Declining Innovation in the Pharmaceutical Industry

Despite the increasing demand for new drugs to address unmet and underserved medical needs, innovation within the pharmaceutical industry has not proceeded at the same pace. Data from numerous credible sources have shown that over past 10 years there has been very little breakthrough innovations in the large pharma sector. For example, data from the FDA revealed that from 2006-2014, there had been no increase in the average number of new drug applications (NDAs) and biologics license applications (BLAs) submitted for novel drugs. Submission numbers for novel drugs have remained relatively constant at about 35 NDAs and BLAs filed during each year (NDA and BLA Submissions). Moreover, in the first comprehensive study of evergreening—defined as artificially extending the intellectual property (IP) protection cliff—it was determined that 78% of the patents approved during the period from 2005-2015 corresponded to medications already on the market (Feldman, 2018). Therefore, rather than create new medicines, companies are largely recycling and repurposing old ones. This finding is a startling departure from the classic concept of IP protection for pharmaceuticals and is emblematic of the declining innovation in the industry.

One possibility for the apparent lack of innovation to meet medical needs is an underlying scarcity of good ideas: as knowledge advances, it becomes more difficult to discover new ideas. In this case, slowdowns in productivity and innovation would be difficult to prevent or reverse. Yet, other factors may also limit innovation. For example, good ideas may not be scarce but they may be riskier to develop, and large pharma companies may prefer to focus instead on safer, but more marginal, projects. The finding that 64% of FDA-approved drugs in 2018 originated from emerging biopharma companies, not large pharma, suggests that scarcity of good ideas is not a factor underlying the declining innovation.

A comprehensive analysis of innovation and R&D productivity in the large pharma sector has been conducted by Dr. Kelvin Stott (Director of R&D Portfolio Management, Novartis). In this two-part blog-post entitled “Pharma’s broken business model, An industry on the brink of terminal decline” (Part 1, Part 2), actual historic profit & loss (P&L) performance data obtained from EvaluatePharma was used to calculate Pharma’s return on R&D investment (ROI) among several large pharmaceutical companies. Dr. Stott’s analysis shows a clear downward trend for R&D ROI over the past 20+ years. A similar finding has been reported by both BCG and Deloitte in 2016 and 2018, respectively. Because the business practices of large pharma show no sign of change, it is likely that this downward trajectory will continue.

Trends and Practices Underlying Declining Innovation

Growing competition and decreased ROI from R&D programs are the primary reasons for down-sizing of non-core business processes among large pharmaceutical companies. Thus, companies may be prevented from pursuing innovative therapies because they lack the cash to turn their financially riskier ideas into reality. Because down-sizing in the pharmaceutical industry has typically taken essential resources away from discovery and early-stage research, the end result is reduced innovation and productivity. Another important aspect of the innovation/productivity decline is the practice of utilizing the patent system to extend existing patents beyond the initial 20-year protection (in the U.S.), rather than reinvesting profits to foster innovation and create new drugs to meet medical needs. What further exacerbates the problem is the issuance of patents with overly-wide claims that block knowledge creation and patents for what are essentially existing drugs. For example, Losec (AstraZeneca), which was developed to treat heartburn and ulcers, was later reformulated and rebranded. This enabled the company to issue a new patent with new claims for the barely modified medication, effectively extending the company’s monopoly on this type of drug well beyond the period granted by the original patent. Finally, the practice of large pharmaceutical companies to implement share buybacks to boost share prices (and stock options for executives) rather than reinvest in R&D further diminishes the opportunity for innovation. To put things in perspective, a Reuters Special Report noted that pharmaceuticals maker Pfizer spent $139 billion on share buybacks and dividends and just $82 billion on R&D over the past decade.

Implications for Stakeholders and Taxpayers 

The trends and practices within large pharmaceutical companies noted above should be alarming not just to stakeholders in drug development, but also to taxpayers as they are largely footing the bill for drug research while pharmaceutical companies are reaping all the rewards. The development of Sofosbuvir, which treats hepatitis C, is a representative example. Sofosbuvir emerged from over 10 years of basic research science and $62.4 million of U.S. taxpayer-funded research (through the Department of Veterans Affairs and the National Institutes of Health, NIH). But when Gilead Sciences later acquired the drug (labeled as Sovaldi), it priced a 12-week course of pills at $84,000 in the U.S. market, even though a 12-week treatment course costs less than $200 to produce. By the end of 2017, Sofosbuvir had generated over $50 billion in sales.

According to Bryn Gay, Hepatitis C Project Co-Director at the Treatment Action Group, “Companies have raked in profits of over $70 billion from hep C medicines, yet companies like Gilead and Janssen have walked away from additional hep C research, such as for a preventative vaccine.”. Gay further stated, “The impact of NIH-funded research again demonstrates that we need to increase government funding for infectious and neglected diseases. We can’t rely on Pharma to set R&D agendas shaped by how much profit can be generated.”

Sofosbuvir is not an exception. Taxpayers in the U.S. have funded research via congressional appropriations to NIH funding for every single one of the 210 new drugs that the FDA approved from 2010-2016 (Cleary et al., 2018). Findings from the study by Cleary et al. show that the NIH contribution to research associated with new drug approvals is greater than previously appreciated. This report also highlights the risk of reducing federal funding for basic biomedical research as this would further hinder innovation in both small and large pharmaceutical sectors.

Collectively, these facts lead to the inescapable conclusion that the current practice of establishing patent monopolies and price-hiking by large pharma cannot be justified by expenditures related to noble and innovative R&D endeavors.

The Cost of New Drug Development

It can be reasonably argued that the one fundamental issue that limits the ability of the pharmaceutical industry to make meaningful improvements in productivity and innovation is the inherent unpredictability of the drug development process and the resulting costs. The exceedingly high failure rate of new drugs (>90%) limits the ability to produce more drugs and prompts drug makers to raise the cost of marketed drugs to balance against the diminishing returns.

In a study published by the Tufts Center for the Study of Drug Development (DiMasi et al., 2016), information provided by 10 pharmaceutical companies on 106 randomly selected drugs that were first tested in human subjects anywhere in the world from 1995 to 2007 was analyzed. According to this analysis, developing a new prescription medicine that gains marketing approval is estimated to cost drug makers $2.6 billion. This is significantly higher than the Tufts Center estimate of $802 million determined in 2003 (DiMasi et al., 2003). Furthermore, while the average time it takes to bring a drug through clinical trials has decreased, the rate of success has gone down by almost half, to just 12%. Tufts breaks down its $2.6 billion figure per approved compound to include approximate average out-of-pocket cost of $1.4 billion and time costs (the expected returns that investors forego while a drug is in development) of $1.2 billion. However, industry critics have argued that incorporating the lost investment from failed drugs into Tufts’s cost analysis is misleading since it creates an inflated drug development bill that helps pharma companies justify similarly inflated costs.

Is There a Solution to The Innovation Crisis?

To solve the innovation crisis, or at least substantially improve productivity, the pharmaceutical industry must augment—not replace–the quality strategy with one focused on quantity. While a detailed description of a quantity-based business model for large pharma is not currently available, the principles are clear. The outcome of drug development is inherently uncertain. Therefore, in order to increase productivity, the industry must significantly increase the number of new drugs that are evaluated for clinical development.  To do that, pharma must reduce cost.

Since in any large organization cost is inherent in the structure, the only way to economically expand discovery and foster innovation is through external development. A proven way to do this is through an entrepreneurial community of virtual companies with shared management, rented infrastructure and other techniques to minimize overhead and maximize agility. By partnering with startup biotech, pharma can reduce early-stage operating costs, share the risk and capital requirements with financial markets and vastly increase the scale of drug development.

The partnering of large pharma with start-up and small biotech companies also has the effect of “validating” the partnered entity in the eyes of potential investors. The primary constraint on expansion of start-up and small biotech companies is risk-capital. Because savvy investors make their investment decisions based on perceived or actual risk, they would likely support pharma-sponsored early-stage funds, rather than invest in start-ups that do not have such support. The capital commitment of corporate partners would function like a down-payment, assuring independent investors and/or financial partners that the pharma companies have skin-in-the-game. With funds secured from pharma and/or venture capital investment, start-up and small biotech companies can then utilize the expertise and services provided by contract research organizations (CROs) and contract development and manufacturing organization (CDMOs) to more efficiently advance their drug development programs.

Ultimately, collaboration with small companies will allow pharma to simultaneously pursue two very different activities—discovery and large-scale development—one is driven by the creativity and intelligence of inventors; the other is driven by corporate infrastructure. The extremely high failure rate of early-stage investments requires a low-cost, high-quantity strategy. Once proof-of-concept is achieved, advancing a drug to the market demands global resources and an unwavering devotion to quality. Over the course of development, the process must evolve seamlessly from a quantity to a quality strategy.

Increasing the rate of innovation is a requirement to achieve much-needed advances in patient care, as well as to secure the future of the pharmaceutical industry. Currently, there is a perception in the external environment that pharmaceutical R&D is no longer innovative, fails to bring new drugs to market or, at best, produces a rising number of ‘me-too’ drugs with no advantage over existing treatments. In addition, the cost to discover and develop new medicines (i.e. cost per launch) has risen dramatically in recent years. In fact, rising cost is a more credible candidate for the primary cause of the innovation and productivity crisis than is diminishing opportunity. The simple fact is that new drugs cost too much. Therefore, new models and practices must be implemented to increase innovation and productivity in the large pharma sector with a focus on the development of novel new medicines.