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Backwards Influence

By Michael A. Greeley

June 14, 2006 | Bio-IT companies exploit pharma executives’ anxiety about the declining productivity of their R&D investments and the withering of their new product pipelines. But there are other market forces at work that may also be affecting how pharma executives think about the bets they are making on new compounds. A number of software tools have been developed to drive ultimate discovery productivity once a given compound has been approved.

An increasingly interesting discussion topic involves market forces that may influence R&D investments and ultimately the bio-IT tools required to develop new products. Arguably the field of “cost-effectiveness” analysis and the explosion of direct-to-consumer (DTC) advertising are having a meaningful impact in setting these priorities.

“Pharma just cannot simply compete on clinical benefits alone, and with even more sophisticated consumers and managed care plans, pharmaco-economic analytical models will increasingly play a role in drug discovery,” observes Peter Neumann, director, Center for the Evaluation of Value and Risk in Health, at Tufts University in Boston. The emerging debate centers on the desire to improve value to the patient with lowering overall healthcare costs. This issue is even more important as pharmacy benefit managers increasingly adopt evidenced-base studies and rely on value-based formularies.

Biotech companies must think downstream as they consider what drugs to develop. Many companies are introducing cost-effectiveness analysis earlier in the discovery process. Traditionally this work is done in Phase IV development or post-approval, but now “executives are studying economic endpoints in Phases I through III and calculating the cost per unit of health benefit realized,” states Neumann.

The benefits of this thinking are still controversial. Arguably, there is a more efficient allocation of healthcare resources as the cost and benefits are better understood. With a more efficient allocation one could argue that this will support greater and more relevant innovation. But do the overall discovery costs go down?

Economists are increasingly debating the overall cost impact. These analyses may further delay innovation and add an incremental cost to the overall discovery process. While the recently enacted Medicare Modernization Act contemplates additional cost-effectiveness analysis, regulatory agencies are not yet requiring them. But is it appropriate for pharmacy plans and formulary guidelines to have any impact on which drugs enter into the discovery pipeline?

Ad Explosion
The other development that will influence the drug discovery pipeline over the next few years is the explosion of DTC advertising. “There has been a tremendous shift in consumer leverage with the education of the public through DTC, and this will drive prescription volume, which logically will influence discovery,” states Chris McKown, president of Health Dialog, a Boston-based provider of consumer healthcare information. “Arguably, the DTC advertising phenomenon over time will shift R&D dollars,” McKown continues, “but does the consumer’s increased involvement correlate to improved consumer utilities?”

The DTC phenomenon has been controversial from the outset. Rigorous guidelines are in place to monitor the accuracy of these promotions. McKown observes that “there is a greater responsibility that comes with influencing parties with relatively low sophistication like the consumer.” Notwithstanding the controversy, there has been a lot of startup activity around companies that promise to improve the productivity of marketing spend and detailing activities.

So why is this relevant to the venture investor? Any tool that drives productivity in the R&D spend is exciting and augurs well for other bio-IT tools vendors, many of which have struggled to date. Evidence is mounting that pharma continues to incorporate software tools in how they conceive their discovery pipelines and increasingly are finding value in conducting detailed analytics, be it molecular pathway modeling to pharmaco-economic analyses. As executives come to appreciate that their drug discovery activity is a critical asset of their companies, there is a greater acceptance that these “assets” need to be managed more intelligently or effectively using many types of software tools.

Michael A. Greeley is managing general partner of IDG Ventures. E-mail:


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