Are the major drug companies really that crazy?
The dismal track record of the bio/pharma industry for new drug development is well known; since 1996, the number of drugs in development has doubled and R&D spending by bio/pharma companies has tripled, but the number of new molecular entities (NMEs) approved by the FDA has halved. The cost of developing a new drug has soared to more than $1 billion and the phrase 'R&D productivity' has become an oxymoron.
Reducing pipeline dependence
In recent years, however, global pharmaceutical companies have made dramatic moves to reduce their dependence on the new product pipeline. Through mergers, acquisitions and licensing deals they have diversified their business portfolios into new business opportunities, such as emerging markets and generics, that are not dependent on new products. They have also addressed technology gaps in their pipelines — especially biologics.
Simultaneously, large bio/pharma companies have hacked away at their traditional R&D model by closing R&D facilities, terminating large numbers of development candidates and exiting entire therapeutic areas. They are experimenting with new organizational structures, such as Lilly's Chorus initiative, that are aimed at finding ways to spend less on drug discovery and early development, where a high percentage of candidates fail. Identifying unpromising candidates sooner, and killing them quicker, is now a major objective of the drug development process.
Recent developments in the commercial environment will drive bio/pharma companies to reduce their spending on new products even further. Regulatory bodies are making commercial approval of new products more difficult out of concern for patient safety and to encourage drug companies to develop products that are better than what is already on the market. In the meantime, pressure on drug prices is intensifying, making it increasingly difficult to make a financial return on new drugs. The insurance companies and governments that pay most of the tab for new drugs are refusing to reimburse payments for certain new drugs, demanding use of generics, stiffening price controls and, in some countries, paying for some drugs only if the patient shows progress.
Venture capital pullback
While major drug companies are looking to reduce their drug development spending, they must also come to terms with the fact that a major source of R&D funding is also likely to decline. Venture capital has fed the growth of the early development pipeline for the past 10 years, pumping more than $1 billion per quarter into US bio/pharma startups. However, the global financial crisis has changed the outlook for venture capital dramatically by making major investors in venture capital funds, pension funds and university endowments much more risk averse. It has also highlighted the fact that returns on venture capital in the past 10 years have not been significantly better than returns on much less risky investments, including stocks and bonds. This is a direct reflection of the fact that far too much venture capital has chased too many lowvalue opportunities.