Hyper-Analytical “Insanity” Cripples Drug R&D, Says Alnylam CEO John Maraganore

11/30/09Follow @xconomy

There’s one thing drug makers love to use to figure out which drugs to invest in: spreadsheets. Not Alnylam Pharmaceuticals, though. Estimates of future cash flows and other financial analysis tools are one of the big reasons why drugmakers spend so much on R&D that creates so few important drugs, says CEO John Maraganore.

“I value judgment, not hyper-analysis,” Maraganore says. “When people are afraid to make decisions, they often rely on hyper-analysis. I don’t believe in that. We are brutally honest about the science, and we get a bunch of people around the table with gray hairs and wrinkles to talk about what the science is telling us.”

This riff on how to make decisions in biotech—and how it directly opposes some of the conventional wisdom coming from business schools—was one interesting insight I picked up recently when I stopped by Maraganore’s office in Cambridge, MA. Maraganore, 47, has had a lot of experience with different management styles in his biotech career, from past stints at Biogen Idec and Millennium Pharmaceuticals to the job he has held since 2002 as the chief executive of Alnylam (NASDAQ: ALNY), a leading developer of gene-silencing treatments that use RNA interference technology.

Alnylam, like every other drug company, is grasping for ways to solve the R&D failure rate that plagues the industry. Drug companies spent more than $50 billion on research and development last year, estimates the Pharmaceutical Research and Manufacturer’s Association. That same year, companies won FDA clearance for just 25 new medicines—some of which were reformulated versions of old drugs, or approvals of existing drugs for new uses, according to this Bloomberg report. This failure of R&D to produce enough new profit drivers—especially as aging blockbusters start to face competition from cheaper generic copies—is a big reason the industry resorts to marketing gimmicks, price increases on existing drugs, and direct-to-consumer advertising to prop up its business, says Pedro Cuatrecasas, a professor of pharmacology at the University of California, San Diego.

Alnylam CEO John Maraganore

Alnylam CEO John Maraganore

Lots of people complain about the ethics of such practices; fewer people look at the root causes. Maraganore says part of the problem exists in the management processes for making decisions on which drugs to advance.

One of the common tools inside pharmaceutical and big biotech companies, Maraganore says, is the “net present value analysis.” Companies use it to estimate the future sales trajectory of a successful new drug. That’s then compared with the projected time and money needed for the R&D to achieve those returns. If the future returns (in the billions) justify the current research program (in the tens of millions), then the company has an economic reason to go ahead. And this is where companies go off track, Maraganore says.

“We never do net present value analysis. It’s always fabricated,” Maraganore says. “It’s fraught with a bazillion assumptions.”

He’s talking about drugs at the earliest stages of development, in preclinical testing and early clinical trials. There are too many variables at that point—how long clinical trials will take, the relative strength of competitors, the real risk-benefit ratio of the product at varying doses. It’s a more legitimate … Next Page »

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