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 financial tool, Maraganore says, for companies that have completed middle and late-stage clinical trials and therefore have a much clearer sense of how their product will really stack up in the marketplace.

At the early stages, because so many things are unknown about a drug candidate, the assumptions are easily manipulated to look the way people want them to look. Just plug in some new assumptions and you can come back with a better-looking financial model, Maraganore says.

“It’s used as a consensus-building approach, and it lends itself to baking the numbers,” Maraganore says.

Not that Alnylam avoids all analysis in favor of snap judgments, like something out of Malcolm Gladwell’s bestseller “Blink.” Like every other company, Alnylam looks at the number of patients with a certain disease (the market opportunity), the strength of its intellectual property, and the competition in a given market. But when it comes down to making decisions on which drug candidates to move forward, Alnylam prefers to bring together a group of scientific opinion leaders to scrutinize all the available scientific evidence at hand, without wearing rose-colored glasses.

“We have to rely on the science. We can’t make decisions on how to develop important new medicines based on a calculation of net present value,” Maraganore says. “For quite some time, Big Pharma has put forecasting from the marketing group ahead of the judgment of their R&D group. To think you can fool yourself into a number, and that is going to make it into a real thing, it’s insanity.”

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