The ABCs of Pharma
An introduction to the Pharmaceutical industry
If I were to rank my pharmaceutical knowledge on a scale of 1-10, it would barely reach a 2, assuming 10 represents an expert. I noticed that there's plenty of content for those who are already at a 2 or above, but for those starting from 0 or just a bit above, grasping the basics can be quite a task.
This realization struck me when I began my job as an equity analyst and was astonished by my own lack of knowledge about this field. What followed was an extensive journey of reading, which brings us to today. (From 0 to 2)
Through this article, I hope to share some of the basics about the industry. Without further ado, let’s get to it.
Innovator Vs Generic Drugs?
You know that one friend who was a genius at math – the kind who effortlessly solved complex problems by breaking them down and deriving formulas? And then there's you, who's grateful when your friend shares the formula, making it all so much easier.
Well, that's precisely the analogy between innovators and generic drugs.
Innovator drugs, often known as brand-name drugs, are the stars of the show. These medications emerge from extensive R&D efforts by pharmaceutical companies and are protected by patents, granting exclusivity for a specific period.
On the other hand, we have cost-effective heroes called generic drugs. Once the patents of innovator drugs expire, generic manufacturers step onto the stage, offering more affordable alternatives. Generic drugs contain the same active ingredients and demonstrate equivalent efficacy to their brand-name counterparts, making quality healthcare more accessible to a broader population.
India is known for its generic drug market. What is remarkable to monitor is the crazy drop in prices that we witness when a patent expires.
Another way we can divide the Pharma industry is through chemical drugs and biologics.
Chemical Drugs & Biologics
Chemical drugs, as the name suggests are synthesized through chemical processes. They are typically made up of relatively small molecules and have a defined chemical structure.
Biologics, on the other hand, are a distinct class of drugs derived from living organisms or their components. They are typically large and complex molecules, such as proteins, antibodies, or nucleic acids. Biologics are often produced using living systems, such as bacteria, yeast, or mammalian cells.
Chemical drugs are easy to replicate through traditional chemical synthesis techniques. The same cannot be said for biologics.
Biological generics, also known as biosimilars, must demonstrate similarity to the reference biologic rather than identical replication. Achieving this level of similarity requires extensive testing and characterization to ensure safety, efficacy, and comparability with the reference product. Factors such as temperature, pH levels, and other environmental conditions during the manufacturing process can significantly impact the structure, stability, and functionality of biologics.
Medicines by therapy area?
Ofcourse, you can divide medicines by treatment. Six key therapy areas account for 74.80% of the total market in Financial Year 2022. (Source: IQVIA MIDAS, 2017-2022)
Oncology: It is the largest therapy market globally, primarily focused on cancer treatments. It is characterized by significant innovations in treatments like cell therapy. It is contributing close to 23.06% of the total formulations market in Financial Year 2022 and is only expected to rise.
Gastrointestinal: The second-largest therapy area, includes medications for gastrointestinal disorders and is expected to grow steadily over the next five years. Is as of 2022, has 16.45% of the market share.
Central Nervous System (CNS): It is the third-largest therapy area, with a market share of 12.23% in 2022. It encompasses treatments for neurological disorders like Alzheimer's and Parkinson's disease, and there is increasing focus on novel migraine therapies and treatments for rare diseases within neurology.
Anti-Infectives: The name says it all. Anti-Infectives capture 9.83% of the global market share in Financial Year 2022.
Cardiovascular: Aas the name suggests, this therapy area deals with medications for cardiovascular diseases.
Respiratory: Again, the name is pretty self-explanatory.
How does a medicine hit the market?
It’s a rather lengthy process, especially if we talking about innovative drugs in the United States.
Target Identification and Validation: Scientists identify specific disease targets and validate their suitability for medical intervention.
Hit Generation and Lead Optimization: Chemical compounds are screened to find those that interact with the disease targets. The most promising compounds, known as "lead compounds," undergo further optimization. (Yes I am making it sound a lot easier than it is)
Preclinical Research and Development: Before a potential drug can advance to human trials, extensive preclinical research takes place. Scientists conduct laboratory experiments and animal studies to assess the drug's safety, potential efficacy, and possible side effects. This stage helps identify promising candidates and lays the foundation for further development.
Candidate Selection: Based on the results of preclinical studies, the most promising lead compound is selected as the candidate for further development.
Investigational New Drug (IND) Application: The pharmaceutical company files an Investigational New Drug (IND) application with regulatory authorities, such as the US FDA (Food and Drug Administration), to seek permission to conduct human clinical trials. The IND includes data from preclinical studies, manufacturing information, and proposed clinical trial protocols.
Clinical Trials: Clinical trials are conducted in three phases.
Phase I involves testing the drug on a few healthy volunteers to evaluate its safety and dosage range.
Phase II expands the study to a larger sample size of patients to assess effectiveness and further evaluate safety.
Phase III involves large-scale trials on a significant number of patients to confirm effectiveness, monitor side effects, and compare with existing treatments.
New Drug Application (NDA) Submission: After the successful completion of Phase III clinical trials, the pharmaceutical company compiles a New Drug Application (NDA). The NDA contains comprehensive data from preclinical studies and clinical trials, along with information on drug manufacturing, labeling, and proposed indications. It is submitted to regulatory authorities for review.
Regulatory Review and Approval: Regulatory authorities review the NDA submission, assessing the safety, efficacy, and quality of the drug. This stage involves a comprehensive evaluation of the data and rigorous scrutiny before granting approval for marketing the drug.
Generic companies rely on the existing preclinical data of the innovator drug, demonstrating that the generic version has the same active ingredients, dosage form, and intended use as the reference product. A Bioequivalent study is usually carried out to show this similarity.
Generic companies follow a different regulatory pathway known as the Abbreviated New Drug Application (ANDA) instead of the New Drug Application (NDA) used by innovator companies. The ANDA application can be basically divided into 4 different types.
Para I: In a Para I certification, the generic applicant states that there are no relevant patents or exclusivities associated with the brand-name drug that the generic seeks to copy. This means that no active patents would prevent the approval of the generic version.
Para II: In a Para II certification, the generic applicant acknowledges that the patents associated with the brand-name drug have already expired. This certification allows the generic drug to proceed without facing any patent infringement challenges as the relevant patents have run their course.
Para III: In a Para III certification, the generic applicant provides information about the patents covering the brand-name drug and states that these patents will expire on a specific date in the future. By providing a Paragraph III certification, the generic company informs the FDA and the brand-name drug manufacturer of the patent expiration date, which allows the generic drug to proceed with the ANDA application once the patents have expired. This certification helps in planning the timeline for generic entry into the market.
Para IV: A Para IV certification is probably the most significant and impactful type of certification in the ANDA process. In a Paragraph IV certification, the generic applicant asserts that one or more of the patents covering the brand-name drug are invalid, not infringed upon by their generic product, or both. This certification initiates a patent infringement lawsuit from the brand-name drug manufacturer, and the outcome of the litigation will determine whether the generic product can be approved and marketed. A successful Paragraph IV challenge can lead to an early entry of the generic drug into the market, bringing competition and potentially lower drug prices.
To keep track of approved generic drugs and their therapeutic equivalents, the FDA maintains the "Orange Book." It lists all approved drug products, including brand-name drugs and their corresponding generic versions. This resource serves as a valuable reference for anyone interested in identifying the companies that have the ability to sell a particular drug.
Formulations & APIs?
Consider pasta. What makes it what it is? I would guess "Penne and the sauce" are the key ingredients that make it what they are. Similarly, in the world of Pharma, the key ingredients in a medicine are known as the API (Active Pharmaceutical Ingredient).
Now, imagine taking your pasta dish and adding cheese, veggies (I mean just Olives), and other elements to it. Once you have the entire combination, that is what we call a formulation.
In pharmaceutical terms, a formulation refers to the complete composition of a medicine, which includes not only the essential API but also other important components, known as excipients. These excipients play a supporting role, just like the cheese and olives in a pasta, to ensure the medicine works effectively, is safe to use, and is available in the right form for patients.
In the pharma world, we have companies that simply manufacture APIs.
CRAMS Vs CROs?
Think medical outsourcing.
CRAMS: CRAMS stands for Contract Research and Manufacturing Services. It refers to a business model where pharmaceutical companies outsource both research and manufacturing activities to third-party service providers. CRAMS companies offer a wide range of services, including drug discovery, process development, analytical testing, and commercial-scale manufacturing.
CROs: CROs are Contract Research Organizations that primarily focus on providing research services to pharmaceutical, biotechnology, and medical device companies. These organizations offer services such as clinical trial management, data management, regulatory affairs, and monitoring of clinical studies.
This market exists cause it allows companies to focus on their core competencies and outsource the rest.
Wait, so how are medicines sold?
As you already know, medicines come in two primary types: over-the-counter (OTC) and prescription drugs. OTC medicines, like cough syrups and allergy remedies, are readily accessible without the need for a doctor's prescription. On the other hand, prescription drugs require a valid prescription from licensed healthcare professionals, such as doctors or nurse practitioners.
But the process of how much we pay depends on a number of parties and is different for different countries. Let’s just look at some common players in the ecosystem.
Drug Manufacturers - They make the medicine and want to sell it.
Doctors - Medical companies often work hard to get their medicines prescribed by doctors. They shower them with information and sometimes even sweet perks, hoping to secure a place on their prescription list.
Insurance Companies - They play a role in reimbursing a portion of the cost of medicines covered under insurance plans. In some countries, insurance companies also negotiate drug prices with manufacturers to control costs and ensure coverage for their policyholders.
PBMs (Pharmacy Benefit Managers) - In countries like the United States, PBMs act as independent intermediaries between health insurance companies, pharmacies, and drug manufacturers. They negotiate drug prices, process prescription claims, and play a significant role in drug pricing and distribution.
Government - Governments play a crucial role in regulating the pharmaceutical sector due to its significance in providing essential goods consumed by everyone. Moreover, some countries take a more proactive approach to drug price regulation. India, for example, has a robust regulatory framework through the National Pharmaceutical Pricing Authority (NPPA). The NPPA is responsible for controlling and fixing the prices of essential medicines to make them accessible and affordable to the general population.
Pharmacies - We get our meds from them.
As you can imagine the healthcare industry is vast and intricate. We haven’t even touched on hospitals, diagnostic companies, and medical equipment companies!
What are some trends we are witnessing in Pharma?
An aging population - Yes this sounds boring and obvious but an aging population means more pills to swallow and more bills to pay. Yep, the Pharma industry won’t mind this.
Growth in Biologics: Biologics compared to many chemical compounds, are said to be more precise and can treat many diseases which were previously not treatable. Their market share has been increasing and will continue to do so in the future.
Personalized Medicine: Advances in genomics and molecular biology have paved the way for personalized medicine, tailoring treatments based on an individual's genetic makeup, lifestyle, and disease characteristics. Had written a basic article on gene editing for those interested.
Rare Diseases and Orphan Drugs: As major diseases find effective cures, the pharmaceutical industry naturally shifts focus to rare diseases. These conditions affect a small number of people and often lack proper treatments. Pharmaceutical companies are now investing in developing medications, known as orphan drugs, specifically designed to address these rare conditions. What is interesting is to see how the unit economics works for such drugs, given that the percentage of the population that will be using that drug is meager.
Artificial Intelligence and Drug Discovery: AI and machine learning are transforming drug discovery by solving issues such as the protein folding problem.
I realize this may have been rather basic, for many of you, but if you made it so far, thank you. If you looking to support the newsletter, consider checking out some of the merch. It’s pretty cool. (Obviously, I’m biased)
Have a good one!
