The Evolution Of Pharmaceutical R&D Model

by Andrii Buvailo 

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There is a plethora of analytics reports, including ones by Deloitte, DKV Global, and Ernst and Young, all pointing out to a declining business performance of the pharmaceutical industry. They all convey a similar bottomline message: the decline is not due to a lack of innovation (the innovations are growing). And not because sales are falling or markets are shrinking (revenues are growing in general, and the markets are expanding with the expanding and ageing population). The key reason of the declining financial performance is the fact that research and development (R&D) costs are growing substantially faster over an average investment period, than the actual revenues over the same period. This kills operational profits, leading to a decline in the overall business gain. A direct consequence of that -- an increasingly stagnating industry, cutting sometimes promising R&D programs, jobs etc.  

There are two more relevant questions here: 

1) why R&D costs are growing faster than revenues, considering that technological progress is seemingly providing more and more optimal and powerful technologies to pharma companies at a constantly decreasing specific price (e.g. costs of computation, sequencing, screening and many other things are falling), and 

2) what to do about it to reverse the decline in pharma industry performance? 

 

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. 

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Topics: Industry Trends   

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