PharmExec Blog

It's Industry's Problem: A Fresh Take on R&D Costs

High in-house failure rates are slowing progress on pricing affordability, says GSK CEO Andrew Witty.

If there is one message that big pharma has applied consistently over the years, it is that drug development is very expensive. Big bucks and long-term investment in the institutional know-how and capacity built exclusively through private enterprise are what count in delivering new therapies to patients.  But like everything else in a dog-eared play book written in what might as well be the technological equivalent of the quill pen, that consensus is now being “goosed” — and from within the industry’s own ranks at that.

In a September 27 speech to the Indian pharma association that attracted little notice here in the US, GSK CEO Andrew Witty plucked some of the substance out of that linear defensive policy wall built by the industry over the past two decades, namely, that the high risk of compound failure leads inevitably to high costs and that this in turn justifies big margins on new launch therapies, across the board.  In his remarks, Witty literally turned the argument on its head, declaring that the industry-backed estimate of more than a billion dollars on average to bring a compound forward from discovery to market authorization was “unacceptable.”  The only “evidence”  it provides is for the perpetuation of a 25 year old model of commercialization, one that frames the debate around larger issues of pricing, IP  and access in a manner that serves the interest of neither the patient, society — or the industry.

What Witty was alluding too is the folly of a message that relates high costs and high prices to what is in essence the burden of low R&D productivity — and the honest way to call that is an “industry failure,”  which he did in his talk.  “We need to fail less, and deliver more,” he said, and directly linked success in restructuring the R&D enterprise to lower development costs in making the best new innovations more affordable, at all income levels, within and across markets.

As usual, Witty raises important and provocative issues that all stakeholders in health ought to take into account.  Just one that comes to mind:  If high prices that lower access are attributable to a flawed R&D development model, is there a readily applicable formula that industry can embrace in delivering better results at lower costs?

From an industry-wide perspective, Witty has accentuated the need for a consensus to promote those “lean management” business tools that can boost productivity and dramatically lower the cost of failure.  Yet to date almost all the evidence accumulated and backed by industry focuses on the inevitability of escalating commitments, whether it be the opportunity cost of sinking scarce funds into early discovery ventures, or the inability to predict with any certainty the response of payers to pricing post-launch.  Overall, the numbers paint a scenario of gloom:  a survey released by the consultant group KPMG last month finds that ROI from in-house investment in R&D among the 30 top drug makers is today half of what it was in 1990.

And while pressure for more affordable pricing is gaining momentum everywhere, due to a demographic and income transition in many emerging markets and the fiscal meltdown in mature countries, new costing commitments placed on the industry are rising too.  How many CEOs are really aware of the multi-million dollar price tag for post-marketing safety studies required by regulators over a time period that often extends beyond the life of the product’s patent?  Funding the demand for post marketing information about how well innovations work in practice is beginning to exceed what is spent to obtain a license to sell in the first place.   Or the endless, “write another check” implications of expanded access programs for yet to be approved drugs, where for ethical reasons there is no end point for giving drugs for free to patients with no other treatment options.

Hard data drives policy — it makes industry positioning credible.  Fresh arguments with verifiable metrics to show the industry actually has a strategy to make its own technology cheaper — and thus suitable for a global market of radically diverse price points — will be vital to the repositioning that Witty seeks.   In other words, the challenge is that while the problem is now defined by the industry itself as an industry responsibility, can industry deliver on the solution?

William Looney, Editor-in-Chief

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2 Comments

  1. Posted October 20, 2011 at 10:02 am | Permalink

    I’m not sure if we’ll ever have a truly objective, clear view of the cost of developing a new drug. I am sure that we’ll never all agree on that number. But Witty’s remarks are certainly a needed reminder that, regardless of the exact number or even the reasons that R&D has gotten harder, the industry needs to produce more hits. Lean management is not a bad idea, though “nimble management” might be a better goal for Pharma. The industry needs more innovative and breakthrough products and it also needs to be able to make the Go/No-Go decision faster. Managing to both those goals should produce what the industry (and patients) needs sooner.

  2. Posted October 20, 2011 at 5:18 pm | Permalink

    A key question is whether increased productivity is better addressed by increasing the numbers of successes, or reducing the number of failures. Considering productivity as a fraction, one increases the numerator and the other reduces the denominator.

    Much of the industry effort for the past decade has been to increase the number of projects (the denominator) and hope the successes (the numerator) will keep pace. This of course leads to lower productivity figure even if the absolute number of successes stays the same, and they obviously haven’t in the case of new chemical entities.

    Perhaps better to focus more attention on avoiding failures earlier, that is reduce the denominator, and boost the productivity fraction. But this is hard to accept when you have huge resources to throw at this challenge.

    Avoiding failures, or failing early, seems a more reasonable strategy for Pharma to consider as their financial resources dwindle. They are getting little respect or financial benefit by pointing to the massive amounts of money they spend on research. Efficiency and effectiveness define corporate success in the 21st century, not how hard you tried or how much you spent.

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