Australia, the “land down under” to many Westerners, is sometimes left at just that — out of sight, and out of mind. But investors who ignore Australia do so at their own peril. Because of its distance from the rest of the West, the country is often overlooked for opportunities, but it is nonetheless emerging as a center of excellence in clinical research, biotechnology, and niche manufacturing, offering a golden opportunity for savvy capitalists willing to take the plunge. Like other modern economies, Australia will be relying on innovation — and plenty of it — in order to turn a “tyranny of distance” into a wealth of opportunity.
At first glance, investors can be forgiven for overlooking Australia, a mature economy with a population accounting for just 0.3 percent of the world’s total spread out across a giant landmass. As the seventh least-densely populated country on Earth, it counts less than one third of Russia’s 8.6 inhabitants per square kilometre. Fortunately, at that point things start to look up. Sixty percent of Australia’s 21 million inhabitants are concentrated in state capitals of Sydney, Melbourne, Brisbane, Perth, and Adelaide — five large, modern cities with world class healthcare infrastructure and consumers. As for the standby measure of GDP per capita — already at just over $43,000 — Australia is projected to pass the US by the end of 2008, and overall GDP figures have nearly doubled in the past five years alone. This prosperity is largely due to the global commodities boom, providing a windfall to the world’s largest coal and iron ore exporter. However, Australia’s strength extends beyond the basics, and in the pharmaceutical sector especially, Australia’s oft-repeated claim of being a nation that “punches above its weight,” is borne out by the statistics.
The Australian pharmaceuticals industry counts over $17 billion in annual revenue, of which pharmaceutical and medicinal products are worth almost $7 billion. But far from being just a consumer market, the broader pharmaceutical industry employs over 30,000 people with 14,200 in the manufacturing sector, representing $4 billion in annual exports, and attracting significant investments of over three quarters of a billion dollars in R&D. A much-maligned “tyranny of distance” is blamed for impacts as diverse as manufacturing disinvestment to biotechnology undercapitalization, but being thousands of miles away from the West may tip the scales in Australia’s favour as world markets shift towards the Asia Pacific region. With the time zones of the East and the culture of the West, Australia’s position as the bridge between them will be increasingly appealing.
In terms of raw numbers, Australia’s advantageous positioning is clear. Its two most obvious jumping off points — the world’s up-and-coming pharmaceutical markets of India and China — are already major global API suppliers, and are slowly inching up the value chain. From 2008 until 2010, total pharma sales in China are set to double, from $14 billion to $28 billion. Over the same time period, Indian clinical trials market will explode to $1 billion from current $150 million, and contract manufacturing to $1 billion from $350 million.
In previous decades, Asian markets were set back by a lack of IP protection, infrastructure, and talent pool. But a rise in affluence, market liberalization, and foreign investments has meant the West is taking notice. Companies like Pfizer, Novartis, and AstraZeneca are investing hundreds of millions in R&D in China alone, spurred by the government’s increasing modernization in areas such as regulatory compliance. However, Australia must stand on its own if it wants to compete with those countries’ domestic markets, in addition to closer neighbors Singapore, Thailand, and South Korea, all of which are vying for a piece of the action.
Fortunately, Australia boasts world class medical research capabilities and infrastructure, strong and effective intellectual property laws, a streamlined approval system for clinical trials, and a highly skilled workforce — including six Nobel laureates in medicine, with the 2005 prize going to Drs. Barry Marshall and Robin Warren for their discovery of the bacteria responsible for stomach ulcers. But this cleverness extends beyond just lab work. In fact, Merck’s blockbuster Gardasil, the cervical cancer vaccine, originated with the scientist Ian Frazer — simultaneously awarding him Australian of the Year in 2006 for its discovery, and earning Merck Pharmaceutical Executive’s Brand of the Year distinction. This basic research excellence is a product of a country whose science “punches above its weight” in quantity and quality of research output. This fundamental strength is supported in the facts that human use pharma R&D accounts for almost 5 percent of total business expenditure R&D in Australia, as well as 14 percent of total manufacturing R&D. Continuing to exports — at $4 billion, and increasing 10 percent annually — the country seems to be excelling in all measures. However, in this latter measure, concentrated activity among a few major players leaves some vulnerability, recently brought to the fore with a recent plant closure announcement from Merck Sharpe & Dohme.
And industry insiders are quick to point out that the pharmaceutical sector is not all milk and honey. Medicines Australia is the national industry association for innovative pharmaceutical companies, and according to its Chief Executive Ian Chalmers, “the Australian pharmaceutical industry is at a crossroad. It is likely that the next few years will be critical in setting the future direction of the Australian industry for the next 20 years.”
Indeed, this crossroad was recognized in the most recent federal elections, with top cabinet positions newly dedicated to addressing the most pressing issues. If the cornerstone of Australia’s future will rely on innovation, Australia’s new Labor government headed by PM Kevin Rudd is certainly taking steps in the right direction, with new ministerial appointments inaugurating at least bureaucratic support. Most evident in this regard is the Ministry for Innovation, Industry, Science, and Research, which was created in December 2007 upon Labor’s election. Senator Kim Carr succinctly outlines the Ministry’s raison d’être: “The whole point of the department is to refocus public debate and re-establish an agenda around the issues of innovation.”
The Ministry’s goal is to push forward an integrated approach, having already created reviews to form public policy in areas as disparate as textiles, clothing, and footwear. The pharmaceutical sphere has seen the creation of the Pharmaceutical Industry Strategy Group (PISG), which according to Senator Carr is “concerned to ensure there is an effective response from industry working alongside government and the research sector to [address] the challenges currently confronting the pharmaceutical industry, which are similar to many other countries in the developed world.” These challenges are important to address, because as Senator Carr points out “the pharmaceutical sector is one of Australia’s most significant export industries, second only to the automotive industry in size of contribution,” and just ahead of wine, perhaps Australia’s most widely loved export.
Proximity to some of the world’s biggest manufacturing countries, and tax havens such as Singapore, is putting pressure on Australia to step up its dwindling industry support programs. Since the heyday of the late 1980s created an influx of manufacturing and R&D activity, support has diminished, and there is no clear sign of a reverse trend. A key role in encouraging investment in the country is Pharmaceutical Benefits Scheme (PBS), whose recent reforms have meant significant change for the industry, not least of which was a 25 percent price reduction — effective August 1, 2008 — on many of the country’s best-selling drugs, including simvastatin, naproxen, and diazepam.
Senator Carr is careful to delineate the scheme’s role in the marketplace: “The PBS is a critical part of the architecture of the Australian pharmaceutical industry. The scheme, however, has two functions. One is to provide medicines at the lowest possible cost to the Australian people, and to ensure that the Australian people get good value for money. The second function is to ensure that there are sustainable industry development processes operating, and although there may be tensions between these functions, the Australian government is highly mindful that there are two and not just one.”
The first function is the more worrisome to the pharmaceutical industry, which contends that low cost and high access do not go hand-in-hand. Still, Senator Carr recognizes that he’s not playing a zero-sum game. “We need to find mechanisms that encourage activities that are uncertain and risky, realizing that potential drugs identified through early R&D may never make it through, while remembering that there are risks but also enormous rewards and it’s a highly profitable industry,” says Carr.
Senator Carr also emphasizes that “Australia’s big strength is going to be in high-value, niche manufacturing,” as evidenced in companies like CSL, which partnered with Merck to deliver the HPV vaccine Gardasil; and IDT, which has flourished by being one of a handful of companies worldwide capable of handling the cytotoxic medicines used in chemotherapy. The country also boasts a specialization in Blow Fill Seal technology, which has recently become the FDA’s preferred aseptic processing standard. Present in AstraZeneca’s and GlaxoSmithKline’s manufacturing centers, the latter’s Boronia, Victoria, facility represents the company’s largest sterile facility worldwide.
Nicola Roxon, Minister for Health and Aging, is equally aware of striking the right chord between access and sustainability. She notes, “The Rudd Government views expenditure on pharmaceuticals as an investment in health, not simply a cost. We know that more than two thirds of PBS expenditure already relates to prevention and management of chronic disease. So, while we believe it is very important to ensure that the cost of the PBS remains sustainable into the future, we are very aware that this needs to be balanced with the need for an environment that encourages research and development of new medicines.”
Commenting on this balance, and the role she expects Australia’s future PBS to play, Minister Roxon says, “Recent reforms to the PBS are designed to put PBS expenditure onto a sustainable footing into the future. The Rudd Government will continue implementation of these reforms, and will closely monitor their impact to ensure that they do not have an adverse effect on consumers and/or the generic medicines sector.”
No pain, no gain?
Indeed, the generics sector is feeling the biggest hit from PBS reforms, whose multitude of changes aim to “recognise the importance of world class, life-enhancing drugs to patients,” according to the government. In doing so, effective August 1, 2007, the PBS was split into two formularies: F1, mainly for single brand medicines; and F2, mainly multiple-brand, generic medicines. Within this latter category are two further divisions: F2T, with most competition, experiences a 25 percent one-off price drop effective August 1, 2008; while F2A decreases at a more modest 2 percent per year for three years. Will Delaat, Chair of the Pharmaceutical Industry Council, the peak body of peak bodies Medicines Australia, Generic Medicines Industry of Australia (GMIA), and AusBiotech, explains the asymmetrical impact of the PBS reforms. “With the delinking that occurred between the F1 and F2 formularies, this provides long term benefit as new products introduced to the market are protected from price erosion over the length of patent life, which was formerly not the case, when there were formerly price linkages to out-of-patent products.” However, at the bottom line, he says, “We’ve taken some short term pain for long term gain in the innovative sector. Generics companies don’t necessarily agree, but from innovative companies’ perspective it’s short term pain for long term gain.”
Di Ford comes from the generics’ perspective. As Executive Director of the GMIA, an industry organization comprising the country’s biggest generic players Alphapharm, Apotex, Genepharm, Hospira, Sandoz, and Sigma, she is the voice of generic medicines, which account for approximately 30 percent of PBS in value terms. Ford says that, “unfortunately, unlike other comparable countries, there is no generic specific policy in Australia aimed at increasing usage of generic medicines.” Despite this lack of specificity, GMIA retains an ambitious goal: to increase generics’ market share from 30 percent to 50 percent. Without a clear government support policy, Ford will be relying on other mechanisms to achieve this objective. “As it has been shown in Europe in particular, one of the ways to increase generic usage is through public information campaigns. It is important that consumers understand that generics are safe, [high] quality, effective medicines, and that they can save money if they choose a generic as well as supporting the PBS.” And support the PBS they shall, as the government estimates $3 billion in savings over the next 10 years. Over this time, GMIA will play a central role, as Ford says the association is “pleased to be involved in the development of the generic awareness campaign which the National Prescribing Service is managing on behalf of the Department of Health and Aging.”
Alphapharm, Australia’s leading generics company — whose market share alone is twice as large as all its competitors combined — started in 1982, and now accounts for 20 percent of Australia’s prescriptions. John Montgomery, the company’s CEO, points to the PBS reform implementing a $1.50 pharmacist payout on each premium-free product dispensed as a step in the right direction. He says, “The good news is that pharmacists, for the first time, will have an incentive to dispense premium-free products, which for the most part are generics. We believe the 25 percent price cut is a very blunt instrument. But on the other hand, we now have the beginnings of a generics policy from government.”
Montgomery, himself a past head of the GMIA, also brings up the advertising campaign Ford refers to, which he believes will make consumers more aware of generics “and also to address some lingering issues around quality and sameness of generics versus branded drugs.” However, commenting on the Rudd government’s decision to reduce the program size to a more modest $5 million from an initial $20 million promise, he notes that “the industry is disappointed that, quite honestly, the government has reneged on a very important part of its commitment.”
Alphapharm has risen to pick up the slack in the form of its own commitment, a unique consumer strategy honed over the last seven years. “Alphapharm is the only company in the industry advertising our corporate name on TV radio and in print, and informing consumers about the benefits of generics,” Montgomery says. “Recently, we also started a major new campaign reinforcing the opportunity that now exists with the $1.50 pharmacy incentive to kick-start generic substitution.”
This generic substitution has seen an influx of smaller companies, from Pharmacare to Genepharm, with the latter’s recent acquisition of Indian firm Strides’ Australasian operations allowing it to gain scale and move up the rankings, chipping away at Alphapharm’s previously overwhelming 80 percent-plus market share. Although the Atlas of the Australian generics industry may be taking a substantial burden on its sizable shoulders, Montgomery seems unconcerned at the prospect of competition making significant inroads. “Having two-thirds of the market, it may look as if Alphapharm is an easy target,” he begins. “However, in the context of a market where there is a government policy on generics and an incentive to dispense generics, I would argue that it’s the smaller companies that are thinking about their reason for being. Alphapharm’s reason for being has always been to increase generic substitution, and now that the government realizes it has to do something from a financial incentive standpoint to increase generic substitution, we feel our long-held strategy is being validated by government policy. In this sense, the company certainly has a clear focus on increasing generic substitution, and is very much on the front foot.”
“The big question is how, or to what level, can we drive generic substitution?” Montgomery muses, before digging into the numbers to elucidate the corporate strategy. He continues: “About 55 percent of all prescriptions on the PBS are substitutable, yet only 33 percent are substituted. Alphapharm has 22 percent, and other companies have 11 percent, with the other 22 percent not yet being substituted. Alphapharm could significantly increase its size if it can penetrate that unsubstituted 22 percent. And this 22 percent is what we are really excited about. We’re focused on the 22 percent we don’t yet have.”
Despite Alphapharm’s focus on the up-and-coming piece of the pie, some are more than happy to sit back and chip away at the giant. Pharmacor is the newest entrant in a market where many may be more timid to try, given the shake-up and regulatory changes thinning margins all around. Explaining the rationale behind acquiring Pharmacare’s generics business some two months prior to the August 1 price reductions, Jean-Pierre Salama, Pharmacor’s CEO, explains, “Pharmacare Laboratories established Pharmacor approximately one year ago, and decided to divest the company two months ago, realizing that they preferred to stick to their core business of OTCs and nutritionals.” Salama, via his existing OTC specialist company Meditech, had for two years been undergoing registrations and filings with the TGA, and as a result, Salama says, “acquiring Pharmacor represented an opportunity to gain a valuable customer base and distribution network. It was perfect timing, and we sat down with the people from Pharmacare to negotiate a deal.”
Salama describes the company’s niche focus: “The strategy falls into two parts. Anyone looking to enter the Australian market would need a niche portfolio. Of our 16 filings, most fall into this category and are of the type that bigger companies such as Sigma or Alphapharm would disregard. Secondly, in the future Pharmacor’s niche of products ensure the big players won’t focus there. They won’t look at molecules with a market size of $5 million to $10 million per year, but rather at those with larger sales. Pharmacor’s bread and butter will be in the small niche products where it’s not worthwhile for the larger companies to focus.”
Salama highlights an important change having a ripple effect on the way pharmacies and companies interact. With product prices dropping below the government-subsidized price, pharmacies are free to price products as they wish; beforehand pharmacies were forced to maintain identical prices. Salama describes the impact as Pharmacor sees it: “Where there was no competition on the retail front, in terms of pricing, the retailers would discount generics and not follow the government-recommended prices. This now means that everyone has to keep close attention to their bottom line, and go for the most competitive offer. Previously, pharmacies and retailers were looking at the most convenient offer on the market, going with an Alphapharm which has a complete range, and sticking to them. Now, all pharmacies are being forced to play ball, and looking for more than just convenience. This will drive generics substitution, and that’s where the growth is for generics companies. The fact that the boat’s rocking now is perfect timing, and things are coming together well with reforms.”
Australian R&D and clinical trials: A viable hub in the Asian wheel?
Although generics are an important part of any pharmaceutical market, for Australia, the more innovative concerns are fuelling growth and investment, and central to these is the National Health and Medical Research Council (NHMRC). Headed by Professor Warwick Anderson AM, the NHMRC is the Australian government’s principal funding body for health and medical research, investing over $600 million annually across a wide portfolio of funding vehicles. Professor Anderson says that since its establishment in 1936, “NHMRC has always been responsible for supporting the best peer-reviewed research applications. More recently, we have worked to ensure that NHMRC’s research support commitment does two things: fund the best research; and build the capacity to undertake health and medical research through some really innovative fellowship schemes.” These schemes, while admittedly not always with commercial interest at heart, or even in mind, contribute to Australian research capacity and create opportunities for spinoffs and eventual successes beyond initial predictions. In this regard, Professor Anderson notes, “For example, Professor Ian Frazer along with others in his team at the Queensland University are benefiting from NHMRC-funded support, including for some of his early groundbreaking work in the development of Gardasil, the cervical cancer vaccine.”
Although Gardasil is the best known success story, there are numerous examples of excellence. Professor Anderson boasts, “Just speaking to health and medical research, there is no question that Australian researchers are outstanding. In bibliometric analyses of our sector, 2 percent of Australian papers are found in the top 1 percent of papers worldwide. One would expect it to be the case that Australia, being ‘out of sight, out of mind’ in a sense, would not be as present there, but the fact that it’s so highly represented at this level is a recognition by the rest of the research community that the research produced in Australia is of outstanding quality.” Getting further niched in the areas of expertise, Professor Anderson points to a particular strength in public health research, representing 3 percent of the top 1 percent of the world’s literature and other areas like immunology, cell biology, and cardiology.
Less tangible than these hard numbers, however, are the tendencies underlying this output. Speculating on some of the less obvious success factors, Professor Anderson notes, “There is also something to be said for the Australian culture around collaboration.” Though this too is backed up by hard numbers: approximately 65 percent of published papers in Australia have an international component.
This collaborative spirit has extended to the private sector as well. Although Australia represents Sanofi-aventis’ second largest sales contributor in the Asia Pacific region, the company is not content to rest on its laurels, instead taking advantage of an attractive environment. Managing Director Jez Moulding puts it quite clearly: “Australia, with its science base and extensive knowledge in scientific affairs, is really a hub of excellence for the Asia Pacific region in terms of clinical trial activity.” As recently as 2007, Sanofi-aventis shored up its $34 million annual R&D commitment to bring further clinical research investments, totalling over 1,000 active research sites and 15,000 patients currently involved in the company’s trials.
From Big Pharma to Big Biotech, Australia is recognized across the board. Richard Davies, managing director of Amgen, says, “Looking at Australia’s history, as a country with 20 million people, research and development has punched above its weight statistically. Amgen reflects that [idea], with 10 percent of its clinical patients in total taken from Australia. That’s because Australian researchers have the skills to explore new chemical entities and biologics of the future. Amgen partners to help them invest in and understand new disease areas. Australia also has key positions in world thought leaders. In osteoporosis, for instance, there’s a disproportionate amount. There’s an imbalance between the country’s market potential and the potential to partner in other parts of the business.”
On the homegrown side of things, local companies are taking advantage of the fertile ground as well. Arana Therapeutics, a global player in the antibody and protein therapeutics sector, and one of Australia’s largest biotechnology companies, recently opened new facilities in Sydney, which will be dedicated to creating products and platforms for the treatment of inflammatory diseases and cancer. The facilities were opened by none other than Senator Kim Carr, who heralded Arana as “a model the whole industry can learn from.” Created in May 2007 by the mergers of Peptech and EvoGenix, Arana represents what CEO Dr. John Chiplin calls, “A combined entity which is poised to be a major player on the worldwide antibody stage,” and a company that has “genuinely built critical mass in this Australian merger to compete aggressively in the fastest growing sector of the international human therapeutic market.”
And the examples abound, from small to large. With three major sites in the country, Pfizer calls Australia home to one of only two Pfizer Biometrics centers around the world, making Sydney a global focus for clinical trial work. This centre’s $14 million investment, on top of the company’s $50 million-plus in annual commitments, provides services for clinical research undertaken by Pfizer in Australia, Asia, Africa and the Middle East. The feather in Australia’s cap was that the country location was chosen over Singapore and India — a small but notable contribution to reversing the off-shoring of Australian researchers.
Eli Lilly invests $40 million annually, following the establishment of InterContinental Information Sciences (ICIS) unit for R&D in the region, one of the largest commercial trial management operations in the pharmaceutical industry. Novartis is yet another major contributor, with $30 million earmarked per year; and last but not least comes AstraZeneca, Australia’s largest private sector investor in medical R&D, with over a quarter of a billion dollars invested in the last decade alone.
CROs: Oil in the R&D engine
Although Big Pharma and its biotechnology counterparts may be known for driving R&D and innovation, oftentimes critical parts of the research value chain are outsourced. Contract Research Organizations (CROs) play an important and growing role in offering capacity to drug developers, with revenues of the nearly 1,100 providers in a fragmented global market estimated to grow from $14 billion in 2006 to $24 billion in 2010.
As sales growth outstrips research capacity, CROs have become an integral part of the R&D process, having evolved from basic preclinical services in data management or monitoring, to advanced packages covering the full spectrum of trials through commercialization and beyond, amazingly accounting for half the overall corporate R&D work force. And in biotechnology, a comparative lack of infrastructure to the Big Pharma brethren has accounted for an ever-growing drive to CROs, and along with it the positive side-effect of lower times-to-market.
As Australia’s oldest CRO, Datapharm has seen this trend develop over the past 21 years. Managing Director Helen Allars says it’s the company’s local knowledge of sites and expertise that is “attractive for overseas companies wanting to do or to extend their clinical trials in Australia. Where an American company wants to do a melanoma study in Australia, they’re better off using a local CRO like Datapharm, which knows a lot of the sites and the best way to go about doing trials. This local connection becomes an advantage in completing the work successfully.”
Pretium confirms the importance of a local advantage, especially in the company’s specialty of health economics. Munro Neville, Pretium’s director of Medical & Operations, and Joyce Lloyd, Pretium’s managing director, explain that “undoubtedly, successfully listing drugs on the PBS in Australia is becoming more difficult. The burden of proof and the height of the hurdles are becoming more challenging. The amount of data collection and work involved in preparing and presenting a convincing case to government is significantly more than it was even three years ago, and more so than in other countries, requiring a lot of customization of global approaches to funding.” Neville and Lloyd note the disadvantage of the cookie-cutter method employed by MNCs operating in Australia. “Most companies use what are called ‘global value dossiers,’ as part of an overall approach to seeking funding, but these are often of limited use in Australia. Much customization is necessary to satisfy the requirements of the PBAC (Pharmaceutical Benefits Advisory Committee), in addition to work by the local affiliates in educating the global headquarters about why they must deviate from accepted pathways.” The bottom line? Neville and Lloyd say, “This results in quite a complicated and involved process that can often be frustrating for the local affiliates, but provides an interesting opportunity for Pretium. For example, many global health economics models are not sufficiently robust to pass the highly in-depth and complicated evaluation process that the PBAC employs in its assessment of product value.”
Emeritus Professor Lloyd Sansom AO, the man behind this in-depth and complicated process, is the chair of the Pharmaceutical Benefits Advisory Committee (PBAC). He describes the organization as “a statutory committee of the Australian government which was first established in the 1940s, and which makes recommendations to the Minister of Health and Aging regarding medicines which should be considered for funding on the Pharmaceutical Benefit Scheme (PBS).” Recognized as a global opinion leader in health technology assessment and cost-effectiveness, they represent two complementary tools for evaluating government healthcare expenditures. Trying to bolster acceptance abroad, Sansom speaks of the importance of domestic buy-in. “There is a clear acceptance in the country that cost-effectiveness is the appropriate way to value medicines expenditure. It is my strong personal belief that the cost-effectiveness paradigm for subsidy consideration will become common in both developed and developing countries throughout in the world. Increasing demand, coupled with increasing cost, will direct and demand that governments and third party payers will look at value for money — they have to.” Professor Sansom looks outside Australia for an eye-opening comparison: “Simply examining the percentage of GDP spent on health in the USA, at almost 17 percent which compares to an Australian expenditure of approximately 9.8percent (and most European countries which vary from 8.5 percent to 10 to 11 percent), and comparing health outcomes and health access equity between countries strongly suggests that it is not necessarily how much you spend but the effectiveness.
(Too many) Men at work: Over-employment down under
It’s perhaps unsurprising that niche providers in the CRO space would be lacking for talent, but this tightness in the labor market extends beyond the specificities of high-level statisticians and experts in Australian regulatory policy.
Australia’s booming economy offers a robust consumer market at all levels of healthcare expenditure. At the same time, those consumers are at unprecedented employment levels — not necessarily a bad thing, unless you want to hire one. The pain is especially acute in the pharmaceutical sector, whose unrelenting demand for highly skilled, specialized labor creates an added challenge to growing companies.
With levels at 30-year lows, Australia’s unemployment rate of 4.3 percent is expected to rise as the economy cools down from an easing global commodities boom and consumer spending, with record production levels from companies like Rio Tinto and BHP countered by significant cutbacks at Qantas and Starbucks.
Although many companies may be desperate for people, it will be the more creative firms that attract and retain the necessary human capital. Dieter Torheiden, Solvay’s Managing Director, has experienced this labor crunch firsthand. In his first years in Australia, Torheiden recounts the path he took towards filling the ranks: “In the early stage, the policy was to focus on headcount, believing frequency would be better than quality. This had some negative effects in 2002 and 2003, where there was quite a high employee turnover. One might say we made the wrong recruitment, but at that stage it was a problem to find good people when there were simply not many around. Another issue was that we probably underestimated the cost of good people.”
Costs notwithstanding, Torheiden says the company decided six years ago to invest heavily in the CCB market, and alongside it a concurrent increase in salespeople. However, things had swung too far the other way, as Torheiden recalls, “with that investment Solvay employed, in principle, far too many salespeople for its turnover at that time, but we had to be competitive in that elephant market. Solvay learned a lot over that time, and the company within 18 to 24 months developed a really good and effective sales force team, adapting more toward quality than quantity.”
Managing Director of Celgene, George Varkanis, knows plenty about quality, which is part of the company’s success in being of the top 10 performing stocks on the NASDAQ over the last decade, and spearheading major expansions to into Europe, Asia Pacific, and Japan from the biotech’s New Jersey headquarters.
Explaining the growth in human resources since starting Australian operations in 2006, Varkanis notes, “Starting greenfield, you can do what you want. You’ve got nowhere to hide and nobody to blame, and that’s the fun part in building an organization. Hopefully, you don’t make too many mistakes, while fostering a culture of taking calculated risks, empowering and encouraging people, and developing teams. Many people at Celgene here and internationally have worked in different positions in Big Pharma, and can apply many of the good things they’ve learned in terms of processes, procedures, and best practices when building the business here. The people joining Celgene like building things and have an entrepreneurial spirit that’s related to risk-taking.” Given the relative youth of the company’s Australian operations, how does Varkanis see Celgene as being differentiated in the employment market? “To the industry as a whole, Celgene represents another interesting company, and represents a fresh option for career development, as an attractive alternative offering a new environment, new products, and a new perspective,” he says.
Although not quite as fresh as Celgene’s operations, Nycomed too tries to stand out culturally to attract the best and brightest. Willem Dekker, Nycomed’s regional director, says, “When I came to Australia in September 2002, one of Nycomed’s goal was to create a new and unique business culture that would create a distinction in the market and provide to staff an identity that would resonate with them as well as our customers. It became a ‘pioneering’ culture.” Beyond the buzzword, Dekker explains what it really means from day to day: “A culture that was low in complexity and high in innovation, both in terms of business as well as R&D, where people are open and willing to multitask and are performance-driven. All this is easier said than done. With hard work by everybody in the organization, a ‘step wisely’ approach and clear goal-setting for each year since incorporation, ‘pioneering’ has helped us to get to our current position of strength. ‘Pioneering’ is not a stage of development in the early life of the company, but a continuum. So Nycomed in Australia wants to be ‘pioneering’ now and into the future.”
But maintaining a continuum for the better part of a decade is a difficult challenge, as Dekker acknowledges. “To retain the momentum it is essential that we attract, via a careful selection process, a certain type of person and manager that fit in the environment of a mid-size organisation. The business culture develops into a business concept, and it becomes a managerial strength. We believe that this is not the average management style, and it’s one of the reasons people find Nycomed attractive as an employer and like to join such a work environment. If you would ask around in the market, this is an image Nycomed has created for itself, and an image that we are all proud of and promote in the market.”
Radek Sali, CEO of Swisse, explains how the natural medicines company differs from some of its pharmaceutical counterparts. “I came to Swisse with a background in a large public company, and they always try to inspire, and the values will be written on the wall, but there was never real synergy between those values and what really happens. This harmony is what really appeals to me in working at Swisse,” Sali says.
Regardless of the differences, Sali notes that the industry’s people-first maxim still applies: “When I go through the company’s 4Ps (people, principles, passion before profits), people are just so important to ensuring the quality of the product. You need to have the best marketing people and the best product, and then comes passion. You must be passionate about your career, as you will be doing it for the majority of your life. It’s like your second marriage in life, and you need to be happy in that marriage in order to be successful. So if you are not passionate, you are certainly in the wrong industry. At Swisse, we really make sure that every person is really passionate about what they do.”
Of course, in marriage as in work, even a philosophy as uplifting as the company’s CLED — Celebrate Life Every Day — must be looked at realistically. Sali says “in order to make this feasible, there needs to be a very inclusive approach involving all the elements in our strategy. Swisse needs to be open to feedback, and maintain regular communication to ensure alignment and that we are very much focused on our teams. If you have good, passionate people, they are going to be excited about working and delivering results.”
Yet transfer of capital is not limited to the human side. Intellectual capital as well, this time in the form of global marketing standards, can be illustrated in two key case studies in Australia’s OTC sector.
Bringing international marketing standards to an international market
Although Australia may be the source of influence in the world’s health technology assessment and cost-effectiveness approaches, it has recently relied on international expertise to revitalize some former laggards in the marketing department. Take the case study from Ralf Dahmen, managing director of Galderma, a joint venture between L’Oreal and Nestle competing in Australia’s $376 million dermatology category. Dahmen points to Loceryl, a lacquer used to treat fungal nail infection. “The work on this campaign began with consumer research to test some assumptions about who suffers from this condition and how they treated it. In the case of Loceryl, the question was whether we were targeting consumers with the right message and communicating with relevance.” As it turned out, Galderma wasn’t, but fortunately, says Dahmen, “the research also highlighted an underestimation of Loceryl’s potential, and on that basis we expanded the campaign to include our first ever television commercial. The campaign educates to help identify the problem and presents a solution to address it, with information about how to find out more (i.e., ask your pharmacist or visit the website. It’s a no-nonsense format to communicate a medicinal message.
“As a marketer, at some point you have to talk with the patient and stop assuming you know how they feel — no matter how straight forward the condition might be,” continues Dahmen. “This demonstrates a fundamental difference between assumption- and evidence-based marketing.”
While Dahmen’s approach may be a more nuanced assessment of a situation in need of change, Stiefel’s Managing Director Troy Guthrie needed a more extreme approach. Noting a sea change around the shuffling of upper management, Guthrie remarks, “Before April 2006, Stiefel ran each individual country separately with a different management structure and product focus; basically, everything was independent.”
Since that time, when global CEO Charlie Stiefel took the company’s reigns, Stiefel “is globalizing and standardizing, to be the Global pharmaceutical player that it is, putting things into practice and harmonizing across the range of procedures, policies, processes, practices, and products,” says Guthrie, who notes that when he became managing director in 2006, Stiefel looked a lot different than today. “We had a field force of 13 people, with no customer database, no IMS data, no established territories, and no sales targets. There was a sales-driven mentality with little scope for marketing activities and little direction, with mediocre achievement.” Guthrie explains his action plan thus: “Basically, my first task was to organize the field force. There was a new product on board called Duac, which is primarily a prescription product. Of the 13 representatives I mentioned, some were looking after dermatologists, GPs, and pharmacies, while some were just looking after GPs, so first they had to be realigned into an ethical and OTC field force, and increase the numbers in the team to effectively cover both.” After implementing doctor and pharmacist databases, using IMS data for sales tracking, call rates, Magellan databases to qualify doctors, and other management systems, Guthrie’s more quantitative approach had effectively transformed the organization. “This has resulted in Stiefel Australia coming a long way to helping get to where it needs to go.” Australia has since grown 26 percent, and is one of Stiefel’s main growth contributors in the area, to make the company ranked the 11th fastest growing pharma company in the country.
Despite this apparent can-do attitude, and a market replete with companies content to help themselves, the Australian government is giving a hand up as well.
Giving a hand up—and out
Australia has a long history of helping out the pharmaceutical industry; the first pharmaceutical industry-specific incentive program was the $1 billion Factor (f) introduced in 1988. During a period of disinvestment and losses in manufacturing capacity, it successfully created a cumulative production increase of $4 billion, incremental R&D expenditure of $600 million, and more than 1,000 jobs, transforming the sector into a key economic contributor. In turn, Factor (f) was replaced with the Pharmaceuticals Industry Investment Program (PIIP), continuing its predecessor’s initiative to a lesser degree, offering $300 million in funding from 1999 to 2004, at which point the Pharmaceuticals Partnership Program (P3) took over through the present day, and will end in 2009. This latter program provided half the levels of support, in absolute dollars, as PIIP, leading many in the industry to question the government’s long term commitment.
Will Delaat, whose PIC is hoping for government to step up, says that “by 2009, there needs to be a successor program, hopefully with more funds and that encourages partnerships between big pharma and biotechnology. With big pharma undergoing global rationalization, it’s important for Australia to retain its manufacturing presence, and to at least hang on to what the country has currently got. If there were a government scheme to at least reward the current levels of manufacturing, parent companies would notice the government’s commitment, even if not in the form of incremental investment,” concludes Delaat.
This comes on the heels of a recent facility closure at Merck Sharpe & Dohme, which will retain its packaging operations but lose medical production capacity. Few see the future of Australia manufacturing in packaging. Delaat, former head of MSD, explains the challenge involved in taking the next step: “It has been difficult to come up with a scheme to meet all the stakeholder requirements: Big Pharma, local companies like CSL and IDT, biotechs, and generics all have their individual issues. Proposals were made to Ministers Macfarlane and Abbott in the previous government, and they required a very strong business case.” Unfortunately, said case did not materialize, and “along with the change of government, the proposals got lost in the shuffle. Now, however, they are being revisited with Minister Carr looking to boost manufacturing, innovation, and R&D.”
Fabian Dwyer, General Manager of IMS Health, agrees. “Australian people hear the messages of ‘innovation’ and ‘clever country.’ However, I don’t foresee large MNCs continuing vast manufacturing facilities here, when Brazil, Ireland, Singapore, etc. have significant tax concessions for start-up or investment that Australia does not appear committed to matching,” he says. Ian Chalmers seconds this opinion, saying “If we’re going to seek significant investment in onshore manufacturing operations, we must find and exploit niche opportunities rather than large-scale, lower value–added small molecule manufacturing, for which there is already very significant global competition.” He also offers a way out: “In my view, an obvious opportunity for significant upscaling here lies in R&D and clinical trials, particularly early stage trials.”
Such niche opportunities were the focus of the Commercial Ready program, a competitive merit-based grants scheme providing funding between $250,000 – $5 million to smaller companies commercializing new technologies. Paradoxically, the program was scrapped in late 2007, with the government citing savings of $700 million over four years. However, at a one-to-one matching of private to public investment, some critics suggest the government would be wiser to look at both sides of the equation. Especially after June 2008, when the federal government offered a $72 million subsidy for Toyota’s new Prius manufacturing facility — after the location decision had already been made.
To paraphrase Elle MacPherson, some executives simply stated that for Big Pharma executives, it’s not even worth getting out of bed for $10 million over five years. Other companies, on the other hand, are not so dismissive. Servier is an example of one company who benefited from P3, receiving $7 million from the government — although CEO Patrick Tete doesn’t credit much impact in his company’s case, perhaps an understandably small amount for a business turning over in excess of $100 million annually in Australia alone. “P3 was not one of the main reasons why Servier has invested more in Australia of late. What drives Servier’s headquarters to conduct more research in Australia is a long term strategy that addresses low prices in the market, as well as the impact of the PBS reforms and the delinking of the F1 & F2 formularies. The Australian context gives Servier more visibility in the long term and pushes the company to invest more in this country. Of course, the P3 helped, but it was not a driving decision for our French headquarters to invest here.” Indeed, such decisions can be traced back over 20 years, creating what Tete calls a virtuous cycle, feeding the company’s advanced clinical facility investment and research capacities upon itself. As a privately owned organization — by the legendary Jacques Servier, who grew the company from a pharmacy of nine to an MNC of over 20,000 — Servier is free to invest more than its peers. Tete notes, “We invest around 15 to 20 percent of our turnover and we have 200 people working in Australia, of which 30 are wholly dedicated to our R&D activities. In fact we invest three times more of what big pharma invests here.”
Arana Therapeutics received $6.6 million from P3 as well, adding to a $180 million war chest accumulated mainly from divesting its share of UK’s Domantis to GSK. It will use that money to accelerate the development of its four lead drug programs, for treatment of diseases including rheumatoid arthritis, psoriasis, osteoporosis, and cancer.
With some worried that scrapping initiatives like this risks Australia losing its reputation as “the clever country,” others maintain that a clever country must be backed up by clever spending, especially when it is “at the crossroads.” Some critics believe that the more apt road comparison would be to a roundabout. Nonetheless, they will be looking to specific initiatives like the PISG to galvanize the industry going forward.
A roadmap toward innovation
Dan Brown, managing director of Genzyme Australasia, and member of the PISG, speaks of the overall positive industry perception of the group. “Senator Carr’s initiative to establish the PISG, and the cross-sectional membership therein, really speaks to what the industry will look like 10 to 20 years down the road. The broadly defined pharmaceutical industry is the second largest exporter in Australia, but the question of sustainability in the global context must be assessed.” In creating this sustainability, Brown assesses the role he expects the group to play. He continues: “The PISG will help define what is important to the future, and from a biotechnology and personalized medicine standpoint, the future lies in targeted therapies that require research, biotech startup incubation, clinical trials, and aligned tertiary education. The future of pharmaceuticals will be more about the outcomes of targeted therapies employing a broader personalized medicine array of genetic screening, diagnostic testing, both small & large molecule therapies, and cellular and genetic therapies.”
George Varkanis, managing director of Celgene, speaks from the point of view of a new-to-Australia global biotechnology firm. While Varkanis believes the group qualified and looks forward to their findings, he says, “I hope the government ultimately acts on these findings, and takes them into consideration when investigating investment into manufacturing and R&D. I’d like to think that the government won’t shy away from the real reasons why companies invest in certain countries, and this has to do particularly with financial incentives. Why is there a big pharmaceutical industry in Ireland, Singapore, or Puerto Rico? It’s quite a consistent common theme, so let’s not ignore it if we’re going to be serious about putting an investigative group together.”
Senator Carr addresses that theme thus: “I was recently in the US, and was advised that a plant that had been scheduled to come to Australia had gone to Singapore on the basis of a complete, total, and permanent tax-free holiday. I don’t know if that’s a sustainable strategy for any government to follow, and I can assure you it’s not a sustainable strategy I would recommend for the Australian government.”
Mark Glover, VP and Managing Director of Allergan, addresses that sustainability: “Allergan is an R&D focused innovative company, and wants to have product sustainability within the pricing structure. The availability of low-price generics does play an important part in the sustainability of the PBS,” Glover says, adding as a caveat, “As long as there is timely access to R&D-based products at reasonable prices to continue to support innovative product development by R&D focused companies. I would hope that this is what should come through the PISG forum.”
Allergan, a world leader in medical aesthetics (BOTOX®, Juvéderm and breast implants) is in a unique situation. While the majority of the company’s neuroscience business is funded by PBS, around 50 percent of its eye-care lines, but only 5 percent of the obesity management product LAP-BAND® are funded. Glover hopes the PISG can balance the push and pull strategies inherent in trying to attract investment while dealing with the difficulties present in PBS reform. “Once a therapeutic is approved and funded, Australia has one of the highest penetration rates around the world. The barrier to entry is twofold. It is a complex health outcomes–related process that takes a long time to achieve success and final approval has a tendency to be at a lower price than is sustained in either the US or Europe. The PBS therefore has some attractiveness, as well as some absolute challenges of getting drugs approved through the review mechanism. There is always a trade-off,” he concludes.
Private equity and venture capital: Too far to go?
This innovation system, while robust in its scope and production, has not been utilized to its full potential. Fabian Dwyer puts it simply: “The difficulty lies in the fact that there’s not the venture capital money like in the West Coast US, ready to pour millions of dollars into a startup to commercialize such products.”
Looking to the world’s most liquid market is perhaps an unfair yardstick, but when stateside VC firms invest over $3 billion per quarter in private companies, it’s an understand ably enviable target. Australian Private Equity, on the other hand, seems also underutilized, representing just 20 percent of total M&A activity — half the levels in the US and UK.
Although the obvious source of financing is overseas, some opportunities are originating much closer to home. One example is specialist biotech Genzyme, which, as Dan Brown relates, in 2005 undertook an “acquisition of Verigen, a cell therapy company with a key facility in Perth, WA, specializing in autologous human cartilage cell therapy. This innovative technology has been strongly supported by S
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