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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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March 21, 2011

The Small Drug Companies And the Big Ones

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Posted by Derek

Here's a fascinating post from Bruce Booth on the R&D numbers for Big Pharma versus everyone else. If you had to guess, how much would you put big-company spending up against all the privately-financed startups? How many Lilliputians does it take to outweigh Gulliver?

Well, it turns out that the top 20 pharma companies spend about 26 times the budget of all the venture-backed companies put together. In fact, just comparing Pfizer's R&D budget alone to the universe of privately financed companies suggests that one Pfizer equals about 1000 small biotechs, or about 2-and-a-half times the number that exist today. Sheesh.

There are a lot of other interesting numbers to be found in that post - for example, given reasonable assumptions about facility costs, Big Pharma probably spends as much on its utility bills and building maintenance to fund the entire universe of VC-backed companies today. The whole thing looks very much like a steep power-law distribution to me, and that raises the question that Booth raises himself: how much more bang for the buck are we getting from the small companies, relative to the larger ones?

Comments (17) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


COMMENTS

1. johnnyboy on March 21, 2011 12:32 PM writes...

Well, comparing both is a bit of an apples and oranges issues, innit ? How many of the small companies can and will bring a drug all the way to the market themselves ? Start-ups invest less because they're often one or two-product companies, and if their product is successful in pre-clinical or phase 1 they get bought out by the biggies, who take on the charges for the costly phase 3. So I don't see how you can make viable comparisons by looking at big-picture budgets.

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2. Hap on March 21, 2011 12:43 PM writes...

It seems like the small pharma companies are almost completely dependent on the ability of big pharma companies to test and market their drugs, so the R+D component is probably a mixture of big pharma R and everyone's D, and not quite as disproportionate as the numbers imply. In addition, it doesn't necessarily factor for the differences in certainty between clinical candidates (do small pharma drugs wash out more often/or later than big pharma candidates?)

Still, it is a problem - if companies can't spend less money and bring good drugs to market, there won't be any money for them to spend or any drugs before long. Of course, the flip side is that if all pharma research was happening at smaller companies, I suspect that there would be fewer people doing it (cost/uncertainty - even though big pharma has those in spades now).

Finally, the post says that R+D spending isn't decreasing but merely slowing its rate of increase. I'm assuming there a lot of outsourcing/shifts of R+D elsewhere, but where is all the money going?

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3. Chemjobber on March 21, 2011 12:51 PM writes...

That's no moon, it's Big Pharma!

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4. Rick on March 21, 2011 1:39 PM writes...

The previous posts have noted salient distinctions between how "R&D" money is allocated in small companies vs. big pharma. If I had to guess (because I can't find reliable data), I'd say that most of the "R&D" activity at small companies is what big pharma would call "discovery research" or even "basic research", whereas big pharma "R&D" activities include a much heavier dose of preclinical development and clinical development. It would be nice to get a head-to-head comparison of the discovery research between big pharma and small companies, but there's way too much opacity in the budget data for that to happen.

I'd also like to see Bruce's comparison extended to academic biomedical research. (IF it were possible, see budget opacity comment above) If small companies are more productive with the research dollars than big companies, maybe non-companies (academics and private research institutions) are even MORE productive. It reminds me of a presentation back in the 90s that depicted the NIH budget to the Merck R&D budget in which the spending was measured in "Merck Units" instead of dollars: Merck was 1 Merck Unit and the NIH was a small fraction of a Merck Unit. Makes one wonder if, for the purposes of DISCOVERING a drug, NIH is more productive.

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5. Jon on March 21, 2011 2:15 PM writes...

A somewhat related map is here at http://www.leydesdorff.net/topcity/figure2.htm Green is high-quality, often-cited stuff and red is lower-quality, less-cited stuff. This is for chemistry, there are also ones for physics and psychology. More links are here: http://www.i-programmer.info/news/81-web-general/2154-citation-map-shows-top-science-cities.html

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6. HelicalZz on March 21, 2011 2:22 PM writes...

Is this really that much of a surprise? When was the last time you saw a large phase III clinical trial funded by a 'VC-backed company'. The later clinical stage costs are staggeringly higher than the development ones. R&D costs aren't apples to apples.

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7. Bruce Booth on March 21, 2011 2:25 PM writes...

Derek - thanks for the link to my post.

Rick - I'd argue most venture capitalists don't fund basic research today, and only a few fund true discovery work. Most VC dollars go between a near-Candidate Designation and Phase 2a PoC, with the bulk of the $ towards the latter. So the focus tends to be late discovery through exploratory development. Startups frequently bemoan the valley of death where its tough to get VC money (pre-Lead Opt). Interesting concept about Merck Units. My guess and experience is that academia is very unproductive when it comes to moving drug discovery efforts forward; its just not in their remit to do dose response studies, PK/PD work, etc... They do the sexy experiment, publish, and move on. That's helpful for target ID, but not systematic enough for the quality pharmacology discovery work required to move projects forward.

Hap - for sure, biotechs largely rely on bigger Pharma for late stage development activities (like Phase 3 mortality studies). Hence my disclaimer in the post reflecting this difference.

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8. Rick on March 21, 2011 5:05 PM writes...

Thanks Bruce (#6),
I think I understand what you've done and, strictly in terms of dollars invested, it's clear that most VC dollars are allocated to later stage programs. Of course, that average is heavily weighted toward the clinical stage because that's most expensive.

Perhaps this is too unconventional, but what's the results if you look at the distribution of funding events (or instances), regardless of dollar amount? Perhaps I misunderstand you, but your comment, "most VCs don't fund basic research and only a few fund discovery work", suggests that the number funding events for what pharma companies consider "basic research" (gen-, proteo-mics, screening technologies, a lot of computational and structure-based design, part of siRNA, part of aptamers, part of DOS for a few examples) and "discovery research" (the rest of siRNA, aptamers, DOS, computational) has dropped. Is that correct?

My point, and I may not be making it very well, is that it would be useful to see a measure of where each stage of biomedical R&D works best (academia vs. small companies vs. big companies). For example, academic "R&D" might look very unproductive vis a vis companies if your focus is drawn to the most expensive parts (clinical and even pre-clinical development), which seems to happen if you focus on where the bulk of the money goes. But academic labs might blow the doors off companies when it comes to early stage research up through and including hit discovery and lead optimization, which a strictly monetary focus would miss because it's too small to see.

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9. Chinabonding on March 21, 2011 8:25 PM writes...

There was an interesting paper, Nature Reviews 2009 by Munos, on the history of NME approved in the last 60yrs or so. The only corelation found was the number of companies...ie more companies = more approvals.

No matter how big the company, the average was only one per year, with Merck having the most approvals.

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10. Fat Old Man on March 22, 2011 2:29 PM writes...

This raises an interesting question, has a 'small' company ever brought it home alone for a launch of a small molecule without lisencing to a big pharma? I imagine it would take a considerable amount of project management skills balancing all the balls in the air from outsourcing all the late stage development activities.

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11. bbooooooya on March 22, 2011 2:39 PM writes...

"has a 'small' company ever brought it home alone for a launch of a small molecule without lisencing to a big pharma?"

Yes, but it often does not end well. Recent examples include AVNR (Nuedexta) and SOMX (Silenor). Note, neither of these are NMEs.

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12. Bruce Booth on March 22, 2011 7:39 PM writes...

Good comments.

Rick (#8) - agree it would be good to see. I would think academics/NIH would score highly on target ID and pathway work, biotechs (small drug co's) at getting to PoC, and large Pharma at getting stuff through late stage dev and approved. If only the urge to vertically integrate didn't spoil it all - we have academics trying to do HTS with lame chemical libraries, biotechs trying to do Phase 3 and launch products, and Big Pharma continuing to squash innovative research with bureaucracy. Why is vertical integration so appealing?

Fat Old Man & Booooyyya (#10, 11) - can't argue with you. Big Pharma does late stage development and sales & marketing better than anyone else. I guess the only caveat I'd make is that prior to recently, orphan or small diseases never got any traction at Pharma. With Pfizer setting up a Rare Diseases Unit, I guess those days are over...

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13. Show me the data on March 22, 2011 7:56 PM writes...

The data is not accurate. Biotech gets funding from IPOs and above all partnering (i.e. Pharma contributes from that huge combined R&D expenditure a significant chunk to pay Biotech reserach). According to Steve Burrill, in 2009 Biotech only in the US got $15 B from public funds (IPO, follow-ons, bonds), $4 B from VC and $37 from partnering.

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14. Still Scared of Dinosaurs on March 23, 2011 3:41 AM writes...

I worked at a small company at which two things were painfully clear. The first was that in small companies one powerful idiot can screw everything up. The other was that the company still had a chance until they signed up with a biotech VC that got seats on the board. All meaningful intellectual activity there ceased almost immediately.

It's really a terrible model to be beholden to people whose only interest is getting their money back out quickly.

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15. Matt on March 23, 2011 2:00 PM writes...

@Jon: interesting graphics. This is off-topic, but one side-effect of those charts is that the more widely they are known, the more they are likely to distort the data they represent. That is, discounting the ideas in papers from some cities because they are less-cited, or giving more credence to papers from more-cited areas. In a busy, noisy world, it doesn't take much for the "same old" to shout out "really original." Hmm, maybe this isn't so off-topic after all.

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16. Veteran on March 26, 2011 3:16 PM writes...

During the last six years I have made the painful transition from Big Pharma to small biotech an in the process widened my employment marketability and reached an executive level from bench scientist. It was sheer hell, humbling and required balls of steel. I now realise what a useless, lazy, demanding, arogant and deluded Big Pharma cock I was. I really mean that. I was wrapped in cotton wool and expected at least 4 blue collar support staff to come running with screw drivers whenever a piece of lab equipment stopped working-now in a small company I have to down load the manual, read it and then fix it myself rather than calling out an engineer and getting bent over for 4 figures in the process. No longer do I mix up a couple of reactions for the day and retire to the Big Pharma library or walk purposefully around the building to look busy with a random piece of paper but now I wear approximately 15 hats and I don't have the energy left at the end of the week to go through them with you but it ranges from counting the toilet rolls to analysing the project gross margins. I am not sure if the growing number of bench scientists on the heap are willing to reinvent themselves as I did but I wish them good luck.

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17. Nile on March 27, 2011 2:23 PM writes...

Other comments (and the original article) point out that there's an 'apples-to-apples' problem in comparing these research budgets. The big issue is Phase III trials, which are counted in the Big Pgarma number but biotechs just don't do. Or rather, they do them in joint ventures with (or after buyouts by) the big players.

The elephant in the room, however, is that there is a relatively small universe of projects that biotechs can actually take on. It's not just that they don't have the depth to pursue an idea from an advance in basic theory to the emergence of plausible drug candidates - although one posted comment pointed out that biotechs are, on average, pursuing later-stage research than staid old industry giants - it's that there's no point investing high-risk venture capital in 'me-too' drugs and incremental improvents in existing treatments that will sell for solid-but-not-stellar profits.

Biotechs have to take on high-risk projects in pursuit of high rewards: risks that Big Pharma often chooses not to take; but these projects cannot be so risky that the project is implausible in its scientific basis or as an investment.

It doesn't surprise me that the research spend is less than five percent of Big Pharma's, even making guesstimates for Phase III trials: there's not much space in the 'Goldilocks' risk niche for biotech investments. Nor is it surprising that, after we've applied a survivorship bias, the biotech successes are so prominent: it's their very nature that they are stellar successes from high-risk ideas.

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