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Commentary

Lean New Pharma
Dr. Scott Gottlieb, Forbes, 2-14-07

Gottlieb, a former Deputy Commissioner at the FDA who is now a resident fellow at the American Enterprise Institute, uses Pfizer's announcement of widespread restructuring to analyze the pharmaceutical industry's underlying business model and economics. He argues that the industry will have to embrace significant new changes if it is to survive in the current regulatory environment.

In the end, this cost cutting is not a transformational strategy, just an exercise in defense to maintain the margin. These companies are treading water until they can start to grow again, which begs the question: When will the celebrated slump in the industry's research productivity start to reverse itself.

Truth is, there have been some spectacular breakthroughs produced in recent years out of big pharma labs, including Merck and Pfizer—drugs aimed at specialized conditions and unmet medical needs. But these medicines have been given short shrift by the mass media because many have not been the kind of big primary care sellers that turn into multibillion–dollar blockbusters. Nevertheless, nobody can mistake the fact that big pharma's spending on research and development has increased about 150% over the decade from 1993 to 2004, to more than $60 billion today, yet the number of drugs from the industry that reach the market has not changed measurably.

Some blame corporate bloat for the falloff, arguing that the drug companies got too big to be entrepreneurial. Others say the incessant focus on blockbusters prompted companies to prematurely cast aside promising but potentially niche molecules. Optimists say we are at a point when fundamental discoveries made in recent years in genomics and proteomics are just filtering into development programs. We will soon see a surge in productivity, similar to previous periods when the application of new sciences like combinatorial chemistry needed time to mature.

Here's another theory. All of that increased R&D spending has been dwarfed by inflation. Over the past decade, the regulations on development and the demands of government payers have grown far faster than those research budgets, meaning we are not buying nearly as much science as we used to.

This is a fact of life that the National Institutes of Health has been bemoaning as it sees its own budget flatlined. The NIH has not had its budget "cut," but it announced last week that it is closing swaths of research nonetheless because a dollar today does not buy nearly as much research as it did a few years ago. The furtive secret is that NIH trials are not even subject to the full brunt of Food and Drug Administration oversight. So they get away a lot cheaper than the industry does.

In this kind of regulated world, where the cost of development and the price of finished goods are increasingly controlled by the government, and where the cost of production goes up even as the selling price goes down, the drug companies will need to find additional ways to cast off more of their fixed costs to focus instead on core competencies in late development, distribution and marketing. This will push drugs firms increasingly toward a more disaggregated model, with work put to a growing legion of smaller outfits—from biotech firms that will continue to do research and early development and offload some of the scientific risks to contract organizations that do the testing and freelancers that sell.



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