Friday, February 19, 2010

Across-the-board R&D cuts will not solve the pharmaceutical industry’s productivity crisis

The big topic in pharmaceutical news lately has been layoffs, including layoffs due to major cuts in R&D. For example, the popular pharmaceutical industry blog “In the Pipeline” has had one story after another, in late 2009 and early 2010, about R&D cutbacks, including many comments from people affected by the reductions in staff. Such companies as Pfizer, GlaxoSmithKline (GSK), AstraZeneca, Sanofi-Aventis, and most recently Merck have been affected.

Layoffs, and cuts in R&D, were expected in companies that underwent big mergers in 2009, especially Pfizer/Wyeth and Merck/Schering-Plough. Much of the value of large-scale mergers to shareholders is realized by cost savings due to restructurings (especially elimination of redundancies between the two merging companies) and reductions in staff.

The more fundamental reason that motivates large pharmaceutical companies to enter into big mergers and/or to undertake restructurings that include reductions in R&D programs and in staff is the need to deal with the combination of major challenges facing the industry, which some experts have called a “perfect storm”. The most important of these challenges are low R&D productivity, increasing R&D costs, and expirations of patents of blockbuster drugs.

From the point of view of a financial analyst, the move to cut internal pharmaceutical R&D is a matter of “sheer economics”. Putting more and more money into R&D without any increase in numbers of high-valued new drugs, especially in the face of patent expiries, is a losing proposition. Why not then cut internal R&D, and concentrate on in-licensing pipeline drugs from biotech companies? In-licensed drugs, and drugs developed by smaller pharmaceutical and biotech companies, have shown a higher rate of success in development (measured in terms of percentage of drugs entering clinical trials that reach the market) than drugs developed internally by large pharmaceutical companies.

The problem with this line of reasoning is that we’ve been here before. Big Pharma went through a previous wave of large-scale mergers and restructurings in the late 1990s and early 2000s. These megamergers and restructurings enabled the surviving companies to realize significant cost savings from staff reductions, and in some cases enabled them to acquire blockbuster drugs (notably Pfizer’s acquisitions of Lipitor [atorvastatin] and Celebrex [celecoxib]). However, these gains were temporary, since the industry faced an even worse set of threats in the 2008-2010 period than it faced in 1997-2003. And the disruptions in R&D staffs and programs caused by these moves contributed to a reduction of the capacity of merged or restructured companies to carry out productive R&D.

Moreover, the move toward a strategy of depending more on in-licensing of pipeline drugs from smaller companies (or acquiring the companies outright) comes at a very bad time. The financial crisis of 2008-2009 resulted in a virtual drying up of venture capital investment in private biotech companies (especially start-ups), and in the inability of development stage private and public biotech companies to raise funds in the capital markets. In the resulting cash crunch, many biotech companies ceased work on all but their most advanced pipeline drugs, and laid off large numbers of their researchers.

For example, here in the Boston area, Dyax, then a development-stage public company, adopted cash-conserving measures in 2009. It stopped early-stage research on internal (as opposed to partnered) drug candidates, and laid off 36% of its staff. It also sold its shares at low prices in the public markets to raise what cash it could. On December 1, 2009, the FDA approved Dyax’ lead drug, the plasma kallikrein inhibitor ecallantide (Kalbitor) for the treatment of hereditary edema, a rare genetic disorder. The FDA approval process had not been easy (for example, Dyax received a “complete response” letter from the FDA last year). Other development stage biotech companies have not been as fortunate, and venture capital for start-up companies (such as spin-offs of university laboratories) has been very hard to come by.

Unless large pharmaceutical companies are prepared to serve as venture capitalists on a much larger scale than they are currently doing, and to invest in earlier-stage, riskier companies and drug candidates, they may be competing for fewer and fewer good in-licensing opportunities. This will result in bidding up the prices for what opportunities exist, and a dearth of drug candidates for pharmaceutical companies to develop. The venture capital market for early-stage biotechs appears to be easing somewhat, and a few companies (some of which have been discussed in this blog) have managed to obtain funding. However, much uncertainty remains.

Moreover, large pharmaceutical companies will need to have internal researchers (or consultants) who are competent to evaluate in-licensing candidates, and internal researchers who can collaborate with their smaller licensing partners. One critical area for such collaboration is translational medicine, in order to predict the outcomes of treatment with in-licensed drug candidates and to increase the probability of clinical success.

The real issue is that the pharmaceutical industry cannot use mergers, restructurings, across-the-board R&D cuts, and layoffs to solve its productivity crisis, except in the short term. It has to work on the actual problem—how to increase the productivity of R&D.

We recently authored two publications that analyzed the nature of the R&D productivity problem, and which outlined solutions. These are an article, “Overcoming Phase II Attrition Problem”, published in Genetic Engineering News (GEN) and available free on our website, and a book-length report, Approaches to Reducing Phase II Attrition, available from Cambridge Healthtech Institute (CHI). In summary, we proposed a two-part strategy to increase rate of success in drug development:
  • Identify those targets and drugs that have the best chance of success in the discovery phase, mainly via focusing on biology-driven drug discovery (i.e., strategies based on understanding of disease mechanisms).
  • Employ early stage proof-of-concept (POC) clinical trials to weed out drugs and targets that do not achieve POC.
With respect to this strategy, it is interesting that two large pharmaceutical companies, the Swiss pharmaceutical giants Novartis and Roche, are not emphasizing layoffs and R&D cuts. Both have biology-driven R&D strategies.

In a recent Reuters article entitled “Killing research no certain cure for Big Pharma”, Novartis’ chairman and former CEO Daniel Vasella is quoted as saying, "You can improve margin up to self-dissolution. You save and you save and you cut costs and cut costs -- and then you have no sales anymore and then you have a collapse."

We have discussed Novartis’ R&D strategy in several articles on this blog, notably our July 20, 2009 article “Biology-driven drug discovery: a ‘disruptive innovation’?”

Roche came by its biology-driven R&D strategy via its 2009 acquisition of Genentech. As we also noted in our July 20 blog post, Roche has been integrating itself with Genentech to become essentially a large biotech company.

In striking contrast to his colleagues in most Big Pharma companies, Roche’s CEO Severin Schwan is optimistic about the future of drug discovery and development in the pharmaceutical industry. He believes that the industry is “poised for a quantum leap into a golden age”, because of continuing discoveries in disease pathways that will enable researchers to design targeted drugs to address unmet medical needs. Roche has no plans to diversify into generics, over-the-counter drugs, or vaccines, as other Big Pharmas have been doing in order to mitigate the lack of high-valued new products coming from their R&D operations.

In addition to overall reductions in R&D and shifting toward greater reliance on in-licensing of drugs, some Big Pharma companies have been taking other, more selective measures in their attempts to cut R&D costs and improve R&D performance. One approach has been to get out of therapeutic areas that are no longer productive for a particular company, and to focus on more promising areas. For example, GSK is eliminating its R&D in depression, anxiety, and pain, and focusing its neuroscience efforts on neurodegenerative diseases such as Alzheimer’s and Parkinson’s disease. It is also building a new R&D unit that will focus on rare diseases. These seem to be sensible moves.

With respect to rare diseases, in addition to adopting the “Genzyme strategy” (which seems to be GSK’s main goal), some rare diseases share pathways with more common diseases. As discussed in our July 20 blog post, Novartis has been developing drugs that address these common pathways, beginning with the rare disease and then expanding to the more common diseases.

Another strategic move by several Big Pharma companies is to shift away from small-molecule drugs toward a greater emphasis on biologics. Biologics have shown a higher rate of success in development than small-molecule drugs. However, kinase inhibitors also have shown a higher success rate than other oncology agents that have entered clinical trials in the last 15 years. As with biologics, kinase inhibitors have been developed via biology-driven drug discovery, resulting in much stronger clinical hypotheses for the mechanisms of action of these drugs. Might not shifting toward biology-driven R&D strategies, rather than just shifting toward biologics, enable companies to improve their R&D productivity, both for small-molecule and large-molecule drugs?

Shifting toward biology-driven R&D strategies should also enable companies to reduce R&D costs, by reducing reliance on the costly and unproductive technology-driven “industrialized drug discovery” approach. However, unlike across-the-board R&D cuts, this more selective approach should result in improved R&D productivity.

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