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					Personalized Medicine
The Emerging Pharmacogenomics Revolution*

Global Technology Centre   ●   Health Research Institute

                                                          Personalized Medicine
                                                          The Emerging Pharmacogenomics Revolution
                                                          February 2005
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          Global Technology Centre
                                                          Health Research Institute

                                                          GLOBAL TECHNOLOGY CENTRE
                                                          Managing Director
                                                          Bo Parker
                                                          Managing Editor
                                                          Christine Wendin
                                                          Christi Whittemore
                                                          Nick Beard
                                                          Saba Mirza
                                                          Production & Graphics
                                                          Richard Eberly, Bruce L. Leininger, Susan Mills
                                                          John Goldie
                                                          Peter Vigil
                                                          Advisory Review Board
                                                          Cassie Arnold, Tony Brooks, John Clements, Attila Karacsony, Tracy Lefteroff, Craig Lutz,
                                                          Sandy Lutz, Fred Pruslin
                                                          Special Thanks
                                                          For assistance during the preparation of this report, we wish to thank Jeff Barber, Eric Berg,
                                                          Hannah Cadby, Volker Fitzner, Doreen Grech, Claus Kusnierz-Glaz, Jay Lall, Alan Morrison,
                                                          Rajan Parmeswar, Teresa Pearlstein, Patrick Silvey, Samantha Smart, Andrew Sneddon,
                                                          Beatrijs Van Liedekerke

                                                          INDUSTRY PERSPECTIVES
                                                          During preparation of this report, we benefited from interviewing the following executives:
                                                          Jo Bury, Director; VIB, the Flanders Interuniversity Institute for Biotechnology
                                                          Pierre G. Cassigneul, President and Chief Executive Officer; XDx Expression Diagnostics
                                                          Oren Cohen, M.D., Chief Medical and Scientific Officer; Quintiles Transnational
                                                          Steven I. Gutman, M.D., MBA, Director; Office of In-vitro Diagnostic Device Evaluation and
                                                          Safety Center for Devices and Radiologic Health, U.S. Food and Drug Administration
                                                          Jesse Hsu, Senior Director, Corporate Development; Perlegen Sciences
                                                          Anja Kammesheidt, Ph.D., Chief Scientific Officer; Ambry Genetics
                                                          Kalev Kask, Ph.D., Chief Executive Officer; EGeen International
                                                          Robert J. Lipschutz, Ph.D., Senior Vice President, Emerging Markets and Molecular Diagnostics;
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          Alan Lotvin, President; Medco Specialty Pharmacy Services
                                                          Elizabeth Mansfield, Ph.D., Director of Regulatory Affairs; Affymetrix
                                                          Mark A. McCamish, M.D., Ph.D., Chief Medical Officer; Perlegen Sciences
                                                          Robert G. Middlebrook, Chief Corporate Development Officer; Perlegen Sciences
                                                          Virginia E. Paton, Pharm.D., Medical Director; Genentech
                                                          Dirk Pollet, Ph.D., Vice President Business Development; Galapagos Genomics
                                                          Brian Raymond, Senior Policy Consultant; Institute for Health Policy, Kaiser Permanente
                                                          Michael J. Shuster, Ph.D., Attorney at Law; Fenwick & West
                                                          Aaron Solomon, Vice President, Business Development; ParAllele BioScience
                                                          Elizabeth S. Song, Vice President, Business Development; EGeen International
                                                          Risa M. Stack, Ph.D., Associate Partner; Kleiner Perkins Caufield & Byers
                                                          Michael C. Venutti, Ph.D., Senior Vice President, Pharmacogenomics; Celera Genomics
                                                          Marc Wilkins, Ph.D., Head of Proteomics; Proteome Systems
                                                          Tom Willis, Ph.D., Chief Scientific Officer; ParAllele BioScience

                                                          Executive Summary
                                                          Each revolutionary change in human medicine, from antibiotics to painkillers to
                                                          vaccines, has moved the practice of healthcare toward improved patient treatment.
                                                          Pharmacogenomics, the next fundamental development in this area, promises to
                                                          usher in an era of individualized patient care or personalized medicine.

                                                          Pharmacogenomics uses markers in individuals’ genetic code to pinpoint the
                                                          underlying causes of disease. The science is enabling researchers to better identify
                                                          drug targets and the mechanisms of action of investigational new drug candidates.
                                                          Genomics-related technology facilitates the elimination of unfavorable products at
                                                          earlier stages of development than is currently possible. It also could guide compa-
                                                          nies in designing clinical trials that would more definitively prove drug efficacy, in
                                                          turn decreasing the time, costs, and risks of drug development. In the clinical setting,
                                                          pharmacogenomics will help physicians better define long-term health risks patients
                                                          face, more precisely diagnose the stage of patients’ diseases, and more accurately
                                                          predict their responsiveness to specific drugs or the likelihood for adverse events.
                                                                                                                                                     Pharmacogenomics is the
                                                          In the first quarter of 2005, a few pharmacogenomics products are already on the           study of how genes affect the
                                                                                                                                                     way individuals respond to
                                                          market. Additionally, the majority of clinical trials now underway are gathering
                                                                                                                                                     drugs. In this report, the term
                                                          genetic data either for current drug approval submittals or for future study.
                                                                                                                                                     pharmacogenomics refers to

                                                          In this report, PricewaterhouseCoopers evaluates the effect of pharmacogenomics            products that use any variety
                                                                                                                                                     of biomarkers for diagnosis,
                                                          on the life sciences and pharmaceutical industries in the United States, highlighting
                                                                                                                                                     drug prescription, or patient
                                                          the clinical impacts. This focus includes each step of the process, from clinical trial
                                                                                                                                                     treatment. These biomarkers
                                                          design to prescribing and monitoring treatment regimens for patients.
                                                                                                                                                     can include differences in the
                                                                                                                                                     DNA, RNA, alleles, and single
                                                          Our report analyzes the current blockbuster business model and traditional drug
                                                                                                                                                     nucleotide polymorphisms
                                                          development processes, both of which are under increasing pressure. It then
                                                                                                                                                     (SNPs) among patients. This
                                                          compares these established approaches with the emerging pharmacogenomics
                                                                                                                                                     definition also includes all
                                                          approach. Through case studies, the benefits of pharmacogenomics products, as              technologies that involve gene
                                                          well as the challenges involved in their development and market acceptance, are            therapy, gene expression,
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          illustrated. Finally, the report looks ahead to how pharmacogenomics will change           proteomics, and bioinformatics.
                                                          the dynamics among the large pharmaceutical and smaller life sciences compa-
                                                          nies. The latter, which include biotechnology and biopharmaceutical companies,
                                                          are likely to benefit most through expanded opportunities, attainable markets, and
                                                          increased power in their negotiations with the pharmaceutical giants.

                                                          Despite its promise, pharmacogenomics faces significant technical and soci-
                                                          etal challenges. This report summarizes the factors governing the speed and ease
                                                          with which pharmacogenomics will reshape the pharmaceutical industry as
                                                          pharmacogenomics products are expected to be a part of mainstream medical
                                                          practice within 10 years.
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                              KEY FINDINGS

                                                              The following is a summary of the primary findings.      is expected to bring major advances to both aca-
                                                              This report is based on third-party and original         demic and industry research, ensuring that
                                                              research, including PricewaterhouseCoopers’ inter-       pharmacogenomics, the study of how genes affect
                                                              views with executives and thought leaders from           the way individuals respond to drugs, will become a
                                                              genomics, diagnostics and drug development com-          major component in the healthcare industry.
                                                              panies, as well as regulators, third-party payers,
                                                              investors, academic researchers, and other experts.         Paradoxically, stratifying prospective patients
                                                                                                                       through pharmacogenomics can increase rather than
                                                                 The blockbuster model currently pursued by the        contract a product’s market. Pharmaceutical giants
                                                              pharmaceutical industry carries high risks and high      are presumed to be resisting pharmacogenomics
                                                              costs. Developing a blockbuster drug—those with          because targeting subsets of patient popula-
                                                              peak annual global sales of at least $1 billion annu-    tions narrows the total available market. However,
                                                              ally—for general population use is both difficult and    pharmacogenomics could expand markets and rev-
                                                              expensive. Because investigators have previously         enues by defining new uses or targets for existing
                                                              been unable to determine which participants will         drugs, “rescuing” drugs in development, managing
                                                              benefit, trials have had to be large enough to show      product life-cycles, and dominating niche markets.
                                                              statistically significant responses among all sub-       Because so much of success in the pharmaceutical
                                                              jects. Nearly 79 percent of investigational new drugs    business depends on marketing and branding, high-
                                                              fail in clinical development. Blockbuster drugs          lighting a product’s pharmacogenomics aspects will
                                                              are typically efficacious in only 40 to 60 percent       help companies differentiate their products and
                                                              of the patient population. If drugs result in severe     build new demand. Further, better targeted drugs
                                                              to fatal adverse events in patient subpopulations,       may not require the broad-based direct-to-consumer
                                                              they are removed from the market—at huge finan-          advertising campaigns vital to blockbuster drugs.
                                                              cial and public relations costs to their manufactur-
                                                                                                                          There are immediate clinical demands for
                                                              ers. Although the pharmaceutical industry cites the
                                                              high costs of drug development for increasing drug       pharmacogenomics products. As populations age,
                                                              prices, research and development (R&D) costs are         medicine becomes more specialized, and complex
                                                              rivaled by the marketing expenditures necessary to       diseases are better characterized and understood,
                                                              launch and promote new therapeutics.                     physicians and their patients require better tar-
                                                                                                                       geted and efficacious therapeutics. The promise of
                                                                 Pharmacogenomics technology is coming of age.         pharmacogenomics is that biomarkers can bring
                                                              Although the first complete sequencing of the            clarity to an individual’s condition and treatment
                                                              human genome in 2001 did not deliver the imme-           regimen. Biomarkers can help predict the efficacy
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                              diate breakthroughs in gene therapy that investors       of a product by showing which patients will respond
                                                              anticipated, it did bring intense interest in and an     and which ones will not; they can also help to antic-
                                                              increased understanding of the tools for decipher-       ipate adverse side-effects. These data could aid phy-
                                                              ing DNA. These technologies have been stream-            sician and patient decisions regarding therapies for
                                                              lined, upgraded, and replicated. They are gener-         serious diseases. Pharmacogenomics may also bet-
                                                              ating data that is being shared through multiple         ter define the patient’s health picture by diagnosing
                                                              public databases by researchers worldwide. Costs         specific subtype diseases within cancer, diabetes,
                                                              of genomics sequencing and bioinformatics analy-         and other such heterogeneous conditions. Diseases
                                                              ses are decreasing, even as their capabilities are       may be diagnosed earlier in their development,
                                                              growing exponentially. This gathering momentum           and biomarkers may be used to determine how far

                                                          a patient’s condition has progressed. Longer term,       concerns, related outside parties (such as infor-
                                                          genetic testing may identify which patients are most     mation technology leaders), or one another.
                                                          prone to a specific disease, condition, or event.        Biotechnology–pharmaceutical agreements already
                                                                                                                   are trending toward a 50/50 cost and profit split.
                                                             Pharmacogenomics tools are being developed            This trend could conceivably continue, with phar-
                                                          for real-world use. Diagnostics companies, usu-          maceutical companies moving out of the R&D busi-
                                                          ally at the behest of pharmaceutical or life sciences    ness altogether. If that were to happen, life sciences
                                                          companies, are actively developing tests to verify       companies would command a bigger share of the
                                                          the presence of genetic markers. Whether these are       scientific-based revenues, and the pharmaceutical
                                                          assays to be run in commercial laboratories or sim-      giants would evolve into full-time brokers, market-
                                                          pler tools for use by healthcare personnel in hos-       ers, and distributors of multinational brands—areas
                                                          pitals and physicians’ offices, the diagnostic tests     in which they already dominate globally.
                                                          are moving pharmacogenomics into mainstream
                                                          use—and public awareness. The first combination             Pharmacogenomics will likely be driven by a
                                                          diagnostic test and drug product, HercepTest from        compelling, successful product. Virtually all of the
                                                          Dako and Herceptin from Genentech/Roche, was             participants in the pharmaceutical industry are pre-
                                                          approved by the U.S. Food and Drug Administration        paring for the entry of pharmacogenomics products
                                                          (FDA) in 1998 for the treatment of a specific form of    into mainstream medical care. Market and industry
                                                          breast cancer. Additional combination products are       acceptance will follow a demonstrated success that
                                                          being developed to address a variety of medical needs.   will likely come in one of two forms. One approach
                                                                                                                   might use a marketing campaign that promotes
                                                              The regulatory and reimbursement structures          the pharmacogenomics component of a product,
                                                          pertaining to pharmacogenomics are being engi-           capitalizing on the use of a biomarker for predict-
                                                          neered. In the United States, the FDA has approved       ing efficacy and safety. Through this approach, for
                                                          a number of pharmacogenomics products to date            example, a smaller company might capture signifi-
                                                          and has been actively preparing guidelines for           cant market share from a large pharmaceutical com-
                                                          future products. The agency is expected to publish       pany, or a foreign company could establish itself in
                                                          its final Guidance for Industry Pharmacogenomic Data     the U.S. market with a pharmacogenomics product.
                                                          Submissions in the first half of 2005. It has estab-     A second likely approach would entail a company
                                                          lished the Office of Combination Products specifi-       of any size introducing a product that captures the
                                                          cally to manage the review and approvals of prod-        media’s attention and propels the concept of per-
                                                          ucts that require both a diagnostic kit and a drug.      sonalized medicine into public awareness.
                                                          On the reimbursement side, the large third-party
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          payers are staying abreast of pharmacogenomics              The first high-profile pharmacogenomics product
                                                          developments and are drafting policies to guide          is likely to be in oncology. In many ways, oncol-
                                                          their organizations.                                     ogy is the ideal incubator for a breakthrough
                                                                                                                   pharmacogenomics product that captures public
                                                             Pharmacogenomics will give life sciences com-         attention. A complex and heterogeneous disease, can-
                                                          panies greater options for leveraging their skills,      cer requires better targeted therapies than are currently
                                                          expertise, and discoveries. Services provided by         available. Numerous compounds are already in devel-
                                                          genomics-related companies will be more valuable         opment, thus the breakthrough may be imminent.
                                                          and marketable than ever, whether in alliances           Also, the submarkets within cancer cannot support a
                                                          with pharmaceutical giants, large biotechnology          blockbuster drug, so the marketplace is not threatened
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                              by the entry of a pharmacogenomics-based prod-
                                                              uct. Oncologists, patients, and payers are eager for
                                                              new treatments with clear cost-to-benefit ratios and
                                                              quality-of-life payoffs—even at higher prices and with
                                                              added requirements, such as the administration of a
                                                              diagnostic test.

                                                                 The blockbuster model may eventually disap-
                                                              pear, but its demise is not imminent. The phar-
                                                              maceutical industry is not prepared, nor inclined,
                                                              to abandon the blockbuster approach. The com-
                                                              panies and the regulatory and reimbursement
                                                              frameworks, notably in the United States, are built
                                                              around the blockbuster business model. Further,
                                                              pharmacogenomics, for all its promise, is not yet
                                                              a viable alternative. This is because not all therapy
                                                              areas are well suited to pharmacogenomics prod-
                                                              ucts, as clear and unchanging biomarkers may
                                                              not exist or be identifiable in every indication.
                                                              Financially, pharmacogenomics products are only
                                                              pursuable if they offer significant benefits over tra-
                                                              ditional therapeutics. Products that are safe and
                                                              inexpensive will continue to fare well in the market-
                                                              place, even if they are not effective for all patients.

                                                                 As with previous technology revolutions, the
                                                              science and the markets lead while society lags.
                                                              Pharmacogenomics poses significant societal
                                                              questions. There are ethical and privacy concerns
                                                              around gathering, storing, and using genetic mate-
                                                              rials. Developing and launching any new drug is a
                                                              formidable task, but one in an entirely new class
                                                              (pharmacogenomics) requires changes to the reg-
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                              ulatory, clinical, and reimbursement landscape.
                                                              Implementing pharmacogenomics in everyday
                                                              healthcare facilities will require extensive edu-
                                                              cation, as well as quality assurance and quality
                                                              control measures. While genetic testing as part
                                                              of patient diagnosis, for prescribing and monitor-
                                                              ing will eventually be as common and accepted as
                                                              blood pressure cuffs, there are considerable chal-
                                                              lenges ahead. ■

                                                            The Pharmaceutical Industry Today
                                                          In the past 40 years, the pharmaceutical business has grown into a $250 billion indus-
                                                          try in the United States. At the top are about a dozen multinational pharmaceutical
                                                          giants that control the majority of the resources and products that drive the industry.
                                                          Supporting these larger firms, as well as making discoveries and commercializing
                                                          drugs alone or in collaboration with their peers, are the life sciences companies.

                                                          BLOCKBUSTER BUSINESS MODEL
                                                          The pharmaceutical industry is dominated by the blockbuster business model, in
                                                          which companies build their operations around a few products that produce the
                                                          bulk of their revenues and dictate their strategic direction. Currently, a blockbuster
                                                          drug is defined as one with peak annual global sales exceeding $1 billion. Beyond
                                                          the strict market definition, a blockbuster drug typically is labeled for use by the
                                                          general population or large subsets thereof. Frequently it is prescribed for a chronic
                                                          condition, providing for long-term sales. In 2002, the leading revenue-producing
                                                          pharmaceutical companies marketed 40 blockbuster drugs for combined global
                                                          sales of $89.3 billion. (See Table 1.)

                                                          Historically, the blockbuster approach has allowed the sector to enjoy consecutive
                                                          years of double-digit growth. It also has served as an effective barrier to entry for
                                                          new drugs. The development, commercialization, and marketing of drugs deemed
                                                          safe and efficacious takes significant knowledge and time, both of which require
                                                          capital. Because large pharmaceutical companies have incorporated depth in every
                                                          step of the discovery, development, manufacturing, and marketing process, they

                                                          TABLE 1: BLOCKBUSTER DRUG SALES BY MAJOR PHARMACEUTICAL COMPANIES, 2002

                                                                        Company                     Blockbuster Sales           No. of
                                                                                                       ($ millions)          Blockbusters
                                                            AstraZeneca                                        $7,746               3
                                                            Aventis                                            $5,090               3
                                                            BristolMyerSquibb                                  $6,056               3
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                            Eli Lilly                                          $4,693               2
                                                            GlaxoSmithKline                                  $14,259                8
                                                            Johnson & Johnson                                  $5,900               3
                                                            Merck                                            $14,055                5
                                                            Pfizer                                           $22,307                8
                                                            Pharmacia                                          $3,050               1
                                                            Wyeth-Ayerst                                       $3,143               2
                                                            Other                                              $3,026               2

                                                            Total                                            $89,325               40
                                                            Source: Rasmussen, Centre for Strategic Economic Studies, 2004
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                                           have endured the long development cycles and risks inherent in drug commercial-
                                                                                                           ization. They have also amassed significant influence over regulatory, business, and
                                                                                                           reimbursement policies.

                                                                                                           Biotechnology’s Supporting Role
                                                                                                           In general, the biotechnology startups of the 1980s and 1990s intended to follow
                                                                                                           the established path of the pharmaceutical companies and ultimately pursue the
                                                                                                           blockbuster business model. To achieve this goal, a biotech would commercial-
                                                                                                           ize a single drug based on a technology platform or focused on a specific market
                                                                                                           niche. As the company moved through discovery to market launch, it would add the
                                                                                                           necessary personnel—bench scientists, regulatory managers, manufacturing and
                                                                                                           sales staff—to achieve the next step. After the first product, the company would fol-
                                                                                                           low with more in the same or similar categories and eventually would become fully
                                                                                                           integrated pharmaceutical companies (FIPCOs). (See Figure 1.)

                                                                                                           FIGURE 1: TRADITIONAL EVOLUTION OF A FULLY INTEGRATED PHARMACEUTICAL COMPANY
                                                          Early pharmaceutical leaders like Pfizer
                                                          and Johnson & Johnson evolved into                                                            Preclinical                    Clinical                  Approval &
                                                          fully integrated entities by adding                                                           Development                    Testing                   Launch
                                                          the necessary functions required
                                                          to move to the next stage of drug                   University or other           Add lab space, R&D staff,     Add regulatory, pilot        Add manufacturing,
                                                                                                              research facility spins off   collaborations, scientific    manufacturing, Quality       distribution, sales and
                                                          development. In the biotech-startup                 compound class or             advisory board.               assurance/quality control,   marketing, and additional
                                                          era, companies sought a similar path,               technology platform as a                                    and administrative staff.    administrative staff.
                                                          but were not able to realize the goal.              startup company.

                                                          Instead, the majority have evolved into
                                                          specialized supporting roles, as shown
                                                          in Figure 2.

                                                                                                           With the exception of a few companies such as Amgen, Biogen Idec, Chiron, and
                                                                                                           Genentech, the life sciences startups did not have the funding or timely successes
                                                                                                           to move them into the blockbuster market. They have succeeded by contracting
                                                                                                           their specialized services or out-licensing innovative new compounds to the larger
                                                                                                           players. (See Figure 2.)

                                                                                                           FIGURE 2: THE ROLE OF LIFE SCIENCES COMPANIES IN DRUG DEVELOPMENT

                                                              Drug                                         Preclinical                                                                            Approval
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                              Development         Discovery                                       Phase 1 Trials         Phase 2 Trials     Phase 3 Trials        and Product         Phase 4 Trials
                                                              Stage                                        Development
                                                                               Target ID             Animal testing       Clinical trial design                                             Manufacturing       Clinical research
                                                                               Target validation     Pharmacokinetics     Clinical research oversight
                                                              Supporting                             testing
                                                                               High-throughput                            Bioinformatics management and analysis
                                                              Roles for Life   screening             Clinical study
                                                                                                                          Regulatory filing support
                                                              Sciences and     Compound
                                                              Related          discovery and         IND filing support   Clinical supply manufacturing
                                                              Companies        development                                Full-scale formulation and design process

                                                          THE BLOCKBUSTER MODEL UNDER PRESSURE
                                                          The blockbuster model assumes that a single compound could effectively treat
                                                          most or all patients who have a particular condition. The drug approval process and
                                                          scientific expectation given the available technologies have assumed the same. Yet
                                                          blockbuster drugs may be efficacious in only 40 to 60 percent of the general popula-
                                                          tion. As long as there is no adverse affect in the remaining patients, physicians are
                                                          able to prescribe them on a trial-and-error basis. Patients who benefit, continue
                                                          taking them; those who do not, try something else.

                                                          One problematic aspect to the blockbuster approach is that clinical trials must be
                                                          large enough to show clear efficacy, even if a large portion of the trial group is non-
                                                          responsive to the drug. Larger trials mean greater expenses, and the bulk of drug
                                                          development costs accrue in clinical trials. The Tufts Center for the Study of Drug
                                                          Development estimates that the fully capitalized cost to develop a new drug in 2000
                                                          was $802 million. (See Figure 3.) This number was up from $318 million in 1991
                                                          (both sums are presented in year 2000 dollar values). While the total average costs
                                                          increased 5.8 times in constant dollars between the 1970s and the 1990s, the clinical
                                                          portion increased 8.6 times. Nearly half of the total costs in drug development are
                                                          attributed to the time value of money; it takes between 8 to 12 years, on average, for
                                                          an experimental drug to advance from the lab bench to pharmacy.

                                                          FIGURE 3: COST FOR DEVELOPING A NEW DRUG, 2000

                                                                                       s                                                              ev
                                                                                    re                                                                  alu
                                                                               lu                                                                          e


                                                                                                                                                                      The cumulative cost per step,

                                                                                           39%                                                                        including failures, to get to one NDA

                                                                                                                                         50%                          in 2000 was $802 million, of which
                                                                                                                                                                      the majority is attributed to clinical
                                                                                                                                                                      failures and the time value of money.

                                                                                                                   Phase 1


                                                                                           C li n             3% 3%          Total =$802 Million
                                                                                                  ic a l s
                                                                                                           u cces s e
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                       Source: DiMasi et al, Journal of Health Economics, 2003

                                                          Pharmaceutical companies could justify these high costs if they resulted in new
                                                          blockbuster drugs. Yet only 9 percent of compounds designated as drug candidates
                                                          ever reach a new drug application (NDA) filing. Of those that advance to Phase 1
                                                          clinical trials, only 21.5 percent are ever approved for marketing. And fully 58 per-
                                                          cent of drugs that failed during development were terminated due to efficacy or
                                                          safety issues. (See Figure 4 on page 8 for additional details.)
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                                   FIGURE 4: ATTRITION RATE OF NEW COMPOUNDS IN THE DRUG DEVELOPMENT PROCESS

                                                                                                           100 compounds
                                                          The figure shows the average
                                                                                                              2.8 years
                                                          duration of each phase in the drug
                                                          development process. It also indicates
                                                          the likelihood, in percentages, of
                                                          a compound making it to the next
                                                          stage. Ultimately, only 9 percent of
                                                          new drug candidates reach an NDA
                                                          filing due in large part to safety and
                                                          efficacy problems identified during               Preclinical
                                                          clinical trials.                                                         40 compounds
                                                                                                                                    1.2 years
                                                                                                                                                  30 compounds
                                                                                                                                                    2.3 years
                                                                                                                                     Phase 1
                                                                                                                                                                       14 compounds
                                                                                                                                                    Phase 2              2.3 years
                                                                                                                            40 %           75%                   48%     Phase 3      64% compounds
                                                                                                   Source: Celera Genomics, 2004

                                                                                                   Obtaining marketing approval is no guarantee that a product will deliver a reason-
                                                                                                   able return on investment. In another Tufts’ study, economists found that only 1 out
                                                                                                   of 10 drugs making it to market between 1990 and 1994 delivered a three-fold return
                                                                                                   on investment. And sales of 7 of 10 approved drugs did not meet or only matched
                                                                                                   their research and development (R&D) costs.

                                                                                                   The shortening life expectancy of blockbuster drugs is further eroding the benefits of
                                                                                                   this model for pharmaceutical companies. Accelerated development of follower—
                                                                                                   or “me-too”—drugs is significant. (See the sidebar on page 9 for an illustration of the
                                                                                                   problem.) Emerging competition from follower drugs cut market exclusivity from
                                                                                                   nearly four years in the 1980s to less than one year in the 1990s. One motivating
                                                                                                   factor has been that clinical trial costs for reformulations and line extensions range
                                                                                                   from $10 million to $30 million, a fraction of the amount required to fully develop a
                                                                                                   new molecular entity. Another factor of the downtrend is the availability of generic
                                                                                                   drugs, whose manufacturers are poised for patent expirations. Insurers have been
                                                                                                   quick to replace brand name drugs with the less-expensive alternatives.

                                                                                                   Additionally, burgeoning development expenditures have not resulted in a propor-
                                                                                                   tionally higher number of product approvals. Only a small percentage of recent U.S.
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                                   Food and Drug Administration (FDA) approvals have been for innovative products.
                                                                                                   Estimates suggest that of the 415 new drugs approved between 1998 and 2002, only
                                                                                                   a third were new molecular entities. Only 14 percent of those approved in the five-
                                                                                                   year period were considered by the FDA to be “a significant improvement” over
                                                                                                   existing products.

                                                                                                   In their quest for blockbuster products, drug companies have opened new lifestyle
                                                                                                   categories for therapeutics. Pfizer’s Viagra (sildenafil)—popularly referred to as the
                                                                                                   “little blue pill”—was first introduced in 1998, and today the pharmaceutical market
                                                                                                   for male sexual dysfunction commands $2.4 billion in annual sales. Allergan’s Botox
                                                                                                   (botulinum toxin type A), approved for therapeutic use in niche markets, generated

                                                          more than $560 million for the company in 2003 for its cosmetic (anti-wrinkle) indi-
                                                          cations. The industry expects that the next big blockbuster will be Sanofi-Aventis’
                                                          Acomplia (rimonabant), an anti-obesity drug that is anticipated to be launched in
                                                          the United States in the second half of 2006.

                                                          Societal Pressures
                                                          Drugs can be shown to be safe and effective in closely controlled clinical trials,
                                                          as long as the trials are large enough to account for non-responders. With market
                                                          launch come problematic factors not present in the clinical studies. Patterns and
                                                          adverse events not obvious in the relatively small pivotal trials are more apparent
                                                          once a drug has been prescribed to hundreds of thousands of patients. For exam-
                                                          ple, patients do not always comply with their treatment regimen. Or categories of
                                                          patients not included in clinical trials, such as children, the elderly, and pregnant
                                                          women, now have access to the product.

                                                          Several recent incidents have given the public reason to doubt the safety and effec-
                                                          tiveness of blockbuster drugs. The most recent blockbuster product pulled off the
                                                          market for safety issues was Merck’s Vioxx (rofecoxib), for the treatment of arthritic
                                                          pain. It was found to increase the risks of stroke and cardiovascular events in some
                                                          patients. Vioxx was a $2.5 billion product for Merck. As of January 2005, the com-
                                                          pany had lost a significant amount of its market capitalization with the product
                                                          withdrawal and was facing numerous product-related lawsuits. Pfizer’s Celebrex,
                                                          also for the treatment of arthritic pain, has also been pulled from clinical studies in
                                                          cancer patients due to increased risks of heart problems in those subjects.

                                                          Past high-profile withdrawals have included Bayer’s Baycol (cerivastatin), a
                                                          cholesterol-lowering agent shown to cause severe muscle breakdown leading to kid-
                                                          ney failure; Warner Lambert’s Rezulin (troglitazone) for Type-II diabetes implicated in

                                                          S TAT I N S : B AT T L E F I E L D O F T H E B L O C K B U S T E R S
                                                            The class of compounds known as statins is widely acknowledged            expanded. Initially labeled to help cardiovascular patients lower
                                                            as being effective in substantially lowering blood cholesterol levels     cholesterol, protect against damage from coronary-artery disease,
                                                            by reducing the liver’s production of cholesterol. This market, which     and prevent heart attacks, the drugs now also are prescribed
                                                            comprises the largest share of the $492 billion global prescription       to patients who are at an increased risk of heart disease due to
                                                            drug business, illustrates the competitive dynamics of the blockbuster    diabetes, cigarette smoking, high blood pressure, or family history of
                                                            drug model.                                                               early onset coronary heart disease.
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                            The first to gain Food and Drug Administration (FDA) approval,            As the brand name statins have neared or passed patent expiration,
                                                            Merck’s Mevacor (lovastatin), was launched in 1987. By 2003,              the manufacturers have resorted to other means for sustaining their
                                                            five new statins had been introduced: AstraZeneca’s Crestor               franchises, most of which resulted in minor variations in the same
                                                            (rosuvastatin), Bristol-Myers Squibb’s Pravachol (pravastatin), Merck’s   class of compounds. Zocor has been available over-the-counter in the
                                                            Zocor (simvastatin), Pfizer’s Lipitor (atorvastatin), and a brand name    United Kingdom since 2004. Merck and Schering-Plough combined
                                                            fluvastatin product. Bayer had also introduced Baycol (cerivastatin),     Zocor with Zetia, another cholesterol-lowering product that the
                                                            which was pulled in 2001 for safety reasons.                              companies co-market. The resulting drug, Vytorin, was launched with
                                                            Together, the manufacturers of these drugs have expanded the market       widespread direct-to-consumer marketing campaigns in 2004 and will
                                                            from $15.9 billion in 2000 to an estimated $20 billion in 2004, with      enjoy patent protection until 2015. And Pfizer, maker of the world’s
                                                            sales growing 15 percent annually. Even as the U.S. government has        best-selling drug, the statin Lipitor, is working on a next-generation
                                                            twice lowered its recommended levels for low-density lipoprotein          product that will combine Lipitor’s LDL lowering capabilities with an
                                                            (LDL), which is “bad” cholesterol, the drugs’ indications have been       HDL, or “good” cholesterol, enhancer. ■
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                           liver damage and failure and several deaths; and Propulsid (cisapride), a Johnson &
                                                                                           Johnson product for heartburn that increased the risk of arrhythmia. Even drugs that
                                                                                           are not withdrawn from the market due to adverse events can see their use restricted.
                                                                                           For instance, the FDA recommends that such anti-depressants as GlaxoSmithKline’s
                                                                                           Paxil (paroxetine) should not be prescribed to patients under the age of 18. Data from
                                                                                           clinical trials in children and adolescents did not demonstrate efficacy in treating
                                                                                           depression yet did show an increase in the risk of self-abusive and suicidal behavior.

                                                                                           Such incidents have repercussions throughout the industry. Drug companies realize
                                                                                           significant monetary and credibility losses even if they stay in business. The safety
                                                                                           of other drugs within the same categories is scrutinized, and label changes often
                                                                                           extend across a class of compounds. The approval process becomes even more
                                                                                           cautionary, and payers, physicians, and patients lose confidence in the products.

                                                            The pressures on               Demographic Pressures
                                                             the blockbuster               The population of the developed world is aging at an unprecedented rate. In the
                                                                                           United States, 13 percent of Americans were age 65 and older in 1997. By 2030, that
                                                                 model are                 demographic is expected to make up 20 percent of the population. Of the more than
                                                               symptoms of                 321 million total visits to primary care providers in the United States in 1997, nearly
                                                                                           27.6 percent were made by people in the 65 and older category.
                                                             the underlying
                                                                 problem:                  The medical need for innovative new drugs will increase with this age shift. First,
                                                                                           many drugs appropriate for younger people should be used only at low doses in older
                                                             Pharmaceutical                individuals—and some should not be used at all. This concern had initially been
                                                            companies must                 raised in the 1980s, but a 1997 report by the U.S. General Accounting Office (GAO)
                                                                                           showed that many older patients were still receiving inappropriate prescriptions.
                                                                                           A second drug issue concerning aging populations centers on degenerative dis-
                                                              introduce new
                                                                                           eases, such as cancer, cardiovascular disease, arthritis, and Alzheimer’s. These con-
                                                           blockbuster drugs               ditions are poorly understood. They are complex, and besides presenting in a vari-
                                                           to replace waning               ety of subtypes, they can be triggered by numerous and vastly different pathways.
                                                                                           Because they are, for the most part, chronic, patients will require long-term therapy.
                                                            sales of previous              Serious and already under-treated, age-related diseases will strain the healthcare
                                                                 products.                 system in the next few decades.

                                                                                           CURRENT INDUSTRY RESPONSE TO BLOCKBUSTER CHALLENGES
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                           The pressures on the blockbuster model are symptoms of the underlying problem:
                                                                                           Pharmaceutical companies must continually introduce new blockbuster drugs to
                                                                                           replace waning sales of previous products. New products must move predictably
                                                                                           through the drug development pipeline so that newer ones can be approved as
                                                                                           older ones are made less profitable by next-generation, me-too, or generic prod-
                                                                                           ucts in the marketplace. However, the drug development process is not predictable.
                                                                                           Pharmaceutical companies have responded in two primary ways to this challenge.

                                                                                           Compressing the Process
                                                                                           Drug sponsors have taken a more disciplined approach to selecting candidates
                                                                                           to pursue. Companies have moved to development teams that include specialists

                                                          from across the value chain—from discovery through sales. These multi-disciplinary
                                                          teams manage the full product development process, including the selection of the
                                                          lead candidate to marketing or failure, whichever comes first.

                                                          Firms also have been more willing to terminate unpromising projects earlier in the
                                                          process. “No Go” decisions frequently include metrics beyond safety and efficacy.
                                                          Ease or difficulty of manufacturing, formulation issues, and marketing concerns
                                                          can play huge roles in the decision process. And, in the blockbuster model, the
                                                          prospect for anticipated revenues can be the decisive factor at any stage of develop-
                                                          ment or commercialization.

                                                          Outsourcing the Research
                                                          The pharmaceutical giants have also looked beyond their own laboratory walls for
                                                          drug candidates that might prove to be the next blockbuster. Through various alli-
                                                          ance strategies and licensing agreements, they have been able to move prospective
                                                          drugs from universities and life sciences companies into the latter stage of the drug
                                                          development process in which they excel.

                                                          L I F E S C I E N C E S C O M PA N I E S C A P I TA L I Z I N G O N G E N O M I C S D I S C O V E R I E S
                                                            The companies founded on genomics technologies are a diverse            trials. They are most useful in determining subsets of patients who
                                                            and specialized group. The majority of these offer genomic services,    may benefit from a drug (trial design or drug rescue) or for helping
                                                            applications, and products to help pharmaceutical and life sciences     pharmaceutical companies better define and/or expand markets
                                                            companies make their product pipelines more productive. While
                                                                                                                                    for existing products. Among the early such pharmacogenomics
                                                            genomics companies’ capabilities, business models, and strategies
                                                            are as dynamic as the technologies on which they are founded, the       companies are Genaissance Pharmaceuticals, Millennium
                                                            following provides a general overview.                                  Pharmaceuticals, and Variagenics. As the industry matures, more
                                                                                                                                    of the other niche service providers will build in-house drug
                                                            Working with researchers and sponsors, bioinformatics companies         discovery and development capabilities to become fully integrated
                                                            process massive amounts of data and look for patterns across            pharmacogenomics businesses.
                                                            patient groups or disease progression. Very few bioinformatics-only     Proteomics
                                                            companies remain, of which Genetics Squared and Lion Biosciences
                                                                                                                                    These companies focus on the precise ways that proteins—of which
                                                            are examples, as are divisions of IBM and General Electric.
                                                                                                                                    there are more than 300,000—control the basic mechanisms of
                                                            Contract Research Organizations                                         cell function. Proteomics promises to grow ever-more important in
                                                            CROs manage clinical trials for drug sponsors. They have long
                                                                                                                                    validating targets, pinpointing causes and catalysts of disease, and
                                                            been an important link in traditional drug development. Leaders,
                                                            such as Quintiles Transnational, are supporting pharmacogenomics        designing therapeutics for protein-mediated conditions. Several
                                                            development by providing DNA sampling and regulatory submittal          genomics companies, including Celera Genomics and Incyte
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                            assistance for clients that request these services.                     Genomics, are building proteomics capabilities. Proteomics-focused
                                                            Diagnostics                                                             companies include Myriad Genetics and Proteome Systems.
                                                            Established diagnostic companies, as well as new entrants, develop      Target Identification
                                                            tests to verify the presence of biomarkers. These specialty firms are   Using proprietary reagents and instrumentation and/or high-
                                                            likely to command more attention and higher fees for their services,
                                                                                                                                    throughput screening technologies, target identification companies
                                                            as well as develop high-margin products of their own, under the
                                                            pharmacogenomics model. Current leading diagnostic developers           identify specific genes or gene expression, alleles, single nucleotide
                                                            include Abbott Diagnostics, Celera Diagnostics, Quest Diagnostics,      polymorphisms (SNPs), and/or haplotypes that may be of interest for
                                                            and Roche Molecular Diagnostics.                                        drug development or drug rescue. Most of these companies have
                                                            Pharmacogenomics                                                        incorporated bioinformatics capabilities and continue to build their
                                                            Pharmacogenomics companies help pharmaceutical companies                own proprietary genomics databases. Examples include Affymetrix,
                                                            identify and use genotypes to recruit high responders for clinical      Celera, Genomic Health, Incyte, ParAllele, and Perlegen Sciences. ■
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                             The biotechnology industry has become the pharmaceutical industry’s best source
                                                                                             for new drug targets and experimental compounds. In addition to simply acquir-
                                                                                             ing new compounds from these smaller companies, the pharmaceutical industry
                                                                                             has increasingly formed development alliances in which the life sciences company
                                                                                             conducts preclinical development work funded by the pharmaceutical company.
                                                                                             The mutually beneficial arrangement gives the biotechnology company needed
                                                                                             capital and third-party credibility while enabling the pharmaceutical company to
                                                                                             pursue numerous projects simultaneously without taking on added staff and obli-
                                                                                             gations of its own.

                                                                                             Alliances also have been formed with companies that have proprietary “platform”
                                                                                             technologies to improve drug discovery and/or speed the development process.
                                                                                             In the early 1990s, these technologies included combinatorial chemistry, high-
                                                                                             throughput screening, and microarrays. At the end of that decade through the pres-
                                                                                             ent, the focus shifted to technologies related to genomics. (See the sidebar on page
                                                                                             11 for an overview of genomics-focused life sciences companies.)

                                                          Genomics studies the makeup
                                                                                               The Promise of Pharmacogenomics
                                                          of the individual’s DNA, which     Genomics studies the genome of living organisms; pharmacogenomics applies the
                                                          is set at conception and remains   results of those studies toward treating disease. The promise of pharmacogenomics
                                                          the same.                          is that it will transform medicine from prescribing treatment based on a patient’s
                                                                                             symptoms to therapies based on the patient’s genetics. By identifying genetic mark-
                                                                                             ers associated with specific conditions, researchers expect to find targets for drugs
                                                                                             or therapies to cure diseases, rather than just alleviate symptoms. (See Figure 5.)
                                                          Proteomics focuses on the          PHARMACOGENOMICS IN DRUG DEVELOPMENT
                                                          constellation of proteins within   Ultimately, pharmacogenomics’ contributions to R&D productivity will be evalu-
                                                          the cell, which can be altered
                                                                                             ated on four measures: number of resulting products, revenue potential, time saved,
                                                          by health, environmental, and
                                                                                             and costs-to-return ratios. By bridging the chasm between gene discovery and drug
                                                          physical changes.
                                                                                             development, pharmacogenomics holds great potential in all four metrics.

                                                                                             Eventually, pharmacogenomics will play a significant role in identifying and
                                                                                             validating drug development targets. Drug candidates with variable efficacy or
                                                                                             those that contribute to adverse effects could be replaced with other investiga-
                                                          Pharmacogenomics applies the
                                                          findings from genomics and
                                                                                             tional compounds or biologics with more favorable pharmacokinetics. Use of
                                                                                             pharmacogenomics in early development would greatly reduce or eliminate prod-
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          proteomics toward determining
                                                          how individual genetic             uct failures later in the clinical testing process, when costs rise significantly. The
                                                          differences will interact with     more immediate application will be the use of pharmacogenomics to improve a
                                                          and respond to particular drugs.   drug’s performance in clinical trials.

                                                                                             More Predictable Trial Outcomes
                                                                                             By stratifying clinical trial participants to include those most likely to benefit from the
                                                                                             drug candidate—and exclude those who likely will not—pharmacogenomics-based
                                                          Pharmacokinetics is the study      clinical trials should attain more specific results with smaller numbers of patients.
                                                          of the body’s absorption,          Smaller numbers mean fewer costs. But the more important aspect for trial partici-
                                                          distribution, metabolism, and
                                                                                             pants and internal review boards (IRBs) is that stratification, given the correct bio-
                                                          excretion of drugs.
                                                                                             marker, may reduce or eliminate adverse events. (See the sidebar on page 14.)

                                                          FIGURE 5: COMPARISON OF SYMPTOMS-BASED AND GENETICS-BASED MEDICINE

                                                                              Symptoms-based Medicine                           Genetics-based Medicine

                                                                                                                                Diagnosis, prophylactic treatment,
                                                                                  Diagnosis, prescriptions, and           prescriptions and patient monitoring and care
                                                             Definition            patient monitoring based               based on molecular diagnostics that accurately
                                                                                         on symptoms.                        characterize the patient's health status.

                                                                                                                                                                           Pharmacogenomics has the potential
                                                                                                                                   Identify cause, pathway, and            to significantly change disease
                                                            Discovery               Targets selected based on                            markers for disease               management by enabling the
                                                               and                largest patient population or              Stratify clinical patient groups to target
                                                           Development                    unmet needs.                                                                     development of precisely targeted
                                                                                                                                       those likely to benefit.
                                                                                                                                                                           therapies that will be administered
                                                                                                                                                                           based upon a patient’s genetic
                                                                                 Blockbuster drugs for all patients                                                        makeup, not his or her symptoms.
                                                                                                                            Preventative medications or therapies may
                                                                                 diagnosed with a certain disease.
                                                                                                                             prevent problems or limit the damage in
                                                             Products      Drugs are generally effective in only 40-60%
                                                                                                                                 those genetically predisposed to
                                                                              of the targeted population and can be
                                                                                                                                       particular conditions.
                                                                                  harmful to subsets of patients.

                                                                                                                           Diagnostics enable healthcare professionals
                                                                                                                          to pinpoint the precise disease subtype, gauge
                                                                                                                            its progression, and monitor drug benefits,
                                                                                                                               ensuring better disease management.

                                                                                                                             Therapeutics targeted at precise disease
                                                                                                                           pathways in the patients genetically ensured
                                                                                                                             to benefit will significantly improve the
                                                                                                                                      practice of medicine.

                                                          Although the traditional drug development process typically involves subjects with
                                                          the targeted disease in Phase 2 and later trials, stratifying for the key biomarkers
                                                          in Phase 1 would yield additional information to guide the sponsor in the ongoing
                                                          development process. Further, pharmacogenomics data gathered in any of the trial
                                                          stages can be used to improve the compound or alter the trial design going forward.
                                                          That is, where in traditional drug development a drug would be considered a fail-
                                                          ure if data were inconclusive, pharmacogenomics enables educated data mining to
                                                          better define the appropriate patient population, and move forward as costs and
                                                          anticipated returns warrant.
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          Archiving DNA information from ongoing clinical studies—with patients’ con-
                                                          sent—could be used to effectively analyze pharmacokinetic outliers from uncorre-
                                                          lated patient responses, and possibly accelerate future research. The data also could
                                                          guide the development of next-generation compounds, which may have improved

                                                          Increased Speed to Market
                                                          Shorter trials with more specific results have received expedited reviews by reg-
                                                          ulatory agencies in the past. A commonly cited example is the FDA’s review and
                                                          approval of Genentech/Roche’s breast cancer treatment, Herceptin, which took less
                                                          than six months. (For more details, see the case study on page 16.)
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                                        Herceptin was a unique example in that it was shown to be highly effective in
                                                                                                        patients with tumors that had been resistant to more conventional treatments. It
                                                                                                        also relied on a diagnostic test that clearly identified which subset of breast can-
                                                                                                        cer patients would be expected to achieve better results and suffer less-serious side
                                                                                                        effects from Herceptin. Nevertheless, using pharmacogenomics in clinical-trial
                                                                                                        design is expected to reduce the clinical development time from 10 to 12 years in
                                                                                                        traditional commercialization to just 3 to 5 years. (See Figure 6 on page 15.)

                                                                                                        “If you do a Phase 3 clinical study on 3,000 patients, but 1,000 of them do not
                                                                                                        respond to your drug, and some 500 over-respond to your drug with more side
                                                                                                        effects, then…the statistical significance will be much lower than if you would have
                                                                                                        tested only those 1,500 patients from whom you expect a response. In that case,
                                                                                                        you would need maybe only 300 patients to show statistical evidence of the work-
                                                                                                        ing mechanism or the efficacy of your drug. That might reduce the cost of a clinical
                                                                                                        study by a factor of 2 to 5—even 10,” explains Jo Bury, director of VIB, the Flanders
                                                                                                        Interuniversity Institute for Biotechnology.

                                                                                                        Oren Cohen, chief medical and scientific officer of Quintiles Transnational, one of
                                                                                                        the largest contract research organizations (CROs) agrees: “Everybody understands
                                                                                                        that the blockbuster model is changing and that the next decade is going to involve
                                                                                                        more targeted therapies. Therapies that are more honed biologically will necessar-
                                                                                                        ily have a smaller market tap. On the flip side, pharmacogenetic testing has some

                                                           S T R AT I F Y I N G PAT I E N T S I N C L I N I C A L T R I A L S
                                                               In traditional drug development, patients with a certain condition or      approval for one subset of patients—might prove that the drug also
                                                               disease are randomly enrolled in clinical trials. Pharmacogenomics         limits damage in a significant percentage of all Alzheimer’s patients.
                                                               brings clarity to the testing phases. By using biomarkers to better
                                                               understand the biological makeup of the participants in clinical trials,   Stratifying for Full Representation
                                                               drug developers can streamline the testing process to address a            The random sampling employed in traditional drug design depends on
                                                               variety of objectives.                                                     large numbers of clinical trial participants to ensure that the general
                                                               Stratifying for Responders                                                 population is represented. Yet biomarkers for drug-metabolizing
                                                               The most obvious and often cited use of stratification is to select        differences, as well as for anticipated response to the drug, could
                                                               only patients who would be expected to respond to a particular             be used to ensure that the trial population is representative of the
                                                               investigational new drug. The drug’s statistically significant benefits    targeted patient group. This approach provides trial designers with
                                                               in this targeted subset of patients could be shown in a smaller and        more accurate results and the need for a fewer number of participants
                                                               shorter-run clinical trial than those needed for randomly selected         to prove clinical and statistical significance. With the better defined
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                               patient groups.                                                            patient profiles, trial monitors may also be able to identify adverse
                                                               Stratifying for responders could also be done retrospectively to           event risks during the clinical trials to predict and prevent post-
                                                               demonstrate efficacy of a compound that did not show statistical           marketing problems.
                                                               significance in the total cohort. This is also referred to as a “rescue”
                                                               strategy.                                                                  In addition to proving efficacy and safety, clinical trials are used
                                                                                                                                          to help establish the optimal dosing regimens. If a drug has a
                                                               This approach could speed approval for drug candidates in one subset       narrow therapeutic window, it would be helpful to know which
                                                               of patients while leaving the door open for further testing and market
                                                                                                                                          trial participants are ultra-fast metabolizers, possibly requiring a
                                                               expansion. For example, by limiting testing to Alzheimer’s patients
                                                               who are likely to be fast progressors, a sponsor might demonstrate         larger dose. Conversely, toxicity could be a special risk for the poor
                                                               that a compound could prevent damage or delay progression in               metabolizers. The ability to design trials and evaluate results with
                                                               patients. The initial approval could be for first-line therapy in fast     defined pharmacogenomics parameters should improve the testing
                                                               progressors. Subsequent trials—funded by revenues from the earlier         process in particular and drug development overall. ■

                                                          potentially tremendous advantages for drug developers in terms of shrinking the
                                                          numbers necessary to prove the efficacy in clinical trials…. Smaller trials are less
                                                          expensive and that has the potential to speed drug development. There’s no better
                                                          example of where ‘time is money’ than in the pharmaceutical industry.”

                                                          FIGURE 6: HOW PHARMACOGENOMICS CAN STREAMLINE CLINICAL TRIALS

                                                                                                                                                   Pharmacogenomics-based clinical
                                                                                                                                                   trials have the potential to be
                                                                                                                                                   significantly less lengthy and costly
                                                                                                                                                   than conventional trials because
                                                                                            Traditional clinical                                   participants would be pre-screened
                                                                                                                                                   for biomarkers that indicate their
                                                                                                                                                   responsiveness to a potential therapy.

                                                                Broad patient population

                                                                                                                    Responders only
                                                                                            10-12 years                       3-5 years
                                                          Source: Quintiles Transnational, 2004

                                                          Ready Markets Commanding Premium Pricing
                                                          Through its labeling, a pharmacogenomics product essentially identifies its own
                                                          instant market. Its target market, identifiable by each patient’s own biomarkers, is
                                                          predisposed to gain the greatest chance of clinical benefits. Pharmacogenomics
                                                          products should show high efficacy in an identified sub-segment of a population,
                                                          possibly as standalone therapies. (For an example, see the sidebar on imatinib
                                                          mesylate on page 18.) Frequently, they are approved for patients in whom other
                                                          more traditional therapies have failed. Unlike blockbuster drugs, which usually gain
                                                          market share through massive marketing campaigns, pharmacogenomics products
                                                          enter the market with a precise, and often eager, group of physicians and patients
                                                          who have greater confidence that they will benefit.

                                                          Because of a pharmacogenomics drug’s proven cost effectiveness and narrow focus,
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          it typically commands a premium price. “Pharmaceutical companies are…conser-
                                                          vative with their market assumptions. You look at the market assumptions for [ima-
                                                          tinib mesylate] before it was deployed in the marketplace, and they thought it was
                                                          going to be a $50 million product. Now it sells $300 million because people are more
                                                          motivated to detect that kind of cancer early because the test is there for them to
                                                          take. So they find a lot more patients. They identify them up front, and they don’t
                                                          wind up going into chemotherapy. They can take [imatinib mesylate] and they’re
                                                          perfectly fine. So if you catch them early, and they get first-line therapy, you basi-
                                                          cally open up the marketplace in some of these areas,” explains Michael Venutti,
                                                          senior vice president of Celera Genomics.
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                                        The viability of the pharmacogenomics economic model has also been borne out by
                                                                                                        Genentech’s Herceptin. “When you try to get a drug to a smaller subset of patients,
                                                                                                        like patients with HER2-positive breast cancer, they are going to be the ones that
                                                                                                        are going to be benefiting most from the product. And when you hit something
                                                                                                        like that, it can be very lucrative because there is a very directed therapy toward a
                                                                                                        patient population with a very bad disease. In that sense, we sort of hit both ends
                                                                                                        of that goal: We’re helping patients who really need therapy because their disease is
                                                                                                        historically a very bad disease. And there is some financial benefit. Business gains
                                                                                                        from that combination,” says Virginia Paton, medical director at Genentech.

                                                                                                        PHARMACOGENOMICS IN PATIENT CARE
                                                                                                        In lay terms, pharmacogenomics advances healthcare from the trial-and-error and
                                                                                                        one-size-fits-all approaches of traditional products to an age of truly personalized
                                                                                                        medicine. The anticipated advantages to patient care are numerous.

                                                           C A S E S T U D Y: H E R C E P T I N
                                                               Genentech, a U.S.–based biotechnology company, filed an                   two prior chemotherapy regimens. Of this subset, 14 percent achieved
                                                               Investigational New Drug (IND) application for Herceptin in 1991 and      a 50 percent or greater tumor shrinkage in response to Herceptin
                                                               completed its Phase 3 trials in March of 1997. Although the drug was      and a median duration of response of 9.1 months. Median survival in
                                                               not effective in the overall trial, a genetically based post-evaluation   this single-arm study was 13 months.
                                                               of the patients showed clear results in women with human epidermal
                                                               growth factor receptor 2 (HER2)–positive metastatic breast cancer.        Fast-Track Approval
                                                               Estimated to comprise 25 to 30 percent of all breast cancer patients,     Based on the evidence, Herceptin received FDA Fast-Track designation
                                                               these women have a more aggressive disease, greater likelihood            as a product for the treatment of metastatic breast cancer in March
                                                               of recurrence, poorer prognosis, and approximately half the life          1998.
                                                               expectancy of patients with HER2-negative breast cancer.                  To develop a diagnostic test that could reliably identify HER2-
                                                               Genentech went to the Food and Drug Administration (FDA) with             positive patients, Genentech collaborated with the Denmark-based
                                                               clinical data that showed the demonstrated benefit of Herceptin           diagnostics company Dako. The resulting HercepTest, a semi-
                                                               to the HER2-positive subset of patients and the prototype of a            quantitative immunohistochemical test that measures HER2 activity,
                                                               diagnostic test that would clearly indicate which patients would          moved through the approval process in parallel with Herceptin.
                                                               benefit from the drug.                                                    The first combination pharmacogenomics products, Herceptin and
                                                               The case was compelling: In the Phase 3 trial of Herceptin, in            HercepTest were approved in September 1998—only 4.5 months
                                                               combination with chemotherapy, the median survival rate was               after Fast-Track designation from the FDA.
                                                               increased to 25.1 months over the 20.3 months seen in the                 The first approvals enabled Herceptin to be prescribed as first-line
                                                               chemotherapy-only group. Herceptin was shown to improve overall           treatment of metastatic disease in combination with Taxol and as
                                                               response rates from 29 percent in women treated with chemotherapy
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                                                                         second- or third-line monotherapy in women with tumors over-
                                                               alone to 45 percent with the addition of Herceptin. And the median
                                                                                                                                         expressing the HER2 protein.
                                                               time to disease progression was increased to 7.2 months in women
                                                               treated with chemotherapy plus Herceptin, as compared to 4.5              In January 2002, the FDA approved a second diagnostic test to be
                                                               months in women treated with chemotherapy alone. The results              used with Herceptin. Developed by Vysis and acquired by Abbot
                                                               were more dramatic in the patients who used Bristol Meyer Squibb’s        Laboratories, the Fluorescence In Situ Hybridization (FISH) test
                                                               chemotherapy agent Taxol (paclitaxel). Overall response rates             determines the number of HER2 genes in a patient’s breast cancer
                                                               improved from 15 percent in women treated only with Taxol to 38           cells. This more accurate genotyping is available to physicians and
                                                               percent with the addition of Herceptin. The median time to disease        patients. It is also being used in ongoing and future clinical trials
                                                               progression was increased from 2.5 months to 6.7 months.                  to determine Herceptin’s efficacy in cancer patients who overexpress
                                                               Herceptin as a monotherapy was demonstrated effective in women            the HER2 protein—whether in different stages of breast cancer or in
                                                               with HER2-positive metastatic breast cancer who had failed one or         other tumor cancers. ■

                                                          Increased Safety and Efficacy
                                                          The shift from broad treatment strategies to more individually, genetically selected
                                                          approaches would help ensure that therapies would be both safer and more effec-
                                                          tive. Today, nearly 3 million prescriptions out of the approximately 3.5 billion writ-
                                                          ten annually are wrong—that is, patients are treated with an incorrect or ineffective
                                                          drug. While most of those errors are minor, numerous studies have identified a ris-
                                                          ing incidence of adverse drug reactions (ADRs) in patients. According to the FDA,
                                                          more than 100,000 U.S. patients die each year from ADRs.

                                                          At the core of the issue is that traditional drugs cannot differentiate among differ-
                                                          ent types of patients. In one measure, there are high responders, those who dem-
                                                          onstrate high-drug efficacy; poor responders, those who demonstrate incomplete
                                                          drug-efficacy; and non-responders, those who demonstrate no drug response. This
                                                          latter group may have a heightened risk of ADRs. The way different individuals’
                                                          bodies metabolize drugs also can come into play. As poor metabolizers cannot clear
                                                          drug from their bodies, they face higher risks of toxicity and other ADRs. (For more
                                                          details on these factors, see Figure 7 below and the sidebar on page 20.)

                                                          “There are multiple different [classes of] antidepressants…. If you had done all
                                                          the pharmacogenomics synonymous with those groups, you could tell the clini-
                                                          cian—based on the DNA variants from a single patient he’s looking at—which
                                                          major therapeutic group that patient would best respond to. That’s one of the real
                                                          promises of pharmacogenomics,” says Mark McCamish, chief medical officer of
                                                          pharmacogenomics company Perlegen Sciences.

                                                          FIGURE 7: FACTORS DETERMINING AN INDIVIDUAL’S DRUG REACTION
                                                                                                                                                     Forty to sixty percent of patients do
                                                                                                                                                     not benefit, and may even suffer
                                                                                        High                   Poor                        Non-
                                                                                     responders             responders                  responders   adverse effects, from the blockbuster
                                                                                                                                                     drugs that they are prescribed. This
                                                                                                                                                     is due to two bodily factors: drug
                                                                                                                                                     responsiveness and drug metabolism.
                                                                Hyper-               Extended                 Poor
                                                              metabolizers          metabolizers           metabolizers

                                                               Drug cleared                                    Drug unnecessary or poorly cleared;
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                               too quickly.                                         Heightened risk of ADRs.

                                                                No effect           Desired effect                      Adverse effects

                                                          Another factor contributing to poor drug response can be poor patient compli-
                                                          ance. Patients who are benefiting from a treatment are more likely to stay with it.
                                                          Pharmacogenomics products, which are prescribed to the patients who are geneti-
                                                          cally predisposed to respond, deliver health benefits. Dosages can be better con-
                                                          trolled and side-effects, while not always avoidable, can be better anticipated with
                                                          pharmacogenomics products.
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                                         “Don’t forget the influence of patients because in the end, as a patient, if you have
                                                                                                         the choice to be treated with a drug that has a 90 percent chance of working, or one
                                                                                                         that has a 50 percent chance of working, you will go for the 90 percent, even if you
                                                                                                         have to go back to the waiting room for another half an hour,” says Dirk Pollet, vice
                                                                                                         president of business development at Galapagos Genomics.

                                                                                                         More Precise Diagnosis and Better Prognosis
                                                                                                         Complex diseases, such as cancer, comprise numerous subtypes. Because the
                                                                                                         symptoms and risk factors look the same, it has not been possible with traditional
                                                                                                         medicine to differentiate among the types, much less customize treatment regi-
                                                                                                         mens to each. Pharmacogenomics, through sequencing and screening technolo-
                                                                                                         gies, is able to define precise disease types.

                                                                                                         As importantly, physicians can use pharmacogenomics technologies to deter-
                                                                                                         mine a patient’s progression in disease by using diagnostic tests on a routine basis
                                                                                                         to monitor a patient’s disease state. This information can be extremely helpful to
                                                                                                         the patient in making treatment decisions and future arrangements. It can also
                                                                                                         improve long-term treatment of the condition as products and doses can be pre-
                                                                                                         scribed based on actual disease progression.

                                                           C A S E S T U D Y: I M AT I N I B M E S Y L AT E
                                                               In patients with chronic myeloid leukemia (CML), an abnormal                not free of side-effects, it is believed to cause fewer serious adverse
                                                               protein directs the body not only to overproduce white blood cells          events than other cancer drugs.
                                                               but to alter the cells’ makeup so that they live longer than normal
                                                                                                                                           CML progresses through three phases: chronic, accelerated, and
                                                               cells do. Approximately 4,500 new cases of CML are reported in the
                                                               United States each year, with an estimated 2,400 Americans dying            blast crisis. Patients experience more physical symptoms, such as
                                                               from the disease annually.                                                  fatigue and loss of appetite, as their disease progresses. The drug is
                                                                                                                                           indicated for the treatment of newly diagnosed adult patients with
                                                               This small subset of leukemia patients carries a distinct biomarker: an
                                                                                                                                           Philadelphia chromosome-positive (Ph+) CML in chronic phase. It
                                                               abnormal chromosome 22, or the Philadelphia chromosome, named
                                                                                                                                           is also prescribed to Ph+ CML patients in any phase of the disease
                                                               after the city where it was first described. The reciprocal translocation
                                                                                                                                           who have not responded to interferon-alpha therapy, as well as to
                                                               between chromosomes 9 and 22 that creates the Philadelphia
                                                               chromosome also directs the production of Bcr-Abl tyrosine kinase,          pediatric patients with pH+ chronic–phase CML whose disease has
                                                               the abnormal protein that causes CML. In May 2001, a brand name             recurred after stem cell transplant or who are resistant to interferon-
                                                               version of the compound imatinib mesylate, designed to specifically         alpha therapy.
                                                               block the abnormal protein, was approved in the United States.              In February 2002, the Food and Drug Administration (FDA) granted
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                               The drug reduces the number of white blood cells to normal levels,          the manufacturer of the brand name drug Fast-Track approval for
                                                               relieves the symptoms associated with CML, and eliminates white
                                                                                                                                           the treatment of specific patients with inoperable and/or mestatic
                                                               blood cells that have the specific genetic abnormality.
                                                                                                                                           gastrointestinal stromal tumors (GIST). The tumors have to carry a
                                                               This drug offers several advantages over chemotherapy, the                  particular gene called KIT. The drug is thought to stop the cancer
                                                               conventional treatment for CML. Whereas chemotherapy kills all              from growing by blocking the KIT pathway.
                                                               fast-growing cells, this imatinib mesylate drug blocks the signals that
                                                               cause the abnormal cells to form in the first place, and leaves the         Satisfying a high unmet need within CML and GIST, the manufacturer
                                                               healthy cells alone. The drug can be used chronically. As a tablet, it      was able to justify premium pricing for this brand name imatinib
                                                               can also be taken at home. Patients respond to the drug within one          mesylate. Despite being applicable to but a small sector of the
                                                               to three months, as measured by blood counts returning to a normal          oncology market, the drug generated approximately $300 million in
                                                               range or the presence of cancer cells in the bone marrow. While             U.S. sales in 2003. ■

                                                          Earlier Detection and Possible Prevention
                                                          Among early genetic tests have been those that show heightened risk for certain
                                                          diseases or conditions. Pharmacogenomics companies are looking for markers for
                                                          many others, including those for cardiovascular disease, alcoholism, obesity, and
                                                          lung cancer. Individuals at higher-than-normal risk for these developed condi-
                                                          tions might be convinced to make lifestyle choices, such as not smoking or drinking
                                                          alcohol, to avoid the condition. If not, their physicians would know to screen them
                                                          more frequently and to select more aggressive treatment options if the condition
                                                          manifested. For diseases such as Alzheimer’s and rheumatoid arthritis, where the
                                                          available therapies primarily work to slow progression, early diagnosis could prove
                                                          most beneficial.
                                                                                                                                                          “We’re on that
                                                            Current Pharmacogenomics Landscape
                                                                                                                                                           cusp. All this
                                                          Industry consensus is that pharmacogenomics—that is, combination diagnos-
                                                          tic and pharmaceutical products—will be part of mainstream medicine within 10                     investment
                                                          years. Numerous products, applications, services, and technology breakthroughs
                                                                                                                                                          we’ve made in
                                                          in the very near future will help determine its success. Life sciences companies,
                                                          which stand to benefit greatly from the technology, are leading the developments,              trying to enable
                                                          while pharmaceutical companies are taking a more measured approach. Primary                  pharmacogenomics
                                                          industry influencers—regulators, investors, and payers—are also preparing for the
                                                          changes that pharmacogenomics will bring.                                                     from the pharma
                                                                                                                                                         side, the biotech
                                                          “When we think of a new technology enabling a new paradigm, we tend to expect
                                                          linear progress between here and there. But of course, the way the world always               side, the investor
                                                          works is that there’s a period where the hard work is going on without producing the             side and the
                                                          linear progress which leads to disappointment.... At some point, that turns around
                                                          and progress outstrips the expectations. I feel like we’re on that cusp. All this invest-          regulatory
                                                          ment we’ve made in trying to enable pharmacogenomics from the pharma side, the                  environment is
                                                          biotech side, the investor side and the regulatory environment is starting to yield
                                                          results, and that’s going to go quickly,” predicts Tom Willis, chief scientific officer of     starting to yield
                                                          ParAllele BioScience.                                                                         results, and that’s
                                                          INDUSTRY RESPONSE                                                                                 going to go
                                                          The genomics, bioinformatics, and pharmacogenomics companies operating today
                                                          understand that competition is intense, technology is rapidly changing, and their
                                                                                                                                                            Tom Willis,
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          future success depends on how well they can establish themselves now. They are
                                                          working with partners or independently, to create and amass critical data, expertise,         ParAllele BioScience
                                                          and strategies for ensuring steady revenue streams in the future. They are making
                                                          breakthrough discoveries and great strides toward establishing pharmacogenomics
                                                          and personalized medicine as a permanent part of healthcare.

                                                          Life Sciences Companies
                                                          Life sciences companies, in this report defined as companies centered around bio-
                                                          technology and biopharmaceutical R&D operations, may not have the resources
                                                          to pursue pharmacogenomics-only R&D, but they are motivated to use the
                                                          technologies to further their business plans.
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                                        The large biotechnology companies that have products on the market are in a
                                                                                                        similar predicament as the pharmaceutical giants: They must continuously seed
                                                                                                        their product pipelines. While they aspire to blockbuster products, markets in the
                                                                                                        $350 million to $500 million range are highly desirable—and realistic with targeted
                                                                                                        pharmacogenomics products. Among this group is Genentech. In 2004, the com-
                                                                                                        pany announced approval of Tarceva (erlotinib) for lung cancer. Although not cur-
                                                                                                        rently labeled to require a genetic test, the drug has a strong pharmacogenomics
                                                                                                        component and furthers Genentech’s reputation as a leader in the field. (For more
                                                                                                        details, see the sidebar on page 23.)

                                                                                                        For smaller life sciences entities that may have only one or two products in develop-
                                                                                                        ment, identifying and using biomarkers in their clinical development process may
                                                                                                        be the only way to get products to market. This group has the least amount of capi-
                                                                                                        tal to spend on inconclusive trials and the most to lose if their product fails. Their
                                                                                                        very existence might depend on the use of pharmacogenomics tools.

                                                                                                        Life sciences R&D firms of all sizes are increasingly looking to capture niche mar-
                                                                                                        kets. In addition to capitalizing on a particular technology platform or market-seg-
                                                                                                        ment expertise, the approach makes their company easier for investors to under-
                                                                                                        stand and track. It also ensures that the regulatory, manufacturing, and sales func-
                                                                                                        tions can be both manageable and effective. Pharmacogenomics can aid a smaller
                                                                                                        life sciences company in carving out a respectable and lucrative niche.

                                                                                                        Similarly, a foreign company intent on penetrating the U.S. market could make
                                                                                                        a name for itself by introducing a significant new pharmacogenomics product.
                                                                                                        Whether a therapy for a new market segment or one that took away market share
                                                                                                        based on its pharmacogenomics attributes, it surely would capture the attention of
                                                                                                        the U.S. based multinationals.

                                                           D I F F E R E N C E S I N D R U G M E TA B O L I S M A N D R E S P O N S E
                                                               Two factors affect the way in which individuals react to a given drug.       used to stratify clinical trial patients, helping to prove drug efficacy.
                                                               First, because of genetic, physiological, or environmental differences,      Retrospective evaluations of P-450 mutations might also explain
                                                               not all patients will respond to a given drug. For example, only HER2-       different response rates in prior or current clinical trials, enabling
                                                               positive patients benefit from Herceptin. Second, not all bodies process     sponsors to redesign and re-enroll failed trials or better conduct
                                                               or metabolize drugs in the same way. (See Figure 7 on page 17.)              future phases of trials. ■
                                                               Pharmacogenomics seeks biomarkers to better             DRUG METABOLIZING ENZYMES AND FREQUENCY OF THEIR MUTATIONS IN ETHNIC POPULATIONS
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                               select the patients who will benefit from a drug
                                                               and to limit the adverse side effects among
                                                                                                                         Metabolizes 55% of
                                                               various populations. To date, some of the most            marketed Rx drugs
                                                                                                                                                              58% of African Americans
                                                               closely studied genetic mutations are those in                                                     9% of Caucasians
                                                               the cytochrome P-450 system, which produces               CYP2D6
                                                               drug metabolizing enzymes. The figure at the right        Metabolizes more than 20 Rx drugs
                                                                                                                                                                   10% of Caucasians
                                                                                                                         Accounts for 25% of metabolic
                                                               illustrates the frequency of mutations in different                                             2% of Asians
                                                                                                                         activities of all existing drugs
                                                               ethnic populations of drug-metabolizing enzymes.
                                                               By identifying the pharmacokinetic variability            Metabolizes numerous classes of
                                                                                                                                                             23% of Asians
                                                                                                                         drugs including antidepressants,
                                                               manifested by mutations among the P-450
                                                                                                                         cardiovascular drugs and oral
                                                               genes, drug companies may reduce adverse drug             contraceptives
                                                               reactions among existing drugs. The data could be
                                                                                                                       Source: Celera Genomics, Quintiles Transnational, 2004

                                                          Concurrently, diagnostics appears destined to become a higher-margin sector.
                                                          Pharmaceutical companies, including Abbott, GlaxoSmithKline, and Roche have
                                                          made major investments in diagnostics. By developing tests to identify the appropri-
                                                          ate patients for specific drugs and genotype-profiled therapeutic classes, diagnos-
                                                          tics companies could be among the first with commercialized pharmacogenomics
                                                          products in the market. Further, they will enjoy automatic market share where com-
                                                          pletion of the test is a labeled prerequisite to prescribing specific drugs.

                                                          Pharmaceutical Companies
                                                          For large pharmaceutical companies, pharmacogenomics currently is viewed as an
                                                          adjunct technology for optimization of the drug discovery and development pro-
                                                          cess. Virtually all of the giant pharmaceutical companies have R&D agreements
                                                          with pharmacogenomics companies. These projects are aimed at helping pharma-                    pharmaceutical
                                                          ceutical companies identify viable targets and eliminate unpromising ones early in
                                                                                                                                                        industry is taking
                                                          the drug development process.
                                                                                                                                                         an opportunistic
                                                          Companies of all sizes with active clinical programs view pharmacogenomics as a
                                                          useful means for guiding clinical trial recruitment and for evaluating the trial results.    approach. They run
                                                          In essentially all of the major clinical trials currently underway in the United States,      into a barrier that
                                                          sponsors are gathering DNA material that may prove useful in understanding the
                                                          results and developing next-generation products.                                             pharmacogenomics
                                                                                                                                                      can address—either
                                                          “Right now, I would say [the pharmaceutical industry is] taking an opportunistic
                                                          approach. In other words, they’re using traditional development. They run into a                they’ve got an
                                                          barrier that pharmacogenomics can address—either they’ve got an adverse event
                                                                                                                                                         adverse event ...
                                                          that they didn’t expect, or an adverse event they did expect, but it’s at a higher fre-
                                                          quency, or their efficacy is less than what their ideal profile was. To commercialize         or their efficacy is
                                                          this drug, they’ve got to get over those hurdles. So…use of pharmacogenomics is
                                                                                                                                                      less than what their
                                                          more opportunistic than it is prospective planning at this point,” says Perlegen’s
                                                          McCamish.                                                                                   ideal profile was. To
                                                          By outsourcing specific tasks within the commercialization process, pharmaceu-               commercialize this
                                                          tical companies can use pharmacogenomics to bolster their drug development                    drug, they’ve got
                                                          strategies without incurring high costs of replicating the capabilities in-house.
                                                          Although, if pharmacogenomics proves itself in coming years, the larger companies              to get over those
                                                          may decide the long-term returns could justify investment in new technologies.                     hurdles.”
                                                                                                                                                         Mark McCamish,
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          Pharmaceutical companies that have made major investments in diagnostics are
                                                          expected to be actively integrating pharmacogenomics testing into their internal               Perlegen Sciences
                                                          programs. These companies will be well positioned to attain regulatory approval
                                                          and capture market share with their pharmacogenomics products.

                                                          REGULATORS, INVESTORS, AND PAYER RESPONSE
                                                          Three groups outside of the drug development business essentially govern it: inves-
                                                          tors, regulators, and payers. These crucial entities are staying abreast of develop-
                                                          ments in pharmacogenomics and are anticipating the significant changes in drug
                                                          development and healthcare that are likely to result over time. Yet, they are cautious
                                                          about such changes and are taking a conservative approach in their response to the
                                                          pharmacogenomics opportunity.
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                                      Despite a sentiment within the pharmacogenomics industry that the FDA
                                                                                                      or large third-party payers should take a leadership role by mandating
                                                                                                      pharmacogenomics elements in drug development and delivery, this is unlikely
                                                                                                      to happen. Neither the FDA nor the payers have the funding, staffing, or motiva-
                                                                                                      tion to take the lead. They have limited their involvement to making policy and
                                                                                                      guidance changes to accommodate products as they move into the respective
                                                                                                      organization’s domains.
                                                                “We’re working                        “We’re working to get a handle on how genetics and genomics are affecting and will
                                                                to get a handle                       affect healthcare delivery systems, health insurance, and clinical research. We’re
                                                                                                      focused on three primary uses of genetic information: the development of gene-based
                                                               on how genetics
                                                                                                      technologies including gene therapy; genetic testing, which is where genetic informa-
                                                               and genomics are                       tion is predominantly used today; and pharmacogenomics—the use of genetic infor-
                                                                                                      mation to guide drug development and drug prescribing,” explains Brian Raymond,
                                                               affecting and will
                                                                                                      senior policy consultant at Kaiser Permanente’s Institute for Health Policy.
                                                               affect healthcare
                                                                                                      For its part, the FDA is expected to finalize its Guidance on Pharmacogenomic Data
                                                               delivery systems,                      Submissions in the first half of 2005. (For more details on pharmacogenomics sub-
                                                               health insurance,                      mittals to the FDA, see the sidebar below.)
                                                                  and clinical                        Investors, who have suffered considerable losses by over-estimating the contribu-
                                                                   research.”                         tions of earlier technologies such as rational drug design, high-throughput screen-
                                                                                                      ing, and the sequencing of the human genome, appear to be more pragmatic and
                                                                   Brian Raymond,                     demanding at this juncture. They are scrutinizing business plans for clear benefits
                                                                Kaiser Permanente’s                   that can be incorporated easily into physician practice and patient care. If there is
                                                                                                      not a clear and compelling reason for a physician to adopt a new diagnostic or drug,
                                                          Institute for Health Policy                 chances are the investors will be reluctant to fund its development.

                                                                                                         The Pharmacogenomics Breakthrough
                                                                                                      Although it is expected to take another decade for pharmacogenomics to
                                                                                                      be an accepted and integral part of mainstream healthcare, a breakthrough
                                                                                                      product could catapult the industry into the public consciousness within the
                                                                                                      next few years.

                                                           P H A R M A C O G E N O M I C S A N D F D A S U B M I T TA L A C T I V I T Y
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                               In 2003, the Food and Drug Administration (FDA) issued its Draft       permission for the pharmacogenomics data to be included. Sponsors
                                                               Guidance on Pharmacogenomic Data Submissions, a set of guidelines      are including pharmacogenomics data in their FDA filings, and it is
                                                               expected to be finalized in 2005. According to that document and FDA   expected that such data submittals will become mandatory within
                                                               practice, Investigational New Drug (IND) and New Drug Application      10 years. ■
                                                               (NDA) submittals must include all pharmacogenomics results that
                                                                                                                                      FDA SUBMISSIONS WITH PHARMACOGENOMICS DATA
                                                               sponsors have on known valid biomarkers. Submittals must include
                                                               all pharmacogenomics data regarding optimal dose, genotyping                        Time Period                     INDs/NDAs
                                                               for inclusion or exclusion, and safety or efficacy. The agency also
                                                                                                                                                     1995-2000                         15
                                                               encourages voluntary data submission of all other genomic data
                                                               gathered during drug discovery and development.                                       2000-2002                         35
                                                                                                                                                     2002-2003                        100+
                                                               The FDA’s pharmacogenomics review group determines whether
                                                                                                                                       Source: Quintiles Transnational, 2004
                                                               the data are pertinent to the submittals, but sponsors must grant

                                                          Unlike earlier successes such as Herceptin, which garnered keen awareness within
                                                          the pharmaceutical industry, this breakthrough product will capture the public’s
                                                          attention. This might be accomplished in any number of ways, such as via a market-
                                                          ing campaign that compels patients to demand a genetic test; the first treatment or
                                                          a significantly improved therapy for such publicized diseases as cancer, or a new
                                                          product that wins the immediate endorsement of physicians. For these reasons and
                                                          more, industry consensus is that the first breakthrough pharmacogenomics prod-
                                                          uct is likely to be in oncology. (For more details, see the sidebar on page 24.)

                                                            The New (and Old) Business Models
                                                          Pharmacogenomics has the potential to revolutionize the practice of medicine
                                                          through safer, more effective drugs prescribed to those with clearly defined bio-
                                                          markers. These products, labeled and prescribed based on a genetic basis, are in an
                                                          entirely new and advanced category than traditional drugs that are prescribed based
                                                          on symptoms. So where does that leave the current pharmaceutical business model?

                                                          THE BLOCKBUSTER MODEL REMAINS
                                                          As discussed earlier in this report, the blockbuster model is currently under intense
                                                          stress, and many question its sustainability. However, the pharmaceutical industry is
                                                          not prepared to abandon the blockbuster approach in favor of pharmacogenomics.

                                                          Companies have built considerable infrastructures, staffs, and capabilities in the past
                                                          40 years that support the blockbuster model. And the pharmaceutical business is
                                                          still among the most lucrative in the world and has historically realized double-digit

                                                          C A S E S T U D Y: TA R C E VA
                                                            According to the World Health Organization, there are more than 1.2         were statistically significant and clinically welcomed. The FDA approved
                                                            million cases worldwide of lung and bronchial cancer each year, and         Tarceva for the treatment of patients with locally advanced or metastatic
                                                            approximately 1.1 million deaths annually. Lung cancer can present as       NSCLC after failure of at least one prior chemotherapy regimen.
                                                            small-cell or non-small-cell lung cancer (NSCLC). The latter is the most
                                                            common and accounts for approximately 80 percent of all lung cancer         Despite the drug’s promise and successes in clinical trials, less than half
                                                            cases. NSCLC is an aggressive disease, with fewer than 10 percent of        of NSCLC patients have the EGFR-associated protein. The Food and
                                                            patients surviving beyond five years of their diagnosis.                    Drug Administration (FDA) has asked OSI and Genentech to do further
                                                                                                                                        evaluations and determine if using the biomarker as a prerequisite
                                                            In 2004, OSI Pharmaceuticals and Genentech/Roche completed                  for prescribing Tarceva would be in order. Further, the $2,026 per
                                                            the development process and began selling a new drug for NSCLC:             month that the companies are charging for the drug was as much as
                                                            Tarceva (erlotinib), a human epidermal growth factor receptor 1
                                                                                                                                        half of what analysts had projected. Tarceva was not shown effective
                                                            (HER1)/epidermal growth factor receptor (EGFR)–inhibitor. The EGFR
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                                                                        in combination with platinum-based chemotherapy agents, so it is
                                                            gene triggers a protein that is correlated with increased metastasis,
                                                                                                                                        not labeled for that use. In addition, patients who are prescribed the
                                                            decreased survival, and a poor prognosis. EGFR also protects
                                                                                                                                        drug will use if for fewer months than the companies had originally
                                                            malignant tumor cells from the cytotoxic effects of chemotherapy and
                                                            radiotherapy, making these treatments less effective. Tarceva inhibits      anticipated. In short, the possibility of a pharmacogenomics labeling
                                                            EGFR-associated tyrosine kinase, thus interfering with the cell signaling   change and the differences in pricing and dosing reduce Tarceva from
                                                            pathways involved in cell proliferation.                                    a potential blockbuster drug to one with projected peak sales of $400
                                                                                                                                        million to $500 million per year.
                                                            In the Phase 3 trial, the Tarceva group showed a median overall survival
                                                            of 6.7 months, compared with 4.7 months in the placebo group. The           Overexpression of EGFR is common in many solid tumors, however. OSI
                                                            percentage of patients alive at 12 months was 31.2 percent for the          and Genentech have shown promising results in clinical trials of Tarceva
                                                            Tarceva group, compared with 21.5 percent for the placebo group. The        in pancreatic cancer. Early-stage trials of Tarceva are being conducted
                                                            median Progression-Free Survival (PFS) was 9.9 weeks in the Tarceva         in other solid tumor indications, such as ovarian, colorectal, head and
                                                            group, compared with 7.9 weeks in the placebo group. These results          neck, renal cell carcinoma, and others. ■
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                                      returns on investment. Additionally, the regulatory and reimbursement frame-
                                                                                                      works, notably in the United States, are also built around the blockbuster business
                                                                                                      model and strategies.

                                                                                                      In the United States, the aging baby-boomer generation is creating demand for
                                                                                                      products that prolong youthfulness. These drugs include tablets for sexual dys-
                                                                                                      function, injections that erase wrinkles, and products that promote weight loss. At
                                                                                                      the same time, this demographic is living longer. Given their longevity, the group
                                                                                                      is expected to experience higher incidences of degenerative diseases including
                                                                                                      arthritis, cancer, osteoporosis, cardiovascular disease, and dementia than prior
                                                                                                      generations. Without blockbuster products that are relatively inexpensive, essen-
                                                                                                      tially safe, and readily available, the current system will not be able to keep pace
                                                                                                      with their healthcare demands.

                                                                                                      Finally, not all therapy areas are well suited to pharmacogenomics products. First,
                                                                                                      clear biomarkers may not exist or be identifiable in every indication. Second,
                                                                                                      there is no financial incentive to pursue a pharmacogenomics strategy that does
                                                                                                      not offer significant benefits over traditional therapeutics. Third, products that
                                                                                                      are safe and inexpensive will continue to fare well in the marketplace, even if they
                                                                                                      are not effective for all patients.

                                                           T H E C A S E F O R A C A N C E R S U C C E S S S T O RY
                                                               The first breakthrough pharmacogenomics product is likely to be               clearly define that window for cancer patients who would ben-
                                                               an oncology drug. The reasons for this belief, outlined below, say            efit from the treatment.
                                                               as much about the difficulty of drug development in general—and         Patient Factors
                                                               pharmacogenomics in particular—as they do about the promise of               Cancer can be an aggressive disease in which time is of the
                                                               personalized medicine for cancer patients.                                   essence. Patients cannot afford the trial-and-error approach
                                                                                                                                            taken with traditional drugs.
                                                               Clinical Factors
                                                                    Cancer is a family of complex and heterogeneous diseases.               Cancer patients, especially those who could be assured that
                                                                    Pharmacogenomics can differentiate among the subtypes and               their biomarker suggested a product would work for them, are
                                                                    deliver therapies effective against specific types.                     typically willing clinical trial participants. They also tend to be
                                                                                                                                            willing DNA donors with the hope that their participation will
                                                                    Oncologists are specialists, making it easier to identify those
                                                                                                                                            help future patients.
                                                                    who would prescribe a particular cancer treatment. They are
                                                                    typically early adopters of new therapies and processes, espe-     Market Factors
                                                                    cially ones proven to benefit identifiable patient subsets.             Subsets of cancer patients are small. New products aimed at
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                    Oncology drugs that are effective deliver clear quality-of-life         them would not be a threat to the blockbusters.
                                                                    benefits and could improve long-term prognoses.                         Numerous oncology drug candidates currently are in develop-
                                                                    Genotyping or functional enzyme analysis already is standard            ment. The breakthrough compound may be among them.
                                                                    practice in cancer diagnosis. A new diagnostic will not pose the        Payers are more likely to reimburse patients for drugs with
                                                                    same learning curve in oncology as in other fields.                     clear cost-to-benefit ratios, as an effective oncology drug
                                                                    Efficacy of traditional cancer treatments is low—typically              would demonstrate.
                                                                    20 to 40 percent. A pharmacogenomics product that deliv-                The public is well aware of cancer. As life expectancies con-
                                                                    ered significantly better results, even within a subset, would          tinue to rise, so do the odds that any individual will develop
                                                                    be welcomed.                                                            cancer in their lifetime.
                                                                    Anticancer drugs tend to have a narrow therapeutic index.               Oncology is an area in which companies could become niche
                                                                    That is, there is little room between doses that are therapeutic        leaders and leverage their findings in one pharmacogenomics
                                                                    and those that are toxic. A pharmacogenomics product could              product across a range of diseases. ■

                                                          PHARMACOGENOMICS BUSINESS MODELS
                                                          The pharmaceutical industry will be reluctant to embrace pharmacogenomics due
                                                          to the substantial up-front costs, high risks, and narrowed markets. The industry
                                                          will, however, recognize and use the new technologies to extend and expand the
                                                          reach of its conventional blockbuster drugs in a number of ways.

                                                          Find New Uses for Existing Drugs
                                                          Products already approved and on the market have overcome significant hurdles in
                                                          development, manufacturing, and marketing. Adding indications, or patient seg-
                                                          ments such as children, may require relatively small financial and time investments,
                                                          while possibly extending the product’s market life, profit margins, and patent pro-
                                                          tection. This approach of first gaining market approval in one group, and later add-
                                                          ing indications, also appeals to drug developers of new compounds. (See Figure 8.)

                                                          “Can you fast-forward the clinical development by taking a known drug and repro-
                                                          gramming it? A lot of VCs [venture capitalists] are actually looking at that as the basis
                                                          of startup companies, because you can grab a drug, even if it’s a generic, and repro-
                                                          gram it with a new use patent or a new formulation and take it into the clinic…. Put
                                                          [a known drug with a proven biomarker] together, and it’d be in the clinic in short
                                                          order. That’s a physician’s dream,” explains Celera’s Venutti.                                                      Pharmaceutical companies can
                                                                                                                                                                              expand the market for existing
                                                          Enhance Efficacy with Diagnostics                                                                                   drugs, or new compounds, by using
                                                          The availability and use of a genetic-based diagnostic would enhance a product’s                                    pharmacogenomics data to further
                                                          market share by demonstrating unmatched clinical efficacy. It would help extend                                     develop the product for use in other
                                                                                                                                                                              indications or patient segments. This
                                                          the drug’s marketable lifetime, assist the sponsor in capturing or holding market
                                                                                                                                                                              ongoing development approach is
                                                          share and, by improving clinical benefits, justify premium pricing strategies that                                  cost-effective because it leverages the
                                                          would cover diagnostic and product development costs. (See Figure 9 on page 26.)                                    lengthy and costly lead identification,
                                                                                                                                                                              validation, and optimization stages
                                                                                                                                                                              several times over.
                                                          FIGURE 8: CONTINUOUS DRUG DEVELOPMENT MODEL MADE POSSIBLE BY PHARMACOGENOMICS

                                                                                        Lead                  Lead                 Lead                 Preclinical           Clinical              Marketed
                                                                                        identification        validation           optimization         testing               development           drug
                                                             and validation

                                                                 Known drug or analog can be fast-forwarded to preclinical or clinical testing with compelling pharmacogenomics data
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          Source: Celera Genomics, Quintiles Transnational, 2004

                                                          “If you enter a particular market with a drug that comes with a predictive test, then
                                                          your competitors will be at a huge disadvantage, because your drug will be effective
                                                          in many more cases. And the patients will be on your side and helping to promote
                                                          your medicine. So you just have to be daring enough to do it. But that’s not in line
                                                          with classical drug development thinking,” says Galapagos’ Pollet.

                                                          Also, by better understanding who does not respond to the product and why, the
                                                          sponsor could develop—or out-license—a lead candidate to serve poor or non-
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                                                      FIGURE 9: HOW PHARMACOGENOMICS EXPANDS MARKET SHARE

                                                                                                          l market               Blockbu
                                                                                        o        f tota                                 ster
                                                                                    30%                                                          1–
                                                                              s–                                                                      40
                                                                            er                                                                          %
                                                                          th                                                                                of

                                                                                           Responders                                                                                  Non-responders
                                                                                              60%                                                                                    40% of total market

                                                                            B lo
                                                                                   ckb                                      40%
                                                                                         u st
                                                                                                er N
                                                                                                       o. 2 –
                                                                                                              3   0% of total market

                                                                                                                                                                    60% of total market

                                                          In this example, Blockbuster No. 2,
                                                          adequately treats 60 percent of the
                                                          patients who take it. An accurate,
                                                          genetically-based diagnostic would
                                                          cut current sales by 40 percent. But,
                                                          this same diagnostic would give
                                                          Blockbuster No. 2 added appeal for                            Expand Customer Base with Predictive Medicine
                                                          the responders, the 60 percent of                             Pharmacogenomics could be used to detect a predisposition toward a particular dis-
                                                          the total patient population. With
                                                                                                                        ease. For growing disease markets, such as cardiovascular disease, a genetics-based
                                                          pharmacogenomics, Blockbuster No.
                                                          2 could win market share from other
                                                                                                                        test could identify patients early for long-term prophylactic therapy. This approach
                                                          products in its class.                                        would require monitoring programs for drug response and disease progress, addi-
                                                                                                                        tional revenue generators for the sponsor. Plus, identification of at-risk patients
                                                                                                                        could increase the market size for the sponsor’s more traditional therapies.

                                                                                                                        PHARMACOGENOMICS BROADENS THE INDUSTRY
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                                                        With genomics has come an entirely new range of technologies, services, and
                                                                                                                        capabilities. These platforms are competing for market dominance and to prove
                                                                                                                        their legitimacy. As with any emerging technology, not all will survive. In the
                                                                                                                        meantime, however, pharmacogenomics is creating significant opportunities for
                                                                                                                        life sciences companies.

                                                                                                                        From a business model perspective, pharmacogenomics’ potential is greatest in its
                                                                                                                        ability to spread profitability across the life sciences sector. The diagnostics compa-
                                                                                                                        nies, in the long run, may benefit most. Not only are they in a position to develop
                                                                                                                        tests to identify the appropriate patients for specific drugs, they will apply genetic-
                                                                                                                        based discoveries in ways that could vastly improve current medical practice. Using

                                                          biomarkers instead of painful and costly biopsies, as is the approach XDx is taking,
                                                          will improve efficiencies for healthcare facilities while simultaneously making phy-
                                                          sicians’ jobs easier and patients’ experiences more comfortable. (For more details
                                                          on XDx, see the case study below.)

                                                          Genetic testing for progressive diseases such as Alzheimer’s could replace sub-
                                                          jective and fallible cognitive testing or the relatively expensive positron emission
                                                          tomography (PET) or magnetic resonance imaging (MRI) scans. Testing that could
                                                          identify progressive diseases early on also would improve the performance—and
                                                          the sales—of drugs that slow the condition’s damage. Whether commissioned by
                                                          large drug sponsors, working in collaboration with other life sciences companies,
                                                          or independently designing and commercializing products, diagnostics companies
                                                          could gain significant momentum through pharmacogenomics.

                                                          Smaller drug sponsors will benefit as well. While they have had difficulty competing
                                                          in traditional drug development scenarios, life sciences companies will capitalize on
                                                          pharmacogenomics to capture market segments large pharmaceutical companies
                                                          have not been willing to pursue. That is, smaller drug developers can thrive on $300

                                                          C A S E S T U D Y: X D X

                                                            For heart transplant patients, the largest risk is transplant rejection,   at the XDx Reference Laboratory, is expected to be most effective in
                                                            which can be managed through immunosuppressive medications.                the stable outpatient population.
                                                            The second largest risk may be complications, such as infections and
                                                                                                                                       To develop its diagnostic, XDx initiated its Cardiac Allograft Rejection
                                                            cancer, resulting from long-term exposure to these very drugs.
                                                                                                                                       Gene Expression Observational (CARGO) study in 2001. The company
                                                            To manage these risks, cardiologists currently rely on endomyocardial      worked with eight leading U.S. transplant centers and enrolled more
                                                            biopsies. In the procedure, physicians insert tiny biopsy shears into      than 600 cardiac transplant recipients who were followed during
                                                            a vein in the patient’s neck and thread them through blood vessels         their post-transplant course for a total of more than 5,000 clinical
                                                            into the heart. The small pieces of the heart muscle they snip off and     encounters. XDx evaluated the gene expression of blood drawn in
                                                            pull back through the vein are sent to pathologists, who look for
                                                                                                                                       each of these encounters, and correlated the gene expression to the
                                                            inflammatory patterns that indicate rejection. Most heart recipients
                                                                                                                                       patient’s biopsy results. Then, using several genomics technologies,
                                                            endure at least 12 such procedures in their first year post-transplant,
                                                                                                                                       XDx identified and validated gene expression patterns in peripheral
                                                            with possible biopsies thereafter. While the procedure is necessary to
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                                                                       blood that correlate with acute rejection.
                                                            detect signs of rejection that may not be clinically apparent, it has
                                                            significant limitations. Because it is invasive, biopsy carries its own    AlloMap is a multi-gene test panel and algorithm that provides
                                                            risk of infection and other complications. It is expensive and not         the physician with a single score correlated to the patient’s current
                                                            adequately sensitive to detect all types of rejection, and it cannot       immune status and may also be able to predict the occurrence of
                                                            be performed frequently enough to predict all incidences in time to        future rejection and graft dysfunction. Physicians use the score in
                                                            initiate treatment that could limit damage.                                combination with other criteria and personal judgment to make
                                                            XDx, a molecular diagnostics company, has developed a better               clinical decisions. The expectation is that the test will reduce the
                                                            diagnostic for monitoring cardiac allograft recipients. The company’s      number of biopsies and deliver a better balance between prevention
                                                            AlloMap assay measures activity patterns of multiple genes in              of rejection and immune suppression complications. XDx intends to
                                                            immune cells to predict or diagnose rejection. The cells are collected     apply its AlloMap technology to other transplant types as well as
                                                            in a standard blood draw. The test, which initially will be performed      diseases that involve the immune system. ■
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                           million to $500 million products; the pharmaceutical industry would need three
                                                                                           or more of those to replace one blockbuster. Given pharmacogenomics products’
                                                                                           shorter development timelines and lower clinical trial costs, the smaller companies
                                                                                           may be better able to complete the full development process on their own, retain-
                                                                                           ing more of the product’s market value. Across the spectrum of drug sponsors,
                                                                                           genotype-based diagnostics and products will enable developers to set premium
                                                                                           price points and improve their profit margins.

                                                                                           By focusing on and being able to better define the activities of specific gene
                                                                                           activities, smaller companies have an opportunity to develop niche franchises.
                                                                                           Companies will increasingly shift their focus from the traditional best-in-class
                                                                                           drugs to those deemed best-in-segment. This approach creates the potential for
                                                          By focusing on and               a company to garner larger market shares than in the traditional blockbuster
                                                          being able to better             model by targeting a wider range of genotypes or therapy areas that share a
                                                                                           common biological mechanism. Obviously, long-term revenue potentials from
                                                          define the activities            such an approach depend on sponsors’ ability to secure dominance in disease
                                                            of specific gene               markets that have easily identifiable, genotype-profiled patient groups and high
                                                                                           unmet needs.
                                                           activities, smaller
                                                            companies have                 Explains Jesse Hsu, senior director of corporate development at Perlegen
                                                                                           Sciences, “[Pharmacogenomics] can be a disruptive technology to the tradi-
                                                             an opportunity                tional pharmaceutical industry’s blockbuster approach; big pharma’s infra-
                                                               to develop                  structure and corporate values are geared towards producing billion-plus dol-
                                                                                           lar drugs. With personalized medicines you’re more apt to be looking at drugs
                                                           niche franchises.
                                                                                           with sales of $200 to $500 million, targeted at specific patient populations. That
                                                            Companies will                 doesn’t seem like the right fit for big pharma today…from the way they make
                                                           increasingly shift              their decisions on what drugs to research and develop, to how they market and
                                                                                           sell drugs. But disruption also creates opportunity for newcomers like Perlegen
                                                            their focus from               to say, ‘I can make a successful business out of personalized medicines…and be
                                                             the traditional               quite satisfied with [getting] multiple base hits instead of a home run.’ By creat-
                                                                                           ing a business model built around more reliably bringing out targeted product
                                                          best-in-class drugs
                                                                                           after targeted product, one can eventually build quite a successful pharmaceuti-
                                                           to those deemed                 cal company doing business in a very different way.”
                                                           best-in-segment.                LIFE SCIENCES COMPANIES PLAY LARGER, MORE LUCRATIVE ROLES
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                           Pharmacogenomics also has the potential to dramatically alter industry dynamics
                                                                                           between the life sciences and pharmaceutical companies. Pharmaceutical com-
                                                                                           panies are challenged by increasing operational costs and declining productivity.
                                                                                           While they have an urgent need to restock their product pipelines, they may not
                                                                                           be able to afford the costs, risks, or disruptions of renovating their internal opera-
                                                                                           tions to leverage genomics-related technologies. Nor are they in a position to bet
                                                                                           on which of the early stage technologies will prove best.

                                                                                           Pharmaceutical companies will depend more heavily on life sciences businesses, both
                                                                                           those that offer pharmacogenomics-related services and expertise and the more tradi-
                                                                                           tional R&D organizations that could ease target identification and validation. Because

                                                          no single validation method is appropriate for every target, collaborations grant spon-
                                                          sors access to a variety of approaches. Once pharmacogenomics has proven itself in
                                                          clinical testing, it is expected that corporations will collaborate more frequently with
                                                          CROs, testing facilities, biobanking specialists, and bioinformatics firms whose exper-
                                                          tise encompasses a broad array of DNA, RNA, and protein markers.

                                                          Early stage R&D companies that begin incorporating pharmacogenomics and pro-
                                                          teomics technologies into their discovery processes will also stand to capitalize on
                                                          the pharmacogenomics opportunity. By eliminating unpromising compounds ear-
                                                          lier in the process, better delineating the mechanisms of action and target recep-
                                                                                                                                                                            By eliminating
                                                          tors, and generating biomarker-related data in preclinical and early clinical testing,                             unpromising
                                                          these companies will build more value into the projects they intend to out-license
                                                          to or collaborate on with pharmaceutical companies. They will be in a position to
                                                                                                                                                                         compounds earlier
                                                          retain more ownership in the end product.                                                                         in the process,
                                                          RECENT BALANCE OF POWER TRENDS TO CONTINUE                                                                     better delineating
                                                          The anticipated shifting of power from pharmaceutical companies to life sciences                                 the mechanisms
                                                          concerns is not new with pharmacogenomics. There have been two distinct phases
                                                          in the growth in alliances between and among pharmaceutical, biotech compa-                                        of action and
                                                          nies, and universities through the 1990s and early in this decade. (See Figure 10.)                             target receptors,
                                                          Biotechnology/pharmaceutical agreements are already trending toward a 50/50
                                                          cost and profit split.
                                                                                                                                                                           and generating
                                                          Genomics technologies helped forge these earlier alliances, and pharmacogenomics
                                                          will continue to give life sciences companies a more robust number of options for                               data in preclinical
                                                          leveraging their skills, expertise, and discoveries. The services, intellectual expertise,                      and early clinical
                                                          FIGURE 10: PHARMACEUTICAL AND BIOTECHNOLOGY ALLIANCES BY PARTY, 1990-2002
                                                                                                                                                                        testing, early stage
                                                                                                                                                                        R&D companies will
                                                                                                                                                                          build more value
                                                                  Number of alliances                                                                                     into the projects
                                                          1,400                                                                                                             they intend to
                                                          1,200              University/biotech
                                                                                                                                                                          out-license to or
                                                                                                                                                                        collaborate on with
© 2005 PricewaterhouseCoopers LLP. All rights reserved.




                                                             1990     1991     1992     1993      1994   1995   1996       1997   1998   1999    2000    2001    2002
                                                          Source: Rasmussen, Centre for Strategic Economic Studies, 2004           Note: 2002 data may be incomplete
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                           and clarity that life sciences companies bring to the drug development process will
                                                                                           be especially valuable and marketable.

                                                                                           Pharmaceutical companies will be competing with one another, and biotech alli-
                                                                                           ances, to become the in-licensor of pharmacogenomics discoveries. Additionally,
                                                                                           they will have to consider new types of alliances with leading genomic and
                                                                                           pharmacogenomics companies, which seek to become development and commer-
                                                                                           cialization partners, not merely target identifiers.

                                                                                           These changes have the potential to reshape the industry in profound ways. It
                                                                                           is conceivable that the pharmaceutical giants may eventually phase out of the
                                                                                           research business altogether and, instead, broker and commercialize niche
                                                             “Showing that                 pharmacogenomics diagnostics and therapeutics. They could even evolve into full-
                                                          diagnostics work is              fledged marketers and distributors of multinational brands—areas in which they
                                                                                           already are global powerhouses.
                                                           more challenging
                                                          than I think people                 Defining Challenges
                                                            appreciate, first              Pharmacogenomics carries great promise, but many factors outside the control of
                                                                                           any single company or organization will play crucial roles in the timing and degree
                                                               because the                 of its commercial success. An overview of some of these factors follows.
                                                           technology itself
                                                                                           ALLEGIANCE TO THE BLOCKBUSTER MODEL
                                                          is challenging. The              Clearly, the pharmaceutical industry has realized enormous success through
                                                            standardization                blockbuster drugs. The drug development process itself has been forged on prod-
                                                                                           ucts intended for total populations. Even companies best suited to developing
                                                           of the technology               pharmacogenomics products want their drugs approved for the widest possible
                                                             is challenging.               markets. It will take time for corporations to adopt strategies that are based on
                                                                                           smaller revenues per product.
                                                             The biology is
                                                              challenging.”                At present, the costs and risks of bringing pharmacogenomics technologies
                                                                                           in-house do not make financial sense to the larger pharmaceutical companies.
                                                                 Steven Gutman,            However, should the technology prove itself—both in increased pipeline produc-
                                                               FDA Office of In Vitro      tivity and greater profit margins—the pharmaceutical companies could shift their
                                                                                           priorities. The leading pharmacogenomics businesses could become prime acqui-
                                                                Diagnostic Device          sition targets. Such a shift would change the dynamics of the pharmacogenomics
                                                                    Evaluation             sector, even as it speeds the technology’s development.
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                           REGULATORY PRESSURES AND CHANGES
                                                                                           In 2004, the FDA and drug companies came under intense scrutiny through three
                                                                                           therapeutic-related incidences: the adverse effects of anti-depressants on children,
                                                                                           Vioxx’s increased risks for heart attacks and stroke in its patients, and the flu vac-
                                                                                           cine shortage due to closure of Chiron’s manufacturing plant by U.K. regulators.
                                                                                           Congressional hearings on these incidents have focused on the FDA’s role and capa-
                                                                                           bilities in ensuring public safety. The scrutiny may dampen the agency’s willingness
                                                                                           and ability to expedite drug approvals for pharmacogenomics drugs—or it may
                                                                                           help usher in more predictable pharmacogenomics products.

                                                          Genetic testing is far more complex than any of the diagnostic technologies cur-
                                                          rently on the market. For clinical use, tests will need to be approved by the FDA.
                                                          Sponsors will have to prove that the tests are accurate and replicable and that their
                                                          signal has valid clinical applications. Under current FDA guidelines, genetic tests
                                                          that pick up multiple signals or identify complex patterns among the genetic code
                                                          are not approvable. The guidelines need to be rewritten, a process that will evolve
                                                          one clinical trial and product approval at a time. The flow and success of each incre-
                                                          mental change will help determine how quickly pharmacogenomics products move
                                                          into mainstream medicine.

                                                          “Showing that diagnostics work is more challenging than I think people appreci-
                                                          ate, first because the technology itself is challenging. The standardization of the
                                                          technology is challenging. The biology is challenging…. You have interactions that
                                                          may be very difficult to elucidate, and you may have environmental overlays to
                                                          that,” explains Steven Gutman, director of the FDA’s Office of In Vitro Diagnostic             Of the $6.3
                                                          Device Evaluation.
                                                                                                                                                    billion invested in
                                                          INVESTOR SUPPORT                                                                           health industries
                                                          Investor interest in pharmacogenomics may have been tempered by the skepticism
                                                          resulting from placing too much hope—and money—on the payoffs from previous                   during 2004,
                                                          new technologies that failed to materialize. Venture capitalists and other funding        61.1 percent were
                                                          sources are carefully evaluating genomics-related products and technologies for
                                                          their potential benefits to patients or physicians.                                       in biotechnology
                                                          The investor climate is promising: As a percentage of venture capital dollars, invest-
                                                          ments in health industries (which include biotechnology, medical devices, phar-             including those
                                                          maceuticals, health services, and health information technology) in 2003 and 2004          that specialize in
                                                          were the highest in the 10-year history of PricewaterhouseCoopers’ MoneyTree
                                                          survey. Of the $6.3 billion invested in health industries during 2004, 61.1 percent       genomics-related
                                                          were in biotechnology companies, including those that specialize in genomics-                   projects.
                                                          related projects. As funds continue to move toward commercializing and launch-
                                                          ing new products, life sciences companies will be able to continue pushing the
                                                          pharmacogenomics industry forward.                                                          MoneyTree survey

                                                          INTELLECTUAL PROPERTY AND PATENT ISSUES
                                                          Since 1980, researchers in universities and companies have been filing and receiv-
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          ing patents on genes that they have isolated. More advanced mapping technologies
                                                          have brought about patents on more genes, gene mutations, and gene patterns asso-
                                                          ciated with certain diseases or functions. More than 3 million U.S. patents have been
                                                          issued or filed for genetic discoveries in the United States alone, with thousands
                                                          more filed each year. As companies identify new genetic drug targets and design
                                                          compounds around them, intellectual property claims and patent infringement
                                                          suits will ensue. Even intellectual property experts are uncertain how these cases will
                                                          be resolved, but their inevitability will be a factor in how soon and how extensively
                                                          pharmacogenomics products will be commercialized.
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                            “I think it [the current pharmacogenomics intellectual property environment]
                                                                                           is a mine field. I think a lot of people are simply ignoring the problem,” asserts
                                                                                           Michael J. Shuster, an attorney at Fenwick & West who specializes in this domain.

                                                                                           ACCEPTANCE BY PAYERS AND PHYSICIANS
                                                                                           As the country’s population ages and Medicare comes under added pressure, the
                                                                                           issue of healthcare costs is expected to become more visible and contentious.
                                                                                           Because pharmacogenomics products are targeted for narrower patient subsets,
                                                                                           sponsors likely will demand a higher price for them. Nearly two-thirds of the respon-
                                                                                           dents (insurers, hospital systems, physician offices, employers, policy makers, and
                                                                                           other healthcare thought leaders) to PricewaterhouseCoopers’ HealthCast 2010
                                                                                           survey predicted an increase in healthcare costs as a result of genetic-based map-
                                                                                           ping. Whether third-party payers are willing to cover diagnostic tests, as well as pay
                                                                                           more for pharmacogenomics drugs, will influence how well pharmacogenomics
                                                                                           products fare in the market place and how committed companies are to developing
                                                                                           such drugs.
                                                              “The current
                                                          pharmacogenomics                 Third-party payers will also face healthcare and privacy issues that result from
                                                                                           genomics technologies. At stake are concerns such as that a specific genetic marker
                                                               intellectual                be counted as a “pre-existing condition.” If the insurer told a company that one if its
                                                                 property                  employees would develop breast cancer, would that woman be more likely than a
                                                                                           coworker to be laid off in a downsizing? Beyond privacy and ethics issues, however,
                                                             environment is                insurers and HMOs are under a great deal of pressure to manage costs, implement
                                                            a mine field.... A             fair policies, and ensure that their personnel are properly trained. Insurers must be
                                                                                           prepared with policies and procedures to incorporate proven products into their
                                                            lot of people are
                                                                                           formularies and clinics (in the case of HMOs) as those become available.
                                                          simply ignoring the
                                                                                           “Health plans, including Kaiser Permanente, have generally assessed new genetic
                                                                                           tests and procedures using the same model of technology assessment that they use
                                                               Michael J. Shuster,         for other emerging technologies. For the foreseeable future, that’s probably going to
                                                                Fenwick & West             be okay. But there will probably come a point when so many new pharmacogenomics
                                                                                           products will be coming to market that it’s going to be overwhelming. We will really
                                                                                           need to get a handle on it in a different way—new models of technology assessment
                                                                                           may be needed,” says Kaiser’s Raymond.
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                           Physicians welcome tools that enable them to better predict efficacy and risk and to
                                                                                           deliver better care to their patients. The challenge comes in what these drugs may
                                                                                           entail in the way of staff time, specialized training, equipment requirements, insur-
                                                                                           ance paperwork, patient costs, and other such questions that impact the doctors’
                                                                                           ability to prescribe a drug and know their patients will comply with the instructions.
                                                                                           Whether general practitioners champion the use of pharmacogenomics drugs will
                                                                                           depend heavily on how well the details are worked out—and whether there are ther-
                                                                                           apies available to help their patients once the test has been administered.

                                                          PATIENT DEMAND AND SOCIETAL ACCEPTANCE
                                                          Patient demand could have a significant affect on the acceptance or rejection of
                                                          pharmacogenomics. If a new product captures the public’s attention and patients
                                                          push their doctors and insurers for the genetic test to determine if it is right for
                                                          them, the mainstreaming of pharmacogenomics products could be accelerated.
                                                          If patients’ fear prevents many from accepting the diagnostics, the industry will
                                                          mature more slowly. Most industry watchers are betting on the power of the con-
                                                          sumer and anticipate that pharmaceutical companies will use direct-to-consumer
                                                          marketing to usher in pharmacogenomics technology.

                                                          At the same time, while genetic testing can provide answers for developing bet-
                                                          ter drugs, making better diagnosis, and delivering better care, it raises questions,
                                                          too. For example, at what point in life would an individual want to know that he
                                                          will develop a specific rare and deadly disease—1 year before? 10 years? How low
                                                          a risk of cancer recurrence would assure that a patient forego chemotherapy?                 If a new product
                                                          Could a genetic quirk in an individual’s genome be considered a pre-existing
                                                          condition? The questions abound. The answers will come through years of incre-
                                                                                                                                                          captures the
                                                          mental decision and policy making. How soon society is comfortable with those               public’s attention
                                                          answers will in part determine how quickly pharmacogenomics becomes part of
                                                                                                                                                      and patients push
                                                          mainstream medicine.
                                                                                                                                                      their doctors and
                                                          BIO-BANKING ISSUES
                                                          Ideally, pharmacogenomics researchers would have an extensive DNA tissue repos-
                                                                                                                                                        insurers for the
                                                          itory from which they could pull material to determine genetic markers responsible             genetic test to
                                                          for specific disease states. The identities of the individual donors would be pro-           determine if it is
                                                          tected yet scientists could know their histories—age, gender, disease, stage of dis-
                                                          ease, and outcome. The materials could be easily accessed and new findings derived         right for them, the
                                                          from them could be used to pursue development of any type of drug a researcher              mainstreaming of
                                                          felt had promise.
                                                          Although other countries have established “bio banks,” currently there is no such           products could be
                                                          bank, nor do the guidelines or regulations exist for creating one, in the United States.
                                                          While patients in clinical and research studies are asked to donate DNA material,               accelerated.
                                                          their samples are kept by the sponsoring organization and can be used only as spec-
                                                          ified by each donor’s informed consent agreement. This shortage of research mate-
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                          rial could be a limiting factor in the development of pharmacogenomics products.

                                                          Scientists, researchers, and organizations—both private and public—are making
                                                          strides in cross-referencing all that is known about the building blocks of human
                                                          life including DNA, RNA, chromosomes, alleles, and SNPs. As the industry moves
                                                          forward, more will be discovered about how each of these complex units plays out
                                                          in human development and disease.
                                                          Personalized Medicine: The Emerging Pharmacogenomics Revolution


                                                                                           These interactions are the focus of pharmacogenomics, which promises to bring
                                                                                           significant breakthroughs in the understanding of the underlying causes and mech-
                                                                                           anisms of disease and drug activity. From enabling researchers to identify and pursue
                                                                                           “drug-able” targets, to adding efficiencies to clinical development, to changing the
                                                                                           practice of medicine, pharmacogenomics will change healthcare substantially.

                                                                                           A few important pharmacogenomics products already are being successfully
                                                                                           marketed and many more are in various stages of development. Submittals and
                                                                                           approvals will accelerate and make pharmacogenomics products a significant
                                                                                           component of mainstream medicine within 10 years. As with the early exam-
                                                                                           ples of products like Herceptin, the biggest impact initially will likely be in the
                                                                                           treatment of cancer. Reasons for this include the heterogeneous and aggres-
                                                                                           sive nature of the disease; the receptiveness of oncologists and cancer patients
                                                             Companies at
                                                                                           toward experimental and new therapies; the large unmet need; the obvious pay-
                                                           the forefront of                off in quality of life and cost-to-benefit ratios; and the large number of oncology
                                                          pharmacogenomics                 drug candidates already in development.

                                                               already are                 Companies at the forefront of pharmacogenomics already are generating product
                                                          generating product               revenues that, while unlikely to reach the $1 billion mark of the more traditional
                                                                                           blockbuster drugs, have settled into the $300 million to $500 million per year
                                                            revenues that,                 range. They are finding that the genetic-based diagnostics that indicate which
                                                             while unlikely                patients are most likely to benefit from a drug are creating instant target markets
                                                                                           and helping to set premium pricing points. These marketing advantages, along
                                                            to reach the $1
                                                                                           with the streamlined and continuous development process resulting from strati-
                                                          billion mark of the              fied clinical trials, are making it much more viable for large biotechnology com-
                                                           more traditional                panies or collaborations to commercialize their own products. Their prospects for
                                                                                           success are strong given the new-found ability to retain bigger ownerships and
                                                          blockbuster drugs,               more of the revenues from their drug candidates.
                                                           have settled into
                                                                                           Overall, life sciences companies—those with expertise in more traditional drug
                                                          the $300 million to              development as well as new pharmacogenomics specialists—are well positioned
                                                           $500 million per                to capture the upside potentials of the new genomics-related technologies. In
                                                               year range.                 contrast to the larger pharmaceutical corporations, biotechnology and bio-
                                                                                           pharmaceutical companies are accustomed to high risk ventures. They remain
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

                                                                                           agile, innovative, flexible and are able to make great advances with lean staffs
                                                                                           and relatively small budgets. They are making these strides at the same time
                                                                                           that the pharmaceutical industry is facing unprecedented pressures to improve
                                                                                           pipeline productivity.

                                                                                           These circumstances should enable life sciences companies to pursue new busi-
                                                                                           ness models and command better terms in their transactions with pharmaceu-
                                                                                           tical corporations. At the same time, pharmaceutical giants are closely watch-
                                                                                           ing pharmacogenomics developments and the companies behind them. Should
                                                                                           the technology prove itself, the larger pharmaceutical companies may integrate
                                                                                           pharmacogenomics within their internal R&D processes, likely through acquisi-

                                                          tion of the more productive genomics companies. Alternately, some pharmaceu-
                                                          tical companies could exit the R&D business entirely and become brokers, dis-
                                                          tributors, and marketers of segmented pharmacogenomics products.

                                                          Despite this enormous potential for the industry and society, there are many chal-
                                                          lenges that must be overcome to make pharmacogenomics a main part—much
                                                          less the driver—of medical and healthcare practices. In addition to the financial,
                                                          technological, and operational hurdles faced by any disruptive new technology,
                                                          pharmacogenomics poses a myriad of societal dilemmas. These include privacy
                                                          and ethical issues around the collection of DNA samples, impending intellectual
                                                          property battles, and the need for new regulatory and reimbursement policies.
                                                          Discussions around all of these topics have begun, with the anticipation they will
                                                          be resolved as proven products enter the markets. Still, these factors could impact
                                                          the speed and ease with which pharmacogenomics comes into its own as a conven-
                                                          tional approach of the pharmaceutical and life sciences industries.
© 2005 PricewaterhouseCoopers LLP. All rights reserved.
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                                                          ADDITIONAL INFORMATION

                                                          Tracy Lefteroff                                    Cassie Arnold
                                                          Global Managing Partner                            Marketing Director
                                                          Life Sciences Industry                             Life Sciences Industry
                                                          (408) 817-4176                                     (408) 817-7926
                                                          February 2005                                                                                            TC-02-06
© 2005 PricewaterhouseCoopers LLP. All rights reserved.

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