New markets, new models for old pharma

One of the most knowledgeable healthcare economists, Scott Gottlieb (M.D.) of AEI has weighed in on big pharma’s dying business models. While no Pollyanna, Dr. Gottlieb finds the glass surprisingly half full — while (as he often does) identifying areas where the FDA is a barrier to innovation.

Writing at the WSJ (and the AEI website) Dr. Gottlieb summarizes the success and limitations of the old business model. The former was represented by Lipitor, which earned $13b/year at its peak. The latter “mostly involved screening millions of random compounds against a molecular target.”

However, he argues that big pharma is learning the proper lessons from the end of their traditional models.

Lesson number one is to use a biological (rather than scattershot chemical) approach:

They took advantage of new science that allowed drug discovery to become a much more targeted endeavor—focused around precise information about the molecular fingerprints of disease.

In this kind of "rational" discovery process, size matters less than precision. Drugs are designed around the individual biological receptor they're targeting rather than being screened out of a library of random compounds. Deploying bigger tools no longer counts as much as having concentrated expertise in the particular pathway that causes a disease.

The next lesson has to do with the organization of innovation:

[B]ig bureaucracies were hostile to the kind of risk-taking and scientific focus needed to do good research. At most companies, the majority of new drugs are discovered by a handful of scientists with repeated successes. There's something unanticipated in drug research that can't be industrialized.

In recent years, pharmaceutical companies started to carve up their sprawling research enterprises into smaller, more focused teams. The right size of a research team is now said to be 20-40 people. To get at new science early, drug makers rely on collaborations with academic research teams and licensing deals with smaller biotech outfits.

(We call the latter process “open innovation”).

The final point is one that been often remarked over the past few years. Drug companies shouldn’t try for incremental improvements for conditions that have been treated in the past 30 years, but instead try to address other conditions (like Alzheimer’s) which lack an effective theraphy.

As a success story for the new, improved big pharma, Dr. Gottlieb cites Pfizer bringing Crizotinib (a lung cancer therapy) to market in 6 years instead of 10-15. Still, he points to the role of the FDA as increasing the costs and delaying the availability of therapies, by increasing the length of trials and the cost per patient.

While various regulatory reforms have been proposed, “none has been meaningfully advanced.” He concludes:

Drug makers are renewing themselves by realizing that their research success wasn't tied to the scale of those endeavors, but their precision. Today, the continuation of these scientific advances depends on their regulators reaching a similar understanding.