Herd Wisdom

At the risk of adding another echo to the blogosphere, I am commenting on a recent editorial by John Carroll, chief of FierceBiotech, in which he noted the major pharmaceutical companies are now concentrating their research and development efforts on a few diseases (indications), apparently to reduce R and D risk but with the possible unintended consequence of increasing their market and competitor risk (“Assessing the Crowd Effect”). Mr. Carroll’s comment was initiated by Helen Thomas’s Heard on the Street column in the Wall Street Journal (“Beware the Thundering Pharma Herd” at WSJ.com for those with a subscription or at Innovator94 for those without). Ms. Thomas cited a report by Barclays (I assume written the bank’s market intelligence group and not publicly available) that the indications of oncology (cancer) and inflammation absorb one-third of big pharma’s R and D budgets although drugs for these indications are likely to account for only 17% of projected sales. The point of both writers is that big pharma, by focusing on indications with less risky and less expensive development efforts, is heading for lower profits when their “not-much-different-than-all-the-other” drugs hit the market. Mr. Carroll: this concentration “could set the stage for a migration [by innovative companies] to lonelier diseases or drug theories, where true pioneers can be years ahead of the next competing therapy.” Ms. Thomas: “Today’s R&D efforts are bearing fruit, but there is something to be said for standing apart from the crowd.”

Of course big pharma’s herd wisdom also includes a number of other rubrics as analysts, industry watchers, and I have noted:

  • R and D is expensive so needs to be down-sized into areas where a greater knowledge base exists to build on;
  • R and D on some indications like cardiovascular disease that require huge trials and are subject to closer scrutiny by the FDA and Alzheimer’s disease that has seen a large number of late-stage trial failures is too risky;
  • biotech companies will take on the riskier, more innovative research (ignoring that investors invest primarily in companies that can be sold to big pharma);
  • more money can be made in rare disease treatments where insurance companies tolerate astronomical annual per-patient costs;
  • although payers (insurance companies and the government) make sounds about paying only for demonstrably better drugs, it is marketing that sells drugs not benefit; and
  • there is no market and will never be one for new drugs to treat the diseases of poverty that afflict a large percentage of humankind.

As one may have noticed over the past four years in this blog, I have applied my small voice to refuting the last rubric, and anyone who is interested may read my rants in “Playing the Long Game”, “Missing the Boat”, “A Rare Request”, and “Throwing Darts”.  So what is my point? If the major pharmaceutical companies are plowing one-third of their current R and D spend (or $17 billion based on a $50 billion annual spend) into drugs that are projected to capture 17% of all sales (or $54 billion if one assumes annual US drug sales of $320 billion) (an approximate 1:3.2 ratio), I think at least one of the major pharma companies would find it an acceptable risk to put $100 million each year into R and D on a neglected disease with the assumption that eventually it would yield a drug with a $320 million market. That seems reasonable to me, given the company would likely have no competition and number of potential patients is in the tens or even hundreds of millions. The only barrier is that the world needs to find a way to pay for the new drug in the next five to ten years, the time it takes to develop it.

The most recent issue of Technology Review is about remarkably innovative companies, and in it I read about Mark Levin, a founding partner of the local venture capital firm, Third Rock (Tech Review feature story). Third Rock is known as a non-traditional VC firm, emphasizing early-stage investments in novel ideas vetted by its science team and acting more like an incubator than an investor (FierceBiotech article). And it has been successful as indicated by its raising of $1.3 billion in capital since 2007, including closing a $500 million fund in 2013. According to the article, Mr. Levin will back companies addressing challenging indications (like amyotrophic lateral sclerosis or ALS), can spot what will be an important product in five to ten years, is personally wealthy, and is “extraordinarily empathetic.” I wonder what he thinks, or if he has thought, about the investment potential of a start-up aimed at a global health disease.



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