Will short-termism kill the pharma industry?

Innovation is a risky way of gaining competitive advantage. And its a risk that pharmaceutical companies have been pouring money into since medicine began. But in recent years, regulations have tightened and the “lower hanging fruits” have all been taken and treated.

What’s left are conditions that affect millions of people around the world, that have so far proved very difficult to understand and drug.

This has led to fewer and fewer drugs being approved by the regulators – just 21 were approved by the FDA last year and this trend is unlikely to change. This is pushing the cost to develop a successful “hit” well above the $1 billion mark and to make matters worse, healthcare providers are becoming increasingly reluctant to pay vast sums of money for drugs that may only postpone the inevitable.

As if this wasn’t a perfect storm by itself, the pharmaceutical industry will see some $63 billion of revenues washed away due to patent expiries and generic competition by 2014.

In order to placate shareholders, many pharmaceutical companies have been downsizing their R&D operations and focussing efforts on in-licensing technologies they feel are more likely to work. However, this approach may lead to pharma companies losing their competitive advantages and simply becoming distribution houses that support manufacturing, clinical trials and regulatory affairs.

Not so for Eli Lilly. While others in the industry have been retrenching, Lilly has been focussing on developing its own drugs and currently has 70 drugs in development – 33 of which are in Phase II or III development.

“At Lilly, our future relies upon our ability to successfully discover and develop innovative medicines that address unmet patient needs,” said John Lechleiter, Lilly’s chairman, president and chief executive officer. “We’re pursuing an R&D-based strategy in full knowledge that the bar for innovative medicines has never been higher and that our industry faces many challenges”

And that is despite the fact that Lilly’s earnings are set to tumble over the next three years due to patent expiries.

“I never thought I’d live to see this, but investors are actually thinking to cut R&D — that’s the hot topic of the day. This is kind of nuts, but this is what’s being talked about,” Lechleiter said in an interview with Reuters.

“It would be a mistake for us to disinvest in any significant way in R&D. As a company that is focused on innovation and seeking new treatments and cures, it’s important that we maintain a steady approach and a consistent approach in investing in R&D, and I’m confident it will pay off.”

It’s a bold play, especially when so many of your peers have opted to follow the cost-cutting path and the company itself has had a few Phase III disappointments of late. Yet with Lilly being in the top 5 for nearly all the disease areas it focuses on – diabetes, oncology, neuroscience, autoimmune diseases and animal health – and with those being some of the fastest growing categories of medicines, it would take a brave person to bet against a pipeline that is the envy of many of its peers.

4 Comments
  1. Matt – thanks for that comment. Much has been written about the short-sighted nature of the industry in recent years.

    That "low-lying fruit" metaphor has been made often for some time now, as I'm sure you're aware. Essentially asserting that "fewer drugs have been discovered lately because there are few drugs left to discover" appears to violate the axiom that you can't prove a negative. It's much like arguing that since we haven't discovered alien life on another planet yet, after many years of searching, there probably isn't any. Yet most in the field of astrobiology would say that life is very likely out there somewhere, given simply the vast expanse and common ingredients observed throughout the Universe. We just haven't looked in the right places yet.

    Likewise, it's arguable that "druggable space" is also vast and largely unexplored. How vast? Who knows? Unlike alien life, however, drugs are not just lying there, waiting to be discovered. Though often inspired by Nature, modern drugs are never found in the Wild, all ready to be bottled and sold. It's a long and bumpy road between Lead and Blockbuster – or even a modestly profitable drug – with no guarantees and many potholes and detours encountered along the way.

    The slope along the time-discovery curve is neither predictable nor always as positive as we've come to expect in a given field. Whether we are presently in a temporary lull or require some novel biological insights or technological breakthroughs is perhaps the crux of the industry's dilemma. Science proceeds in fits and starts and technology is always changing. But you don't find something you're not looking for, and Big Pharma's slashing of R&D (Lilly perhaps notwithstanding) suggests they have largely ceded the effort to academia, smaller biotech centers, or the other hemisphere. Patience is no virtue on Wall St., so cutting costs (and headcount), M&A mania, and appeasing stockholders for the short term is the new paradigm. The Blockbuster model has run its course and there's no obvious solution in sight; meanwhile, the industry treads water seeking any port in this Perfect Storm.

  2. Hi Greg,

    Many thanks for taking the time to respond with such a thought provoking addendum. Perhaps I was a little vague with my first comment about low-hanging fruit – which was aimed at the easier to drug (and most profitable?) conditions rather than the easier to make molecules.

    I agree that the remainder of "druggable space" is huge and with new delivery methods making Lipinski's Rule of Five less of a worry the potential size of druggable space is increasing dramatically.

    In case you hadn't seen them recent comments from Sanofi's CEO
    seem to highlight exactly what's wrong with the thinking at the top of the pharmaceutical management tree.

    The responses to his comments on Derek Lowe's excellent blog "In the Pipeline" highlight just how damaging this sort of thinking can be.

  3. Hi Matt,

    Thanks for those links. Apparently, he doesn't see his own self-contradiction in that interview (Big Pharma bad at internal innovation, but great at validating some small startup's?). I guess when you're inside a shrinking bubble everything on the outside looks like either a sharp tack or the end of the rainbow.

    The low-hanging fruit metaphor is certainly apt in some respects, especially if you've been picking much the same fruit. Many of the candidates in the pipeline and clinic appear to be of the "Son of Kong" type, and many of them are flat molecules, or nearly so, with many of the same liabilities. The "spinach" appended here or there seems almost an afterthought to address, post-facto, some ADMET, PK/PD, hERG, or solubility issues that invariably arise. Admittedly, drug discovery is hard work and very risky, as Sanofi's own head of R&D, Elias Zerhouni, has recently commented on – http://bit.ly/knT9JA – and which seems to contradict his own CEO in some aspects.

    But thinking outside the box (bubble?) seems to be discouraged of late (too risky, no time) and, anyway, if it isn't seen as Blockbuster potential it doesn't really exist. Much better to hedge your risk, slash costs (read: heads), and have your exit strategy at hand. Patience is no virtue on Wall St.

    If there's a silver lining, perhaps the shift to a smaller and leaner R&D model may lead to a renewed interest in addressing some of the unmet medical needs that presently fly below Big Pharma's Blockbuster radar.

    Thanks for an interesting blog.

    Cheers,
    Greg

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