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


Xconomy Seattle — 

Research is the lifeblood of the biotech and pharmaceuticals business. The pharma and biotech industry spent some $65 billion dollars on R & D in 2008, according to the Pharmaceutical Research and Manufacturers Association. That’s a tremendous amount of money considering that the FDA only approved 24 new drugs (21 new molecular entities and 3 biologics) that same year. If the PhRMA numbers are true, this would imply that it cost about $2.7 billion/drug to win FDA approval, a very poor return on investment since few drugs would ever be able to recoup that expense.

These numbers suggest that drug makers need to find a more efficient way of developing medicines. A recent report from financial analysts at Morgan Stanley recommended that large pharma companies abandon their own early stage drug development programs, and switch to a less costly licensing model. Rather than try to discover drugs, Big Pharma should simply buy them from smaller, more nimble and innovative biotech companies. It was claimed that such an approach, as reported in the Financial Times, “would boost success rates, lower costs, and triple returns”. This scheme would certainly fit into the plans of most venture capital (VC) firms, who could cash out large profits if Big Pharma acquires the biotech startups that they have invested in.

Even before the Morgan Stanley report came out, Big Pharma had embarked on a major job shedding binge, eliminating positions duplicated as a result of mergers and a number of research programs. Merck is eliminating 16,000 jobs after buying Schering-Plough, Pfizer around 19,500 positions after acquiring Wyeth, and Roche about 1,500 jobs after purchasing the remainder of Genentech. Layoffs, however, were not confined to companies making acquisitions. To stay competitive, Johnson & Johnson is cutting 8,000 jobs this year, Eli Lilly is axing 5,500, and GlaxoSmithKline around 6,000 positions.

In seeking additional resources to fill holes in their drug development programs, many Big Pharma companies have partnered with academic institutions. Pfizer and Genentech have both partnered with UCSF, GlaxoSmithKline with the Immune Disease Institute, Solvay Pharmaceuticals with Emory University, and Janssen Pharmaceutica with Vanderbilt University. These alliances provide money to academic investigators, usually in exchange for licensing rights that arise from any discoveries made. Grant pressure on academic investigators (80 to 90 percent of applications to the NIH do not currently get funded) makes them willing partners to help solve Big Pharma’s empty pipeline problem.

These academic collaborations, though quite helpful to Big Pharma, are not a substitute for real drug discovery and development work. If Big Pharma ramps down its research efforts, can smaller companies ramp up their research programs to compensate? I have no doubt that some of these organizations could provide a true fountain of research innovation that the larger companies can drink from. But are these companies sufficiently productive to shoulder a much larger share of the responsibility for the industry?

I believe the answer is no. Many of the smaller companies will not be up to the challenge. Tight finances have caused numerous companies to reduce or even eliminate their research staffs. Here in Seattle, two of the oldest and most established biotech companies, ZymoGenetics and … Next Page »

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

  1. Ty says:

    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.

  2. Steve S says:

    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!)

  3. Simon says:

    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!)

  4. 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 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).

  5. Mike says:

    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.

  6. Marc says:

    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.

  7. 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.