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Drug development costs hit $1.7 billion

08-Dec-2003

Another report has slammed the so-called blockbuster model of drug development in the pharmaceutical industry, in which R&D efforts are concentrated on drugs that can command sales in excess of $1 billion (€820m).

Since 2002, industry observers have been using an estimate for the cost of drug development of $802 million, worked out by the Tufts Center for the Study of Drug Development in the US.

Business consultancy Bain & Company suggest that the model is being undermined by a heftier than though cost of developing drugs. When the costs of failed prospective drugs are factored in, the actual cost for discovering, developing and launching a single new drug has risen to nearly $1.7 billion, a 55 per cent increase on the average level between 1995 and 2000.

 

These rising costs are also expected to substantially drive down investment returns. Based on recent investment levels, success rates and forecasts of commercial performance, Bain expects the current blockbuster drug model to deliver just 5 per cent return on investment - significantly lower than the industry's risk-adjusted cost of capital.

 

"This suggests that only one out of six new drug prospects will likely deliver returns above their cost of capital, an unattractive prospect for investors," according to the company.

 

So what went wrong with a model that has delivered a trillion dollars to drug industry shareholders?

 

Bain counts among the main factors the oft-reported decline in R&D productivity, with one in 13 drugs put into preclinical development now reaching the market, versus one in eight in 1995-2000.

 

Coupled with this is the increasing reluctance of national healthcare systems and insurance companies to foot the bill for new prescription drugs, and an increasingly aggressive generic industry that is lobbying to cut patent protection times. Exclusivity periods are also under pressure from governments (for example the calls to break patents on HIV drugs in Africa and Asia).

 

"The choice is stark," said Ashish Singh, director of Bain's Global Healthcare Practice and co-author of the study. "With fewer resources to drive primary care products and to invest in the 'arms race' in R&D, sales and marketing, most pharmaceutical companies must take steps to proactively replace their blockbuster strategies."

 

However, even with stagnating blockbuster strategies and market values already shifting to smaller pharmaceutical industry players - such as Novo Nordisk , Genentech, and Forest Laboratories - the Bain study suggests few pharmaceutical majors are abandoning the blockbuster model.

 

Bain believes that the primary reason for the reluctance to shift from this model is that executives are still in a state of denial and reluctant to think beyond the strategies that led to past successes.

 

However, the reality is that the importance of the model has been over-inflated. Many companies can claim to have a Viagra (sildenafil) - Pfizer's blockbuster erectile dysfunction drug that was originally developed for a cardiovascular application - in their history.

 

In fact, history has overemphasized these lucky breaks, according to Bain. 70 per cent of all blockbusters have been created by companies with significant prior experience in the relevant drug category, as prior experience helps companies design better trials and launch products more effectively. This in turn delivers more compelling economic results - increased probability for launch success and dramatically lower costs of developing and commercialising a drug.

 

A shift from an opportunistic to a focused approach is just one of four building blocks that Bain recommends pharmaceutical companies should adopt to break out of the blockbuster model.

 

The second is a smarter way to pursue partnerships, and de-emphasising the FIPCO (fully-integrated pharmaceutical company) model, with each firm running its own discovery, development, manufacturing, marketing and sales for the majority of its product pipeline and portfolio. Companies should combine skills to reduce risk in what he Singh describes as 'coopetition'.

 

The third building block is an increased emphasis on customers. Historically, the pharmaceutical industry has focused on selling pills that address the patient's disease, but don't necessarily cure disease or meet their full needs in managing their disease.

 

The high profitability of pills in the past suggested that incremental investment should always focus on maintaining existing brand franchises or on discovering the next blockbuster. But take away the blockbuster elements and this strategy may no longer be valid, suggests Singh.

 

For the next few years, the product itself will likely retain the most profit, according to the report. But over time the industry can expect to see some shift in profits, just as profits in the computer industry shifted into ancillary products and services from the traditional boxes.

 

Finally, companies will benefit from a shift away from structures based on functional units for each stage of the drug discovery process, to an integrated model where each stage is coordinated by an individual business unit.

 

"While each building block can create value by itself, their full value is likely to emerge when companies integrate them coherently," according to Bain.Smaller players, out of necessity, have moved ahead of the majors in finding successful new business models that make use of these four building blocks, "and the results are beginning to show, it concludes.

 

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