Issue Date: January 29, 2007
Rethinking Pharma R&D
THIS WEEK'S LEAD news story on Pfizer's restructuring plans brings into sharp focus the business pressures that are buffeting big pharma (see page 7). Pfizer announced that it will lay off 7,800 employees in addition to the 2,200 announced recently—10% of its total workforce—and close research and manufacturing facilities worldwide.
To be sure, the pharmaceutical business remains a good one to be in. For the first nine months of 2006, Pfizer had sales of $35.8 billion and earnings of $11.9 billion for a profit margin of 33.4%; however, sales increased only 2.6% over the same period in 2005 and earnings climbed 9.7%, just short of the minimum double-digit earnings growth demanded of big pharma by Wall Street.
For the first nine months of 2006, the 12 U.S. and European pharmaceutical companies C&EN tracks had combined sales of $262 billion, up 5.6%, and earnings of $58 billion, up 13.9%, for a profit margin of 22.2%. Indications are that the numbers for the full year will be in line with the first nine months. Even so, analysts will once again maintain that pharma is in the doldrums.
A litany of reasons are cited for the relative decline in the financial performance of the sector, among them competition from generics that, as consumers, we should cheer. However, one trend contributing to pharma's woes should be of concern to consumers of pharmaceuticals and those interested in the chemistry enterprise: For the past decade, despite significant increases in pharmaceutical R&D spending, there has been a steady decline in the introduction of innovative new drugs.
Late last year, the Government Accountability Office released a report titled "New Drug Development." GAO reported that the pharmaceutical industry increased its R&D spending in constant dollars from $16 billion in 1993 to nearly $40 billion in 2004, a 147% increase. In that time, the number of New Drug Applications (NDAs) submitted annually to FDA increased 38%; however, the number of NDAs for new molecular entities (NMEs), indicative of truly innovative drugs, increased only 7%. In recent years, the numbers of both NDAs and NMEs have been declining.
GAO identified a number of factors behind these trends, including "limitations on the scientific understanding of how to translate chemical and biological discoveries into safe and effective drugs; business decisions by the pharmaceutical industry that influence the types of drugs developed; uncertainty regarding regulatory standards for determining whether a drug should be approved as safe and effective; and certain intellectual property protections that can discourage innovation." Together, GAO said, these factors affect "the cost and length of the drug development process, as well as the types of drugs being produced."
GAO points out that the industry is increasingly focusing on developing drugs for complex and chronic diseases such as cancer, which contributes to higher failure rates, slower drug development, and higher costs. Also, new technologies such as genomics and high-throughput screening have provided tools for researchers to discover and test compounds. While these technologies have generated "vast quantities of newly discovered biological data, company researchers are still learning whether the data will lead to potentially valid drug candidates," GAO reported.
Unfortunately, GAO also found that the "blockbuster" model for drug development has skewed industry priorities. "Companies frequently choose to stop developing drugs that do not offer the same revenue-generating potential as blockbuster drugs, even though they could be highly innovative and offer therapeutic advances," GAO said. GAO makes a number of useful recommendations on patents, regulatory oversight, and training that could help boost the productivity of pharmaceutical R&D.
It seems to me that part of the problem is that we probably are in the down portion of a productivity cycle that will naturally correct itself. As important, however, is that we need to fundamentally rethink what constitutes success for pharmaceutical companies, both in terms of the drugs they bring to market and their financial performance.
Thanks for reading.
Views expressed on this page are those of the author and not necessarily those of ACS.
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