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Everyone agrees that by streamlining and downsizing, Big Pharma is taking a step in the right direction. What no one yet knows is if it's too little, too late. Or what "too little, too late" might look like. Or what else might work.
"I think it's probably one of the most hotly anticipated moments in recent biotech history," says Robert Scott in that endearing, slightly embarrassed tone common to scientists hyping their own products. Scott is executive vice president of R&D and chief medical officer at AtheroGenics, an Atlanta-based biotech, and his product, AGI-1067, is a novel anti-inflammatory that may or may not be on the verge of a medical breakthrough in the treatment of heart disease.
A South African expat, Scott is also a refugee from Big Pharma who left his high-profile perch as Pfizer's worldwide medical head of cardiovascular R&D to join AtheroGenics in 2002. To say that Scott leapt at the chance to steer AGI-1067 through an ambitious, multifaceted 6,000-patient Phase III trial dubbed ARISE—and, hopefully, on to blockbuster status—is putting it mildly. "It was an unprecedented research opportunity," he says. "Biotechs typically don't enter the cardio field because of the size and expense of the outcomes trials required. And here was a drug with the potential to be a true innovation against the disease that kills more people than any other."
Inevitably, Scott's move from the industry leader with close to 100,000 employees to a 100-person biotech is also a statement of sorts, though Scott is careful when choosing his words. "I would never have got a Phase III of this complexity done in this short a time frame at Pfizer," he says, and: "Here at AtheroGenics, the people at the meetings are the same people who are doing the work. Decisions get made quickly because everyone understands the mission." And: "As head of cardio at Pfizer, my job was no longer to be a great drug developer but to manage all the people who were doing the development and keep them competing."
Scott's frustration with Big Pharma is no different from what many industry leaders voice. The pharmaceutical empires that dominate the production of medicine, it is increasingly acknowledged, suffer from an advanced case of "too much"-ness: too big, too bureaucratic, too centralized, too much management, too much inefficiency, too much regulation, too many stakeholders involved in too many decisions resulting in too much caution.
Scott's data—unveiled at the American Academy of Cardiology's annual summit in New Orleans last month—were long the subject of enormous anticipation, and for tiny AtheroGenics, the meeting was a do-or-die moment. For Scott himself, though, it had an added poignancy. His former Pfizer colleagues were also on the bill, presenting final autopsy results on torcetrapib, another cardio novelty hyped as a medical breakthrough right up to the day it crashed and burned in Phase III last fall.
If AGI-1067 eventually emerges as a winner, it will mark the first time a biotech has revolutionized a market as massive as cardio. If it fails, well, it was a bold experiment, and science doesn't get much better than that. (As Pharm Exec went to press, the biotech announced that the ARISE data were decidedly mixed, falling short of the primary target—reducing "soft" events like stent procedures, bypass surgery, and chest pain—but hitting key "hard" marks by reducing heart attack, stroke, deaths, and diabetes-related symptoms.) Win or lose, though, no one will be writing the obituary of the biotech business model. By contrast, when Pfizer's cardio blockbuster-to-be hit the wall, it was almost universally viewed as the last nail in the coffin of the bigger-is-better business model, if not Big Pharma itself.
Still, rumors of Big Pharma's death are greatly exaggerated. Among many undeniably gloomy trends, one instructive red thread shines through. "Global demographics are totally in the industry's favor," says Carolyn Buck Luce, Ernst & Young's global pharmaceutical sector leader. "In both existing and emerging markets, there are more older people, more middle-class people, and, therefore, more middle-class diseases. That means the demand for healthcare, and in particular medicine, will continue to grow."
The problem, of course, is that giant companies are no longer growing—at least not fast enough for Wall Street. According to a new Accenture report, $1 trillion in enterprise value has vanished from the industry, thanks to investors' black view of future profitability. A Bain drug-economics model reveals that return on investment fell from 9 percent between 1995 and 2000 to less than 5 percent between 2000 and 2005. Meanwhile, the cost of taking a drug from discovery through launch rose 50 percent over the same period, to as much as $1.7 billion. Only one of every six new products is due to deliver returns above the cost of capital.
Industry members can recite in their sleep the reasons why. The major mergers of the past decade saw the consolidation of the big pharmas into Big Pharma, and Big Pharma has failed, in a Big Way, to sustain Big Profits. On paper, consolidation made sense, promising to yield advantages of scale—lower costs, more products, higher profits. But contrary to popular opinion, big pharmas were not simply lazing about, doing deals, and getting fat in the '90s. Firms were busy divesting themselves of extraneous plants, offices, R&D sites, low-end products, non-strategic divisions, and any other good and services unlikely to yield major margins. (They were also investing hand over fist in the sales-force arms race.) One unintended consequence was what economists call "the unraveling of the value chain." This collective casting off of opportunities stimulated the growth of a far field of commerce, from contract research, manufacturing, and sales organizations to specialty and generic drug makers. Many of these new, nimble companies were soon outperforming Big Pharma at their function of choice. The economic reality in which consolidation was designed to prosper no longer existed.
Derek Lowe, author of the In the Pipeline blog, caught the current zeitgeist perfectly in a post bemoaning the rumored merger of Bristol-Myers Squibb and Sanofi-Aventis: "Research productivity is the thing that doesn't scale in these mergers, and research productivity has to increase eventually, or the whole mighty monument is going to topple over. You have to have something to sell, and it should come from your own research. Going out and just buying the good stuff ends up raising its price. You can't buy your way out of trouble in research. More people and more money, after some point, can actually make things worse."
To their credit, pharma companies are doing more than buying their way out of trouble. They are also (finally) cutting sales forces and operations. As for more strategic transformations, the current trend among big pharmas is to try to streamline R&D to ramp up that elusive research productivity. GlaxoSmithKline pioneered this approach in 2003 with its far-flung seven Centers of Excellence for Drug Discovery (CEDDs), plus a virtual number eight to do deals outside the company. Roche, Merck, Novartis, and AstraZeneca have each, in their own way, followed suit. If Pfizer's recently announced restructuring—housing medical, marketing, and sales under four therapeutic areas—proved underwhelming to Wall Street, who can blame the analysts? The sight of this vast, innovative, and deeply troubled industry responding in follow-the-leader lockstep—and calling it a new strategy—is not especially inspiring.
Still, the consensus is that the firms are at least heading in the right direction. What no one yet knows is if it is too little, too late. Or what "too little, too late" might actually look like. Or what else might work. Given this sense of uncertainty, in which each step into the unknown may be a step off a cliff, Pharm Exec went looking for the boldest, riskiest, most radical blueprints for rebuilding the industry. The following two fit the bill and more.
Are the drug giants scientific organizations or sales machines? As Big Pharma downsizes to focus on core competencies, will each company eventually face a Solomon's choice between its R&D and its commercial sides? Will we see a Pfizer that is all sales force and no pipeline? A Merck focused exclusively on drug development?
In hopes of helping pharma escape such ultimatums, Omar Chane, vice president of life sciences at Capgemini, has developed a new model built around early commercialization in drug development. "We need to bridge the gap between R&D and the commercial side," he says. This is a common enough industry complaint, but Chane means nothing less than reforming the entire R&D process to incorporate the profound transformations in the marketplace. "A company needs to develop not only the right product but the right evidence to show its value to consumers, doctors, and especially third-party payers," he says. "And that process has to start at the preclinical phase."
In surveying or interviewing 200 industry execs on both sides of the medical/marketing equation, Chane and his colleagues discovered that while everyone agrees there is a serious problem, that is where the agreement ends. Most disturbing, he says, is that Big Pharma's attempt to increase R&D productivity by streamlining pipelines into therapeutic areas may be doomed to fail without a revolution in medical-marketing integration.
Chane sketches the big trends in the blockbuster model. About 15 years ago, he says, the drug-discovery engine began losing steam. With fewer breakthrough compounds, the industry focused on line extensions—and pumping up sales forces to differentiate products that were often essentially indistinguishable. Meantime, discovery techniques (screening, genomics, proteomics, molecular biology, etc.) matured to the point where there are now ample new candidates in Phase I.
What makes the status quo unsustainable, in his view, is not that pipelines are tapped out, but that late-stage development, marketing, and sales are too expensive—especially in light of the unprecedented pressures and competition that products now face. The old R&D-centric focus on delivering a single compound to the FDA doesn't cut it anymore. What the marketplace now demands is not just an approval letter but an entire portfolio of data to support and sustain its viability. Proving cost-effectiveness and real-world value is the name of the game. And increasingly the game is centered on the consumer, not the compound.
"Companies can no longer rely on bringing a product to market and then waiting several years for Phase IV to prove its value," he says. "The commercial perspective on access to the market must be introduced as soon as you think of a development plan for the compound." For example, since third-party payers are increasingly running comparative trials and health-outcomes studies, it pays for drug makers to do their own version first, as a component of Phase III.
According to Chane, development is the weak link in the decade-long lab-to-pharmacy adventure, and its massive inefficiencies will only increase with the in-licensing of products from outside biotechs. No pharma firm is still fat enough to swallow a $500 million investment in a Phase III flop or to strangle a promising compound prematurely due to low commercial valuation. If faster failing is the mantra, then a model built around early commercialization is the best way to master it. "A more systematic approach that integrates R&D and commercial must replace scientists' traditional reliance on serendipity," says Chane. "That's how you get more products out of preclinical and better products into Phase III."
Another reason Chane is skeptical about the therapeutic-area trend is that it smacks of tactical opportunism at the expense of long-term strategy—a holdover from the blockbuster model. Some companies are lining up to crow about their new oncology franchises when in reality all they have is a single viable product. "What I want to ask is: Is it a real therapeutic area or a virtual one?" Chane says. "If you want to be a player in a market, you need to say what kind of products you are bringing—what novel approaches, what technical innovations, what targets, what your goals are over many years. This becomes the umbrella that informs all decisions and processes."
The good news is that pharma's discovery engine is pumping out promising targets. The bad news is that the escalating economic squeeze makes it even more essential to stake a claim in a therapeutic area of choice. And that will tempt researchers to speed compounds through Phase I and II—garnering the minimum amount of data—to get to Phase III as fast as possible. Chane says that's backward. "Because there are so many potential targets, because the commercial picture is so complex, and because the price of late failure is so high," he says, "companies should be putting a lot more time and effort into Phase II."
He argues that "by running more early trials, such as dosing, therapeutic mechanisms, and multiple proofs of concept"—and knowing as much as possible about the compound—"companies will be able not only to control risk better but, more important, to build differentiation into the product and its value." A drug that comes to market with data to answer real-world cost-effectiveness questions should require much less sales muscle. "Phase III will become almost mechanical, with a higher bar for success but fewer surprises because so much data has already been generated."
Chane acknowledges that scientists have a deep-rooted—and well-founded—resistance to commercial influence. What the R&Ders understandably object to is the imposition of marketing tactics on the scientific method. For Chane's early-commercialization model to work, it requires a whole new breed of marketer for R&D to partner with. "You don't want sales reps or brand managers who have been promoted out of the field to be doing this work," he says. "The right people are MDs and maybe RNs—people from the medical affairs department who know both the science of the drug and the standards of care around the disease."
What if today's spiraling costs and plummeting productivity are symptoms of a breakdown beyond the business model? What if the problem lies not in pharma's value chain but in its values? Could the industry's instinct for self-protection and secrecy have resulted in practices and mind-sets that are no longer functional? Could its obsession with competition have closed down its capacity to compete effectively?
"Everyone agrees that when you introduce competition, quality goes up, costs go down, and customer satisfaction rises," says Bernard Munos, an advisor in corporate strategy at Eli Lilly. "And nothing places you in competition with the skills and capabilities that exist in the rest of the world like the open source model. Pharma might counter that, with each big company managing hundreds of alliances, its R&D process is already open to external innovation. This is true—yet what goes on inside is visible to the company at the center, but out-of-bounds to everyone else. Open-source changes that radically."
According to Munos, business models, like people, are not forever. They are born, they prosper, and they pass away, and the symptoms of decay tend to be similar from industry to industry: sales growth flattens, product lifecycles shorten, fierce competition causes periods of exclusivity to collapse along with prices. True innovation, demanding too dear an investment of time and money, ends. And when innovation dies, the industry goes with it.
Creating a new model from scratch, rather than merely tweaking the old, is what Munos has in mind. "I started with the question, Where does innovation come from?" he says. "But when I asked around pharma, none of these very smart people seemed to know. For an industry that spends so much on innovation, that was disturbing."Munos researched the history of biomedical breakthroughs and concluded that innovation derives from diversity—not what the buzzword typically means, he is quick to clarify, "but everything else—differences in styles of problem solving, professional training, specialization, language, all the way to how your brain is wired."
The research institutes with the highest number of Nobel Prizes—Rockefeller University, Cal Tech, the Pasteur Institute—also have the most diverse group of scientists working on the same problem. "The bottom line is that most conceptual or theoretical problems in any field that, once solved, would lead to a breakthrough have been solved already in another field," Munos says. Maximizing the diversity of problem-solving techniques can increase the speed of innovation. Needless to say, this contrasts starkly with the traditional pharma model, in which chemists, biologists, toxocologists—not to mention marketers—work in separate silos, cut off from competing approaches.
The search for diversity-driving models led Munos to the freshly minted concept of"open source," a collaborative process born in the software industry: A program with basic functionalities is posted on a Web site—"and then you invite the world to join in, contributing their own expertise and enhancements," Munos says. "You do not control who works on it or what they do. You only control what gets included in the final program." Wikipedia, the Web-based encyclopedia written (and revised in a never-ending fashion) by millions of volunteers, is an example.
In an effort to solve pharma's high costs/low productivity conundrum, Munos was inspired to apply open source to the discovery stage of R&D. "Tapping the insights and skills of clever scientists around the world, including those outside of traditional drug R&D—physicists, mathematicians, artificial-intelligence specialists, economists—and allowing them to cross-pollinate over the Internet, may generate breakthroughs," he says. "You post research challenges viewed as intractable and offer a bounty to the person who can solve it. Intellectual property is not an issue, because most ideas discussed on open source do not meet the legal requirements of innovation as defined by patent law." Commercialization comes after this global "scientific conversation."
Outsourcing, in Munos' radical redesign, is to drug development what open-sourcing is to drug discovery. "At any moment there is lots of infrastructure around the world sitting idle that can do clinical trials now—rather than two years from now," he says. Outsourcing is one solution to the blockbuster model's bedeviled cost structure—and the fact that even the biggest companies can no longer pay $1.7 billion to make a new drug. "Clinical research in the United States is famously wasteful," Munos says. "It's run by a legacy system of provisions that once served us but no longer provide security, quality, or efficiency."
But what about the values of quality and safety essential to pharma's mission? "Open-source organizations use reputation, due diligence, and audits as a means of preventing or uncovering problems," says Munos. "In the future, codes of good practice or even ISO standards could be developed to safeguard the process."
In fact, the open source/outsource pharma model already exists among a new breed of public-private partnerships (PPPs). Nonprofit initiatives such as the Drugs for Neglected Diseases Initiative are "systems cobbled together as cheaply as possible to help people who are desperate," says Munos. "They put out an open call for scientists to submit research projects for malaria, HIV, TB. They assemble a scientific advisory board to decide which merit funding. And then they outsource the work for development through a network of hundreds of researchers and doctors."
What does all this bleeding-heart stuff have to do with business? According to Munos, with spending levels that average $15 million a year—chump change for a drug company—well-run PPPs have produced a robust portfolio of compounds moving from discovery to Phase III in less than five years.
But Eli Lilly doesn't just bankroll Munos to sit and spin beautiful theories. The Indianapolis-based company has backed a number of Web-based open-source initiatives, including InnoCentive, which matches scientists and R&D projects; Collaborative Drug Discovery, where researchers can store and share data; and Chorus, which runs outsourcing through Phase II. "The implications are still being sorted out," Munos says. "But they imply profound changes in culture, work processes, leadership, and compensation."
As different as Chane's and Munos's models are, both ask pharma to Think Big. Ironically, that may be what has been most glaringly absent from Big Pharma of late—and not just for research scientists like Robert Scott. When Ernst & Young's Carolyn Buck Luce points to the rise of a global middle-class as a telltale thumbs-up for pharma's future, she is quick to caution against complacency.
Buck Luce recalls hosting a roundtable of industry leaders last December to discuss pharma's changing landscape over the next five years. One drug-company board member discussed having once coined the term "financial services industry" when it was time to consolidate the crazy-quilt range of banks, insurance firms, credit-card companies, hedge funds, and such that comprises the nation's largest industry. This sparked the question, What will the pharmaceutical industry be called in 10 or 20 years?
"There was no unified Big Pharma answer," Luce says. "The heads of different companies each have a different response. Will it still be 'the pharmaceutical manufacturers industry'? Or 'the health and wellness delivery industry'? Or the 'lowering the cost of diseases industry'? Where a company leader placed the emphasis said a lot about how the company would meet the challenges and changes of the future."
Of course, there is no "right" answer because no one can read the future. But how a drug company answers that question—essentially, how its members work together to evolve its strategy, take risks, and seize opportunities—will determine which ones will still be here when the future arrives.