Friday, February 27, 2009

Innovation Is the Pharmaceutical Industry's Only Salvation

We here at The IN VIVO Blog probably get a little bit too caught up in our own blathering. As a tonic, we'll be inviting some outsiders to contribute. As here: to get an investor's point of view on the industry, we asked T. Rowe Price biotech analyst Jay Markowitz, MD to share some of his thoughts.

If the movie Cool Hand Luke were a commentary on the pharmaceutical industry, the most memorable line would be, "what we've got here is failure to innovate." (For an IN VIVO take on Cool Hand Luke and innovation via the JP Morgan Healthcare meeting, click here)

The decline of the drug industry is all the more dramatic in the context of its past accomplishments. Many of the most important advances in health, from HIV to cancer, are attributable to new drugs. And yet in a 2008 survey by USA Today, the Kaiser Foundation, and the Harvard School of Public Health, 44% of Americans had an unfavorable view of the pharmaceutical industry. Only health insurers and oil companies did worse.

The industry's woes boil down to a single cause: inadequate innovation. It is estimated that by 2015, $200 billion worth of branded drug sales may be lost to generic competition. The 24 new drugs approved by the FDA in 2008 was the highest number since 2004; only nine came from multinational drug companies. This meager number can replenish but a fraction of pending lost sales.

The poor record of new drug approvals can’t be blamed on a lack of R&D spending. Last year the major pharmaceutical companies spent over $50 billion on drug discovery and development. If current trends are any guide, the $1 billion estimated cost per new drug now will seem like a bargain in the future.

The industry finds itself in such a predicament because it can no longer go after me-too drugs in such blockbuster categories as ulcer medicines, blood pressure pills, antidepressants, and cholesterol lowering agents. Pharmaceutical companies previously had the luxury of letting someone else take the risk of innovation; if that someone succeeded, the drug company could follow fast with a similar drug that might have some advantages. It paid more to imitate than create. With minimal clinical differentiation of their products, companies needed to spend heavily on marketing to drive sales. But it was more profitable to spend on drug promotion than drug creation.

That equation is changing. Now that cheap generics and multiple branded drugs are available in many therapeutic categories, innovation may end up being all that pays.

To reverse its current plight and not only survive but thrive in the future, industry leaders must accept the gravity of their situation and address its root cause.

First, they must recognize that innovation is more about people than process; it can neither be scaled nor industrialized. Drug companies ought to pare back internal research, foster a more entrepreneurial culture, and be more open-minded about accessing research done by others. Far more productive to divide a $1 billion research investment among ten to twenty small, scrappy, hungry companies than to concentrate in one that is big and complacent.

Second, they need to leverage their strengths in drug development and regulatory affairs. Whereas smaller companies may be more adept at discovering novel drugs, testing them in people and getting them approved put a premium on money, manpower, and experience. Because they are constrained by capital and limited know how, all too often smaller companies make mistakes by under-investing in clinical trials or pursuing needlessly risky approval strategies. Pharmaceutical companies should grasp the opportunity to partner with smaller companies in the middle phases of human testing, thereby providing the necessary money and expertise to minimize the chance that a drug fails because it was developed for the wrong indication or because of poor planning and execution. Good new drugs are too precious to delay or waste.

Third, they should embrace comparative-effectiveness testing and value-based drug pricing to support the argument for first- or best-in-class drugs. Although such a strategy would result in higher clinical attrition, clear product differentiation would reduce the need for sales and marketing. Far better for data, not advertising, to determine which drugs are prescribed.

And fourth, they should not view mega-mergers as a solution. Yes, in the short term, consolidation can increase sales and, by reducing redundant costs, profits. And it can bring new capabilities to the acquirer. But it will ultimately disappoint unless it redresses fundamental problems. For a merger between two big pharmaceutical companies to generate long term value, it must result in more novel drugs than each would have created separately.

From my point of view as an investor, the drug industry -- despite its challenges -- is ideally positioned to translate tremendous gains in chemistry, biology, and genetics into important new medicines that extend lives and reduce suffering. But it must discard its risk-averse and xenophobic culture, embrace the drug discovery work taking place in hundreds of creative, entrepreneurial companies, and recognize that constant innovation is its only hope for sustainable growth. The good news is that there are ample opportunities to succeed. Several pharmaceutical companies are already taking appropriate steps to revive their businesses. But these steps must be bigger and faster.

Jay's views do not necessarily reflect those of his employer, T. Rowe Price, Inc., an investment management company.


Anonymous said...


Having been in the industry for 10 years it is obvious Innovation has been lacking....

Me too drugs have benefitted no one but the coporate executives and shareholders; medicine is supposed to focus on the patient not profits; patient focus will lead to profits, but PATIENTS MUST be the focus...

Let's pray that Obama's plan allows innovation to flourish and profit before patient to be a thing of the past......

A surviving drug rep

Anonymous said...

Lack of innovation may be a problem but a greater problem is the science underlying drug development is not well understood. Pharmaceutcial, biotechnology, and other life sciences companies are forced to do basic research to unlock the doors to new therapies. The outocmoe of basic research is uncertain and risky. Gary Paisano in his book "Science Business" elegantly describes the dilemma. In addtion, the system supporting basic research in universities is broken. Academia and the government funding of basic research value individual contributions over team projects. This inhibits collaboration, sharing of information, and multidisciplinary research that is needed to uncover disease mechanisms. Progress in understanding disease mechanisms is critical for progress in drug development and innovative therapies.

Anonymous said...

Wow Dr. Markowitz, it's like you're in my head. Very well put.

Anonymous said...

Your comments are on track however I believe you miss a big root cause. While "big pharma" does need to increase innovation they have not been totally deviod of it either. The FDA bears some responsibility. Since Vioxx the FDA standards for approval seem ever changing and changing in ways that make them appear as they don't even understand the critera for approval.
In addtion, historically innovative news drugs have not led to decreased marketing cost. The need to educate health care providers goes up with innovation and causes the need for increased marketing (which when done properly is not a bad thing, it can lead to better outcomes).
Finally, to the first poster "the surviving drug rep" me too products have not only benefited corporate executives but may very well have given you a job but more importantly they bring the cost of health care down through competition. With each addtional me too market entry companies are increasingly forced to compete on cost, proton pump inhibitors are a prefect example of this.