The Pharmaceutical R&D Model is Broken. Here’s How to Fix It

3/5/10

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and where I admit that I have little direct experience, has to do with a perceived lack of passion and control. I’ve worked for a biotech where the scientists (and many other employees as well) worked evenings, weekends, and holidays to move their projects forward. They had the drive, the fire in the belly. Are contract employees similarly invested? Will they do your studies the right way? Are they motivated to go all out and spend long days solving all of the problems that keep you up during long nights?

New (draft) legislation has been proposed (The Therapeutic Tax Credit) as part of the nation’s health care reform package that would provide a large tax benefit to biotech companies with 250 or fewer employees. The grant-like program would require companies to vie for funds based on how their drugs would lower health care costs or meet unmet medical needs. Interestingly, this competition is to be vetted by the Treasury Department, not previously known for its wisdom in reviewing drugs. Winning companies would be awarded tax credits (and possibly cash payments) that would cover as much as 50 percentof research and development expenses. The entire program is envisioned as lasting two years, and is capped at a total expenditure of $1 billion.

While I would love to see a tax credit to boost biotech research, this approach seems fraught with problems. One can imagine companies telling the Feds that their drug will lower health care costs because it will only cost $500/month when launched. Then, when it really does get on the market, the actual price turns out to be $10,000/month. Who could have seen that coming? And science can surprise even the best of intentions. Get a tax credit for developing a drug for heart disease, and then sell it for erectile dysfunction (this is the story behind Pfizer’s Viagra). There would need to be some serious safeguards put in place to handle either of these types of scenarios before I (and I imagine many others) could support something like this.

New approaches are needed that remove the pressures on startup companies to race into the clinic with drugs that are not ready for prime time. An obvious path, and one that I favor, is to incentivize investment in early stage biotech and pharma. The long timeline required to develop a new drug is perhaps unique to this industry. Investors in biotech and pharma need to be compensated, in the form of a greatly reduced tax burden, to balance both the nature of the risk as well as the lengthy development times. My suggestion: lower or eliminate taxes on investments in pharma and biotech that are in place for more than five years. This would hopefully entice investors into accepting a longer waiting period before financial returns are realized. This, in turn, would then allow companies more time to develop novel drugs that are likelier to succeed in the clinic. Besides tax reductions, other innovative types of incentives should be considered to reward the investors who provide the resources that fuel innovations in America’s healthcare.

Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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  • Ty

    Very good analysis on the problems, yet mere tax incentive is a kinda weak solution. What we need is a whole new biotech eco system. The long and single-threaded pipeline should be disected. Discovery companies should be focusing on validating novel disease/target concepts in animal and able to ‘sell’ the newly discovered target/lead. There should be a separate breed of companies with expertise in ‘lead optimization’ that turns the lead into a viable clinical candidate that can be ‘sold’. And development companies take over and proceed with clinical trials and registration. The first group sells the science. Second group compounds and the third drugs. It’s not too unlike Intel sells chips, MS sells Windows, and HP sells PCs. Why ROI is too long in pharma industry? Because we perceive ‘a drug’ as the only ‘product’. We need to change that perception.

  • Steve S

    If one of the problems of drug trial failure rates and wasted money is that small companies are pressured to move ideas to quickly into the clinic – how do you rate the so called new discipline of “translational medicine” where the whole idea is to get “drug candidates” into people with as little development as possible? (and I suspect is also a mechanism where Med Schools can gain access to a large previously untapped source of revenue!)

  • Simon

    Great analysis of the problem, but agree that tax incentives may not be enough. Although it is a good start. Bridging the “valley of death” or the period between proof of concept in animals and filing an IND is still the biggest problem for start-up biopharma. So-called “seed and early-satge funds” are now wanting phase 2 data. (Sorry VCs, but I’m going straight to big pharma with decent phase 2a data!)

  • http://robertmatthews.org Robert Matthews

    Great overview. Picking up on the point made by Ty, it seems to me that there are strong grounds for scepticism about current animal models. My own research (see http://tinyurl.com/ygm6dtc) suggests their false positive and false negative rates are so high that they contribute no predictive weight of evidence to subsequent performance in human RCTs. We really need these models either validated (which may well be very hard and expensive to do), or abandoned in favour of something better (eg microdosing, human tissue culture etc).

  • http://www.hustonassociates.net Mike

    Excellent overview and subsequent commentary. I have considerable experience with start ups as a consultant. The trends I have witnessed are CEO’s more focused filing an IND for whatever they can rather admitting that some drugs should never see the clinic. I also agree with Robert. Animal models (even for safety) are not very predictive. Translational medicine does have a chance to improve our “hit” rates, but most biomarkers are in the process of being validated and lag the availability of potential therapeutics. There will be convergence over the next 3-5 years.

  • Marc

    Insightful analysis. However missing some key points on the numbers.
    Yes one can pick 5 startups/pre-revenue companies who had a product approved in a given year. But the important stat is the denominator: how many comparable companies did not have a product advance, let alone file or get approved?
    Large pharmas are indeed advancing multiple compounds in multiple therapy areas, simultaneously. The startups do not have that luxury or capacity. The reported costs, $2.7 Billion per approved drug, reflect those allocated to failed and successful programs. Given the benchmarks of approx 10% success from IND to launch, that translates to roughly $270 Million / approved drug, which does not seem that far off the mark.
    Large pharma certainly does have its issues, and I’m not one to rush to its defense. But when stats are invoked to support a position, they need to be used carefully or they can detract from the inferences.

  • http://www.lymanbiopharma.com Stewart Lyman

    Thank you all for taking the time to share your thoughts. I agree that more reforms are needed besides the tax incentive for five-year minimum biotech investments, but that was the best idea that I could come up with that I could actually envision being put into practice relatively rapidly. I was hoping others would respond to my commentary with a variety of novel ideas as to how this R&D problem might be solved. In response to Ty’s comment, I heard a seminar just this week by Clive Stanway, CSO of Cancer Research Technology in the UK. His organization, in fact, represents the first third of what Ty is proposing: they do the preclinal research and then sell it off for a royalty to pharma companies to develop. Reconfiguring an entire industry, as Ty suggests doing, would be extremely difficult to accomplish (in the short term) given the inertia of the member companies. Look how long it took pharma to embrace biotechnology. As for Steve S’s comment, my sense of the term “translational medicine” is to imply adding resources directed at moving discoveries from the bench into the clinic. I do not associate this with “as little development as possible” although others may think of it that way. Translational medicine should benefit both the public and pharma/biotech by increasing the transfer rate of discoveries into potential medicines. Simon, any novel ideas how to bridge the “valley of death”? As to Robert’s comments, many people want to get rid of animal models because they are expensive (especially when you step up to primates), time consuming, and not always predictive. However, the industry is still waiting for an acceptable substitute that does better. If this were an easy problem to solve, someone would have already done so. I agree with Mike that useful biomarkers are still being validated, and while I think it is clear that many of these will be quite helpful in sorting patients with particular diseases (e.g. cancer) into different groups for dosing with distinct drugs, this approach may not work for many afflictions that result from a wide spectrum of molecular determinants. Finally, in response to Marc, the numbers I picked were not meant to be statistics. They were merely chosen to illustrate certain points. The “$2.7 billion dollars spent per new drug developed” number is clearly wrong; small companies never have anywhere near that kind of money, and the large ones clearly never spend anything close to that. Finding out true numbers in this area is exceedingly difficult. It is easy to determine the number of clinical trials being conducted in the US. However, many of these are not for new molecular entities, but instead are for new indications for old drugs, or new dosing modalities (different formulation, dose, route of administration, syringe design, etc.). Pharma, of course, counts all of this money spent as drug development R&D expense (which it is), but let’s be clear: this is not money spent on the discovery of new drugs. Small companies will, almost by definition, have a success rate of zero, fifty, or one hundred percent because they will only have one or two drugs in development.

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