Pharmaceuticals: Back to the lab ©Science Photo Library Priming the pipeline: investors are rewarding companies where biological products make up more of their portfolio He has promised no big shift in strategy or focus, spurned big acquisitions and suffered a series of research setbacks. Yet Pascal Soriot, who became chief executive of AstraZeneca last October, has been rewarded by investors as he attempts to turn round the Anglo-Swedish pharmaceutical group. Mr Soriot, who left a secure senior job at Roche to take the top post at AstraZeneca, has ridden a fresh wave of investor optimism towards the prescription medicines sector after a long period of gloom. "We are committed to science and innovation," he says. If we make the right choices, we'll transform our portfolio. Mark Clark, director of European pharmaceuticals research at Deutsche Bank, says this view resonates more broadly in the equity markets, with the price multiples of the large drug companies rising sharply since 2012. Investors are really positive on pharma stocks. There are real signs of an improvement in research and development productivity. Increasingly people are taking more of a long-term view, of a return to growth. Such sentiment is in sharp contrast to the mood over much of the previous decade. Stock markets considered the "pipeline" of experimental medicines to be effectively worthless. Most pharmaceutical companies" shares were valued at little more than future sales of their existing products, despite billions of dollars spent annually on research to develop new medicines. But while many executives argued that past investor sentiment was too negative, some are now concerned such a positive reappraisal fails to distinguish sufficiently between different companies" strategies. All now speak of new approaches but only some will succeed. Over the past decade, scepticism has overhung innovation. Large pharmaceutical companies expanded on the back of "blockbuster" drugs that allowed them to invest in expensive new laboratories and offices. There was a shift from intuitive, artisanal-based drug development controlled by individual scientists towards industrialised techniques such as "high throughput screening" to identify potential new medicines by machine. The results were disappointing. Companies threw money at research. But if you look at the productivity, it didn't really change that much," says Professor Ray Hill at Imperial College. One problem was that a golden era of developing new drugs in the late 20th century pushed up the threshold for further improvement. Costlier new therapies often offered only slight improvements on previous medicines developed for conditions including high blood pressure and cholesterol. Many are now available cheaply since the patents have expired. Breakthroughs have been slow to follow, including medicines inspired by the decoding of the human genome at the start of the millennium. "It will come, but not as fast as everyone was anticipating," cautions Sir Richard Sykes, the former head of what is now GlaxoSmithKline. It's unbelievably complicated. Some of the biggest drugs are still only dealing with symptoms, not eliminating the problem. Much of the change in mood about the pharmaceutical industry's promise is linked to the rise of biological medicines, proteins or "large molecules." In contrast to traditional "small" chemical-based drugs, they tend to be more targeted to diseases and have a higher rate of success in clinical trials. Because they are more complex and difficult to copy, they are also less open to rapid and aggressive generic competition when their patents expire. They already comprise half of the world's 10 top-selling medicines, led by AbbVie's Humira for conditions such as rheumatoid arthritis, which last year became the second best-selling drug around the globe with nearly $9bn in sales. Investors have rewarded those companies where biological drugs make up a big proportion of their portfolio and pipeline, including Roche, which fully acquired the biotech giant Genentech in 2009, and Sanofi, which bought Genzyme in 2011. Now such products are at the forefront of a move to more "personalised" medicine, as genetic differences increasingly allow more effective treatments to be targeted to specific subgroups of patients. While productivity has been edging up, pressure on industry is rising fast. Medical insurers and cash-strapped governments who underwrite medicine costs in most of the industrialised world have become tougher. There has also been an intensifying backlash against strong-arm marketing by companies to influence prescribing: something critics argue would be unnecessary if the enhanced efficacy of their new drugs was so clear-cut. GSK, currently facing accusations of bribery in China, last year paid a record $3bn fine in the US to settle outstanding claims of marketing drugs aggressively. For shareholders, the broader concern was that pharmaceutical companies had become victims of their own success. Since the heyday of blockbusters at the end of the last century, they have struggled to maintain sales and margins as exclusivity on those top-selling drugs expires. Investors pointed to the risks posed by steep "patent cliffs," with generic rivals challenging patents and deeply discounting products. In the previous decade, companies tended to fill holes in sales through large acquisitions, such as Merck's $41bn purchase of Schering-Plough, and Pfizer's of Wyeth in 2009 for $68bn. They also sought to diversify into fields with lower margins but less uncertainty such as generic drugs, consumer products and animal health. Such deals helped companies generate economies of scale. The cost-cutting began in administration and marketing, but has since spread to research and development. In the UK alone, Pfizer in 2011 announced the closure of its historic site at Sandwich in Kent, and this year AstraZeneca did the same for its hub at Alderley Edge near Manchester. Most companies have recently held back from large mergers, often viewed as distracting senior management while doing little to boost productivity. Instead, they have focused on creating partnerships, licensing drugs from other companies or focusing on smaller external deals. At the top end, Amgen is seeking to buy Onyx, a developer of cancer drugs, for $10bn. Some divested peripheral activities to refocus on their research "core." Abbott separated its entire drug business into the standalone company AbbVie last year; GSK recently put up for sale its drinks Lucozade and Ribena and is divesting off-patent drugs. Pfizer is considering a similar move, following the sale of its nutrition business and plans to shed its animal health division, Zoetis. Companies have also sought to appeal to investors by cutting back on reinvestment and stepping up dividends and share buybacks. Those who failed to please shareholders paid dearly, including David Brennan, Mr Soriot's predecessor at AstraZeneca, who left abruptly as chief executive last year, and Daniel Vasella, the longstanding chairman of Novartis in Switzerland, who stood down unexpectedly this spring. There are some signs that the emphasis on research is paying off. Approvals of new drugs by the US Food and Drug Administration rose sharply to 39 in 2012, the highest number since 1996. Credit Suisse argued in a recent report that returns on R&D had been rising since a trough in 2011. Deutsche Bank estimates that European-based pharmaceutical companies alone are likely to generate $27bn between them from newly approved medicines launched over the next three years. Flemming Ornskov, the new chief executive at Shire Pharmaceuticals, says: "Science is back in the high street. There is a return to the realisation that innovation is the key driver. The old selling model was lots of reps running en masse to doctors" offices. Now it is about creating a differentiated product with people focused on medical need and comparative data. To succeed in developing the next generation of therapies, researchers argue that pharmaceutical companies - and other parts of society - will have to work far more extensively in alliances with other partners, recognising that neither the expertise nor the resources for scientific innovation can come from a single company. "This is a mega-trend in the industry," says John Lechleiter, chief executive of Eli Lilly. There is a whole wave of new partnership and experiments. Richard Evans, an analyst with Sector & Sovereign Research, says companies still remain too reluctant to abandon their own in-house experimental drugs even when testing shows they are inferior to medicines under development by rivals. He also says they fail to diversify adequately their risk by sharing costs and benefits with others. "Given the high rates of failure, I would rather own 50 per cent of 200 projects than 100 per cent of 100," he says. Many point out that partnerships need to involve not just other companies but also medical institutions and universities. That requires a change in attitudes on all sides. "We need far more circulation between academia and industry," says Sir John Tooke, head of University College London Medical School, who calls for a shift away from academia's single-minded focus on publication in prestigious journals. We need to recognise that excellent science also occurs in industry. Such alliances are increasingly being forged, such as through the European Commission-funded Innovative Medicines Initiative, in which companies and academic groups work together on a growing range of projects where they can find common ground. Stimulating such innovation requires greater openness. Allegations of companies withholding evidence of side effects or clinical trials that fail to show efficacy of their drugs have helped trigger plans by the European Medicines Agency to make public much more "raw" data from the start of next year. More generally, the capacity and demand for collecting large volumes of biomedical data are growing sharply. Patients are increasingly sharing genetic information and experiences with diseases and drugs, while healthcare systems are pushing for the adoption of electronic medical records and other databases to track the impact of medicines and progression of diseases far more systematically. Afinal condition for boosting innovation through such partnerships and openness is a change in attitudes towards risk and reward across society. Drug companies are coming under increasing pressure to modify their pricing far more closely to reflect the incremental value of new drugs. But analysts argue that other cultural shifts are needed. Healthcare systems, currently more focused on cost-cutting, may need to become more open to paying a higher price for genuinely innovative treatments that displace less effective ones. Medical facilities often seem more tempted to charge high fees to the industry to recruit patients into trials rather than viewing them as partners to improve care for patients. Regulators are under pressure to approve more flexible "adaptive" clinical trials that can evolve as interim findings emerge on new drugs. There is much discussion of granting more "conditional licences," which authorise earlier sale of treatments in exchange for greater scrutiny of side effects or benefits unlikely to be picked up in trials on small numbers of patients. Finally, such a "new deal" will require patients to accept that drug development is uncertain and may incur risks. Even with gradual moves in these directions, progress towards more innovation will be uncertain and inconsistent. Sir Andrew Witty, chief executive of GSK, who has seen his company's share price multiple rise sharply as it prepares for the launch of new medicines, cautions: "There is a false dawn with a sense that the industry has solved its problems. There has never been such heterogeneity and not everybody is going to make it. It's too early to call victory.