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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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In the Pipeline: Don't miss Derek Lowe's excellent commentary on drug discovery and the pharma industry in general at In the Pipeline

In the Pipeline

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October 14, 2004

Could I Have a Side Order of Risk With That?

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Posted by Derek

Talking about the fix that Merck (and the rest of the industry) is in, Jesse Eisinger of the Wall Street Journal used some strong words in his Wednesday "Long & Short" column:

"How did the pharmaceuticals industry get into this situation? Most followed the imperiatives of Wall Street. Investors and analysts demand fast growth from drug companies, but can't abide the risks. They want to be able to draw a ruler under their earnings projections. So most big drug companies relied on brand extensions and raising prices, not breakthrough drugs. They merged with each other to smooth out earnings in bad times, thinking that they were diversifying. But since the industry has huddled around a small number of huge therapeutic categories like hypertension and cholesterol-lowering, the diversification turned out to be largely illusory."

Well, one reason we ended up in those categories is that we know how to do something about them - they have good druggable therapeutic targets, and it sure doesn't hurt that they're huge markets. (Of course, there are other huge markets that we don't have a clue of how to go after.) But he's right that Wall Street (and too many pharma executives) want our earnings to be much more predictable than they ever can be.

What business and accounting types don't want to recognize is the level of crazy risk-taking that the drug industry is founded on. As I've pointed out before, in business school they teach you all about risk: how to avoid it, amortize it, outsource it, hedge it and minimize it. But what if risk is your whole business? How do you get around it then? Being the first to market with an innovative therapy, which is what both pharma management and the industry's worst critics both would like for us to spend more time doing, is insanely risky. No one wants to admit it, but it is.

Remember that 90% attrition rate I was quoting the other day? We can go years and years before we ever find anything, and it takes years of work before we know if it's any good. If we make it all the way to the market, there's no way we can know everything our compounds are capable of doing. We have to do what we can to find out, then get them out into the real world and hope for the best. Then we can spend huge amounts of money promoting something that not many people want to buy (Clarinex! Get your Clarinex!), or watch our biggest sellers turn into horrible hydras of liability (Baycol! Vioxx!)

Despite the huge financial rewards waiting for anyone who solves these problems, they're still out there and they're not a bit smaller than they ever were. But some investors and managers would rather convince themselves, against all evidence, that the world is a more orderly place. So let me be blunt: if anyone thinks that a pharmaceutical company can deliver predictable earnings under the current conditions, they're delusional. Or grievously misinformed, or just plain slow. You pick.

Eisinger goes on to point out that analysts say that they love Pfizer's get-big-and-sell-like-crazy strategy, but Prizer's stock is back where it was in 1998. Meanwhile, they're spending much more per new molecule than, say, Merck or Lilly, two of the industry's go-it-alones, and they have major trouble looming with competition and patent expirations:

"Merck is the ghost of Pfizer's future. . .Investors are slowly realizing that pharmaceutical companies should stay as small as they can, avoid distracting megamergers, invest large amounts in R&D, partner aggressively across the biotech spectrum and strive for novel, breakthrough medicines that add value."

These are noble goals, which I endorse while having few good ideas of how to live up to them. That's especially true in a publicly traded company, which brings us right back around to the beginning, and a question I'd like to throw out: how would some drug companies fare if they were held privately, away from the glare of the stock market? There aren't many of them, but should there be more?

Comments (8) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. Jake McGuire on October 15, 2004 12:58 AM writes...

I'd be interested to see a drug company stay private. I don't know how comparable to the computer startup field it is, but over here it's pretty tough to do. Look at Google, for instance - the company didn't need the money. The venture capitalists aren't interested in cash flows stretching off to the horizon; they want their money now. And if you gave your key employees stock options in exchange for grotesque working hours and comparatively low pay, they want to cash out (or diversify, depending on how you put it) as well. It's a lot harder to make that happen without selling your company to the public.

Permalink to Comment

2. Derek Lowe on October 15, 2004 6:55 AM writes...

The first example I can think of in a private drug company is Boehringer Ingleheim. After that, there's not much, especially in the US. (That is, outside of small outfits that would like to go public and haven't yet. . .)

Permalink to Comment

3. biff on October 15, 2004 11:40 AM writes...

Off-hand, I think the biggest privately held US-based pharma is Purdue Pharma.

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4. jeet on October 15, 2004 6:24 PM writes...

I would say it is impossible given the amount of capital needed to get you first drug in Phase III trials.



Say it takes you $40-60 million (more likely $100-200) to get a firm up and running and your lead candidate through phase II. Well, there are a lot of people (VCs) who have given you that money over the last 3-5 years to get you there. The problem is that the money that the VCs gave you doesn't belong to them. It belongs to pension funds, endowments and other broad based investment funds who are expecting it back (with some profits). And the VCs are contractually obligated to give it back to them.



Since the company belongs to the investors, soon enough you will be on NASDAQ and subject to the forces of the market. That is, if the company's doesn't fold first (which is the more likely option).


Permalink to Comment

5. qetzal on October 15, 2004 7:00 PM writes...

Does anyone know how much (if at all) the oft-quoted "90% attrition rate" is skewed by "me-toos"?

I would like to see the attrition rate broken down into (at least) two categories - drugs acting through targets of proven value, vs drugs acting through new targets. (New in the sense that they are not targets for any approved drug.)

I'd expect drugs against new targets would fail in development much more often. Also, I wonder whether approved first-in-class drugs are more likely to run into post-market problems.

Permalink to Comment

6. biff on October 16, 2004 11:38 PM writes...

qetzal - I'll take a stab at your question, but, first, a comment. In the small molecule business, "me-too" refers more to the compound class of the drug, rather than the target through which the drug acts. For example, ibuprofen isn't a "me-too" with respect to aspirin, even though they both target COX proteins. (I'm not a medicinal chemist - I'm sure somebody like the host of this blog could name some much better examples than I can.) Anyway, I'll give a "back of the envelope" answer to your question about target classes: If you count all the pre-clinical programs against _new_ targets which fail at the HTS or lead optimization stages, the rate of attrition for such "innovative" targets is depressingly close to 100% -- probably around 98-99% -- which explains the bursting of the genomics bubble. For those which make it past the screening stages, the attrition rate starts to improve, but since there is less experience with animal models, pharmacology, etc, with such programs, the attrition rate is still significantly higher than that of a true "me-too".

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7. mark on October 18, 2004 4:25 PM writes...

Quintiles, the largest development CRO, went private (was public with a good slug of the CRO industry's market cap) because management felt that its forays into development--betting against the odds on successful development--would not be fairly valued in the public markets.

Permalink to Comment

8. Ken on October 18, 2004 8:32 PM writes...

I bet it would be a hell of a lot easier to get investors to take on the insane levels of risk involved with the pharmaceutical industry if there wasn't a ready supply of leftists to bitch and moan and threaten legislation when those insane risks paid off and generated insane profits.

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