process of the pharmaceutical industry are taking into consideration, however, it should be noted that besides WTO’s TRIPS agreement and Waxman-Hatch Act other initiatives, like the European Union’s Innovative Medicines Initiative, also impact the innovation structure to a smaller extent. The innovative Medicines Initiative, for example, is a public–private partnership established in 2007 between the European Federation of Pharmaceutical Industries and Associations (EFPIA) and the European Community (EC), the partnership, as Kaitin explains ‘fosters

precompetitive research by bringing together the respective capabilities of academia, industry, and government to identify new biomarkers and other tools to improve the selection of drug candidates and increase the likelihood of pipeline success’ (Kaitin 2010: 183). In

other words, an initiative to lower the failure of drugs not passing the clinical trials and prevent overlay in R&D.

3.2.2 R&D Costs, Clinical trials

The average costs of producing a new drug is 2.5 billion dollar (Dimasi, Grabowski & Hansen 2016). The long development processes combined with very low success rates results into extremely high R&D costs, which, in turn, results into high drug prices on the market. A recent Tufts CSDD study showed that the average capitalized cost, including failures, increased to $1861 million for out-of-pocket cost per approved drug and $2558 million for pre-tax capitalized cost per approval (DiMasi, Grabowski & Hansen 2016: 21). In table 3.2.2 the fluctuation between R&D costs estimated are illustrated. However, it should be noted that the Tufts research centre - that PhRMA calls independent and bases its facts on - is for 35%

8_{The pipeline refers to the backlog of inventions of new pharmaceutical products that were no longer}

patentable on that date, because disclosed, but not yet on the market because pending marketing approval (World Bank 2016).

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financed by pharmaceutical companies (Tufts centre 2015). Most research comes out as positive for the pharmaceuticals, like the high R&D costs that legitimize higher prizes for drugs.

The survey, performed by Joseph DiMasi, Henry Grabowski and Ronald Hansen, includes data from ten multinational pharmaceuticals of varying sizes, and shows that

‘’these firms spent 73.1% of their prescription biopharmaceutical R&D expenditures on investigational self-originated new compounds, 10.2% on investigational compounds that were licensed-in or otherwise acquired, and 16.5% on improvements to drugs that have already been approved’’ (DiMasi, Grabowski & Hansen 2016: 26).

So according to this research at least 26.7% of the R&D expenditures are not conducted to the development of NMEs. The size of the company is important since this determines to a large extent the business strategy of a company - which will be further argued below. Especially relevant for this thesis is how the costs for M&A and strategic partnerships are included. On that they comment ‘’Data were also provided on annual R&D expenditures for

licensed-in or otherwise acquired new drugs, and on already-approved drugs (…) Licensed-Table 3.2.2 prior studies R&D costs 2003-2012 (DiMasi,,

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in and co-developed compounds without partner clinical cost data were excluded because non-survey firms would have conducted significant portions of the R&D’’ (DiMasi, Grabowski & Hansen 2016: 26)

As mentioned before, R&D activities represent a significant part in the pharmaceutical industry, according to PhRMA even 21 percent (PhRMA 2016). However, as mentioned above this does not just include progressive internal R&D for NMEs. In last year’s annual report of one of the largest pharmaceuticals they acknowledge these expenditures ‘’relate to

the processes of discovering, testing and developing new products, upfront payments and milestones, improving existing products, as well as ensuring product efficacy and regulatory compliance prior to launch.’’ (Johnson & Johnson 2015)

Furthermore, only 12 percent of the drugs entering clinical trials reach patients. Thousands won’t even make it past the animal testing phase, the discovery and research and pre-clinical testing stages and do not enter the clinical trials. Drugs fail because of insufficient efficacy, safety concerns or commercial concerns (Mignani, et al. 2016: 241). Again, the whole process takes 10-15 years (PhRMA 2016). From the start of human testing (the start of the clinical trial, after pre-clinical testing stages) a candidate drug needs nearly 9 years (Kaitin 2010: 358). Considering a patent runs 20 year and these products are highly demanded by patients this is quite a long time. Researchers from Tufts CSDD have shown, in addition, high attrition is not improving. For candidate drugs that entered the clinical testing phase during 1999–2004, the clinical approval success rate was 16%. Despite industry’s efforts over the years to address low success rates, this level, they show, actually represents a decline from the 21.5% average for drugs that began clinical testing in the early 1990s. As in the case of drug development times, the 16% average masks considerable differences across therapeutic areas. Clinical success rates range from 27% for systemic anti-infectives to dismal rates of 8 and 7% for neuropharmacologic and cardiovascular agents, respectively (Kaitin 2010: 357). Part of the cause is the focus of many pharmaceuticals on the same R&D. The price, time and approval rate are all related to the innovation structure in regard with drugs. These characteristics form a threshold for new entrants. It should be emphasized the $2.5 billion includes failures and all related clinical studies. On the contrary, the costs and time to successfully enter the clinical trial, and perform one clinical study, is significantly lower. The (financial) capabilities subsequently to actually succeed in realizing a marketable drug are the second burden. These burdens in combination with the clarity of the R&D process construct relative strong conditions for incumbents to resist disruptive innovation.

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Moreover, new entrants of clinical trials lack besides financial resources, a whole network consisting of marketing and legal capabilities to eventually process the bureaucracy and market entrance a successful drug is subject to. This contributes to the trust of the product and the success in sales. However, it does not contribute per se to the performance of the drug. In other words, it does not help cure more people. The leading pharmaceuticals possess the capabilities and experience needed to reach the market. Hence synergy, in which capabilities of different pharmaceuticals between smaller and large pharmaceuticals are combined, is no exception to the R&D process. Leading pharmaceuticals profit most from this synergy as it not only provide them with progressive R&D, but also it adopts and thus automatically resist disruption.

The structure that provides these conditions has remained unchanged for decennia resulting in widening gaps between different kinds of pharmaceuticals. Only recently a minor adjustment in this structure was allowed by large pharmaceuticals. American and Dutch oncologist started an experiment to collect data from patients they treat with medicines that were not registered for that specific kind of cancer but very likely to be effective (Visser 2016c). In the current clinical trials drugs are registered for one particular kind of disease. The drug gets approved and - depending on the health insurance status in the country - is covered for just the disease the clinical studies were aiming for. Due to this structure it needs to start a new clinical trial proving its effectiveness for similar diseases – and get insured. Oncologists, however, could use the drugs for other treatments too, but, even though their effectiveness is very likely, the drugs are not covered. In the current experiment oncologists cooperate with pharmaceuticals by collect data about the performance of the drugs in exchange for discount on the drugs (Visser 2016c). This is a minor but significant development in the sense it is rare innovative adjustment to the rusted drug development process.

3.3 Drugs

3.3.1 Distribution of NMEs

Kaitin and DiMasi (2014) have shown the trend in NMEs being approved by the clinical trials. On average 20-25 NMEs per year are approved, a number that remained steady since the 80s, with an exception in 1997 when a record of 55 NMEs was approved, and recently

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increased to the average of 25-30 a year (Kinch, Haynesworth & Kinch 2014: 1035-1036).9 Between 2000 and 2012 over 400 new medicines received approval. In 2013 alone more than 5000 medicines were in development from which 25 were approved by the FDA, 48% of these NMEs are set to achieve $1 billion sales within 5 years (Mignani et al., 2016: 240) Micheal Kinch, Austin Haynesworth and Sara Kinch found 275 different organizations – companies and governmental organizations – developed at least one NME. Due to acquisition, merger, bankruptcies or strategic repositioning, 93 of these organizations remain active and independent in the end of 2013 (Kinch, Haynesworth & Kinch 2014: 1036). Due to M&A Pfizer controls almost four times the amount of NMEs they have granted. Only 14 organizations have received more than 20 NMEs and fewer still (six) received more than 50. The most successful organization thus far is Merck, which has received 63 approvals for NMEs (Ibidem). Twelve companies control more than 20 NMEs each.

The five largest holders of NMEs are Pfizer (198) followed by Merck (106), Novartis (98), SanofiAventis – now Sanofi - (84) and GlaxoSmithKline (79). Altogether, the top five companies control more than 40%, and the top ten more than two-thirds of all NMEs (Kinch, Haynesworth & Kinch 2014: 1037). In line with this research Kinch Haynesworth & Kinch (2014) presuppose leading pharmaceuticals gained the dominance in NMEs more as a result of mergers and acquisitions than internal R&D. They assessed how the top five companies have changed over time. In 1950 the top five companies with the largest number of NMEs was Eli Lilly, followed by Merck, Abbott, Ciba and American Home Products. This ranking remained unchanged throughout the 1960s and 1970s. The 1980s and 1990s witnessed multiple pharmaceutical industry M&A, and at present, all of the top five companies gained their positions as a result of M&A. Merck re-joined the top companies as a result of its takeover of Schering Plough in 2009.

Kinch, Haynesworth & Kinch (2014: 1037-1038) focused on Eli Lilly and Pfizer in more detail finding that Eli Lilly relied almost entirely on internal R&D and dominated the NME market until 2000. Pfizer in its turn largely paralleled Eli Lilly’s growth rate in NMEs albeit starting with a lower initial base. The big change occurred from the late ‘90s onwards, Pfizer’s M&A success (Warner Lambert, Pharmacia-Upjohn, American Home Products) increased the number of NMEs (Ibidem). Pfizer’s successful M&A strategy rather than

9_{The spike in new drug approvals from 1995 to 1999 was likely impacted significantly by the initial}

implementation of the Prescription Drug Use Fee Act of 1992. The number of therapeutics approved in this period is particularly high and such a high rate has not been recorded either before or after in the modern drug development era (Kaitin & DiMasi 2010: 185).

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internal R&D in order to outperform competitors, remained as its main instrument in getting new drugs. The absolute success so far has been the acquirement of Lipitor, which will be discussed below. In 2014 41 NMEs were approved, the highest number since 1996. About 65% of these NMEs were in-licensed or acquired (Mignani 2016: 240). The market characteristics provide the conditions to successfully perform M&A and use it as instrument to dominate and exploit disruptive innovation.

Figure 3.2.4. NMEs (Kinch, Haynesworth & Kinch 2014: 1035)

Valeant Pharmaceuticals International illustrates best what possible consequences the use of M&A instead of internal R&D as instrument could cause. Valeant entered the top ten NME holders in 2010. Due to fierce marketing strategies it acquired 44 NMEs (Kinch, Haynesworth & Kinch 2014: 1038) The unethical business strategy with a limited contribution to actual R&D progress raised prices of cardiac-care drugs Isuprel and Nitropress by 525% and 212%, respectively, directly after their acquirement. In total prices of 16 Valeant drugs have been raised this year (Senate Hearing 2016). The fierce business strategy led to Valeant’s outgoing CEO testifying at a Senate hearing investigating drug pricing (WSJ 2016). He admitted the company ‘was too aggressive in dramatically raising the prices of some of its drugs’. Valeant and Pfizer represent the significant change in the drug discovery and development enterprise. Kinch, Haynesworth & Kinch (2014: 1037)show the

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growth of companies with a similar strategy is recent and robust. ‘as of 1990, only two NMEs

(0.26% of all NMEs awarded up to that date) were controlled by organizations that had not been directly awarded an NME. By the end of 2013, this numbers had swelled to 215 NMEs (or 14.8% of all NMEs granted to date). Indeed, of the 118 companies that hold at least one NME today, 25 (21.1%) did not receive an NME approval from the FDA’. This research, in

addition, shows of current blockbusters over 60% has enjoyed a significant share or its development in the R&D process of others.

3.3.2 What Drugs?

NMEs translate into brand name drugs on the market. After passing the clinical trials patents secure exclusivity on the market. The TRIPS Agreement includes exceptions to secure a right equilibrium between protection of intellectual property and accessibility to innovative life-saving knowledge. Together with the Waxman-Hatch Act these exceptions enable generic drugs to enter the market as soon as the patent expires. Consequently these generic drugs cause patent cliffs and disrupt high sales. Below four types of drugs, characterized by low price elasticity and constant demand, are presented. It should be clear these different types of drugs result from the structure of the industry. Moreover, drugs are the link between industry and society, between supply and demand and most importantly for this thesis the outcome of disruptive innovation.

Brand name drugs

Brand name drugs are the drugs with highest sales potential. These drugs provide new treatments for millions of patients. The brand name drugs and especially the few that come out as blockbusters drugs (drugs with profits over a billion a year) is what many leading companies rely on.

‘’For most leading companies is often quoted as the only viable way to meet the high growth

expectations. One reason is that blockbuster drugs offer relatively high returns compared to lower value drugs, due to the substantial risks, time and costs involved in product development and commercialization. In addition, developing drugs with blockbuster potential is a more sustainable growth strategy than relying on patent defence.’’ (Gassmann et al.,

2008: 4)

The brand name drugs once were one of the thousands pre-clinical drugs that eventually turn out to add something to the treatment for diseases. Many of these brand name drugs originate

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in laboratory research funded by governmental organizations, a good example for this is are statins which will be discussed in the Pfizer case study (Thompson 2001). Unfortunately, as discussed before, these indications often represent crowded pharmaceutical markets, and therefore a greater likelihood of termination of the development process at the clinical stage for economic or market-related reasons (Kaitin 2010: 358). Tufts CSDD analyses have shown that these economic failures tend to occur late in the clinical development process, at an average of 3.7 years after the start of clinical studies, when R&D costs and resource demands are at their peak (Ibidem). Bringing a brand name drug to the market quickly, promote it widely, and especially do it before the competitors is of significant importance for the sales (Gassmann et al. 2008: 16): ‘The first in the market captures between 40 to 60 percent of the

market (..). Moreover, delaying market introduction of a blockbuster drug by two months not only involves the risk that a competitor seizes significant market share, it also means a net loss of US$ 100 million, or almost US$ 2 million a day.

Generic drugs

As said, exceptions are made under the TRIPS agreement for pharmaceutical products. The WTO Panel in Canada covered a provision of Canadian law, which permits the use by generic producers of patented products, without authorization and prior to the expiry of the patent term for the purposes of seeking regulatory approval from public health authorities for the marketing of their generic version as soon as the patent expires (WTO 2015). The Waxman-Hatch act fulfils a similar purpose, which allows drugs based on the same generics to enter the market without running the entire clinical trial process. Although the effect and side-effects can differ from brand name drugs these drugs are legally identical. According to the Generic Pharmaceutical Association (GPhA) the use of generic drugs saved the U.S. health care system approximately $1.68 trillion from 2005 till 2014 (GPhA 2013). In the period 2010-2017 drugs worth $150 billion go off-patent which consequently cause an increase for the generic drug market from $124 to $231 (Mignani et al. 2016: 243). In the US generic drugs are 88% of prescriptions and ‘only’ 28% of pharmaceutical expenditures (GPHA 2013).

Obviously, the production process is more than just copy the original research and also the generic market is competitive. Recently, Sandoz’s approved the first US biosimilar drug (Zarxio), it is a copy of Novartis’s Neupogen (Mignani 2016: 240). Sandoz however, is the generic drug division of Novartis, so, in other words, Novartis directed its own patent cliff,

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but assured itself to profit from the generics. Last years, Sandoz, Teva and Mylan – three large generic companies/divisions - decided to produce higher value generics, and like the brand name drug market alliances are set-up with branded pharma for marketing and exclusivity right to generic blockbusters (ibid: 242). At the same time the growth has provided specialized generic companies with more financial power which for example enabled Teva to acquire Allergan’s Generic division. By integrated generic divisions and the granting of exclusive rights for generics the generic drug market becomes more controllable, and also less disruptive for incumbents as shocks from patent cliffs are less severe. This decrease in disruptiveness provides (especially) blockbuster owners with more time to compensate the lost business.

Me-too drugs

Me-too drugs are drugs largely duplicate the action of existing drugs. The controversy is these drugs do not diminish from pioneering pre-existing drugs. Me-too drugs are often referred to as drugs following an established therapeutic approach (Field 2012: 16-17). The drugs can be the result of parallel development and imitation, but don’t necessarily mean they are wasteful less innovative products (Hollis 2004: 1). Drugs involving reformulations or incremental modifications of existing modifications are the kind of me-too drugs leading to the negative reputation of these drugs. However, brand name drugs that pass the clinical trial later then their competitors similar drug - and therefore are not new - are also referred to as me-too drugs. Also late entrants could come out as best-in-class drugs and therefore outperform the ‘first-in-class’ drugs. The late entrants could base R&D on the performance of the first-in-class drug and come out as far better – as happened with Lipitor (atorvastatin calcium) and Mevacor (lovastatin) – and in that way skim the sales of the first-in-class. Therefore pharmaceuticals often develop ‘follow-on’ drugs based on the validated target (Mignani 2016: 243) These drugs could result in a drop of price for the first to the market drug, also the small differences can treat people who do not react on other drugs. In the context of innovation, however, me-too drugs do not have a significant innovative impact on the market. And it should be clear it is a way of exploiting (breakthrough) R&D besides the original brand name drug.

Orphan drugs

The last, least relevant drug for incumbents and therefor for this research are the orphan drugs. These drugs focus on relative small diseases. In the US this means the disease affects

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fewer than 200,000 patients, and in the EU an orphan drug affect no more than 5 in 10.000. In both cases exceptions are made for when it is unlikely sales of the product would cover the sponsor’s investment (FDA 2016; EMA 2016). It is highly unlikely these drugs lead to high sales, so it does not attract many profit-seeking pharmaceuticals. Instead, finance of pre-clinical research is often realised by private or charity funds.

3.4 Pharmaceuticals

3.4.1 Different types of companies

Like most sectors the pharmaceutical sector includes different sized companies. For the pharmaceutical industry, however, this has profound consequences for the innovation process. The market has an integrated network of stakeholders, in which the core capabilities are leveraged. A noticeable fact, demonstrated by Kinch, Haynesworth and Kinch, is the growing number of partnerships and alliances between small and large companies, as well as the acquisitions of small firms by large companies (Kinch, Haynesworth & Kinch 2014). The development into the existing structure could be seen as a logical result of the persuasion of NMEs and blockbuster drugs. Small pharmaceutical companies provide the network with highly innovative R&D and early development capabilities. Large pharmaceuticals, in turn, have (financial) capabilities, large marketing divisions, and experiences in reaching the market. Progress of smaller pharmaceuticals and the quality of drugs is linked to the potential market value, and, if profitable, becomes a prey for larger pharmaceuticals. The earlier outlined special characteristics, like clinical trials and patents, provide stimulating conditions for this structure.

The synergy between the large and smaller pharmaceuticals is important in order to understand the existing character and the basis of M&E and strategic partnerships of the industry. It should be clear synergy between large and small companies affect the whole market. Furthermore, it helps to understand how the distribution of R&D is divided. Kinch, Haynesworth and Kinch (2014: 1037) divide the market into four kinds of companies based on the amount of MNEs. To a large extent this research agrees with their definitions, but based on own findings and the emphasis on blockbuster drugs instead of the distribution of NMEs it slightly differentiates or adds nuances.

Ranked from small to large companies the first group consists of the above mentioned pharmaceutical companies providing highly innovative R&D and early development

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capabilities (Kinch, Haynesworth & Kinch 2014: 1036-1037). These are the companies that are progressive and start on large scale potential disruptive innovation. This group includes companies that evolve from university based research and other start-ups. Own findings support the argument that these first tier companies are based on R&D with besides the goal to add valuable research, the goal to be acquired by larger pharmaceuticals. These companies often start off with private capital injections, government support and charity funds (Thomson 2001). By successfully introducing one of the R&D results into clinical trials the companies are noticed by larger companies and need more money to continue affordable R&D process. In this they start partnerships with companies or are already acquired.

The second type are the medium companies, these own a few NMEs, patents and drugs. Depending on their potential success they acquired or merged with other medium companies to form a larger company (Kinch, Haynesworth and Kinch 2014: 1038). These companies execute R&D to find new products and increase sales, they lack the capability to directly acquire well-selling drugs. Like tier 1 companies the scientific researchers in these companies often start research from close ties to the basic research and knowledge of underlying new classes of therapies and technology platforms. Therefore together with tier 1 companies they have comparative advantage in the discovery (DiMasi, Grabowski & Hansen 2016: 31). Since these companies depend on capital from outside costs of R&D are significantly higher (the difference is discussed above), especially when they are start-ups financed by venture firms (Ibidem). Compared with tier one companies these companies have more diversified pipelines and more experience and consequently a higher chance of success during the costly R&D process.

The third tier consists of large, established companies that rose from middle tier as a result of mergers or (lucky) findings from R&D resulting in blockbuster medicines. The first way includes fierce strategies in which investment is quickly returned through the internationalization of acquisition costs in the acquired or own drugs (e.g. Valeant, Gilead). These hold a disproportionately large number of NMEs with sales of hundreds of millions to a few billion (Kinch, Haynesworth & Kinch 2014: 1039). The global economic crisis at the end of the decade, and the resultant frozen asset markets, severely restricted access to capital for many small and medium-sized pharmaceutical companies and start-ups. The result was a restructuring of the small pharmaceutical sector of the life science industry, as many of the smaller companies were either acquired by wealthier, cash-rich larger companies, or were liquidated as they ran out of cash (Kaitin & DiMasi 2010: 184).

Resisting disruptive innovation : big pharma’s blockbuster medicine