Cultivating a new crop of bioscience leaders

Today is the first day of classes for the 13th year of classes here at the Keck Graduate Institute. (The first students of the 2-year Masters of Biosciences Program graduated in 2002).

While KGI started with just the one program, this fall brings record enrollment of 150 students across four degree programs (MBS, PPM, PPC, PhD) and certificate students from the City of Hope. A total of 102 of those students are new, including 31 in the one-year degree programs.

I’ve already had my first teaching at KGI during the business “ramp up” day in the first week of orientation. I also judged five of about 20 teams of new students on their initial team projects, including the very impressive (and eventual winning) team of Felicia Amaechi (MBS), Richard Chen (MBS), Ramya Kartikeyen (PPM), Brent Vincent (MBS) and Erin White (PPC).

At Friday’s convocation, KGI President Sheldon Schuster emphasized his commitment to core idea of KGI. KGI is about combining science and business — the former to provide the technology and the latter to identify the needs that this technology will solve. He noted that , the KGI was the first to offer a life science Professional Science Masters — which is now being copied — and then was the first to create a post-PhD program.

Our guest speaker was Marina Gorbis, executive director of the Institute for the Future in Palo Alto. She provided numerous examples of how social media and crowdsourcing are changing how new ideas are created, including in life sciences. She concluded with a provocative scenario of how a decentralized social learning model might supplant (or supplement) conventional university-based learning.

Finally, on Saturday night, about 50 returning MBS students came both to learn what happened over the summer and to make the transition from being the junior to senior MBS students. When asked by director of student services Sue Friedman what they wanted to be, they suggested a combination of engagement, institution building and support for their fellow students.

In the fall, I will be almost entirely be spending my time with the PPM and second year MBS students through the TMP program. I am faculty advisor for two projects, and am also team teaching the TMP class (ALS 400) with TMP director Craig Adams and Diana Bartlett, Assistant Vice President and Director of Corporate Partnerships.

However, as with faculty at other top graduate schools, I will also be spending time on my research — in this case as 25% of the full-time business faculty. Right now I’m wrapping up my latest review paper on open innovation, and then will be turning my attention to two presentations next month at the Technology Transfer Conference 2011.

At what cost diversification?

In teaching about diversification strategies, one of the main theoretical arguments supporting diversification comes when firms provide financing for a portfolio of bets that can’t be separately financed through the stock market.

In his latest posting to “In the Pipeline,” Derek Lowe notes that such diversification has also been one of the historic strengths of Big Pharma. Quoting a blog comment by (longtime Lilly executive) Bernard Munos:

(Arthur) De Vany has shown that the movie industry has developed clever tools (e.g., adaptive contracts) to deal with (portfolio uncertainty). That may come to pharma too, and in fact he is working on creating such tools. In the meantime, one can build on the work of Frank Scherer at Harvard, and Dietmar Harhoff. (Andrew Lo at MIT is also working on this). Using simulations, they have shown that traditional portfolio management (as practiced in pharma) does achieve a degree of risk mitigation, but far too little to be effective. In other words, because of the extremely skewed probability distributions in our industry, the residual variance, after you've done portfolio management, is large enough to put you out of business if you hit a dry spell.

Both Munos and Lowe ask if Pfizer — the largest drug company in the world — doesn’t have a big enough portfolio to diversify against patent cliffs, who does?

In its forthcoming August 22 issue, Forbes is also running an article on the ideas of Munos to reduce R&D and outsource innovation. It also quotes criticism from former Pfizer R&D head John LaMattina, who thinks the death of the pipeline is greatly exaggerated.

Despite LaMattina’s criticism, I find persuasive the argument by Munos — published two years ago in Nature Reviews Drug Discovery — that the current model is running out of steam.

I don’t have enough experience with pharma R&D enough to offer my own fixes, but my sense is that outsourcing inefficient search processes to external partners isn’t going to work. Perhaps startups will have better intuition as to where to look versus a systematic search by big pharma, but if the discovery paradigm is busted, outsourcing it won’t solve the problem. Instead, that would suggest we need a new search or discovery paradigm.

Still this suggests a new debate to bring to my KGI grad students next spring in the innovation management class. In particular, I’d like assign the 2000 article in Research Policy by Scherer and Harhoff (or the Scherer et al article in the Journal of Evolutionary Economics) if their earlier coursework prepares them for the math. (The RP seems more relevant, but the 2002 De Vany article on movie studios cites the JEE).

Wednesday I sent an e-mail to Harhoff, who I visited many years ago and was once dissertation advisor to a friend of mine. He wasn’t aware of the recent visibility of his earlier work, so I guess I’ll have to use the forward cites from Google Scholar to help students make the connection.

Is the death of blockbusters greatly exaggerated?

John LaMattina, former head of R&D for Pfizer, has a provocative post that argues that “The Death of the Blockbuster Has Been Greatly Exaggerated.”

He lists some contrary evidence including a recent WSJ article on potential blockbusters in the pipeline. And of course the title is a deliberate allusion to the famous Mark Twain line.

It’s hard to argue with his credentials and experience, and he makes some important points about the problems about why it’s hard to make predictions about the future. Some drugs will do worse than expected, and some will do better: Lipitor was predicted to peak at $0.8b/year but peaked at $13b/year.

He also argues that there are some major diseases left to be cured, and these cures will be lucrative by any measure.

I can't say I’m complete convinced. Even if such blockbusters remain, on the recent trajectory the cost of getting those blockbusters is getting higher — at some point firms may no longer try.

Perhaps the more serious problem is that the returns from the losers may also be lower, since incremental therapies are having trouble commanding a higher price than established off-patent drugs. (As an allergy sufferer, I can say that the generic versions of Claritin and Flonase are pretty good compared to what was available 20 years ago.)

So the glass is not entirely empty even if it’s not quite half full. The boom times of the old paradigm are clearly in the past. Perhaps some new paradigm (computational biology? personalized medicine?) will enjoy its own boom, but we haven’t seen it.

What are doctors worth?

US doctors have historically been among the best paid members of a community. One list puts surgeons ahead of CEOs, while another study (based on BLS data) shows medical and dental professionals best represented among the top 25 professions.

However, in countries where government runs and controls healthcare, the premium for doctors is not so high: doctors are paid like government professionals rather than self-employed small business owners. A NYT report puts doctors’ pay in some of the Scandinavian countries at half that of the US. Not surprisingly, many economists expect that (for good or for bad) if the US system continues to evolve towards the European model, doctors’ salaries will do likewise.

Now a Business Week report suggests the premium for doctors in China is ridiculously low:

A newly qualified doctor makes about 2,000 to 3,000 yuan ($309 to $464) a month, while a one-bedroom apartment in Dalian, a city of 6 million people, goes for 2,000 to 2,500 yuan. Typically three or four newly qualified doctors will rent a flat together to defray their costs, Mao says.

Shi Yingkang, dean of the West China Medical School at Sichuan University in Chengdu and vice-president of the Chinese Medical Doctor Assn., says half his students spurn local hospitals for better-paying jobs overseas or in drug sales. “To them, the pay does not match the effort put in,” explains Shi, who says pharmaceutical reps can earn two to three times more.

In fact, the article is about how the doctors are quitting their practice to become sales reps for Western pharma companies, including Pfizer, Sanofi and Bayer. An estimated 30-40% of sales jobs in China are staffed by doctors, with pharmacists and nurses also being targeted.

I would be curious to see how the salaries of Chinese doctors compare to party officials, entrepreneurs or software engineers. But with the state in full control of this segment of the economy, it’s not like they have a choice — other than to join the pharma companies or emigrate.

BTW, it had occurred to me that top US sales reps might be paid so generously that they are paid better than doctors. Certainly I’ve met B2B sales representatives who are paid $100k, $200k or more. But according to Monster.com, the median compensation (salary+commission) for pharma sales reps with 20+ years experience is only $125k.

Still — as with any government policy to set salaries — there are important questions about what is a fair price for doctors. The medical profession is highly skilled, with long training required and a need to attract the most talented people. Even for systems that set pay by central planning (rather than the market), one would expect doctors to command a salary well above average.

If pharma R&D is broken, what will replace it?

The last few weeks, I’ve been watching some disconcerting news that adds to existing concerns about funding pharma research.

At Forbes, Matthew Herper presented two graphs. One shows the number of approved new molecular entities (NMEs), which has wild swings (and an impressive peak in 1996) but no overall trend despite the huge upswing in pharma and biotech R&D.

The second graph is the one that (as Derek Lowe noted) is the depressing one:






Two parts are depressing. First, of course, that we’re getting fewer not more drugs per dollar as time goes on. But almost as depressing, the obstacles are not just the limits of science, but also the regulatory regime which at times can distort the curve (good or bad) with fairly arbitrary decisions.

If that’s not depressing enough, then there was this post (at the NY Post) by former Wyeth chemist Josh Bloom, which opens:

The folks at Scientific American have launched "1,000 Scientists in 1,000 Days" -- a program to bring together scientists, teachers and students to improve America's "dismal" showing among wealthy countries (27th out of 29) in graduating college students with degrees in science or engineering. I'm sure they mean well -- but, at least as it applies to the field of chemistry, "1,000 Unemployed Scientists Living With Their Parents at Age 35 While Working at the Gap" would be a better name.

In addition to the soaring costs of bringing a NME to market and the FDA, Bloom points to offshoring:

To trim expenses, companies began to outsource research to India and China. It started as a trickle, but soon became a tsunami, leaving many thousands of highly intelligent and well-trained professionals with nothing to do -- a shameful waste of talent.
My colleagues and I at Wyeth watched helplessly as one company after another shed employees in huge numbers -- 300,000 since 2000. When Pfizer -- facing the looming expiration of its Lipitor patent and a poor research pipeline -- bought Wyeth for its portfolio of products in 2009, it cut about 25,000 jobs, with more to come.

Now Ph.D. chemists can’t even get a job teaching high school chemistry — or at least in New Jersey, where they’re a dime a dozen.

Bloom seems to think that US drug discovery is not cyclical, but in fact in a permanent decline. Let me offer two historical analogies.

For now, IT seems to be cyclical. I remember after the end of the dot-com era, software engineers were also laid off as IT companies died while the survivors offshored most of the routine work to Bangalore. Now, experienced engineers are once again in high demand in Silicon Valley “as they benefit from a tech job market that hasn't been this overheated since the dot-com bubble in the late 1990s” (as the San Jose Mercury put it a week ago.)

When I was growing up in San Diego, the demand for aerospace engineers was cyclical — layoffs and shortages all throughout the 1960s and 1970s. The Reagan buildup brought it back one last time, but eventually the SoCal aerospace industry died after the end of the Cold War. The cycle has ended and the industry is gone.

What’s interesting is that (iPhone Apps notwithstanding) the sale of software products is also in a steady decline. The growth is mostly in software-as-a-service (SaaS) models like Google and Facebook and the rest of “The Cloud.”

People have been talking for years about a similar shift for medicine, from mass-producing little pills to providing personalized medicine. In 2004, IBM’s consulting arm (the former PWC) released a report entitled “Pharma 2010,” which envisioned such a shift. (Such complex service-oriented businesses would play to both IBM and PWC’s strengths). It didn’t happen by 2010, but that doesn’t mean it won’t happen.

So what is the future?

1. Less spending on R&D
2. Spending on R&D but mostly offshore
3. A shift from mass R&D to custom (bioinformatics-based) research

I don’t know what the future holds, but the employees (and shareholders) of the big pharma companies hope that their brands, distribution, manufacturing and (yes) R&D will give them a significant role to play in that future.

Perverse incentives that encourage unethical waste

If you had a federal agency in charge of getting scientific discoveries commercialized, wouldn’t you want them out talking to industry?

So when the agency is NIH, what do they do? Thanks to the 2005 NIH ethics rules, they are discouraged from collaborating with industry.

Derek Lowe writes

The reason I'm talking about all this is that I've heard of instances where people from NIH have refused (or felt as if they have had to refuse) invitations to give talks in industrial settings, because they feared conflict-of-interest problems. This seems perverse, especially for an agency that's talking about getting heavily into translational drug research. That'll have to lead to numerous contacts with industry, I think, in order to be much good at all. So how will the NIH manage that if the drug industry is seen as contaminating their Purity of Essence?

and then in the comments “JAB” replied:

As an NIHer, I pretty much agree with Derek that we're actively discouraged from interacting with industry by the current ethics rules. Formal consultancies were prohibited several years ago, and I don't believe that's changed. Most of my colleagues shy away from anything that might require ethics office approval. It IS possible to give a simple seminar at an industrial site, with prior approval, and I know of folks who do so. Formal collaborations under a CRADA are permitted, but that's two orders of magnitude more work to set up.

I don’t want to minimize the importance of being as blameless as Cæsar’s wife, or the very real problems of any private entity (whether business or activists) illegally influencing government decisions.

That said, the idea of — on the one hand — pressuring (or exhorting) collaboration between government, industry and university scientists to collaborate — while on the other hand adding red tape to make that nigh impossible — is just crazy. Crazy.

And while i understand the central role NIH plays in funding, evaluating and disseminating medical discoveries, they’re not the FDA. It’s one thing to say we don’t want regulators mingling with dirty industry — it’s another to say researchers can’t actually go out and promote real translational research.

It’s not clear how to fix the problem without re-opening the same problems that led to the 2005 rules in the first place. In any endeavor, government regulation and red tape comes along because of a bad apple (or barrel or orchard) that (often) leads to overreaction in the other direction. So eliminating the rules is begging for trouble.

Still, once upon a time the government had rules about de minimis benefits. Is providing someone free lunch in a cafeteria — rather than spending $25 in labor to reimburse a $10 meal cost — really going to lead to unethical outcomes? Some of this is just common sense.

The problem is that some of the outside lobby groups really don't want close industry-government collaboration. (The group pressuring NIH director Francis Collins seems to fit into this category, led by all the usual suspects).

To me, it seems unethical to waste taxpayer money with excessive regulation, delay necessary therapeutics and diagnostics, and even perhaps lead to people dying who didn’t need to.

But then, much as David Friedman points out in his economics primer Hidden Order, people focus on the direct benefit of a given government intervention (e.g. preventing one case of fraud) but not the indirect costs (wasting thousands of person-hours of labor for compliance).

Buying biotech firms to kill them

(Cross posted from the Engineering Entrepreneurship blog)

At #IndustryStudies2011 this week in Pittsburgh, I heard an interesting talk about what happens to biotech startups after they are acquired. Panos Desyllas of the University of Manchester presented his study (with two Manchester co-authors) of UK biotech firms acquired 2006-2010 by non-UK companies.

The team studied in depth six acquisitions, interviewing executives from both sides of each transaction and also analyzing five years of trailing patent data. They also traced what happened to the key scientists after the merger by noting their affiliations in subsequent patents.

From this data, they came up with a simple (but useful) 2x2 typology: are the two firms similar in technology and are they similar in capabilities?

The firms might be exploring different technological frontiers. Or the acquired firm might have something that the acquirer does not — or vice versa — whether it be UK marketing by the acquired firm or global marketing by the acquirer. The (plausible) intuition is that complementary acquisition is more likely to create ongoing value than a more directly competing one.

The typology worked as predicted. In the case of acquisitions where both the technology and capabilities overlapped, the buyer closed the acquired company, keeping only an IP expert or two as a temporary consultant to transfer the tacit knowledge.

In discussion during and after the session, we discussed the case where the buyer bought a rival with the sole purpose of killing it. This happens all the time, and in some ways it seems like a special case with an utterly predictable outcome.

The other case I brought up was when the acquisition starts out as being complementary — but the acquired firm gets killed anyway.

In April, Cisco killed the Flip camera line that it bought for $590 million in 2009. Pure Digital founder Jonathan Kaplan was sorry to see Cisco knife his baby rather than put it up for adoption, particularly when it remained profitable.

The other example (from the life sciences industry) was Biogen Idec, billed in 2003 as a merger of equals between two biotech startups, Boston-based Biogen and San Diego-based Idec Pharmaceuticals. However, the failed merger brought the closure of the former Idec operations in San Diego last November, and the layoff of some 300 employees (including a close personal friend).

During Desyllas’ session, we discussed whether the closure was a good thing or a bad thing for the local economy. In true Schumpeterian fashion, the creative destruction makes available skilled talent to the local economy for other ventures. On the other hand, some off the displaced workers may never have a similar opportunity again.

But in the end, we agreed that the pattern proved a familiar point: companies get sold when the owners want to sell — usually when they want liquidity for an illiquid investment. Whether the founder (such as Kaplan) or the venture investors, once the company is sold all bets are off.