Pharma 2.0

This piece has taken me longer to write than I expected, but hopefully a few people are still interested.

I am sure most people have by now heard about the Morgan Stanley analysis that buying drugs gives a much better return on investment that developing them yourself. Looking at the lay-offs and closing of research sites, it appears that Big Pharma is listening to the Wall Street analysis with interest, despite some rejecting the idea as dangerous. After all, if Big Pharma doesn’t develop any of its own drugs any more, how are they all going to keep fed?

I tried to imagine what this remoulding of the pharmaceutical industry would look like, what the drug discovery cycle would look like.

It all starts with the initial lead. A lot of these have previously come from screening the compound libraries of the big pharma companies, with some coming from biotech companies developing interesting targets and from academic labs (with funding from the government as a major source). Those latter two will clearly still contribute to the initial leads in pharma 2.0. I can also imagine big pharma still using their screening to find leads – but then who develops them? Biotech companies often are pure biology (or at least only a limited chemistry staff) and use contract research to effectively be their chemistry departments. Big Pharma might do this (they already use contract companies for projects they don’t have the resources to work on internally) or the lead of GSK might be followed, as they allow companies to screen their libraries and then if they get a hit, negotiations begin.

Once a lead is identified, the lead optimization begins, the meat and potatoes of the medicinal chemistry department. If we assume that Big Pharma will not be doing this part, we will likely have a mix of companies doing this type of work, some being the archetypal biotech companies, focused on one pathway, the reason the company was formed. They will have their small chemistry department (possibly sub-contracted) working on the project, with biology resources using their compounds to expand their knowledge of their target. They will take the compound into preclinical evaluation – beyond that depends on their financing.

The other type of company I can imagine is one that is more diverse, more chemistry-based. They may do contract work for other companies and may pursue one or two internal lead optimization programs. Again, they will be able to do preclinical evaluation (either outsourcing the biological analysis, PK, toxicity, etc. or perhaps a limited amount themselves).

To take these compounds through clinical trials is where things start to get a lot more expensive. Pure biotech companies may be able to ride their great white hope through the minefield, though many will fall. The ones that succeed will get their return on investment and everyone gets rich. The chemistry-based companies will not be able to go all the way through – some biotechs may not either. However, this is where Big Pharma come back into the picture – looking for the most promising compounds, so they can take on some of the risk in exchange for their expertise and financial muscle to take the compound through clinical evaluation. The further the small company takes it alone, the greater the potential reward for them. If they have a preclinical candidate, which has just passed the initial (and most likely preliminary) toxicity screens is much less valuable then something that has proof of concept in real patients in phase II.

So what big pharma is hoping is to improve their return on investment by having more in-licensed drug candidates and thus transferring the burden of the early drug discovery onto small companies and their venture capital backers. Right now, VC is hard to find so it seems hard to believe that there is enough to keep the mighty pharmaceutical giants happy. They might help that along by passing along some of their abandoned internal projects to start up companies (possibly made up of old employees), seeding the pool as it were. You can’t help but feel, though, that small companies with promising compounds will be highly sought after, possibly prompting bidding wars and certainly elevating the price for acquiring that piece of the pie. Smart execs might seek to have in place agreements with the biotechs to avoid such stand-offs with their competitors. They may end up more involved in early phase drug discovery than they planned to be. Though since these investments won’t be direct employees, lay-offs won’t be such an issue any more.

I’m not sure if this could all work – I have many doubts. We may get to find out. These will continue to be Interesting Times.

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5 comments on “Pharma 2.0

  1. akshatrathi294 says:

    You have some good ideas there and yes it might as well happen. But if they are closing research centers in the western world then they are also opening them in India or China. As far as innovation is is concerned, it’s about time that these countries start funding their science on a grand scale. These moves will help them grow up. The western world will still have it’s excellent academic centers if not the commercial research setups. These will definitely be ‘Interesting Times’ but not for the people without a job.

  2. David Perrey says:

    I agree with you, Indian and Chinese companies are still acquiring the expertise to compete, but they are getting there. Also, Albany Molecular have sites in India, Singapore and Hungary. So I think even the western companies will be globalizing significantly if they want to play in the drug discovery game.

  3. milkshake says:

    the industry “remoulding” started with mildew that gradually progressed into a wide-spread rot.

  4. Nice post. I’ve written about the same topic, but I state what I believe to be the Achilles Heel of an in-licensing model (see Pharma Conduct: Why Morgan Stanley Grossly Overestimated the Value of In-Licensing ROI to Pharma).

    Regardless of who’s doing the R&D, the real issue, which nobody is talking about, is being able to mitigate late stage attrition. Internal R&D groups are producing fewer leads because they can’t hide warts as easily as an external group.

  5. David Perrey says:

    Thanks for the comments!

    I agree that the industry has been heading in this direction a while – but that was still beautifully put!

    Late stage attrition (I read your blog too, PCG) – I think Big Pharma believes it can look over the potential candidates and pick the winners. But that all seems so unpredictable I don’t see how it can work. I guess that is supposed to be factored into the Morgan Stanley analysis.

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