William A. Haseltine

As the founder and former chief executive officer of Human Genome Sciences, William A. Haseltine got an up-close look at the inner psyche of the pharmaceutical industry. He did not like what he saw.

Human Genome Sciences, known for its role in decoding the human genome, was able to raise billions of dollars to support drug discovery and development, but so far it has not brought a drug to market. Although some of the drugs that Haseltine shepherded through early-phase trials are now nearing commercialization, his experience left him questioning the fundamental structure of the system.

"I was running one of the best biotech companies. If you can't develop drugs on your own for $3 billion, who in the world is able to develop drugs?" Haseltine asks.

He may sound disillusioned, but he is certainly not defeated. Haseltine retired in late 2004 after more than a decade at the helm of Human Genome Sciences and has spent the past two years trying to understand the industry's woes. In that time, he traveled extensively through China, India, and Eastern Europe to understand the state of research in such low-cost centers. His latest venture, Haseltine Global Health, is a consultancy focused on improving health by tapping into these global resources.

"My basic concern," he says, "is that the tremendous progress we've made in innovation over the past 20 years from molecular biology to genomics to stem cells is not going to see anywhere near its potential realized under the current structure."

Biotech firms, traditionally viewed as the source of innovation in the industry, can do groundbreaking research, but they don't have the infrastructure to bring drugs to market. That engine of innovation breaks down when big pharma comes in to run late-stage development, Haseltine says.

The problem, he argues, is that the mammoth size of pharmaceutical companies has created an addiction to blockbuster drugs. "Any other industry would be delighted to have a $200 million product with a 70% profit margin," Haseltine points out. "This does nothing for pharma companies."

This dependence on billion-dollar-per-year products creates two fundamental quandaries that keep innovative medicines from reaching patients. First, companies have found that so-called me-too drugs are the only guarantees of broad commercial success. This means that most research dollars go to developing drugs with incremental benefits, rather than to molecules that offer fresh approaches. Yet, even this strategy is getting tough; the me-too options are drying up, and regulatory agencies are becoming weary of iterations on a therapeutic theme.

The second problem, Haseltine says, is that drug companies are trying to fit a small foot into a big shoe by conducting massive clinical trials for a drug candidate that may be useful only in a narrow indication. This "reverse Cinderella syndrome" can be lethal, because it drives companies to either abandon drugs with $200 million sales potential or try to force them to be blockbusters.

"The way drugs should be developed initially is for their best and optimal use," he says. "You cannot predict whether it's going to be a blockbuster or a small use."

Haseltine suggests that drugs like Merck's Vioxx and Pfizer's recently withdrawn late-stage cholesterol drug, torcetrapib, might have survived if they had been pursued for a narrow indication—usually the sickest patients—rather than a broad population.

He isn't sure that the addiction can be broken. "The sheer size of the organizations and their sales demand a distortion of the clinical development profile, destroy the relationship between drug discovery and development, and lead to repeated failure," he says. "There's no way around that conundrum."

Meanwhile, big pharma's plan to maintain profits by cutting costs could exacerbate the problem. Haseltine believes the recent slashes in R&D capacity—Bayer and Pfizer are the latest to shed research jobs—are setting the industry up for a fall. As companies look to cut costs, they are increasingly outsourcing research to low-cost centers such as India, China, and Eastern Europe.

However, Haseltine is concerned that their approach—handing off research to lower cost centers rather than tying these centers to their own R&D operations—is misguided. "Global R&D capacity is being created that is fungible for anybody that wants to pay for it," he explains. Low-cost regions, traditionally focused on making generic drugs, are becoming increasingly competitive in the drug discovery arena.

"Pharma, in its efforts to control costs, is building the seeds of its own R&D demise," Haseltine predicts. "They see it as cost-cutting, but they are building their major competitor in the next 10 to 20 years."

All of these issues are leading up to what Haseltine believes will be for the industry a "painful readjustment" that will take years to play out.

The only solution, as he sees it, is to sever the ties between innovation and value creation. To create value, a drug company should focus on what it does best—marketing—and drive innovation by setting up separate R&D houses endowed with their own intellectual property. The drug firm would retain ownership of these entities and some rights to products, but it would let them grow independently.

"I think this model could result in a rich diversity of compounds," spanning from $50 million-per-year drugs for overlooked diseases to compounds with multi-billion-dollar potential for broad indications, he says. It could even be a means of financing personalized medicine, he adds. "There is plenty for everyone with this new model."