This article is the second in a series by venture capitalist Standish Fleming looking at whether the strategy of acquiring molecules from Small Biotech can satisfy Big Pharma’s need for a sustainable supply of new products. The first article in the series outlined the topic. This second article delves more in depth into the source of Pharma’s problem.
Drug development is essentially two different businesses: lots of small-scale, high-risk early-stage experiments and a few large-scale, lower-risk (one would hope), late-stage clinical trials. Pharma has to be large enough to register and sell drugs, and small enough to create innovative new products, i.e. to pursue the unorthodox and risky ideas of a few creative thinkers. But large organizations are neither low-cost nor agile. It makes no sense to expect pharma to operate as both an elephant and an ant at the same time. In theory biotech can fill the latter role and let pharma concentrate on the large end of the business.
Over the last 15 years the pharmaceutical industry has demonstrated that it cannot provide a sustainable supply of proprietary products sufficient to maintain its present scale and scope. In the coming decade if prices level off or decline, as seems likely, if not inevitable, in the era of “health-care reform,” and the cost-per-compound continues to rise at the present rate, the supply of product that the industry can support will contract. As a result, a number of companies could fall below the “critical-mass” level of cash flow and capital required to develop new drugs.
The New York Times (“Plavix Set to Lose Patent Protection”, 5/16/12) reported that “19 drugs are set to lose patent protection this year , which is expected to cost the pharmaceutical industry about $38.5 billion in lost sales.” With overall sales of branded medicine at $595 billion last year (IMS Report: “The Global Use of Medicines Outlook Through 2016,” July 12, 2012), pharma has to “grow” revenues by nearly 6.5% just to hold still. Net gains in developed markets, which are more dependent on new products than new customers for growth, are projected at only $10 billion (<2%) through 2016.
Source of Problem
There are many reasons for the decline in productivity, including external forces such as a difficult political/regulatory environment. These pressures have largely been evolutionary, which pharma should be able to address in the course of “normal” operations.
However, one major change in the drug development landscape has been revolutionary. Pharma’s narrowly focused, conventional response to the revolution that transformed life sciences from systems-based to molecular has resulted in a catastrophic collapse in productivity. The new tools now available have provided scientists with remarkable insight into biological processes. However, their application to the real-world of human disease/health has proven far more challenging than commercial researchers anticipated. The decline in pharma productivity is particularly frustrating because it comes at a time when scientific breakthroughs are rapidly expanding the potential for “miracle” life-saving treatments.
When available knowledge limited the industry to working at the level of systems biology, pharma was forced to rely on empirical discovery. Until the 1980s this approach, which involves screening molecules in cells, animals and ultimately humans to find what works, supported the growth of a remarkably prosperous industry. Unfortunately since then pharma has struggled with the transition to testing molecular-based hypotheses. Rather than running the two systems in parallel, entire programs were switched to “rational” drug development before managers understood how to apply the new science to the business of making drugs.
While remarkable achievements in areas like cancer reflect the long-term potential of the reductionist approach, in many indications the science has not evolved to the point at which researchers can reliably predict clinical outcomes from molecular mechanisms. Though candidate drugs hit their targets, some targets didn’t have the expected effect. Pathways have proven more complex than realized with unexpected redundancies and compensating mechanisms. Biologically active molecules that hit the intended target often also hit other less desirable targets. The industry has been remarkably successful at curing cancer in model organisms such as mice, but human disease has proven more elusive.
The impact of the high failure rate for drugs in development— Tufts Center for the Study of Drug Development estimates the probability that a small molecule entering the clinic will ever reach the market at less than 10%—has been compounded by the costs that molecular medicine have added to studies. Genomic and bio-marker testing have enabled pharma to target new drugs to responsive populations, but they have increased the cost of trials to the point where it is not unusual for per patient costs to exceed $100,000. Genetic profiling has meant more patients screened for each enrolled. The result has been longer and more expensive trials and, even more troubling, smaller markets.
As difficult as it is to predict therapeutic outcomes, it is even harder to project the commercial potential of new molecules. Clinical success has been painfully slow and in some cases so narrowly focused that drug prices have had to reach stratospheric levels to provide acceptable returns. To date the United States has paid the bill and shared the benefits with the world, but that era may be drawing to a close.
The industry has paid an enormous price for the transition to rational drug development and will continue to do so. While extending the life of a terminal cancer patient by six months may be a meaningful step in the process of transforming an acute into a chronic disease, as anti-retroviral therapeutics did in HIV/AIDS, the cost of those gains is testing the patience of payers world-wide. An article last year by Matthew Herper of Forbes (“The Truly Staggering Cost of Inventing New Drugs,” 2/10/12) based on original work done by Bernard Munos of the Innothink Center for Research Biomedical Innovation) provided a quantitative measure of the inefficiency of the current drug development paradigm. The researchers reported that the total cost-per-drug-approved for the top 12 pharmaceutical companies over the past 15 years averaged between $3.5 and $12 billion. With average return on new investment at 5%–less than half the industry’s cost-of-capital–drug development today is not economically viable.
Why, despite the help of an eager biotech community, compelling financial incentives (gross margins of 90+%), intense demand for its products, many billions of dollars to spend on development, and the best efforts of an army of pharma executives and consultants, hasn’t the industry been successful in addressing this problem?