The solution to the "innovation threat" facing big pharma lies in making deals outside the company, Schering-Plough CEO Fred Hassan said during an R&D update Nov. 1.

"Our philosophy is that about half of our pipeline and portfolio should come from other people's labs," the exec stated. "I can tell you today we are in deal mode."

"Our industry faces a serious innovation threat," Hassan asserted, "what I would call the post- Vioxx innovation threat."

Merck's withdrawal of its COX-2 inhibitor due to cardiovascular risk more than five years after its approval and the ensuing liability issues have raised concerns that companies may take a more cautious approach towards development, avoiding newer products that have unknown safety profiles.

"One critical impact is in the regulatory arena," Hassan maintained. "FDA drug safety advisories are on the rise, FDA black box warnings are multiplying, average approval times are lengthening," he cautioned.

"In the meantime, there are indications that our industry is in an R&D productivity slump. The low-hanging fruit has been harvested. Development hurdles and costs are increasing," Hassan stated. "We see escalating later date attrition rates. This later stage attrition is hugely costly."

In addition to the dwindling flow in big pharma R&D, pipelines have been clogged by increasing late-stage failures in recent years. The Phase III failure rate has reached about 50%, up from 20% 10 years ago.

Hassan acknowledged that Schering-Plough has "a reality of a late-stage pipeline gap."

As a result, he said, the company has adopted the approach of striving for a "balance between internal and external innovation - because we realize that no single team has a monopoly on innovation."

Schering is thus attempting to bolster its pipeline and portfolio through both internal development and acquisition of innovative products.

On the internal side, Schering has underway a "development excellence" program that emphasizes "cycle time reduction in all phases of clinical development," Exec VP-Global Development Thomas Koestler said.

"Our discovery engine has been very productive," he noted. "We have 14 new molecular entities rapidly approaching proof-of-concept, another eight that are in Phase II and four more that are [in]Phase III and registration" (see ¹ Also see "Schering-Plough R&D Pipeline Sticks To Traditional Strengths" - Pink Sheet, 7 November, 2005. ).

"The number of compounds in full development we expect may grow by almost 40%," Koestler added.

In terms of in-house development, "we are now on the upswing and we project a significant increase as a result of new product candidates entering full development over the next few years," Koestler said.

Schering has bolstered its development team with several appointments and promotions this year. The company named an Aventis researcher, Susan Arbuck, as VP-global clinical development for oncology and a former Novartis exec, James McLeod, to the post of global VP-clinical development, early clinical research & experimental medicine.

The company also announced the promotion of two management execs to development posts: Koestler to the post of exec VP-global development and James MacDonald to exec VP-preclinical development.

Hassan detailed Schering's external efforts to build its portfolio during the R&D presentation - the company's first in two years - by outlining a series of licensing plans.

Schering's first focus is on technology alliances, then early-stage acquisitions and alliances and late-stage deals. The firm is also open to full product acquisitions and complete company buyouts, particularly if they offer access to late-stage projects.

Schering has already begun to step up its partnerships, putting into practice the licensing strategy outlined by Hassan. The company announced the signing of several technology alliances over the past year.

In August, Schering said it exercised its rights to develop and commercialize a fully human monoclonal antibody with Centocor; golimumab (CNTO 148) is in Phase II for the treatment of rheumatoid arthritis and other inflammatory diseases.

The announcement followed Schering's acquisition in July of exclusive U.S. development and commercialization rights to Millennium's marketed thrombolytic product Integrilin (eptifibatide) to build on the company's strengths in cardiovascular care.

In January, Schering announced it would acquire most of the assets of the biopharmaceutical company NeoGenesis, which is focused on the development of small molecule drugs.

As Schering looks to extend its pipeline and portfolio, Hassan noted that the company will particularly seek to expand beyond its existing biotech brands, which include PEG-Intron (pegylated interferon alfa-2b) for hepatitis C and Remicade (infliximab) for inflammatory diseases, which Schering markets outside the U.S.

In May, the company consolidated its West Coast biotech facilities to create a new Biopharma unit in Palo Alto, Calif. Hassan reported that new molecules are beginning to emerge from that unit.

"Biotech is finally coming of age," Hassan asserted. "My expectation is that over the next couple of decades we will see a new explosion of health innovation in treating Alzheimer's disease, obesity, cardiovascular and metabolic syndrome, cancer, autoimmune diseases and infectious diseases."

"However, achieving this sunrise in our industry will require truly transformational change," he said. Big pharma will be outpaced by smaller, innovative competitors if it does not "adapt and transform," Hassan said.

In particular, "the companies that will succeed must unleash the R&D engine."

"We must create the winning attitude, the winning behaviors and the 'can do' spirit that you see in energized small companies," Hassan said. "At the same time, we must leverage the benefits of a big company environment, especially the financial staying power and the learning curve in downstream processes."

Hassan has previously described Schering's goal to "work as a small company in a big company," fostering innovation but still taking advantage of the size of a large company (² Also see "Schering’s External Alliances Improving “D” In R&D, CEO Hassan Says" - Pink Sheet, 6 June, 2005., p. 8).

Many in the industry have already adopted a strategy of acquiring pharmaceutical innovators but maintaining their independence.

Johnson & Johnson has a history of balancing its large-company, diversified model with specialized subsidiaries, bringing in companies like Centocor, Alza, Scion and Transform Pharmaceutical over the past three years and continuing to operate the businesses semi-independently.

Roche similarly established a majority stake in Genentech, which has brought the oncologics Avastin and Herceptin to market, while the biotech company operates independently as a cutting edge researcher.

Novartis announced a successful bid for Chiron Oct. 31; the Swiss drug maker has highlighted Chiron's potential to bring innovation in high growth areas where Novartis did not have a presence, like vaccines and diagnostics.

The increased partnering and acquisition activity at Schering comes as the firm moves into the "turnaround" phase of its five-point, five-year action plan initiated in 2003.

"Turnaround" is third stage of the program; the first two phases were "stabilize" and "repair," while the last two will be "build the base" and "break out."

Hassan took the helm at Schering in April 2003 to implement a turnaround strategy in the wake of multiple business and regulatory challenges, including the implementation of an unprecedented consent decree and the OTC switch of Claritin .

"What we found when I joined the company in spring 2003 [was] a wounded company in prolonged decline. This was the most challenging situation I have seen in our industry in my more than 30 years."

Two years later, however, "we are advancing our action agenda into a new period of building sustainable transformation and sustainable performance," he said.

The current goal at Schering, Hassan said, is to see top-line sales gains drive bottom-line earnings growth, followed up with continued reinvestment aimed at strengthening the business over the long term.

He also said the company is making steady progress on its FDA manufacturing consent decree. More than 90% of the obligations to FDA have been completed, with no penalty for missed deadlines, he reported.

Schering Seeks Salvation In External Deals; Hassan Outlines Licensing Plan

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