Drug companies: great expectations, not-so-great results
A recent article by John Simons in Fortune magazine, "When Big Pharma gets too big" (12/4/06) reconfirms what we've saying for while. As Big Pharma has concentrated on growth through mergers and acquisitions, it has, at the same time, lost its ability to innovate. He especially looks closely at the case of Pfizer, the biggest of the big.
Its #1 drug, Lipitor, the anti-cholesterol treatment, generates $12 billion in gross income a year for the company. It's the biggest selling medicine in the world. As Simons notes, Pfizer has for years been promising a drug that will match, even improve on Lipitor. But its patent runs out in 2010, when generic versions will be easily and less expensive available. That's only three years away and the clock is ticking.
But Pfizer recently has cancel work on a drug named torcetripib, the candidate drug that they believed would be the successor to Lipitor, because of bad results in late-stage testing of the drug.
That's pretty typical of the industry, Simons writes. "In spite of ever-expanding research budgets - since 1995, annual industry spending on R&D has more than doubled, to $31 billion - scientists are enjoying fewer eureka moments. Major drugmakers are struggling to come up with enough mass-market blockbuster drugs to maintain the industry's fading aura of growth."
And it has caused self-destructive behavior among the drug companies, who, as they see patents expiring and their stocks taking a hit, end up putting more and more weight on the next generation of drugs. Pfizer has an annual research budget of $7.5 billion and over of 13,000 scientists in its labs, but the failure rate in developing medicines is very high. It's a risky business, and Simons argues that by building up anticipation for new drugs, like torcetripib, Pfizer may be hurt even more when those expectations are disappointed.
But maybe even more important, Simons argues, is the problem of the insatiable demand for growth in such a big company. "In most other businesses, a $400 million-a-year product with 80 percent margins is a welcome addition to a company's bottom line. But for most Big Pharma companies, medicines don't really matter unless they have the potential to be blockbusters-- generating annual revenues in the range of $1 to $2 billion."
And in the end, blockbusters aren't so urgently needed. We have pretty good treatments for common and well-understood and common conditions like high blood pressure, high cholesterol, and arthritis. What's really needed are new drugs for those disease that affect smaller number of people.
Simons sees that it all has to do with excessive growth. Hank McKinnell, Pfizer's CEO in the 1990s up until last year, brought the company from fourteenth largest to #1 through a series of big acquisitions. He argued that "economies of scale and synergies would allow companies to plow enormous resources into sales, marketing, distribution, and most importantly research and development of new medicines. The new model, McKinnell insisted, would usher in a new age of drug discovery."
Those deals, and those of other companies, have triune out to be a failure, almost across the board. The reason: the research failed. "As companies became larger and their appetites for blockbusters grew, many companies began scuttling research projects that appear not to be instant blockbusters. This practice hurts morale, wastes R&D money, and is reducing the number of 'successes' companies can point to."
The result is fewer new drugs, not more. Simons reports that the number of truly new drugs submitted to the FDA has gone form an average of 41 a year in the 1990s to an average of 27 per year since. And it would be worse, he argues, except that these big companies are "buying or licensing-in an increasing number of test compounds from smaller drugmakers and biotech firms."
As we've stated before, large companies are death to real innovation. The need to keep stoking the growth engine creases an environmrnt in whcih innovative thinking is almost imporssible.
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9:34:07 PM 
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