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Volume 88 Issue 23 | pp. 13-18
Issue Date: June 7, 2010

Cover Stories

Research Recalibrated

The spending race is over in pharmaceutical R&D, with companies now focused on doing more with less
Department: Business
Keywords: pharmaceuticals, strategy, R&D, Merck, Pfizer
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TEAMWORK
Pharma companies are supplementing internal research with partnerships.
Credit: Novartis
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TEAMWORK
Pharma companies are supplementing internal research with partnerships.
Credit: Novartis

Not long ago, almost every pharmaceutical company’s playbook was dog-eared at the page outlining the “multiple shots on goal” strategy. If you threw enough compounds at a target, it explained, you’d inevitably come up with one that hit. And if you went after enough targets across many diseases, you’d make enough money to pay for the cycle to continue.

The game has changed. Fewer new drugs are being approved, and those that reach the market face a strict health insurance reimbursement environment. The patent clock is winding down for a number of key products, and every major pharma company is on the brink of losing one or more big revenue streams to generic competition. Doctors, meanwhile, are writing more prescriptions for generic drugs than ever before.

As such, today’s pharmaceutical industry playbook advocates a tight rein on research spending, a narrower therapeutic focus, and fewer scientists in the lab. The new goals are quality over quantity and doing more with less. Teamwork is the mantra as companies realize that the best drug candidates aren’t always born in big pharma’s labs. In turn, big pharma scientists are adapting to working with a more complex network of collaborators.

The question now is whether this new strategy will work. Can drug companies create a more robust new-product pipeline for less research money?

“For years, it seemed like R&D spending only went in one direction, and that was up,” says Michael Latwis, who covers the drug industry for the market research firm Decision Resources. But eventually companies realized that they weren’t getting more for that incremental dollar spent on R&D and decided to rethink the process, Latwis says. “It was the end of the arms race in R&D.”

Pharma firms themselves concede that they have not delivered on the promise of the billions of R&D dollars spent. “It is fair to say that over the past decade, we spread ourselves really thin across a lot of projects,” says Richard Tillyer, head of drug discovery and preclinical development at Merck Research Laboratories. Part of the problem, Tillyer adds, was the focus on shots on goal. “Everyone used this strategy and was pretty much following that approach. Merck was the same. It didn’t deliver what we hoped it would deliver.”

The pharmaceutical industry’s trials are not new. The lag in productivity—fewer new drugs and modest sales for the drugs that do launch—has been a problem for nearly a decade.

Companies are trying to shake their addiction to blockbuster drugs, and for good reason: Ten of the products on pharmaceutical consulting firm IMS Health’s list of the 15 top-selling drugs in 2009 have been on the market for more than 10 years. No product approved since 2004 has joined the list, and few new drugs have even broken the $1 billion annual sales mark in that time. Notable exceptions are Merck’s cholesterol treatments Zetia and Vytorin and its diabetes drug Januvia.

With fewer successes, the health care consultancy Datamonitor says, the average cost to bring a drug to market is now an eye-popping $1.3 billion, up 60% from 2001.

And the dreaded patent cliff has arrived. Burrill & Co., a pharmaceuticals-oriented investment banking firm, expects $12 billion in sales to be lost to generic competition this year. The figure will skyrocket to $32 billion in 2011—when the patent on Lipitor, Pfizer’s cholesterol-lowering drug, expires—and $24 billion in 2012. According to IMS Health, generic drugs already represent 75% of all prescriptions in the U.S., up from 57% in 2004.

Furthermore, with passage of the health care bill, the government and insurance companies are watching their dollars closely. Securing a slot on their drug reimbursement lists is only getting harder. If a compound isn’t better than an existing product, particularly a generic, it’s going to have a tough time finding a market.

As a consequence, drug firms are rethinking their approaches to finding new medicines. The days of making minor tweaks to blockbuster drugs—building a better statin, for example—are past. Regulatory agencies have little tolerance for drug candidates that might have side effects. Companies are now operating “in a world where a single adverse event can kill a project if it is addressing a minor illness—one case of liver toxicity is all it takes,” says Jay Siegel, chief biotechnology officer for Johnson & Johnson’s pharmaceuticals R&D division.

“Companies seem much more focused now on novel or medically necessary products as opposed to just cranking out me-too drugs,” Decision Resources’ Latwis says. A more stringent reimbursement process “went a long way in making companies realize they need to focus on innovating instead of just doing more of the same. Companies are trying to have fewer, better ideas; more quality over quantity.”

The transformation has been accompanied by deep cuts in R&D organizations at nearly every major drug firm. Last year’s mergers between Pfizer and Wyeth and between Merck & Co. and Schering-Plough, and the accompanying major layoffs, underscored the efforts to change strategies.

Switching gears is no simple task. Merck sees the merger with Schering-Plough as an opportunity, albeit a complicated one, to revamp its research organization. The company was already in the midst of an overhaul when it bought Schering-Plough. It leveraged the organizational flux to eliminate areas of research that were dying on the vine.

“In the past few years, I think that we’d become a little too stripped down because we were trying to be too much,” Tillyer says. With the merger, the companies took a hard look at each discovery program. “We’ve been striving to create choice points in our pipeline for years, and overnight we had them,” he adds.

Merck is one of several firms acknowledging the bureaucracy inherent in big pharma and taking a cue from their biotech brethren. After years of top-down decision-making on research projects, the industry appears ready to put more power in the hands of scientists, although layoffs have depleted their ranks. In a move that Pfizer’s chief executive officer, Jeffrey B. Kindler, has called “the spirit of small and the power of scale,” nearly every big pharma firm has restructured its research organization into therapeutic areas touted as having more autonomy.

For its part, Pfizer has created smaller units focused on specific disease areas. The units all “have empowered leaders with the authority, the resources, the knowledge and expertise to make decisions; the entrepreneurial mind-set and agility to implement those decisions quickly; and most importantly, the accountability for the results of their decisions,” Kindler told investors during a review of the company’s 2009 financial results.

As Merck melds its R&D organizations with that of Schering-Plough, it is both taking a disease-centered approach and trying to better integrate its drug discovery and development teams. The discovery groups at both companies were focused on finding candidates that would be handed off to the preclinical development group, but they didn’t always have the end in sight, Tillyer says. Now, they are trying to deliver products rather than candidates. “It may seem mom-and-apple-pie obvious, but it is a real­ly big change for us,” he says.

Meanwhile at J&J, after years of operating somewhat autonomously, the various biotech subsidiaries came under one roof in 2008. Centocor, Alza, Tibotec, and J&J’s internal biotech research team now all operate as part of a therapeutically aligned biotech center of excellence, J&J’s Siegel notes.

GlaxoSmithKline and AstraZeneca have made more dramatic changes to decision-making in research in hopes of empowering and motivating scientists to pursue the best projects.

GSK is trying to recreate the entrepreneurial spirit of biotechs by establishing smaller, multidisciplinary teams called “discovery performance units,” or DPUs (C&EN, Nov. 30, 2009, page 20). Just as a biotech executive must approach venture capitalists for funding, research leaders in each DPU must present project proposals to a board composed of GSK R&D head Moncef Slaoui, a biotech company CEO, a senior public health official, and other GSK management. Each project has checkpoints at which the board reviews its progress. Success is rewarded with another round of cash.

GSK offers numbers as proof its plan is working. In 2006, the company spent $6.8 billion on R&D and had eight drugs in Phase IIb or beyond; last year, it spent $6.4 billion and had 19 drugs in late-stage trials.

In the thick of its own R&D cuts, AstraZeneca unveiled a similar strategy in January. The company formed an investment board that metes out funding for research projects. The company has also established eight Innovative Medicine Units, each with a single therapeutic focus.

Amid the research overhaul, companies are also winnowing the therapeutic areas they are pursuing. In 2008, Pfizer discontinued research in anemia, bone health, obesity, gastrointestinal disease, and some cardiovascular diseases. A year later, it eliminated 100 of 600 drug candidates from the combined portfolio of Pfizer and Wyeth. GSK ended some neurosciences activities, and AstraZeneca and Sanofi-Aventis each ditched more than a dozen clinical candidates.

Merck, meanwhile, recently completed an intensive review of all its and Schering-Plough’s programs. In addition to prioritizing clinical projects—Merck now has 22 compounds and vaccines in Phase II clinical trials and 20 in Phase III—the company looked at which disease pathways and targets are worth pursuing. “We’re probably looking at progressing about half of the combined number of targets,” Tillyer says. The other half will be put on hold.

Not only are research organizations smaller and reconfigured, they are also looking beyond their walls. Partnerships have played an important role in recent years, but with major cuts to their in-house research activities, big pharma has become explicit about the importance of work in outside labs.

For example, as GSK downsized its R&D organization earlier this year, the firm said it would rely more on partners to support its discovery activities. At the time, the company was already outsourcing 30% of its discovery research, or more than 80 projects, to roughly 47 partners. Meanwhile, Sanofi-Aventis recently said that 55% of the candidates in its development pipeline were in-licensed and that the portion would only grow going forward.

At Merck, heads of discovery research for each therapeutic area must now spend at least 50% of their time outside the company’s walls, Tillyer says.

Eli Lilly & Co. is perhaps the most deeply invested in a partnering strategy. For several years now, the company has been transforming itself into what it calls a fully integrated pharmaceutical network, meaning an organization with a broad collection of partners that can help lower risk and costs. In addition to the usual licensing deals with biotech firms, research pacts with academic institutions, and outsourcing relationships with Chinese and Indian companies, Lilly is incorporating nontraditional relationships into its network.

Lilly’s collaboration with Covance shows how nontraditional partners can lower risk. In 2008, Lilly sold its Greenfield, Ind., operations to the drug development services firm, which in turn received a 10-year contract worth $1.6 billion to take on Lilly’s toxicology testing and some other R&D functions. More recently, the companies signed a three-year pact under which Covance will do analytical testing of bioproducts for Lilly.

When Covance bought the Greenfield site, it also took on about 265 of the 800 Lilly employees there. Covance has since expanded headcount by 70 and plans to add another 300 people. Last year, Co­vance conducted 3,800 studies for Lilly. The companies say they have advanced their goal of reducing the time to choose a lead candidate and advance it through proof-of-concept studies in humans. Lilly says the collaboration will eventually save it “tens of millions of dollars per year.”

Lilly is also an early adopter of the growing trend among big pharma competitors to collaborate. Merck, Lilly, and Pfizer were the first companies to provide funding for Enlight Biosciences, a collaboration devoted to cultivating “transformative” ideas into commercial opportunities. And the three companies have since set up the Asian Cancer Research Group, a nonprofit that will establish a public pharmacogeno­mic cancer database intended to accelerate the development of new drugs and diagnostics.

Novartis, which has distinguished itself from many of its big pharma peers by stressing its commitment to internal R&D, nevertheless also sees the need for a strong network of partners. “The universe of drug discovery science is vast and expanding every day as new technologies and basic research increase our understanding of human biology and physiology,” says Scott Biller, head of global discovery chemistry at Novartis. “No one company or person can possibly harness all that information in-house.”

The company cites the option deals forged by its venture capital arm, Novartis Option Fund, as one way to access innovative ideas without taking on significant risk. Novartis makes seed investments in start-ups and gets an exclusive right to license one or more drugs or technologies that come out of the venture.

J&J is also exploring alternative ways to support innovative ideas as part of its partnering effort. “We’ve allocated a significant portion of our budget on partnering,” Siegel says. For example, he says, the company has been talking with venture capital groups about how it can invest in biotechs or help them get off the ground. J&J’s venture capital arm recently created an incubator, RedScript Ventures, that provides funding and start-up services to entrepreneurs with technologies or products of interest to J&J.

Corporate venture funds are just one way to lower the risk of early-stage partnerships. In the past, a licensing deal with a biotech was fairly routine: an up-front payment, development-based milestones, and a percentage of sales once the product reached the market. Today, a lot of deals have option arrangements or are weighted toward success at later stages of development, says Alistair Sinclair, Datamonitor’s senior analyst for pharma strategy. And these days, a drug’s milestone payments and royalties hinge on reimbursement by insurers, Sinclair adds.

For big pharma scientists, a more complex network of partners means rethinking how they do their jobs. They need to be experts in their fields in order to choose the best collaborators but also must be able to integrate ideas from the outside into their own research. “It has taken us several years to adapt,” Merck’s Tillyer says.

To help scientists adjust to the more collaborative environment, Merck now has its senior researchers work for a few years with an external science group before rotating back to in-house research. “We’re finding it’s pretty rewarding at this point,” Tillyer says. “It helps break down that sort of uncertainty about working with partners.”

The question remains whether any or all of these efforts will improve productivity. Not everyone buys into the notion that more drugs can be developed with less research money.

After Pfizer said it would reduce its R&D budget from $10.6 billion last year to somewhere between $8.0 billion and $8.5 billion by 2012, Bernstein Research stock analyst Tim Anderson offered words of caution. “Pfizer and other companies that are also cutting R&D, like Sanofi-Aventis, are implying that they will spend R&D dollars in a smarter fashion going forward,” he wrote to investors. “Perhaps, but in an industry where innovation lies at the core, cutting R&D should raise at least some red flags.”

Bumps have already emerged on the road to seamlessly aligning research organizations. After its purchase of Wyeth, Pfizer created small-molecule and biologic drug divisions, each with their own heads of research who were to act in parallel to fill the company’s pipeline. Last month, the company reversed course after Martin Mackay, the small-molecule chief, jumped ship to head R&D at AstraZeneca. Pfizer has now put former Wyeth research head Mikael Dolsten in charge of the entire research organization (C&EN, May 31, page 10).

Moreover, as they revamp research, the big pharma companies all seem to be turning to the same page in the playbook once again. They’ve all created smaller, therapeutically driven units and are focusing on the same areas: antivirals, oncology, metabolism, central nervous system ailments, and inflammatory diseases. “Even though they all say they want to find differentiated targets, they’re all looking at the same primary areas again,” Decision Resources’ Latwis says.

Plus, not all R&D cuts are created equal, and some companies are better at executing strategy than others. In particular, industry observers are closely watching how Merck and Pfizer integrate their acquisitions into their research structures. Most analysts think Merck is emerging from its deal more focused and with a stronger pipeline.

And for others, the research overhaul might be too little, too late. For some companies, Latwis says, maybe the problems are just too big to be solved.

 
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