BIG PHARMA RESPONSE TO THE PIPELINE PROBLEM

So, what are big Pharma doing to try and solve their pipeline problem? Well, they’re certainly spending a lot on R&D – in excess of $40bn in 2005. The real question is better put in terms of where this huge amount of money is going. If we consider projects that are active in R&D as the location for the spend, we find the average is over $20 million per project in 2005. I know this is a relatively meaningless number as the range of spend is enormous, but $20 million on average seems to me to be a huge number given that most biotech wouldn’t dream of needing to spend that much per project (in fact, many biotech companies would love to have half that amount for their entire clinical program).

There is another really interesting trend and it relates to licensing. We all know that big pharma has been increasing their demand for in-licensed products in recent years. What I hadn’t realized was just how substantial this trend really is. In the years from 1984-99 the top 10 companies completed about 50 in-licensing deals of late-stage products (Phase 3 and later), and this was about equal to the number of early stage product specific deals. From 2000-05 they completed about 40 late-stage product deals but over 100 early stage deals. Not only did they do about 150 deals in 6 years (as opposed to 100 deals in 15 years), but the number of early stage deals more than doubled.

But that isn’t all; in addition to the product specific deals, for the same time periods, the number of development collaboration deals went up from about 30 to nearly 400!!

What this says to me is that the top ten companies have accepted that their huge research organizations are not able to improve their efficiency at discovering key new products and that this is best done by small specialist companies with particular expertise and incredible motivation (helped by deals that include full funding of research, milestones and royalties). This is looking more and more to me like the Hollywood model – more and more movies aren’t made by the big studios, they acquire the marketing and distribution rights from production companies.

The real problem that the top 10 still have is that their 30% of the late stage compounds is probably not enough to maintain their growth and profitability while they wait for these development deals to increase their share of the early stage compounds beyond the current 25%. This must mean that they are more vulnerable to patent expiry than in previous years, and that doesn’t bode well for their long term viability as independent entities. Does that mean that another round of big company acquisition activity is on the way? I don’t see how they can all avoid it – but the question is who is buying and who is selling?