The Pharmaceutical R&D Model is Broken. Here’s How to Fix It
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Cell Therapeutics, have both eliminated their new drug discovery programs while shifting efforts to develop candidates already in the late stages of development. Other local companies have laid off hundreds of researchers in recent years. Yes, if the good times return these companies will likely start hiring researchers again (provided they are not bought out first, a more likely outcome of success). However, the sad reality is that building a world-class research staff at a company that repeatedly cycles through layoffs and hirings is going to be quite difficult, if not impossible.
What did Sciele Pharma, Kowa Research, Gloucester Pharma, Dyax, Allos Therapeutics, and Vanda Pharma all have in common in 2009? Not sure? How about Merck, Genentech, Amgen, Abbott Laboratories, Bayer, and Pfizer? In the first group, all of these companies had a new drug approved by the US FDA in 2009. In the second group, none of the named powerhouse companies got a new drug over that goal line. What’s the lesson here? Small companies can succeed in getting their drugs approved by the FDA, and for a lot less than $2.7 billion. In this sense, size doesn’t matter.
These examples, while illustrative, are a bit misleading as they are only sampling a single year. Over a multi-year period, the drug approval numbers tilt much more heavily towards Big Pharma. However, the numbers don’t scale per employee. If a company with 500 employees can get one drug approved, this doesn’t mean that having 5,000 employees will net you 10 new drugs. Therefore, for their size, Big Pharma is relatively inefficient in developing new drugs. It’s also worth noting that some of the small companies that win drug approvals have Big Pharma partners helping them through the process.
To be fair, comparing drugs put into trials by Big Pharma vs. small biotechs is really an apples and oranges comparison. Why? Because the two groups have different expectations surrounding the returns generated by the drugs that they are developing. All companies want billion-dollar drugs, but these don’t come along so often. These businesses all have an internal benchmark number that they use for vetting drug candidates. Big Pharma might not send a drug to the clinic unless they are convinced it will produce hundreds of millions a year in revenue. In contrast, a $75 million/year drug can be a big winner for a company with only a couple of hundred employees. However, estimates of potential sales are just that, estimates, and these numbers often turn out to be wrong in both directions. Large companies are equally vulnerable to making bad decisions here as small ones. For example, in 2008 Amgen unloaded three drugs whose sales were so poor (combined sales of only $70 million in 2007) that they weren’t worth the sales and marketing expense.
Drug and biotech companies get started when entrepreneurs (usually a mix of business people and university profs) band together to license some discovery (and it’s concomitant intellectual property) from a university. This discovery then becomes the backbone upon which a company is incorporated and a drug is developed. How does this get paid for? It’s usually done with a combination of angel investors, small business grants, and the bigger dollars provided by VC firms.
VC money, however, comes with serious strings attached. VC firms are planning their divorces from the companies they fund before they even consummate their marriage. The investors will only make money if one of three things happens: the company is acquired, the company goes public, or the company successfully develops and profitably markets its drug. Estimates for the average time to fully develop a drug range from 8-12 years. Rightly or wrongly, most biotech investors are simply not willing to wait that long to get a return on their investment. If they had to wait until the drug was available … Next Page »