Why Not Test a Supply Chain Model? What We’ve Got Isn’t Working

5/31/13

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potential gains in the creativity our industry achieves from a competitive biotech-phama market.

Biotech has done well on innovation, but fallen short on realizing value for its investors. Pharma and late-stage venture have enjoyed a windfall of cheap new products from companies started in the first half of the last decade. But the innovation pipeline will run dry unless the industry can devise models that enable the sector to attract sufficient capital—and that is a far bigger threat to creativity than a lack of independent thinking.

The Supply-Chain Solution

Instead of a buyer-seller relationship, the supply-chain model creates a partnership to bring the two sides into closer alignment and maximize LargeCo-SmallCo efficiencies. Each side can specialize in its particular strengths. By cooperating rather than competing during development, they can use their resources more efficiently than in a market-driven relationship.

Pharma’s principal problem with innovation is not so much what to do but how to do it. Pharma has plenty of bright creative people; venture capitalists often recruit them. In a true partnership both sides contribute energy and ideas. Together the partners can take on more risk and push deeper into discovery than they could independently. The greater the time and cost to product sales, the greater the need for both sides to share the burden.

Biotech investors make money through timely, efficient exits. Pharma will pay for a work-in-progress, but a half-completed product has to fit not only an acquirer’s strategic goals but detailed requirements like patent protection and data configuration. It is a tremendous advantage to biotech if planning for an efficient hand-off can begin at the starting point of a project, rather than the conclusion. Trying to negotiate terms after the money has been spent may be great for pharma, which gains advantage by seeing the data, but it often eliminates any “walk-away” leverage the biotech investors might have had before committing their capital.

Pre-negotiated deals can’t guarantee a sale—pharma always has the option to step back if the strategy or market conditions change. However, they can improve the probability of an efficient exit. On the other hand, if both sides can’t agree on a deal up-front, the bio-venture managers had better walk away if they expect to live to see another deal, or another day.

Alignment may reduce innovation relative to what biotech could do unconstrained by the realities of the capital markets, but it will increase the creativity of pharma alone. Even if aligning the two sides does reduce the innovation factor, the long-term gains from a sustainable early stage sector would far outweigh the cost to creativity. Over time the partners can learn to move the risk/reward equilibrium further in the direction of innovation. The threat that Ms. Bosely sees in the supply chain model is not nearly as great as that of the failed business model we have now.

The supply-chain model will not be the only approach to early stage investment. The investors who choose to pursue a partnered approach should not diminish the number of traditionalists. The very clever (or lucky) VCs who can make the market-driven model work will continue to use it. However, a supply chain approach can broaden the range of options and offer an alternative should the industry need more new products than market-based model can provide.

Standish Fleming is a co-founder of San Diego’s Forward Ventures, and a 24-year veteran of early-stage, life sciences investing. He has helped raise and manage six venture funds totaling more than $500 million and served on the boards of 19 venture-backed companies, including Nereus Pharmaceuticals, Ambit Biosciences, Triangle Pharmaceuticals (acquired by Gilead Sciences) and Actigen/Corixa (now part of GSK). Follow @

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  • Kyle Serikawa

    I really appreciate the ongoing conversation about how to fix the problems that appear to be facing drug development–specifically a lack of truly transformative, life- and health-changing new drugs. I think the idea of a supply chain process in drug development is worth looking at. However, I am not convinced it will actually fix the problem.

    In this piece, Standish Fleming suggests a market driven process isn’t meeting the needs of drug development because the potential suppliers in the market (the startup biotechs) don’t have a clear view of what the eventual buyers (the pharma) really want as part of their strategic goals. Alignment is often a good thing. I believe many startups may not have a clear idea of what actually constitutes a good drug as many of them arise out of academia. This is not a criticism, just a statement of how the academic and industrial systems have different cultures, goals and knowledge bases. I also appreciate the point that, with capital harder to get via venture funds, pulling pharma in to replace that investment at an earlier stage requires some sacrifice of control on the part of the biotech, with a corresponding gain in risk sharing and predictability.

    But I don’t think alignment is enough. I worry instead that the key problem is one that’s been suggested by David Shaywitz and others–we just don’t understand enough about diseases to make the next generation of drugs. It seems that the buyers themselves don’t have a clear idea of what is most likely to make a good drug. As evidence, I’d suggest that if pharma really knew what they wanted, failures in Phase I-III would be far lower since drugs would never be tested in humans until pharma were sure of an 80-90% success rate. Baseball aside, a 30% or lower success rate generally doesn’t make for a good business strategy, but that’s what we’ve got. And I agree with the point that there are a lot of smart people working on the problem across pharma, so it’s not just a question of brainpower.

    If pharma can’t easily predict what kinds of drugs will succeed, then this model may just swap out VC funding for pharma funding with the same net effect. Also, the development of a drug is an incredibly long process. For a pharma to be able to predict the market ten or more years ahead of time is adding another uncertainty yet.

    Since I live in Seattle, I’d like to throw out the analogy of the Dreamliner. A key reason the Dreamliner exists is because of 9/11. Before that, Boeing was designing a supersonic passenger jet. After 9/11, the pressure for nations to become more fuel-efficient to allow less involvement in the Middle East led Boeing to change course and design a plane that would instead be a model of fuel-efficient design. So there’s an example in which changes in the market outside of a company’s control can render all its best plans moot.

    Another point about the Dreamliner is that that project relied on a supply chain that ended up delaying launch for over a year. I know people at Boeing and they have good project managers and good communicators and they told their suppliers exactly what they needed, and problems still arose. Ever after launch, unexpected issues with batteries grounded the jets again. How much messier might a supply chain relationship be between biotech and pharma? Can deadlines and milestones be guaranteed when we won’t know until Phase I if we’re dealing with the next best thing in air travel or a flaming battery?

    All this is not to say it couldn’t work; just that I’m skeptical. I agree the current method seems inefficient and difficult to make work in the current funding environment. I just wonder if maybe there is a third way. Now, if only Bill Clinton could get into drug development…

    These opinions are my own and do not necessarily reflect those of Novo Nordisk.

    • Stan Fleming, Forward Ventures

      Kyle, you raise a great “elephant-in-the-room” point: What if drug development is simply too difficult, given the current state of our knowledge, for anyone–large or small–to do profitably? I am not willing to concede that point without further consideration, hence my interest in alternative approaches such as the supply-chain model. However, it is possible that in areas of great complexity and uncertainty like Alzheimer’s disease, we don’t know enough to make drugs. Key players in both the pharma and venture worlds have come to that conclusion and ruled out further investment those indications, which does nothing to increase the likelihood of breakthrough drugs any time soon, despite tremendous need.

      The best we can do is push the envelope of efficiency with the tools at our disposal. Depending on Bill Clinton, George Bush or Barack Obama to provide innovative anything, let alone new drugs, is one experiment I would not recommend trying for reasons that could fill several editions of Xconomy. Still, I am convinced that we can to better than we have in the past 20 years. Pharma has just begun to awaken to the need for innovation in early stage business models. There is much we can try. Will it be enough to provide for the needs of patients and health-care systems world-wide? We shall see. One thing that we have established is that holding still, the traditional default for big business, won’t work.

  • Kyle Serikawa

    Stan, I do agree that current models don’t seem to be meeting the need. Today’s reporting about the article in Health Affairs which suggests that newer drugs have not led to the same degree of improvements to patient health as older drugs underscores the need for change, and I think looking for efficiencies is one way to approach the process. Kind of the Kaizen approach to drug development. A lot of small changes may add up to a big change.
    In terms of inefficiencies, another area that really needs examination is the boundary between competitive and pre-competitive efforts. For almost every indication we have several companies all working with their specific collaborators and their in house R&D groups and essentially duplicating efforts. This is done in the name of IP and in the spirit of a race, which can be kind of fun, but is also kind of inefficient. There is a romance about being first, but could the system be restructured to support and reward collaboration rather than competition at the earlier stages? I actually don’t know, but it does seem like having a number of groups working in parallel may no longer be the best model. I think that’s what groups like Sage Bionetworks are trying to get at with their drive for open access science.
    With respect to Bill, that was more an analogy to his reworking of the Democratic party to a third way, to try and move the party more towards the center. I also don’t have a ton of faith, personally, in top down approaches to solving innovation and execution in drug development.

  • Sean Carter

    Some solid advice, I found myself in a similar situation, after speaking with some JDA Consultants we were able to install a much more efficient system!