In this book review, Kessler, the author of The End of Medicine
, offers his thoughts on why biotech companies can't offerat least not yeta magic bullet that could cut the enormous financial costs and risks of drug development.
While an Airbus plane, Intel's Core Duo or "Apocalypto" may have market risk, their development is undertaken with confidence that the products will at least make it to market; drug companies begin work on a new product with no idea whether it will even make it out of the lab, much less progress through clinical trials and onto drugstore shelves. A new drug might have the potential to be a blockbuster, but, then again, only one drug out of 6,000 newly developed compounds actually goes on sale. "Productivity" is not a word used often in the drug business.
Drug development is a gamble in itself simply because of the hit-or-miss nature of the scienceor the "profound and persistent uncertainty," as Mr. Pisano calls it, "rooted in our current limited knowledge of human biological systems." But it becomes a staggeringly expensive gamblelike playing blackjack at a table with a billiondollar minimumbecause of the facilities required and the legions of experts in chemistry, biology, genomics and other fields who pour their time and energy into research. The "nature of this process is integral," Mr. Pisano points out. "It cannot be broken neatly into different pieces."
And therein lies the rub. Most other sciencebased businesses nowadays have made the transition from vertical to horizontal integration. Vertically integrated IBM ruled the computer industry, for instance, until the market showed that it was more efficient for Microsoft and Intel and Dell and Best Buy each to own a horizontal layer of the business.
But in drug development, attempts by companies to stake out a horizontal layerby providing just the compounds or the processes or the genomic databaseshave failed to take hold. The conventional wisdom remains, though, that it's much harder, if not impossible, to take risks inside large corporations, where managers pay more attention to career risks than market risks. Given that venture capitalists exist to fund smart entrepreneurs with new potential blockbuster drug ideas, biotech companies continue to sprout up, ready to chase new ideas.
So we have vertically integrated Big Pharma plodding along with its riskaverse corporate structure operating in a terrifyingly risky business, and the more nimble biotech companies hoping to catch lightning in a bottle even as they bleed fortunes. Mr. Pisano, in his conclusion, calls for structural change in both businesses: Big Pharma should take more biotechlike risk, and biotech should vertically integrate like Big Pharma. In addition, the entire drug industry should embrace more university research and use the grants process to push R&D at the basicscience level.
I'm not so sure. The biotech industry exists because Wall Street provides access to capital. The stock market, in its inimitable way, looks at the industry, strips away the high R&D spending and then models what a company's profits might look like on a normalized basis, considering today's losses in the light of future profits. Failure is punished quickly.