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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: Twitter: Dereklowe

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July 27, 2007

You Discover It, We Sell It. Deal?

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Posted by Derek

There was a comment to the previous post which asked an interesting question: if you look at the best-selling drugs in the portfolios of the major companies, what percentage of them were developed in-house?

I'm sure that someone has already done this analysis, but I haven't been able to lay my hands on it. But in some cases it's a rather embarassing figure - Pfizer, for example, which brings up the question of how you define "in-house" when the house keeps expanding. The rigorous definition - a project (and chemical matter) that started inside the company and went all the way to market - is probably the way to go. A drug that came about through buying a compound, a target, or a whole company doesn't qualify.

It's impossible to talk about this without someone bringing up the idea of a virtual drug company - one that doesn't do any of its own discovery research, but exists to do clinical, regulatory, and marketing. This ideas has been kicking around for fifteen or twenty years that I know of, and probably longer. The best argument I can make against it is that no one's tried it yet. I'd be very surprised if this hasn't been seriously looked at and rejected.

My strong suspicion is that when you run the numbers (how many compounds are available, how much they'd cost, etc.) that you can't quite make it work. Bidding is already expensive for the good stuff, and a company that tried to live only by buying things in would often find itself paying the highest prices possible. And that's assuming that there were enough compounds out there in the first place, no matter the price, and I have my doubts about that, too.

Comments (28) + TrackBacks (0) | Category: Drug Development | Drug Industry History


1. Canuck Chemist on July 27, 2007 12:05 PM writes...

Though it hasn't been the exclusive strategy of Big Pharma to buy up compounds and/or the companies that discovered them, then pay for the expensive business of clinical development, it at least composes a major part of their strategies (e.g. Pfizer). There are two important questions to ask about this:

1. What does this say about the ability (or lack thereof) of Big Pharma to discover their own promising compounds, despite all their resources?

2. How long can these companies continue buying the invention and shooting the inventor (by buying the companies and eventually laying off the scientists)? It seems like it would be mutually beneficial for Big Pharma to generally stick to licensing deals which are lucrative for the small company, allowing them to continue to innovate without being eaten by the much larger partner (and losing the agility that goes with being a small company).

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2. A-non-y-mous on July 27, 2007 12:36 PM writes...

There have been some virtual-type companies like the type you describe. I'd give you their names, but I've forgotten, and the companies are no longer around. In a nutshell, they got conned by some licensing guy at a university, started a management heavy company with fancy titles for all, raised enough money from private investors to get advanced pre-clinical data, then fell flat on their face when Pharma didn't want to license it from them. But don't feel bad for them, they've got some rockin' business cards.

The problem with this model is that you better have a hell of a compound to make Pharma buy a pre-clinical drug. Even for a relatively simple compound it takes ~$10M to get through phase I. It's hard to raise that type of cash without a plan B, and with a ~10% chance of sending the drug to market, it's not worth the risk for VCs.

One company that was successful with a virtual model, but now it looks like they might do some discovery, is Debiopharm (Swiss, I think). They are (were?) really just a middle man and push compounds through clinical trials until they can out-license.

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3. Sebastian Holsclaw on July 27, 2007 4:54 PM writes...

"What does this say about the ability (or lack thereof) of Big Pharma to discover their own promising compounds, despite all their resources?"

I don't understand the 'in house' vs. 'buy up compounds' argument at all. The reason US pharma research as a whole is doing so well is because a couple of specialist scientists can have an idea, convince some venture capitalists to support it and then investigate it. Most of these ideas fail. The good ones then get bought out by large pharma, because the tiny biotech firms don't have the resources to conduct Phase III trials. The price of the buyout has to be high enough to incentivize all the venture capitalists who supported all the failing ventures.

An 'in house' drug goes through a very similar process, where the failure are paid for directly in house, and where the successes have to pay for all the failures as well as provide enough profit for the investors to bother with pharma.

They aren't functionally different, except that having both in house and hoping-to-be-bought biotechs lets more ideas have an initial try than any purely in-house system is likely to duplicate.

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4. wondering on July 27, 2007 5:26 PM writes...

Hasn't Proctor and Gamble essentially dispensed with its in-house discovery research, yet still has a human health business? You blogged about it last March, in fact.

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5. Malfitano on July 27, 2007 5:28 PM writes...

I'd just like to quibble with Derek's definition of a virtual company as "one that doesn't do any of its own discovery research, but exists to do clinical, regulatory, and marketing". I know of several that not only don't do their own discovery research, but don't do clinical, regulatory or marketing either. The whole lot is contracted out. I'd probably reserve judgement on whether this is a validated model yet. The one that I'm most familiar with has a successful Phase III trial completed for its most advanced product but has not yet submitted the dossier

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6. Canuck Chemist on July 27, 2007 6:38 PM writes...

Sebastian, what you say is completely correct, but the point is that even if Big Pharma successfully develops compounds it purchases, it still has big resources and manpower devoted to its own discovery scientists, who on the scorecard don't appear to be doing as well as they could compared to the smaller companies. For example, varenicline is one of the only drugs to come out of the massive Pfizer site in Connecticut in a long time. These sources of promising compounds appear to be drying up-- witness the recent huge pharma buy-fest into the unproven siRNA technologies.

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7. bitter pill on July 27, 2007 6:53 PM writes...

I think the no discovery, just development route is the forest pharmaceuticals business model.

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8. Clark on July 27, 2007 7:20 PM writes...


I agree that this does not have macro (i.e. at a national policy level) effects. But it could have substantial effects below that.

My guess is that big pharma spends as much on pre-phase 1 research as the rest of biotech in total? But their hit rate is a lot lower? (Sorry Derek - really just exploring the issue.). Big pharma's specialty is not the basic research, but essentially identifying post phase 1 products with promise, running trials, knowing how to submit and then doing the marketing.

This would have lots of interesting implications:

a) Where is big pharma likely to layoff?

b) Are there successful models? (AMGN?) What are they doing differently?

c) Do the big pharma know of this issue - and so will be likely to shift models?

Just some thoughts.

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9. Norman Yarvin on July 28, 2007 12:28 PM writes...

As a general rule, people who can't do something themselves have a hard time choosing others to do it for them. A company that just bought drug candidates, and had no in-house development arm of its own, would be an easy mark for scams of all types and sizes.

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10. Polymer Bound on July 28, 2007 8:37 PM writes...

I think many big companies spend a good deal of their R&D budgets working on projects that a small company couldn't afford to. Varenicline is a great example of swinging for a home run... low probability of success/high payoff. I think that project would have been too risky and resource intensive for a biotech to undertake.

It's understandable that some companies may not generate as many drugs as they license in. If I were in their shoes, I'd much rather have my R&D team working on really challenging targets, hoping for a home run, while the licensing division works to keep the company afloat. The trick is to not get too big in this process.

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11. tri on July 29, 2007 1:39 AM writes...

see Forest Labs.

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12. A Knowing Mess on July 30, 2007 10:12 AM writes...

To Canuck Chemist, and others,

on the 'success rate' of big pharma research vs. small companies - one thing that is never brought up is the overall success rate of small companies. How many startups fail to get a product to the point it could be successfully licensed?

Just because one startup with 10 scientists gets lucky and produces a blockbuster drug in three years doesn't mean that a company with 1000 scientists should be producing 100 every three years in order to be considered successful - but this is the calculus that everyone seems to be doing.

Average out the rates of success between 'lucky' startups and 'unlucky' startups, and I think most large biotech or pharma research organizations will start looking pretty good..

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13. milkshake on July 30, 2007 12:31 PM writes...

The argument about big pharma productivity is on wrong track here.

A big company management runs its own research to the ground. To fill the empty pipeline, the big company purchases a medium-sized competitor with a decent pipeline/portfolio, for sligtly inflated price paid in stock. The stockholders are led to believe that there will be "2 billions a year" savings from combined sales/marketing and from synergies. The new company then has to fire lots of people and politically it is more difficult to fire its own (less-productive) scientists and managers so people from the productive mid-sized company get axed. The pipelines are filled with enough candidates to make it look like success for a short time. In few years, the combined research output drops again, company announces a new wave of layoffs, another "2 billions a yeear savings" combined with increased prices of new drugs. Stock falls. The dumb investors and poor patients pay for management self-aggrandisment and incompetency.

The delay between cause and the bottom line problem takes too long in big pharma. It is hard to calculate what breakthrough drugs could have been developed if the management did not axed the better half of its scientists. It is allways easy to hide the management responsibility for disastrous research "consolidation" behind a collective decision and the stockholders expectations. Big pharma management is paid to raise the share price now; their big bucks are only indirectly tied to managing a high-quality research over long periods of time. So they don't.

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15. SynChem on July 30, 2007 1:54 PM writes...


Excellent post! Sadlly, more and more pharmas are run by businessmen with a shortsighted and exlusive focus on quarter-to-quarter bottomline growth, whatever the expense.

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16. Eric Johnson on July 30, 2007 2:23 PM writes...

Well, ideally -- well, I know free markets aren't always as ideal as Adam Smith might like. But ideally, why doesn't the market fix this? If Milkshake is accurate in #13, why not specifically charter a new big firm such that it can only be controlled by PhDs? Why hasn't it happened, and will it happen in the future? Are MBAs' educations and thinking as (relatively) irrigorous as natural scientists like to think? If so, is there some reason a firm couldn't be run without them - or rather without them having any power beyond an advisory/consulting role? Finally, if a firm like this is possible, but only ideally, what is the concrete politico-cultural/market reason why it can't be put into practice?

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17. Eric Johnson on July 30, 2007 2:26 PM writes...

By the way, just as a disclaimer, I don't claim to know thing one about business. My question is in the spirit of brainstorming or experimentation.

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18. SynChem on July 30, 2007 2:40 PM writes...


There's no need to go to extremes here. Visionary businessmen are always needed and indispensable in any industry. Running a pharma business requires a particularly keen and long term view and committment on the company's scientific investment, given the arduous product development cycle and high attrition rate. That's why decision-making driven by quarterly results can ruin a company. One needs to look no further than Pfizer.

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19. srp on July 30, 2007 6:15 PM writes...

If pharma management is obssessed with the stock price, then they should be obssessed with long-term prospects, not just quarterly results. There's a pretty big literature in accounting and finance that shows that investors value R&D investment. That's what we teach MBAs.

But you shouldn't need multiple regression to note that most biotechs and pharmas have stock prices way above what could be justified by their current profit streams. Investors are betting both on long-term payoffs and on profits from existing products/markets.

Of course, estimates of the discounted value of the latter component are affected by quarterly and annual earnings results; if these dip unexpectedly, a downward revision of firm value is likely, because the longevity and size of the current-products component of value has diminished. The perceived expected value of the company's future product stream might be affected by quarterly results--"if they're screwing up their current products maybe they'll screw up future ones that do get approved"--but this effect is likely to be pretty small, in my estimation.

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20. Clark on July 30, 2007 10:41 PM writes...

Anyone reading this thread should read the linked article from below - which comes from the WSJ. Essentially they point to LLY, which apparently admits that prior to 2001 only 10% of their pipeline was discovered in house. They are now trying a new discovery model - but at this point I'd guess that less than 10% of their current sales are from drugs they discovered in house. So I was right in guessing less than 20% - at least for LLY.

BTW - A lot of people here are dissing big pharma because they didn't discover the drugs. This is bizzare even if you dispise money - if you watch enough stupid moves by small biotech you realize that a huge factor in getting a drug successfully through trials is skill in data mining and setting up successful trials. An awful lot of promising drugs are bumbled by small biotech that doesn't know the ropes or skimps stupidly in order to save money or get through sooner.

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21. Indy on July 31, 2007 5:57 AM writes...

Clark, I think that you got it wrong for LLY, in fact exactly backwards, that less than 10% of the pipeline came from external discovery, and that the rest was the result of internal discovery. Certainly their big drugs (Zyprexa, Gemzar, Cymbalta, Evista) are all internally discovered and the sole in-license among the big drugs was Cialis.

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22. weirdo on July 31, 2007 11:42 AM writes...

No offense intended to either Clark or Indy, but that WSJ article says absolutely nothing about internally discovered versus externally discovered drugs. It is about "small-molecule" vs. "biotech" drugs. Where they were discovered is not really mentioned.

One could argue that the buying AME means they are actually "buying" the newer biotech drugs, but I would view an acquisition to get a headstart in a technology as very different than an acquisition to get products immediately.

But Indy is certainly correct, it is difficult to argue that anywhere near the bulk of Lilly's sales come from in-licensed drugs.

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23. TNC on July 31, 2007 12:03 PM writes...

Can someone define the difference between a pharma company and a biotech company? Is it the difference between biomolecules (antibodies, proteins) and small molecules (MW

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24. J on July 31, 2007 12:30 PM writes...

I saw some insight into this issue in a presentation by Mark Edwards of Recombinant Capital. He discussed the top selling biotech drugs and provided the following examples:

Enbrel: Marketed by Amgen/Wyeth, developed by Immunex
Remicade: Marketed by Schering Plough and J&J, developed by Centocor
Rituxan: Marketed by Genentech and Roche, developed by IDEC
Procrit: Marketed by J&J, developed by Amgen

Other top biotech drugs are both marketed and developed by either Amgen or Genentech (Arenesp, Neulasta and Epogen by Amgen; Herceptin and Avastin by Genentech).

I’m sure there are many more examples across the industry.

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25. SF Reader on July 31, 2007 5:40 PM writes...

I was very surprised by Derek's comment about no one having tried a virtual company. I work for one now - we have several products (all in-licensed), with no lab space and no manufacturing. While I was interviewing, I visited several others. I find the virtual company to be very common here in the San Francisco Bay Area. I started at a small soup-to-nuts company (R&D, QC lab, manufacturing, the whole deal), and it's only later that I've seen how unusual that is here. The virtual company is more the norm, at least for small companies.

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26. SD Reader on August 4, 2007 11:24 AM writes...

NovoCardia is another company that develops in-licensed products. It was recently acquired by Merck.

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27. Alan on August 13, 2007 3:40 PM writes...

There are some interesting comments in this correspondence but they are usually incomplete. Some seriously clear thinking is required to untangle the business models which exist in the pharma/biotech world.

Any business can choose what bits of the value chain (from rawest of raw materials to marketing finished product) it occupies and where it captures the maximum benefit for itself in relation to the costs incurred and the capital investment required.

Some companies occupy the whole chain from research (R) through development (D) to registration (Reg) to production (P) and marketing/sales (M). Let’s give them a name FIPCO (for Fully Integrated Pharmaceutical Company). Pfizer, Merck and GSK are examples.

To some extent, large pharma companies like these also inward licence products from biotech companies. Here the R, and probably some of the D, happened in biotech and the rest happens in the pharma.

There are also pharma companies that avoid R like the plague but do D, Reg, P and M --- see Forrest and Shire for example.

There are many pharma and biotech companies that oversee certain activities but contract out the delivery of certain aspects to others. The most obvious examples of outsource providers are CROs and CMOs. Many companies use them because it’s cost efficient to do so.

But, none of the above are virtual companies. A true virtual company has very few staff and all it does is own/control IP and manage outsourcing. In the pharma/biotech world, the best example is Alizyme (no R, D, Reg, P or M) but it owns three drugs in Phase 3, employs only 20 people, because almost every activity is outsourced, and has a market cap in the hundreds of millions.

In another world, Benetton is almost virtual – it owns none of the factories where its woollen goods are made (all are outsourced but made up to its designs – in other words it controls the IP) and, surprisingly to most people, it doesn’t own the stores either (it just lets others do that difficult job – to a formula created by Benetton which again owns the IP in store design etc etc).

So, make your choice where you want to be.

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28. it solution provider on March 8, 2012 7:22 AM writes...

I love the theme you are using, I have a Wordpress blog as well, and I would love to use this theme. Anyway you can tell me what its called?

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