Pharma, Reinvent Thyself

Assertions that the pharmaceutical industry’s business model is broken are not new (e.g., “Rebuilding Big Pharma’s Business Model” by Bain and Co. smarties published in In Vivo, Bain article 2003) and certainly it is well established that productivity (new drugs launched) has dropped off significantly while costs have increased (e.g., Munos 2010 which I cited in my last post).  Various cures have been recommended, depending on the services the author, usually a management consultant, is selling, but  they rarely include developing affordable drugs for high-volume, low-margin markets (i.e., everywhere except the US) which is a theme I’ve sounded in several of my posts (e.g., 11/20/09,  8/12/10).

Hence my interest when I read a quote of an author of a report on the health of the biotech industry published this week by the advisory branch of the eminent accounting firm of PwC (the new brand name for PricewaterhouseCoopers, after Waterhouse was minimized, but he didn’t complain having died in 1917).  In a press release on the report, called “Biotech Reinvented” (PwC report), Steve Arlington, Global Pharmaceutical and Life Sciences Industry Advisory Services Leader, said:  “Hard-pressed governments are now struggling to meet the healthcare demands of growing populations and their changing demographics. More effective and more economical medicines are now more important than ever and only when the industry can work together will it be on track to meeting the demands of today’s society.”  (PwC press release)  I liked the “more economical” part, thinking it meant lower-priced, but was disappointed when I read the report.

In addition to lamenting the main problems of the biopharma industry, the authors make several general points:

  • the difference between biotech and big pharma companies is blurring with biotech doing more Phase III work and pharma companies using more biotech-like more decentralized research and quicker decision-making;
  • the biotech drug discovery and development model is not more productive than the pharma model; and
  • biotech companies yield an “typical” net rate of return on investment (about 16%) so biotech VC money is going elsewhere like the biopharma industry in emerging economies.

Then the authors make two recommendations:

  • biotech/pharma companies need to collaborate more in all directions (upstream with academia, downstream with the CROs, and sideways with their peers) to reduce costs (the “more economical” part) and
  • they not only need to develop new drugs but “will have to switch from selling medicines to managing outcomes.”

The former I understand but the latter puts them into competition with the hospital industry which, around Boston anyway, is heavily subsidized by tax breaks, billions in public research funding, and gifts from lots of generous people.  Not a good move in my mind.

As for increasing collaboration, the authors describe two mechanisms:

  • competitive development consortia in which companies pool data on their late-stage drug candidates and pursue the best one; and
  • pre-competitive discovery federations with academia and government to increase the knowledge database for drug discovery.

The first sounds unworkable to me (how do the companies share revenue from the sale of the successful candidate?); the second is more promising.  As pointed out by the authors, the federations are similar to the neglected disease product development programs (PDPs), although they also are doing development and eventually (if they figure this part out) deployment.  So my take-home recommendation is that the biopharma industry should ramp up their participation in the existing PDPs and start some of new ones to find affordable drugs for the other neglected diseases including the coming worldwide epidemic of non-infectious disease.  What’s in it for them?  Saleable products in new markets?  A net return on their investment at least what their venture capital group earns?  Or the rights to tier-price the new drugs for the reimbursed markets?  Maybe the companies and the PDPs should hire some creative business development people to figure out how to make this pre-competitive discovery and  development federation idea work.

At least one big pharma is pursuing the low-margin high-volume route.  GlaxoSmithKline recently cut drug prices by 30-50% in Indonesia as part of its emerging markets strategy.  “We are aiming at more volume at lower prices. In middle income countries where there is no safety net and only out of pocket (patient expenditure), we want to work with 30 to 40 percent of the population rather than 10 percent,” according to Chris Weber, GSK’s senior vice president and regional director for the Asia Pacific region (Forex article).  So why aren’t the biopharma industry advisers selling advice on how to discover new drugs for or sell existing drugs to the developing world market?  Dunno.  I checked our local big-name consulting firm, the Boston Consulting Group, and found a recent report, “Capitalizing on the Crisis: New Ways to Create Value in Biopharma” (BCG report 2009); no mention of markets outside the US.  I also heard a talk this week by Wendy Woods, partner and managing director in BCG’s Boston office and leader for the firm’s global health work.  She was informative about the very capable work BCG has done for various government agencies and philanthropic groups but apparently this group has no corporate clients.  Sounds like another place for some creative business development people.


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