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Derek Lowe The 2002 Model

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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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November 30, 2010

More Advice From Andrew Witty

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Posted by Derek

Andrew Witty of GSK has a one-page essay in The Economist on the problems of the drug industry. None of the background he gives will be news to anyone who reads this site, as you'd imagine - lower rates of success in discovery, higher costs, patent expirations, etc.

Here's his take on research and development:

. . .it is clear that the size of the industry will continue to contract in the drive for efficiency. For some players, more mergers and acquisitions are likely, but others will plan to shrink, and all parts of the value chain from R&D through to production and sales and marketing will be affected. . .

. . .In the past the problem of R&D in big pharmaceutical companies has been “fixed” by spending more and by using scale to “industrialise” the research process. These are no longer solutions: shareholders are not prepared to see more money invested in R&D without tangible success. If anything, based on a rational allocation of capital, R&D should now be consuming less resource.

Yikes. I'm not sure where that last sentence comes from, to be honest with you. Does Witty think that we now know so much about what we're doing that it shouldn't cost so much for us to do it? Or that it shouldn't cost so much to comply with the regulatory authorities, for some reason? I'm a bit baffled, and if someone can explain that "rational allocation" that he speaks of, I'd be grateful.

And I'd like to say that the rest of the piece advances some useful ideas, but I can't do that with a straight face. (To be fair, if Andrew Witty has some great ideas for making GSK more productive, he's most certainly not going to lay them out for everyone in The Economist). So it's all innovative business models, dynamic partnerships, recapturing creative talent in the drug labs, and so on. That last line will no doubt inspire a lot of bitter comment, considering what things have been like at GSK in the last few years.

His main pitch seems to be that drug companies need a "fair reward for innovation", and that's one of those things that's hard to disagree with on the surface. But unpacking it, that's the tough part, because everyone involved will start disagreeing on what's innovative, what might constitute a reward, and (especially) what's fair. Witty has been giving speeches on this for a while now, and I'd say that this latest article is just the condensed version.

Comments (55) + TrackBacks (0) | Category: Business and Markets | Drug Development | Drug Industry History


1. Hap on November 30, 2010 10:43 AM writes...

I have to wonder where "fair reward" figures into the pay of pharma CEOs - given that while cutting the pay and benefits of their employees and getting rid of the ones they don't think they need, their pay seems to stay the same or improve.

There probably is reason to want more from R+D then what pharma has been getting, but Witty is probably one of the last people on earth to have standing to complain about it.

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2. Petros on November 30, 2010 10:51 AM writes...

I was also "amused" at this article given the prevailing paradigms at GSK and the endless slashing of R&D

But I note from Fierce Pharma that the knives are being sharpened for the soon to be superfluous marketers (the patent cliff effect), some of whose activities have incurred fines of a size that might have markedly enhanced R&D productivity

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3. RB Woodweird on November 30, 2010 10:53 AM writes...

Witty and his ilk are mice who write little mouse essays for the Journal of Mousy Thoughts about how the cat needs a bell.

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4. anchor on November 30, 2010 11:15 AM writes...

Noting insightful from Mr. Witty's comment, I say. Could not wait for what Mr. Ken Frazier has to say, now that he is taking over from Mr. Dick Clark as CEO of Merck (effective 01/01/2011). In appointing him, I suppose Merck is again following Pfizer's lead in appointing lawyer as CEO. To me it also foretells that Merck might face lot of litigation issue down the road and that means less science and scientists. He may need Kim, Hutchinson, Tillyer more than his predecessor and we all know where this is headed.

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5. Anonymous on November 30, 2010 11:21 AM writes...

How about transforming the funding of drug development within big pharma to a system where shares of a development candidate are sold to investors. The cost is shared with a large number of investors. The big pharma would of course retain a large number of shares. This would be more akind to treating a development candidate as a start up biotech. You could motivate researchers just like a small biotech with stock options of that development candidate.

This is merging the venture capital world with big pharma.

In the end, big pharma would be more like a holding company, with each product more or less its own daughter company.

My experience personally is going from a very large pharmaceutical company to a very small start up. It is VERY motivating to think of the possible rewards of stock options, it is also very motivating to know that success/failure depends on just a few people. It will drive people.

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6. Schlake on November 30, 2010 11:24 AM writes...

The Economist writers are concerned with one thing: making money. So, if R&D doesn't make money, then it is bad. They never consider the long term future, morality, or ethics in their opinions. Money made now is the only concern, and the future damage is never thought of.

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7. A nonie mouse on November 30, 2010 11:39 AM writes...

Rational allocation means that if you aren't getting a good enough return on your investment, maybe you shouldn't do that anymore. So not enough success argues for less investment until someone comes up with a new approach that is likely to yield better outcomes.

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8. emjeff on November 30, 2010 11:46 AM writes...

What do you expect from an economist? All Andy cares about is making money.

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9. Curt F. on November 30, 2010 11:51 AM writes...

@Hap #1: You don't think the CEO of a large pharmaceutical company has "standing" to want more out of pharmaceutical R&D?

@Anonymous #5: That is an interesting idea. To some extent I suppose it is already happening since the exit strategy for most VC-funded biopharmaceutical startups is acquisition by big pharma. But why not do it internally?

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11. David Formerly Known as a Chemist on November 30, 2010 12:23 PM writes...

I think he's merely positioning the topic from the viewpoint of an investor: more and more money has been plowed into R&D, and productivity has simultaneously decreased. Hence, the rational thing to do is stop plowing more money into R&D. That's a simplistic argument, but one that's hard to refute.

Realistically, we must continue to invest in R&D or else there will be no new products. But the nature of R&D needs to change, because the old way isn't working anymore.

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12. Virgil on November 30, 2010 12:35 PM writes...

@#22 David
I disagree that R&D "productivity" is down. It all depends on whether you count an approved drug as the end product of R&D. I would argue that an approved drug is not an R&D product, but instead it is the product of an R&D outcome plus a bunch of legalese, marketing, medicinal chemistry, SAR, and other magic performed on it.

The numbers of new candidates being generated by R&D is as strong as ever. What has changed is the FDA approval process and the heavy focus on side effects, which often leads to very promising and efficacious lead compounds never making it to the clinic. R&D is still pumping things into the pipeline, they just aren't coming out the other end so fast any more, and that is in large part due to the FDA.

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13. processchemist on November 30, 2010 12:41 PM writes...

The business model that produced big pharma companies with AAA rating and profits largely exceeding 10%/year was based on research. Every scientist in this line of work knows that research can't be industrialized: after 20 years of failed tests (combichem, armies of asians crunching molecules etc), it's clear that intensification does not produce more blockbusters.
But a plan to keep two digits profits and AAA rating with less research (that means lesser probabilities of future products) is pure nonsense.
By the way, have a look at the current GSK pipeline: it speaks by itself.
Everyone with friends in GSK knows how the company rewarded the groups that actually delivered new products (many others did the same, we know). And no CEO, as far as I know, ever talked about *motivation*.

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14. azetidine on November 30, 2010 12:48 PM writes...

If R&D funding went all the way done to zero, and we were stuck with the drugs that we currently have, would we really be so bad off, in the grand scheme of things?

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15. David Formerly Known as a Chemist on November 30, 2010 12:56 PM writes...

@#12 Virgil: I think all the steps you mentioned are part of the R&D process (a lot of it is the "D" part). Yes, the bar has gotten higher and more difficult to jump, but that's because our knowledge base has grown and we know how to predict potential side effect liabilities better. Medchem is still pumping leads into the pipeline, but the R&D process does a stricter job filtering those compounds than in the past. That in turn makes productivity go down (if you define productivity as approved drug per dollar spent, which is an appropriate measure, because approved drugs are the money-producing products that pay for all these activities).

The end conclusion reached is still the same. Pumping more money into R&D isn't resulting in more approved drugs, so why pump even MORE money into R&D? Even if the main culprit is the FDA as you stated, throwing more molecules into the pipeline won't solve that problem. They need to be smarter compounds. Or smarter targets. Or smarter clinical trial designs. And no, I don't have the answers on how to solve these problems.

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16. CR on November 30, 2010 1:03 PM writes...

@#12 Virgil...
"I disagree that R&D "productivity" is down. It all depends on whether you count an approved drug as the end product of R&D. I would argue that an approved drug is not an R&D product."

It absolutely has to be the end product of R&D. What you are saying is the end of the "R" in R&D; and one doesn't make too much money on that end of things. The only outcome that can be a measure of success is the approved drug. For example, one company has a single "new candidate" but that candidate makes it to the market, compared to another company that has 10 "new candidates" but none of them make it to the market. Which company is more successful? Clearly company #1, no argument.

My take on Witty's comments: Big Pharma is, in economists eyes, throwing good money after bad in R&D because there hasn't been an increase in approved drugs with the appropriate increase in budgets. So, instead of increasing and increasing budgets, what would happen if the R&D budget is cut to a scale that is appropriate for the number of drugs? Would it get worse? Can it get worse?

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17. Wagonwheel on November 30, 2010 1:05 PM writes...

@10, not to worry because according to the list there will be fewer Wittys too.

Agree with most of the posts, the cost of getting compounds to patients is just so high nowadays that we can't overcome the barrier. There are potentially good medications lost for ever in the vaults of big pharma because the forecasters say the market won't be big enough to cover costs and support the behemoth. Somethings gotta change...more drastically than at current...

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18. LNT on November 30, 2010 1:15 PM writes...

I think Witty's arguement about reduced funding of R&D is twofold:
1) As the profits of drug companies are shrinking, R&D budgets should be equally shrinking. (given the uncertain output of R&D it is only rational to "cap" the R&D costs at a certain percentage of sales)
2) The percentage of sales $ that goes into pharma R&D has been going up and up. (it was historically ~12-13% of sales in the 1970's, but it is now closer to 18%) I suspect that he wants the percentage to drop back to historical levels.

How can the industry shrink R&D while maintaining future profits? Simple. Just look at pharma portfolios and you'll get the answer: More profits coming from areas that are more "stable" than traditional small molecule drugs: Vaccines, biologic products, vetenary medicine, consumer healthcare products, diagnostics, and (yes) generics. All these areas less "rewarding" than the next blockbuster -- but they are far less risky (in terms of future profits).

Witty is essentially conseding defeat -- the current buisness model is fading fast. The new one is already emerging -- just look around you.

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19. Hap on November 30, 2010 1:36 PM writes...

#9: No, I think he in a position to want more from R+D, but since he's part of the reason it isn't producing, the complaints seem more than a little hypocritical. If you want to complain that R+D isn't productive enough while getting paid (in increasing amounts) for your part in making it less productive, then your standing to complain about it isn't very good.

Other than upper management, who has the "subsume and outsource yourself to greatness" benefited? Not employees, though that's sort of life. Not patients or consumers, because companies produce fewer drugs and (have to) charge more for those they do produce. Not stockholders, I don't think. Maybe the firms that engineer the purchases get rich too. I guess that's something.

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20. GSDecay on November 30, 2010 1:43 PM writes...

Witty also waxes that R&D is "more of an art than a process" which may be music to the ears of those SixSigma-hating readers of this blog but unfortunately to investors this reads "R&D is fundamentally unpredictable and you have no idea if you will make any money out of it" which when the bean counters are pulling all the strings is not music to the ears of the legions of passionate scientists who just want to use the available scientific knowledge to further human wellbeing. That bit got lost in the spreadsheets somewhere...
At a time of unprecedented scientific advances in understanding human health why do we so struggle to find a business model that can be easily used to apply it?

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21. HelicalZz on November 30, 2010 2:06 PM writes...

Perhaps part of the problem is that those in R&D are in so frequently 'baffled by rational allocations of capital'. Or at least fail to understand the role and responsibilities of a CEO as much as they accuse those same from failing to appreciate their role.

No, discovery will not get cheaper. But the efforts can be focused in areas that can most likely drive revenues and future profits, and/or areas of unmet need. Pushback from regulatory and reimbursing authorities means a diminished return on the spend for 'me too' types of products, the area where big pharma could in the past most predictably create a return on investment. The sentence before the one questioned was pretty explanatory. "shareholders are not prepared to see more money invested in R&D without tangible success." So 'rational expenditures' will likely be those pegged to certain metrics like % of revenues (as they always have been).

If a promising return on investment can not be generated in such a fashion, spending more won't improve things and could make it worse, such as by raising the hurdle rate for seed capital for startup 'pure' R&D operations.


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22. Curt F. on November 30, 2010 2:15 PM writes...

@Hap #19: If you want to complain that R+D isn't productive enough while getting paid (in increasing amounts) for your part in making it less productive, then your standing to complain about it isn't very good.

Do you think GSK shareholders share your apparent belief that their CEO is "getting paid" for making R+D "less productive"? It seems counterintuitive to me that shareholders would pay a CEO to lower their company's R+D productivity, but I am not an expert on GSK and have not been following them closely.

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23. alig on November 30, 2010 2:30 PM writes...

I wonder if R&D would seem as broken if GSK hadn't made so many mistakes outside of R&D. Such as management giving away Cialis for free (a few billion a year right now would be nice), paying billions in fines for illegal marketing, paying billions in fines for manufacturing issues, wasting $720 million on a company w/o real clinical assets. If Witty thinks the disfunctional pair at the top of R&D and Drug Discovery are the solution, he must not be the smartest guy in the room.

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24. ArtCase on November 30, 2010 2:45 PM writes...

This guy works on one principal:
Income - Expenses = Profit
Profit keeps shareholders happy and Witty in clover. R&D is an expense so slash and burn to keep profits up. He doesn't give a shit about patients or future viability as he'll be long gone. Don't know why all the navel gazing, it's pretty simple.

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25. Chemjobber on November 30, 2010 3:07 PM writes...

mad (#10):

A quick check of BLS reve