Biotech and Pharma

Are we seeing a new dawn of innovation in pharma?

Modernizing Medicine's electronic medical assistant.
Source: Modernizing Medicine

Innovation has always been the blood pumping through the body of the pharmaceutical industry, but in recent years the supply seemed to be getting poorer.

Yet now a slew of breakthroughs in treatment for diseases like Hepatitis C, Ebola, malaria and even Alzheimer's, the memory-destroying condition on which much time and effort has been spent to little avail so far, has prompted hope of an era of new ideas and treatments in the industry.

So is this a new start for big pharma, mired for years in a cycle of patent expiries and chasing new blockbuster drugs which disappointed, or a false dawn?

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"The traditional blockbuster model doesn't work any more," Luca Raffellini, director of consulting, business & financial services at Frost & Sullivan, told CNBC.

"There's the opportunity to address and cure a much broader spread of diseases. The fundamental reason is that there's a long term fundamental move towards an older and older average age, so there are a lot more chronic diseases which are difficult to treat. If anything, there's even more innovation than before."

New advances in regenerative medicine and diagnostics also seem to be appearing to finally pay off commercially.

There is a new sense of optimism among investors and analysts. HSBC analysts recently produced a punchy, bullish note on the European pharma sector, which argued that "the sector's re-rating is set to continue", "companies are largely through the patent cliff period", and slapped Buy ratings on Novartis, Sanofi, Bayer and GSK.

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Rather than internal advances, many of the most exciting new treatments at big pharma companies are as a result of buying in scientific breakthroughs made elsewhere rather than concentrating on in-house research and development – and this is set to continue. Global healthcare M&A volume stands at is at a year-to-date record high of $422.8 billion this year, after a torrent of deals motivated by both record cash piles and tax benefits, as well as innovation. The latest bid to rock the sector is Shire's $30 billion attempt to gain control of Baxalta, the rare diseases company spun out of Baxter in June.

"There's a huge flow of M&A that's driving the sector," Jo Pisani, UK pharma and life sciences consulting leader at PricewaterhouseCoopers, told CNBC.

"Many deals have been around strategic areas that people don't understand at the time – AstraZeneca and MedImmune, which got AZ into immuno-oncology, for example."

The increasing number of harder-to-copy complex biologics will also aid the firms which have the existing economic capacity to research and manufacture these drugs.

"Those companies that prefer their own discovery have done less well with it than those who have forged strong external networks," according to Mike Rea, chief executive of IDEA Pharma.

There are still plenty who think the industry still hasn't made the necessary changes, including Rea.

"There are companies that have embraced the need to change, but they are not typical - the norm is a company staring at the need to do things differently, but continuing to do the same while they're afraid to take the leap," he told CNBC.

One key shift in mindset has been towards curing rarer diseases, with smaller patient populations, as governments have sped up the approval process for conditions where there is no existing treatment.

"Many more products whose market ambition is a niche have hit the market. There has also been a tremendous change in the regulatory groups, who have brought about a new mindset with accelerated approval pathways," Rea said.

Yet these treatments are often priced according to their rarity, causing problems for insurers and governments, depending on who is funding healthcare systems.

"Although these important treatments are coming through, how many healthcare systems are going to be able to pay for them? We need more innovation in the commercial model, too," Pisani argued.

Alarmingly, there have been some areas where big pharma has almost entirely exited the stage, believing that there was little profit or innovation to be found – antibiotics is one of the most immediately concerning examples of this.

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Ultimately, the Pfizers of this world may need to be more worried about competition from Apple and Google than from their peers in the pharma industry, according to Pisani. As these companies move into the healthcare space via smartwatches and healthcare applications, they are likely to offer more diagnoses and even prescriptions. Uber, the cab company, has also recently started taking doctors to house calls via the Pager app, which is mostly concentrated in New York at the moment.

"People are more comfortable sharing with Apple than pharma companies," she said.

- By CNBC's Catherine Boyle