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There's a lot of one kind, but not enough of another in pharma land

By Malorye Branca

December 15, 2002 | Too many new technologies and too few new drugs — that sums up the state of pharmaceutical R&D.

The same dreaded graphic is used repeatedly to tell the bleak story: R&D spending goes steadily up while new-drug launches go down. Even allowing for complicating factors such as the lengthy product development cycle, the problematic trend is difficult to ignore, and solutions seem to be in short supply.

"The bigger pharma companies get, the more bureaucracy there is, and the level of truly creative science and risk-taking goes down." Jim Healy, Sofinnova Ventures Inc. 
It's not just the small number of new drugs that's a problem, but also their lack of "newness." New, distinct drugs with clear benefits are rare, concludes a recent report from the National Institute for Health Care Management (NIHCM). Most pharmas are relying on products that offer only incremental improvements and launching mainly modified versions of older drugs.

The crux of the matter seems to be this: Creating and harnessing innovation in the pharmaceutical and biotech industries has proven to be far more expensive and difficult than anyone expected.

But disappointment with technologies is not new in this industry. What is new is the intense financial pressure on both big and small companies.

"Make no mistake, biotech's health still depends on that of Big Pharma, the equity markets in general, the health of the economy. When money is tight, biotech feels the sting," said venture capitalist Steven Burrill, CEO of San Francisco-based Burrill & Co., in a recent media release from his company.

Meanwhile, many experts say that the current backlash against technology will only exacerbate the drug drought. What's really needed, they argue, is better management of technological innovation.

From Splurge to Merge 
When genomics became hot around the late '90s, speedier drug discovery and development was one of its most commonly cited advantages. "Pharma has invested heavily in genomics," says John Zawad, vice president of technology licensing and alliances at Aventis Pharmaceuticals Inc., headquartered in Bridgewater, N.J. "But so far, the returns have been slim."

What happened? Many blame the technology developers and investors who used the "essential completion" of the human genome as an excuse to pump vast sums of money into hundreds of immature technologies and poorly thought-out businesses.

In response, there has been a massive downturn in new-technology spending and a return to the old way of doing things. Pfizer Inc.'s recent $60-billion acquisition of Pharmacia Corp., for example, is widely regarded as a move to create the world's largest sales force rather than a strategic acquisition of long-term R&D capability. Biotechs, the source of most innovation, are suddenly on their own.

R&D spending is increasing as the number of new chemical entities (NMEs) launched each year goes down, leaving researchers struggling to address the disparity between spending and productivity. "Gone are the days when people can expect big pharmaceutical companies to validate their technologies for them," Zawad says. Many deals involve no cash, and getting a deal at all involves "a lot more meetings, even if you have a valuable technology," says Malcolm Weir, CEO of London-based Inpharmatica Ltd.

"There is a perception that genomics has not delivered, so they are going back to the old way of doing things, moving farther away from pure research to marketing," says Christoph Hergersberg, chief scientific officer for startup Xantos Biomedicine AG in Martinsried, Germany.

It's not clear how far the pharma pendulum will swing toward marketing, but it seems unlikely any major company would completely give up R&D. "That would make them too vulnerable," says Weir, who was formerly divisional director of the molecular sciences division at Glaxo Wellcome (now GlaxoSmithKline, or GSK). "Once you do that, you lose your edge and your ability to assess what's good," Zawad says. Still, this possibility seems more likely now.

Some of the biggest companies are still counting on internal R&D for success. "The key to sustainable growth is innovation," says Clifford C. Kalb, senior director of strategic business at Merck & Co. As evidence that Merck "walks the walk," he points out that of the 18 products that have received fast-track FDA reviews in the past five years, three have been from Merck.

But much of Big Pharma is counting on biotech for more drug discovery. For that to happen, pharma will have to help keep the industry fruitful by accelerating its rate of biotech deal-making. The painful truth is that the number of biotech companies, particularly genomics companies, that can survive long enough to generate the products pharma needs is shrinking. That matters to everyone because no matter how big and powerful pharmas' marketing engines become, they can't turn profits without products.

Breaking Away 
No one denies that large companies face unique problems in managing innovation. "There is a push-pull between [organization] size and the level of innovation," says Jim Healy, managing director of Sofinnova Ventures Inc., based in San Francisco. "The bigger pharma companies get, the more bureaucracy there is, and the level of truly creative science and risk-taking goes down."

It's quite common, particularly after mergers, for large pharmaceutical companies to discard development projects. Some projects are failures worthy of dumping, but others are just victims of bad luck, having fallen outside the parent company's business mandate. Healy has made a living turning many such projects into spinoffs, including InterMune Inc. from Genentech Inc., Actelion Ltd. out of Hoffmann-La Roche Inc. (which is now part of Roche Group), and Seattle Genetics Inc. out of Bristol-Myers Squibb — all of which he says gave Sofinnova "considerable return on our investment."

"I find folks who have invented interesting technologies that are poised for growth but [who] are at companies that deem the markets they offer to be too small, or outside their focus," Healy says. "It's innovation lying fallow on the shelf."

In 1997, Bruno Tocqué and two colleagues left Rhône-Poulenc Rorer (now part of Aventis Pharma) to found genomic startup ExonHit Therapeutics SA, headquartered in Paris. ExonHit uses a novel platform based on alternative gene splicing to find and validate drug targets. Asked whether it was easier to pursue his idea in a small startup than in a major pharmaceutical company, Tocqué is succinct: "Here, I was actually able to do it."

GlaxoSmithKline's CellMap project is an unusual case in which a division was launched expressly to become a spinoff. By establishing and then selling the unit, GSK was able to capture and capitalize on an exciting new technology without making a long-term commitment.

"The idea was to super-engineer and accelerate the technology for studying how proteins interact in cells using mass spectrometry," says Weir, who spearheaded the project with Walter Blackstock. "It was thought this might be one model [for managing innovation]," says Blackstock. "Sort of a 'distributed' corporation." Interestingly, in January of this year, Tadataka Yamada, GSK's head of R&D, was quoted in The Financial Times as saying, "We need to be big and small at the same time."

When CellMap was acquired by Cellzome AG in September 2001, Blackstock left GlaxoSmith-Kline with the division. He is now a founder of Cellzome's London-based center, and vice president of technology. GSK retains rights to some of the technology and has a minority financial interest in Cellzome.

"In a smaller company, you find out more quickly if your idea will fly or die," Blackstock says. New ideas naturally require more "selling" in a larger company, since more people need to sign off on them. Such processes sometimes spin out of control, and it can be difficult even for insiders to know to whom they must sell. "You also have to have an internal champion for the idea to succeed," Blackstock says, noting that Weir took on that role for the CellMap project.

Cellzome made a splash early this year by publishing a groundbreaking, large-scale study of protein-protein interactions in yeast (see "Prime Time for Proteomics," March Bio·IT World, page 24). Unfortunately, Cellzome released that study just as the economic tide was turning, and there was suddenly intense pressure from the market to see clear commercial benefits from any new approach.

The company is now hunkered down in an effort to show how it will use the platform to do better drug discovery and development. As a small company, the chief challenge it faces now is getting through this "proof-of-concept" period.

Managing Innovation 
Big Pharma desperately needs more products. The bigger these companies become, the more drugs they need to launch, no matter how cost-effectively they manage their organizations. And more mergers won't help.

"I do not believe that financial resources are the critical ingredient in making you successful or not in science," said Daniel Vasella, CEO of Novartis AG, based in Basel, Switzerland, to The Wall Street Journal after the Pfizer/Pharmacia acquisition. "I believe that [large] size makes it a little more difficult."

Most large pharmas recognize the problem and are trying to solve it. In a recent review (Drug Discovery Today, Sept. 15, 2002), Pfizer Sandwich Laboratories' Esther F. Schmid, strategic planner in discovery, and Dennis A. Smith, executive director of drug metabolism, ask the question, "Should scientific innovation be managed?". While conceding that "the traditional project management approach is unlikely to meet a warm reception [with scientists]," they concluded that "the world of drug discovery has become a managed process."

Big pharmas must delicately balance adherence to strict processes that generate cost-saving efficiencies against the need for flexibility to incorporate new ideas. "Science and discovery throw things up at you when you least expect it," Weir says. "You've got to be able to react to that." One option for big companies is to go back and "cut the R&D operations into smaller chunks," he says. The challenge is to ensure that they don't become isolated islands within the organization.

"Being able to innovate is largely a matter of luck," Zawad says. "But success will come by integrating these innovations."

"Rather than organizations merely getting larger, they will have to capitalize on their mass of technology and the information it generates." Malcolm Weir, Inpharmatica Ltd. 
Hergersberg has wrestled with technology in both little and big pharmas (at Boehringer Mannheim and then at Roche, after it acquired Boehringer). He says the key is "having a flexible scheme, where new ideas can pop into a development process at any stage." The matrix organizational structure typical of Big Pharma doesn't readily allow this, but it can be engineered to do so, he maintains.

With big deals scarce, small companies are collaborating more among themselves. Some industry insiders, including Zawad and Hergersberg, believe biotechs will start to partner and even band together to create novel technology platforms and novel organizational structures.

Last August, it was rumored that several of Britain's biggest biotechnology companies, including Xenova Group PLC, British Biotech PLC, and proteomics player Oxford GlycoSciences PLC (OGS), were holding secret talks to create a cancer company able to compete at the global level. An OGS spokesperson vehemently denied the rumor, pointing out the difficulty of managing such a complex deal, but confirmed that the company is interested in making deals and has been in discussion with some oncology concerns.

Some small companies may actually have an edge in managing R&D innovation because their organizational structures are deliberately designed to overcome the deficiencies that plague larger firms.

In particular, companies run by pharma alumni, including Inpharmatica, ExonHit, and Xantos, are trying to establish a single, rigorous process that connects biology, chemistry, and development, and that allows them to tap into different technologies wherever they are needed. This, they suggest, is the wave of the future. "Rather than organizations merely getting larger, they will have to capitalize on their mass of technology and the information it generates," Weir says.

Accomplishing this is more difficult for Big Pharma, but it must try nonetheless.

"We are at the stage of pulling together all those things — genomics, high-throughput screening, combinatorial chemistry, etc. — and learning how to apply them in an effective and innovative way for individual projects," Weir says.

If Weir's right, this won't be just another wave — it will be a sea change, encompassing all the modern technologies and truly revolutionizing the way companies find and develop new drugs. That would make everyone happy. As Merck's Kalb says, "If we develop breakthrough drugs and focus on the patient, the profits will follow." *


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