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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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« Pfizer's R&D Productivity | Main | Another Take on the Munos Paper »

December 11, 2009

Munos On Big Companies and Small Ones

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Posted by Derek

So that roughly linear production of new drugs by Pfizer, as shown in yesterday's chart, is not an anomaly. As the Bernard Munos article I've been talking about says:

Surprisingly, nothing that companies have done in the past 60 years has affected their rates of new-drug production: whether large or small, focused on small molecules or biologics, operating in the twenty-first century or in the 1950s, companies have produced NMEs at steady rates, usually well below one per year. This characteristic raises questions about the sustainability of the industry's R&D model, as costs per NME have soared into billions of dollars.

What he's found, actually, is the NME generation at drug companies seems to follow a Poisson distribution, which makes sense. This behavior is found for systems (like nuclear decay in a radioactive sample) where there are a large number of possible events, but where individual ones are rare (and not dependent on the others). A Poisson process also implies that there's some sort of underlying average rate, and that the process is stochastic - that is, not deterministic, but rather with a lot of underlying randomness. And that fits drug development pretty damned well, in my experience.

But that's just the sort of thing, as I've pointed out, that the business-trained side of the industry doesn't necessarily want to hear about. Modern management techniques are supposed to quantify and tame all that risky stuff, and give you a clear, rational path forward. Yeah, boy. The underlying business model of the drug industry, though, as with any fundamentally research-based industry, is much more like writing screenplays on spec or prospecting for gold. You can increase your chances of success, mostly by avoiding things that have been shown to actively decrease them, and you have to continually keep an eye out for new information that might help you out. But you most definitely need all the help you can get.

As that Pfizer chart helps make clear, Munos is particularly not a fan of the merge-your-way-to-success idea:

Another surprising finding is that companies that do essentially the same thing can have rates of NME output that differ widely. This suggests there are substantial differences in the ability of different companies to foster innovation. In this respect, the fact that the companies that have relied heavily on M&A tend to lag behind those that have not suggests that M&A are not an effective way to promote an innovation culture or remedy a deficit of innovation.

In fact, since the industry as a whole isn't producing noticeably more in the way of new drugs, he suggests that one possibility is that nothing we've done over the last 50 years has helped much. There's another explanation, though, that I'd like to throw out, and whether you think it's a more cheerful one is up to you: perhaps the rate of drug discovery would actually have declined otherwise, and we've managed to keep it steady? I can argue this one semi-plausibly both ways: you could say, very believably, that the progress in finding and understanding disease targets and mechanisms has been an underlying driver that should have kept drug discovery moving along. On the other hand, our understanding of toxicology and our increased emphasis on drug safety have kept a lot of things from coming to the market that certainly would have been approved thirty years ago. Is it just that these two tendencies have fought each other to a draw, leaving us with the straight lines Munos is seeing?

Another important point the paper brings up is that the output of new drugs correlates with the number of companies, better than with pretty much anything else. This fits my own opinions well (therefore I think highly of it): I've long held that the pharmaceutical business benefits from as many different approaches to problems as can be brought to bear. Since we most certainly haven't optimized our research and development processes, there are a lot of different ways to do things, and a lot of different ideas that might work. Twenty different competing companies are much more likely to explore this space than one company that's twenty times the size. Much of my loathing for the bigger-bigger-bigger business model comes from this conviction.

In fact, the Munos paper notes that the share of NMEs from smaller companies has been growing, partly because the ratio of big companies to smaller ones has changed (what with all the mergers on the big end and all the startups on the small end). He advances several other possible reasons for this:

It is too early to tell whether the trends of the past 10 years are artefacts or evidence of a more fundamental transformation of the drug innovation dynamics that have prevailed since 1950. Hypotheses to explain these trends, which could be tested in the future, include: first, that the NME output of small companies has increased as they have become more enmeshed in innovation networks; second, that large companies are making more detailed investigations into fundamental science, which stretch research and regulatory timelines; and third, that the heightened safety concerns of regulators affect large and small companies differently, perhaps because a substantial number of small firms are developing orphan drugs and/or drugs that are likely to gain priority review from the FDA owing to unmet medical needs.

He makes the point that each individual small company has a lower chance of delivering a drug, but as a group, they do a better job for the money than the equivalent large ones. In other words, economies of scale really don't seem to apply to the R&D part of the industry very well, despite what you might hear from people engaged in buying out other research organizations.

In other posts, I'll look at his detailed analysis of what mergers do, his take on the (escalating) costs of research, and other topics. This paper manages to hit a great number of topics that I cover here; I highly recommend it.

Comments (41) + TrackBacks (0) | Category: Business and Markets | Drug Development | Drug Industry History | Who Discovers and Why


COMMENTS

1. clinicalpharmacologist on December 11, 2009 9:52 AM writes...

So the drug discovery process is (scientifically speaking) magic and not susceptible to rational analysis?

Sounds about right to me. Luck has always been the basis of the majority of the really game- changing breakthroughs and we've spent the last 20 years designing luck out of the system. Time to bring it back.

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2. Lucifer on December 11, 2009 10:08 AM writes...

But MBAs do not like to hear that... you are removing the very reason for their existence.

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3. RB Woodweird on December 11, 2009 10:26 AM writes...

Nah, it's because you haven't been properly trained in Six Sigma. And 5S, yeah, that's it - 5S everything and those drugs will come billowing out the pipeline.

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4. Greg Hlatky on December 11, 2009 10:26 AM writes...

Any day that you can remove an MBA's reason for existence is a good day.

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5. anonymous on December 11, 2009 10:34 AM writes...

#1, you are spot on! There is no way, repeat no way, to forecast blockbusters. Every penny spent towards that end is a penny wasted. And God only knows that the drug industry has huge staffs of PhDs dedicated to doing just that, not to mention the vendors. Art de Vany has written a wonderful book, Hollywood Economics, in which he works out the mathematics of blockbuster economics. Suffice to say that they follow a Bose-Einstein distribution to hint at the complexity. The short of it though, is forecasting their occurrence cannot be done. It's a mathematical impossibility given their distribution. Try to explain that to a scientifically illiterate CEO.

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6. bamh1d on December 11, 2009 10:54 AM writes...

Thanks for an excellent post, Derek. The picture projects the dis-integration of the big pharma companies and suggests two things to me: (1) if the trend continues we're probably looking at a future that has only two or three global pharma companies that don't discover or develop anything, but simply buy up promising clinical candidates and then manage the regulatory and marketing aspects of the business, and (2) as companies become bigger through M&A they close a lot of projects in order to arrive at a manageable number, which results in an ever more risk averse R&D environment. Painful as it may be, perhaps a lot of pharma R&D scientists will be happier working in smaller companies that are, by and large, more tolerant of innovative approaches. However, that happiness will be tempered by the fact that they share directly in the commercial risks of innovation.

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7. Anonymous on December 11, 2009 11:48 AM writes...

I agree with #6. Big pharmas are at a real risk of losing drug discovery, and repositioning themselves, willy nilly, on drug development and regulatory. This is not happening as a result of vision, but as a result of risk aversion, and a compulsive addiction to process management. The big question is where is value created? I tend to think that it is created in discovery, while development and regulatory are (or will become) cost-plus operations. But perhaps I am wrong.

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8. emjeff on December 11, 2009 11:50 AM writes...

Hi #1 ;

"Chance favors the prepared mind".

In other words, you need to be smart BUT you need to be lucky too.

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9. Brian on December 11, 2009 12:28 PM writes...

Nice post. One question from a non-industry person: does M&A here mean mergers and acquisitions, or are you talking about something specific to pharma?

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10. Guernseyman on December 11, 2009 1:35 PM writes...

#7 I agree and I think there is an answer that could benefit all in this.

Big pharma does regulatory, distribution and marketing driven by MBAs.

However a certain percentage of budgets are directed to VC-like high risk diverse R & D efforts. The model of these efforts is to throw the money into as many possible different efforts as possible.

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11. CMCguy on December 11, 2009 1:48 PM writes...

Is scary to imagine as I do not know if a rate decline might have occurred without some of the changes that have been introduced but has seen much oscillation caused by "new and approved" paradigms in how to discover drugs. Maybe we have so "overly prepared our minds and then missed out on serendipity". I do like the concept of forces balancing out with better perceived understandings and tougher hurdles but I wonder how big factors such as targeting only "blockbusters" and sue-happy legal environment have impacted what could have been in terms of medicines available. Of course can't forget how companies focus' have changed from long term success to immediate return for shareholders.

Although many Research people seem to think can divorce the Science/Discovery side from the Development/Business parts I am less convinced that in the end will be truly effective. To take something from an idea to a marketed drug product need inputs from many functions and the more different groups interact the smoother the process and better the result will be. I do think many Pharma companies have grow too big and the R&D often suffers from over-management that hinders progress. At the same time un- or misdirected efforts can detour a promising idea from being a success also, with many examples in Biotech. There should be possibilities for a balance in the middle that fosters great R&D and simultaneously executes well on the Marketing/Business side. Guess I can always dream although remember a time when several Pharmas were closer to that combination.

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12. David P on December 11, 2009 2:32 PM writes...

Thanks again for bringing this article up. Sometimes you'll hear about a study that makes concrete an intuition and this seems like one to me, though perhaps that the only thing related to the number of NMEs is number of companies is perhaps an even more extreme version of what I thought.

Hmm, maybe big pharma can improve their pipelines by doing the opposite of M&A - they put money into start-up companies, then when a candidate makes it through they can acquire it and develop it (i.e. all the things that big pharma can do well and do benefit from economies of scale).

It seems like a happy little dream though.

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13. Cellbio on December 11, 2009 4:01 PM writes...

CMC guy, would like to pick up your theme:

"Although many Research people seem to think can divorce the Science/Discovery side from the Development/Business parts I am less convinced that in the end will be truly effective."

Research needs to be in an environment not dominated by business and MBA types, but certainly not divorced from market insights, competitive intelligence etc.

"To take something from an idea to a marketed drug product need inputs from many functions and the more different groups interact the smoother the process and better the result will be."

I agree in principle, but in practice, this is what does not scale, IMO. I have seen this work in small companies, and efficiently, with something as old fashioned as a conversation. In bigco's, this is always placed into a context of metrics, analytics, defined portal criteria and all the other crap that McK and BCG use to create a false sense of controlling the risk, reducing variability and improving efficiency. In the end, bigco employees suffer. I also love this quote posted by Mutatis:

"The leaders of major corporations including pharmaceuticals have incorrectly assumed that R&D was scalable, could be industrialized and could be driven by detailed metrics and automation. The grand result: a loss of personal accountability, transparency and the passion of scientists in discovery and development."

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14. dearieme on December 11, 2009 6:21 PM writes...

"Another surprising finding is that companies that do essentially the same thing can have rates of NME output that differ widely": why is that surprising? For years the Oil Majors all explored for oil, but BP proved by far the most successful at finding the stuff.

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15. Hap on December 11, 2009 6:37 PM writes...

At some point, though, don't companies have to have some idea what the risk and reward for a given project is? There are lots of things we don't know, and some of them are important, but some of them are not. Distinguishing them (and attmpting to do so quantitatively) seems like a good idea.

If large companies have the infrastructure to attempt to measure and evaluate their research projects, why don't they have the ability to admit to themselves that their metrics aren't effective and to try new ones? If you can't tell whether the outcomes of metric-based decisions are better or worse than those made based on a Magic 8-Ball or rat entrails, then that would be a legitimate issue (Why don't you try something else? Why are you spending money for accountants who can't account for anything? If you don't know whether your research is better-performed or worse-performed based on your metrics, then are you just trying to fool yourselves or your stockholders?) Testable theories aren't just for science after all, and nontestable ones aren't terribly useful (particularly when measureable outcomes are the objectives).

I don't know that trying to evaluate risk quantitatively (or at least, as best you can) is a bad idea - the problem is the inability to see whether a theory works long before it's too late to change it easily, and perhaps the inability to change metrics when they don't work (or not to use them when you can't actually tell if they work).

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16. srp on December 11, 2009 9:15 PM writes...

Hap:

Trying to get people to manage rationally is very, very difficult in high-uncertainty environments. For one thing, cause and effect is hard to establish between behavior and outcome. This leads to a lot of politics and impression management, as well as difficulty for any sincere effort to improve things. For another, psychological factors--fear, primarily--cause people to grasp for anything that gives them some feeling of control. Anyone who's worked in the movie business can tell stories of "irrational" behavior and practices that would probably seem familiar to some of you in pharma-land.

Chris