The Evolution Of Pharmaceutical R&D Model

Reasons of declining returns on research capital

Trying to find answers to the above questions, I stumbled upon one nicely crafted financial model of the pharmaceutical industry in a post “Pharma's broken business model: An industry on the brink of terminal decline” by Kelvin Stott, an experienced consultant and executive, which suggested that the nature of the industry’s declining productivity is conditioned by the “law of diminishing returns”. Simply put, pharma companies have already picked all the “low hanging fruit” among successful drug ideas, and now it takes more and more effort and money to get any new marginal progress over the currently available options, with constantly diminishing returns. 

However, when you consider a plethora of recent groundbreaking advances in pretty much every aspect of biology, chemistry, modelling, and all related science areas, plus a wide array of novel enabling technologies, developed or adopted by pharma companies over the years (for example, read "Top 7 Trends In Pharmaceutical Research In 2018", and "Hot" Research Areas in Drug Discovery - 2019" for a quick reference), it feels countre-intuitive to think about “diminishing opportunities”.

A more natural reason, from my point of view, was outlined in a Forbes post by Standish Fleming, founding managing member of Forward Ventures, and a veteran of venture capital investing in therapeutics discovery, who pointed out two more credible (and seemingly less regarded) aspects of the existing decline in the pharma industry -- the inherent unpredictability of drug discovery endeavor, and an outdated business model of drug discovery, not accounting for the uncertainty efficiently.

Essentially, unlike most traditional businesses (for instance, construction, automobile development, internet technologies etc), where the product development phase is an engineering task, which can be substantially improved with more tech and talent thrown at it, drug discovery endeavor is experimentation from day zero. Considering a current chances of success for a compound entering clinical trials to be below 10%, the drug discovery resembles a lottery. 

Even worse, the process can not be gradually optimized using a well-known “market-product fit” strategy, used in more “engineering” industries like, say, software manufacturing. This strategy allows creating an early prototype of, say, a mobile app (a minimal viable product, or MVP), then getting early feedback from customers (“early adopters”), upgrading based on the feedback, repeating this exercise, etc. -- all the way till the market is satisfied with the app and is ready to buy.