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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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October 26, 2012

"Basically, They're A Bunch of Lemmings"

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Posted by Derek

True, but that's unfair to lemmings. This is Raghuram Selveraju of Aegis Capital, talking about deal-making executives in the big pharma companies and the string of costly blowups so far this year. That link has the list, and it's quite an impressive string of fireballs.

“What all of these deals had in common was the desperation of big pharma, because its R&D productivity has been dropping and we’ve known that for a long time,” he said.

That desperation leads to the repetition of familiar mistakes which derive from the predictable thinking of too many business development executives at big pharma, Selveraju opined. First, when looking for licensing opportunities, pharmas very often seek out their comfort zone – a potential product for which they can deploy an existing sales force or promote to doctors they already know and communicate with. Also, to be confident in an experimental drug’s preclinical and clinical data, pharmas often want to go into areas where their competitors also have a compound as well as into validated targets.

“Basically, they’re a bunch of lemmings,” Selveraju said. “As soon as a target becomes hot, they all have to have a molecule in that space, hitting that target."

But who could blame them? Going out into areas that haven't been explored, or haven't worked out for others, can get you slaughtered, too (ask Eli Lilly about Alzheimer's). And when that happens, you have nowhere to hide. If everyone else was rushing into a given therapeutic area and it turns out to be a disaster, well, you yourself might be able to get by, because that's just one of those things, and it happened to everyone at the same time. It reminds me of something I saw years ago about investment managers. If you go out and buy a bunch of (say) IBM for your clients and it drops, people might say "Man, what's wrong with IBM?" But if you go out and buy a bunch of WhoZat, Inc., and it drops, people will ask what's wrong with you.

My own biases make me think that if the chances for failure are high both ways, then maybe you should go ahead and strike out for the unknown territory, because the payoff is larger if you succeed. Selveraju himself has a much more cautious (and perhaps outright dispiriting) recommendation:

What then is Selveraju’s prescription for better business development practices? It might disappoint those who want pharma to be in the vanguard of innovation. He recommends incremental innovation – using FDA’s 505b2 pathway to develop products with already defined efficacy and safety – as well as biosimilars and re-purposing. Pharma also should focus on niche and specialty indications, and largely eliminate primary care products and the large commercial operations that come with them.

That's cranking up the dial even more on the Bernard Munos strategy. Munos also recommends getting out of the big, expensive areas and going more for niche and specialty ones, but mainly because of the cost of the clinical trials (and the validation step inherent in them). Alzheimer's, for example, scores big on innovation, but very, very poorly on the risk/cost ratio, since it's going to take you years and years in huge clinical trials to see if you've got something.

But that "develop products with already defined efficacy and safety" line is Selveraju’s own, and doesn't that sound like loads of fun? Coming up with new formulations and dosing schedules of existing drugs is what a 505(b)(2) strategy amounts to, and it brings up thoughts of alternative careers - going off to trucking school and learning to drive the big rigs, for example. Actually, as a drug-discovery chemist, that's probably what I'd end up doing if everyone switched to that plan, since you certainly don't need people like me if you're five-oh-five-bee-twoing.

Comments (21) + TrackBacks (0) | Category: Business and Markets | Clinical Trials | Regulatory Affairs


1. RB Woodweird on October 26, 2012 8:46 AM writes...

You can have endless meetings to exhort your employees to THINK OUTSIDE THE BOX, and you can hire consultants to come in and show videos designed to get everyone to THINK OUTSIDE THE BOX, and you can have retreats and team-building exercises to help everyone THINK OUTSIDE THE BOX, but when the money gets spent, it gets spent inside the box.

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2. Electrochemist on October 26, 2012 8:53 AM writes...

"...R&D productivity has been dropping and we’ve known that for a long time."

I would be interested in seeing an agnostic analysis quantifying how much of the perceived drop in Pharma R&D productivity is attributable to the chaos inflicted on R&D organizations by M&A activity over the past decade.

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3. lynn on October 26, 2012 8:57 AM writes...

Dispiriting indeed. Maybe it's the time for Pharma to get back into antibacterials - where, even though it's hard - and the regulatory path has been tough [although it's improving] - you can tell if you're efficacious preclinically. And we do need new anti-Gram-negative agents.

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4. simpl on October 26, 2012 9:00 AM writes...

"develop products with already defined efficacy and safety" would be generics - an okay business at the moment. In fact, there are several start-ups doing generics-plus, going for a new indication or route of administration, This is also a successful route, but such hard work that most of them find one to get cash flowing and then switch to looking for molecules.

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5. Jumbo on October 26, 2012 9:05 AM writes...

Another problem is the aversion to early programs. Yes, they are "riskier," but good negotiation should factor that into the cost basis. Most would agree you could get 5 (or 10!?) programs at or around IND for the cost of a late Ph2. And what are you getting for the latter? A guaranteed launch? Not likely. Especially since the clinical development has been in the hands of a shoestring budget clinical team who more than likely have sought out a very narrowly defined patient population to boost the outcome signal (and maybe gone to India or Russia for the trial - ask Medivation how that works!). Bottom line, I bet if you license say 5 IND-ready programs exploring novel MoAs, properly vetted (meaning using real scientists and allowing maybe wet-lab confirmation), you will have at least one and maybe two get to Ph3, whereas the stats say you are at less than 50/50 with your Ph2 to getting to launch. What are the relative economics? But if an early stage program fails "Whose fault is it?" whereas a late stage "Well thems the breaks!"

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6. Dick Turpin on October 26, 2012 9:09 AM writes...

Speaking of five-oh-five-bee-twoing:

The recommended approach has been adopted by pharma for a few years apparently.

In any case, it's unfair to base an argument only on failures like BMY/Inhibitex and ABT/Reata. For every two of those, you get a Roche/Plexxikon type of success.

Reversion to the mean, people, just be patient (sorry for the pun), and it'll all shake out in the end. Pharma management is not desperate - it's the shareholders who are, and it's more likely the latter are the true lemmings here.

Dick Turpin

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7. simpl (again) on October 26, 2012 9:15 AM writes...

At a pharma pensioner's lunch today we discussed what's next, since the lemming leads are fully valued i.e. too expensive. One hope was for big pharma carrion after jumping off the patent expiration cliff - more for residual compounds than for long-running products or key staff. Anyone smell anything?

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8. FWIW on October 26, 2012 9:26 AM writes...

Probably of note is that the median market cap of Selveraju's stock coverage universe is $210m, with the largest being Medivation at $3.9bn. What might work for the tiddlers might struggle to keep the lights on at Pfizer or GSK....

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9. luysii on October 26, 2012 10:08 AM writes...

Not to be repetitive, but the reason for all the sturm and drang in big (and small) pharma is that we are trying to use small molecules (e.g. drugs) to influence a system we only dimly understand (the cell and beyond that the organ and beyond that the organism).

For 25 examples of just how poor our understanding is see

and the posts therein

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10. Am I Lloyd peptide on October 26, 2012 10:36 AM writes...

9 luysii: That's just one reason, and I am not even sure it's the most important one. If people with vision really put their money where their mouth is we would be in a much better place. There have always been hard problems in science, but it takes people with long-term strategies and sustained leadership to solve them.

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11. John Wayne on October 26, 2012 12:55 PM writes...

RB Woodweird, your post made me laugh out loud; well done, sir. All satire aside, chemists who remember this trend will have better careers than those who keep their head in the sand.

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12. Kevin Gaffney on October 26, 2012 2:24 PM writes...

@Am I Lloyd peptide:
You are sounding a bit Romney with the "vision really put their money where their mouth is we would be in a much better place." What isn't being done that should be? What would you do if you were running things?

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13. Kevin Gaffney on October 26, 2012 2:26 PM writes...

@Am I Lloyd peptide:
You are sounding a bit Romney with the "vision really put their money where their mouth is we would be in a much better place." What isn't being done that should be? What would you do if you were running things, specifically? I am not trying to be critical. I just want learn from your experience.

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14. Am I Lloyd peptide on October 26, 2012 2:32 PM writes...

@13: Huh, Romney? For one thing, give the scientists enough funds and the freedom to pursue good research, the way Merck and the others did in the 80s and 90s. Let them publish, explore basic target biology. Don't give up on a target because it looks too hard. Keep the layers and bureaucracy to a minimum and put scientists and not MBAs or lawyers in charge of the science. Understand that doing good science takes time. It's not like WS was not impatient in the 80s, but these guys pulled it off by emphasizing the science.

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15. Kevin Gaffney on October 26, 2012 2:45 PM writes...

Romney = criticism without solution. Thanks for the specifics. I am a chem grad student and I truly appreciate the tremendous wealth of information all the commenters have to offer. Apologize for the naivety, but are there that many targets that were just abandoned so capriciously? Any examples that I could learn from?

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16. Chris Swain on October 26, 2012 2:59 PM writes...

Some of the targets may be hard but there are lots of patients who need cures.

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17. Alex on October 26, 2012 6:36 PM writes...


" Imagine [a model with] three classes of investor:

- an impatient short-term speculator , who follows the momentum of the herd, buying when prices are rising and selling when they fall;

- a patient long-term investor, who invests according to where prices are relative to their long-term fundamentals;

- an untested investor, who can mimic either the speculator or the long-term investor, but whose performance either way is assessed at frequent intervals by end-investors who withdraw or maintain funds accordingly.

Market prices in this model are buffeted
by two winds. Momentum-based speculators
cause deviations from fundamentals, while
long-term investors drive prices back
towards fundamentals. [...]

Under one equilibrium, patience wins the day.
When long-term investors start in the ascendency, prices tend to correct towards fundamentals. The performance of untested investors pursuing momentum strategies falters, while those pursuing long-term strategies flourish. The fraction of long-term investors rises. The self-correcting tendencies of market prices are thus reinforced, further supporting long-term investors. The patience gene thrives, the impatience gene dies.

But there is a second equilibrium where this
cycle operates in reverse gear. With a large fraction of momentum traders, prices deviate persistently from fundamentals. Among untested investors, momentum strategies now flourish while long-term fundamentalists fail. The speculative balance of investors rises, increasing the degree
of misalignment in prices. The patience gene falls into terminal decline. "

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18. Cellbio on October 26, 2012 11:14 PM writes...


I mostly agree with your prescription, but would point out the efforts to install efficient management (awful), and the rise of MBAs is a result of the vast piles of money flushed in the 80s and 90s. I started in industry then, and rode a great wave of discovery that swept through the industry and academia as the genome was being discovered, novel proteins being identified, targets being known, cloned and screened by growing collections. We published in the best journals, stuffed pipelines and filed INDs. Just had one little problem, we did not make back the investment, by a large margin.

I agree one needs a long term vision, but disagree that the vision is to just let the team do good science with good leadership providing a long time horizon.

In contrast, the teams do best, in my opinion, drawn from experience, with exacting demands for technical advancement of a commercial entity (drug, device, Dx) within a commercially viable time frame. The long term strategy needs to fit within the financial reality of the enterprise.

There are a lot of factors that are quite different today than the 80s and 90s, both generally (genome, sense of endless opportunities, venture capital, IPO markets) and specifically (financial state of a company, recent or pending patent expirations). I wish we could all go back to the lab with awesome haircuts and blast Indie rock while we solve today's problems, but it is a very different world.

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19. Hibob on October 27, 2012 4:59 PM writes...

@14 Loyd:
>For one thing, give the scientists enough funds
>Understand that doing good science takes time.

Sorry, could you answer again? You can have whatever you want so long as it does not involve additional time or money for pre-clinical research.

Kidding aside, shouldn't we be getting the NIH/academic side to work out the target biology? That seems to me to be the one valid part of the translational medicine emphasis NIH has been pushing lately.

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20. User on October 28, 2012 12:46 PM writes...

They are a bunch of greedy lemmings!

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21. Davetox on November 1, 2012 1:11 PM writes...

In his books, the Professor/writer/former Wall Street trader Nassim Taleb offers very insightful critiques of risk management & business. He notes the general feeling in business is "It's better to be wrong, than alone."

That is, to Derek's initial point, if everyone is buying IBM and IBM craters, the individuals who recommended IBM don't look bad. Similarly, if everyone in pharma is buying small companies and jumping into biosimiliars and these turn out to be bad investments, those that recommended this approach are insulated from criticism (everybody was doing it....).

In contrast, the few that buck these trends are easily criticized.

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