Bigger Isn’t Better: It’s Time for Big Pharma to Break Up Into Little Pharma

3/28/11Follow @xconomy

Fresh headlines cross my desk almost weekly about the crisis in the pharmaceutical business. Jaw-dropping sums of money, about $65 billion a year, flow into the pursuit of new medicines. Yet every year we hear the same old refrain—a pathetic number of new FDA-approved drugs, just 21 last year—come out the other end.

This highly unproductive endeavor has caused endless hand-wringing and finger-pointing. Some like to blame the FDA for being too much of a hard-ass, setting impossible standards for safety and effectiveness. Others accuse scientists for overpromising about the benefits of the genomics revolution, then failing to deliver. Wall Street is an easy boogeyman, given its fast-money obsession that is out of whack with the long-term financial support drug development requires.

But if we really want to see more wonder drugs, then Big Pharma needs to take a hard look in the mirror. Big Pharma’s mega-merger binge of the past few years made quarterly earnings reports look better, and put a lot of money in the pockets of lawyers, investment bankers, and C-level executives. But now that much of the dust has settled, these companies can see they have created enormous global organizations (Pfizer/Wyeth, Merck/Schering-Plough, Roche/Genentech to name a few) that are so far-flung it is darn near impossible to know who’s on first anymore. Pfizer alone now has 110,000 employees around the world.

I’ve heard something close to this sentiment—on background—from multiple sources within most of the major pharma companies I’ve talked to over the past few months. Mega-mergers create a lot of internal bureaucratic headaches—which mostly get glossed over in favor of the spin about synergy and complementary corporate strengths. Months, sometimes years, get spent as these companies try to figure out exactly what they now have obtained through the merger, so they can figure out what to keep and what to scrap in their newly bloated organization. While they all say that partnerships with small biotechs and academic institutions are critical, becoming Titanic in size makes it hard to stay on the same path with smaller, nimbler organizations.

Technology, I’m sure some will say, will fix some of this inefficiency in drug development. We’re living in the age of the $10,000 genome, and fast on our way to the time when entire human genomes will be sequenced for $1,000 or so in an afternoon. It’s true, this is an exciting trend that is bound to help drug developers gain a much better understanding of the genetic and molecular underpinnings of disease. It ought to pave the way for more personalized therapies with a better chance of success in clinical trials.

There are some inspired ideas out there which could transform the drug development business. Merck, Pfizer, Eli Lilly, Novartis, Johnson & Johnson, and Abbott Laboratories have pooled resources in a Boston outfit called Enlight Biosciences that is seeking to create enabling technologies, like RNA interference, which can be used for the betterment of the entire industry. Some of the same characters are contributing money and data to Sage Bionetworks, a Seattle-based nonprofit seeking to spark an “open-source” movement for biology. The notion is that biologists can no longer keep working in isolation, and they need to put much more of their experimental data in the open, to harness the wisdom of the crowd to create better drugs.

But none of these technologies or collaborative efforts are going to amount to much if … Next Page »

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  • http://www.danerius.com Alan Dunton

    as the former head of the Janssen Research Foundation at JNJ, I think we had it right back in the 1990s….no larger than 1000 people total…no budget bigger than $500MM….walk the halls, talk with the scientists…and know evryone by name…drugs came from our own discovery adn were developed in house….simple decision making process with global product teams…soup to nuts….turned out many successful products….I was confused with mergers of teh 2000s…now not confused…all a bust…you are spot on

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  • http://Xconomy J. Keeney

    As usual, LT has it wrong. first, it was that govt. control of health care won’t lead to a slowing of drug R&D. Wrong, it already has, witness the lack of new antibiotics against resistant, life-threatening bacterial infections.

    Now, it’s that Big Pharma should be broken up into Little Pharma. The correct answer is that patent life on forthcoming marketing new drugs should be extended beyond 20 years, perhaps, indefinitely, like a song or book copyright.

    As is it is now, 12 years of drug patent life normally is consumed in drug testing and R&D. leaving companies only 8 years to recoup their investment and show profits on their research. Moreover, during these 8 years, drug companies have to content with a flock of spurious (and sometimes, govt.-encouraged) Paragraph IV patent challenges from generic companies, seeking to break these patents.

    Longer patent lives for new drug molecules would lead to lower introductory prices for these products, and less prices increases in the future, while encouraging drug companies to invest more heavily in all areas of drug R&D.

    Maybe, such patent reform would even encourage generic companies, whose ideas of R&D, are lawyers running around in white coats, to invest in original drug R&D; that would contribute more meaningfully to medicine than just lower prices for drugs that they themselves did not discover.

  • http://www.xconomy.com/author/ltimmerman/ Luke Timmerman

    J. Keeney—biologic drug makers, under the healthcare reform law, are getting 12 years of market exclusivity before they have to provide data to companies that want to make “biosimilar” versions of their drugs. That is 12 years of time on the market, regardless of when the patent expires. I think most people would agree that’s a pretty sweet deal.

    As for whether small molecule drugs should have longer patent life, that argument has major problems. If Big Pharma thinks its patents are too short-lived, I’d say they should find ways to improve the efficiency of their R&D so the drug can get on the market sooner. And as a practical matter, if drug patents lasted much longer, it would put a lot more strain on the nation’s healthcare budget, since so much depends on a steady supply of cheap generic drugs.

    The point about longer drug patent life reminds me of a May 2009 post from Carl Weissman of Accelerator and OVP Venture Partners. He argues that drug patents should last forever. I’d encourage you to check it out, and the comments, too.

    http://www.xconomy.com/seattle/2009/05/29/you-can-own-a-diamond-forever-why-not-a-drug-patent/

  • http://Xconomy J. Keeney

    L. Timmerman – Your answer of saying so much of health care depends on a steady stream of cheap generic drugs is nonsensical. This is exactly what’s driving Big Pharma to become even bigger Pharma. And, given time, biotech will follow along the same path to become Big Biotech. You have to admit that Big Pharma and Biotech really are one and the same industry; only the means of discovery are different.

    Complain all you may about the need to break up Big Pharma into smaller components, and you still have not addressed the core of the problem of why drug R&D is lagging. And, twelve years of exclusive marketing for new biotech drugs still will lead to higher and higher introductory prices for new biotech advances. Only when R&D-oriented companies are granted indefinite patent life on future marketed new drugs, will their be an easing of introductory pricing pressures, and result in an increased flow of new drug discoveries.

    Mr. Weissman was on to something in his comments. The drug industry shouldn’t be looked on as adversaries in the health care debate, but as Pfizer says, part of the solution.

  • Ted

    Drug companies need to spend less of their capital on marketing and more on R&D. Since the floodgates opened in the eighties, direct-to-consumer marketing has steadily eroded the research focus in big pharma. Many marketing activities (“physician education” – usually over Mai Tais…) continue to this day to be buried within the “R&D” budget. For a decade or so, increasing revenues on existing products covered this shortfall. Now, no amount of marketing can fix a decade-long crimp in the pipeline. With dwindling margins and increased competition from generics, many big pharma outfits decided to double down on marketing. You can Google “illegal marketing penalties pharmaceutical” to get a sense of how this is working out.

    Adding to the difficulty is the widely acknowledged observation that drug discovery is harder now. The days of making modest improvements on anti-hypertensives is over. The FDA has grown increasingly skeptical of Me-Too drugs. Why not? I’m not paying 50X fold for a 1.15X improvement. Macrocycles and sulfa drugs for antibiotics are played out. We know more about side effect than we ever have before. Remember Seldane? Now everything gets screened for QT interval effects. There are even more screens in place that eliminate candidates (many are turning into hoary old chestnuts in dire need of updating… any First Church of Lipinski followers?) before they are synthesized. Speaking of screens, how many candidates fail to make the grand leap into whole cell assays? It used to be that you started with whole cell assays (heck, most diabetes researchers were using obese mice as a primary screen well into the 90’s).

    Large companies are inherently risk-averse. Yet, drug discovery is a financially risky business. That’s what has brought us to the current paradigm. Small companies pony up the risk and go for broke developing ideas. Most fail. Those that succeed are bought by large pharma, which shoulders the lower risk higher outlay path of moving candidates through the pipeline.

    Big pharma isn’t going away, it’s just going to turn into a specialized financial service. Good luck to the next round of little guys.

    -t

  • http://www.davidsvendsen.com David Svendsen

    The high R&D spending with fewer approvals over the last decade has forced a natural consolidation at the top. Smarter companies like Sanofi-Aventis saw this a few years ago and cut back their R&D because they know that (just as Luke noted) R&D productivity goes down amidst a behemoth environment.

    Look at what a difference Sanofi can make for a company like Genzyme. The R&D costs that Genzyme would have had to spend to find another blockbuster, or to expand into new markets, would have been highly distressing on earnings. But with the capital that Sanofi has on hand, Genzyme’s drugs can now get to more markets (and get to them faster) than they would have on their own. But by also keeping Genzyme’s facility, culture, and R&D intact in Cambridge, they enjoy the ability to focus on creating new drugs. Sanofi’s earnings will not take such a giant hit because they no longer will have a massive % of revenue coming from just a few drugs and disproportionately high R&D spending. They can then include Genzyme’s R&D spending as part of a larger diverse product portfolio. I see it as a win-win.

    So rather than breaking up Big Pharma, a combination of strategic acquisitions of smaller companies, along with a measured and sensible approach to what they do new with the acquired company’s pipeline and talent, will actually produce the more efficient R&D outcomes that we all yearn for.

    The downside: Nobody is going to wake up today with a spectacular new compound and expect to take that one drug, start a company, and grow to become the next Amgen or Genentech. Those days are over. In fact, those days are over even for companies that are already established publicly traded companies with positive earnings. They’ll get swallowed by someone bigger.

    The upside: shareholders of the BIG companies no longer have to sit back and watch billions go to waste on R&D that is negative ROI. Let the venture guys take on the risk of early funding of seemingly promising compounds. They’re be better at it than the executives within a Big Pharma company anyway.

  • Derek

    I am not sure that “Big Pharma” can or should ever get to “little pharma” – the scale and scope of Big Pharma’s ability to market, manufacture, and distribute medicines is unparalleled.

    Perhaps the model for R&D at “Big Pharma” needs to be “redefined” – the difficulty is that refining research models in an industry that is so heavily scrutinized by Wall Street for stepping out of line – which would add significant risk to an already risk-laden industry – is heavily penalized in terms of valuation and shareholder support.

    Perhaps it is a gradual change? Perhaps there will actually be some differences in corporate culture (JNJ-like conglomeration of multiple operating R&D companies)?

    Maybe the change is not led by Pharma? Maybe a leading set of biotech companies (not the big guys) will transform detection and development technologies to make drug discovery profitable – turn themselves into engines of discovery that Big Pharma would pay for (and therefore establish company value).

    There needs to be some reconciliation between the massive drug discovery efforts and the process of getting drugs approved (where nimble and innovative are and should be favored) and the heavy process of manufacturing and/or enormous clinical trial efforts.

    With new technologies being developed all the time, the true forefront of this industry are which companies/teams/entrepreneurs are going to be able to shift the model for drug discovery. It will be those disruptions that cause the large-scale changes in healthcare, as the establishment is too entrenched in the system for it to be truly profitable for them to take the risk to blaze new paths.

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