Innovation: The Moneyball Test

Jan 21, 2014
By Pharmaceutical Executive Editors

In 2012, the U.S. pharmaceutical industry enjoyed a benchmark year. According to Pharm Exec's "Pharma 50 Survey," it was the first year in a half-century in which sales in the key U.S. market actually declined. Much of this was the result of the loss of revenues.

The root problem is not expiring patents—which, though a distressing financial event, is relatively easy to forecast and model. What's devastating is the lack of new products in the pipeline to replace them. One study claims that for each dollar being lost in major-drug patent expiries, the revenue from new products is forecast to be only 26 cents.

The good news is that, in terms of raw numbers, the industry's rate of new molecular entities approved seems once again on the upswing. The FDA approved 39 NMEs in 2012, the most since 1999 and is on course to achieve the same results for 2013. Twenty of these were 'first in class', each representing a new and unique mechanism for treating a medical condition. And many were in high-value target areas like oncology.

The bad news is this increased output comes at ever greater cost. The productivity of US pharma R&D — as measured by new drugs approved per billion inflation-adjusted dollars of R&D spending — has been on a downward spiral since at least the early 1950s, when it peaked at 64 new drugs. By 2010 that $1 billion in R&D produced something less than ½ a drug — a loss of over 99% in productivity. Seen the other way around, it now costs an average of about $1.8 billion in R&D to launch a new drug.

Analysts at researchers Sanford C. Bernstein have dubbed this "Eroom's Law," since it seems exactly the reverse of the productivity gains consistently seen in the computer chip manufacturing industry ("Moore's Law".) Though the metric blips up and down, over a 60-year period the trend line moves consistently in one direction: down.

These facts are widely known and discussed, particularly on Wall Street. There is a variety of causal factors noted, both within and outside the industry. But, as is often the case with complex data, the interpretations vary widely. The major scenarios being discussed by industry leaders seem to be the following:

"It's not our fault." In this interpretation, there are externalities not directly controllable by the industry, for example the greater regulatory scrutiny during the filing and review process, best exemplified by the Vioxx withdrawal crisis. Others claim that the lower returns to R&D come from the fact that the industry's past spectacular successes (for example, in controlling cardiovascular disease) have left progressively fewer high-value areas in which to develop products. "Today's blockbuster is tomorrow's generic", the saying goes.

"That's the way we were, but we have already turned the corner." Dr. Janet Woodcock of the FDA recently testified before Congress that the FDA is "seeing a lot of innovation, much more than in recent memory." McKinsey predicts that NMEs will exceed 30 per year through 2015, and will provide 9% of global industry sales (up from 7% in 2011.) Skeptics point out revenues from new drugs have been notoriously difficult to forecast.

"We are damaged, but not broken." In this view, incremental fixes can and will get the process back on target. Many claim that the industry has successfully shifted its emphasis away from small molecules toward biologics and specialty drugs. Still others say the industry has moved away from a 'fortress R&D' approach toward an open innovation model that partners with academics, smaller companies, regulators, and even direct rivals.

"The industry's value model is broken." The 'value engine' of novel branded drugs that essentially funds discovery, development, and shareholder returns is significantly impaired. Some 80% of prescriptions are now filled generically in the US, a metric that is expected to keep rising. This puts even more pressure on the pipeline, where the seemingly intractable negative long-term innovation productivity trend (Eroom's Law) suggests that incremental fixes to the product innovation process alone will not be enough.

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