The Business of Virtualization in Research and Development
Barriers to Innovation As R&D processes within the biopharmaceutical industry have become increasingly complex, it is hardly surprising that productivity has tumbled. At the beginning of the millennium, the mapping of the human genome was expected to greatly increase the number of therapeutic targets, which would in turn help improve productivity. This has not proved to be the case, with the human genome proving even more complex than originally envisioned. At the beginning of the decade, the estimated cost of bringing a new medicine to market was $802 million. This estimate took into account the cost of financing the R&D and the expense of failed drug candidates.3
$1.2 billion for a biological drug.
The current estimate is $1.318 billion for an NME and PricewaterhouseCoopers
4
estimates that the average cost of drug development is in the region of $454 million. 5
Obviously, there is considerable variation in development costs depending on the therapeutic area, 6 but these
numbers still point to a considerable financial risk. Indeed, Pfizer was widely reported to have spent 13 years and $800 million on developing the failed cholesterol-lowering drug torcetrapib.7,8
The current structure of the political and legal framework surrounding drug development also means that companies do not know whether their product will be eligible for reimbursement if it does reach the market. In other words, after significant investment and expenditure a newly licensed drug might not even gain market access due to pharmacoeconomic barriers. This is a substantial risk for an organization to take on, which is why the strategic decision for many companies is often to ‘play it safe.’ Research from the Centre for Medicines Research International found that 10 of the largest pharmaceutical companies invested over 20% of R&D expenditure on line extensions rather than new development projects. In smaller companies, the percentage was over 40%.9
The industry will need to adapt and transform to address the changing environment, which will add to the challenges already facing the industry. These changes include:
• chronic diseases placing increasing pressure on healthcare budgets; •
greater influence on prescribing by payers and healthcare policy-makers;
• more pharmacoeconomic barriers and outcomes-based pricing; • the provision of healthcare moving closer to the patient; • the growing markets of the emerging economies; • the shift from treatment to prevention of disease; and • even tighter regulation.
The current cyclical model of reliance on a few billion-dollar blockbusters and the subsequent race to develop new medicines to replace the income lost from these high-value drugs as they come off patent will not suffice. Nevertheless, the trends affecting the industry will also provide some major opportunities.
R&D spending NMEs and new biologics approved
*Includes biologics. Data on R&D spending for non-PhRMA companies are not included here, because they are not available for all 11 years. Sources: FDA/CDER data; PhRMA data; PricewaterhouseCoopers analysis: PricewaterhouseCoopers, 2007.5
The necessity for change will have to be managed without forfeiting the confidence of the capital markets. There are examples of major pharma losing billions in market capitalization after issuing unfavorable news (such as withdrawal of ‘potential blockbusters’ from phase III trials). The biopharmaceutical industry will therefore have to balance the need to meet short-term earnings targets with long-term aspirations.
The ‘one size fits all’ approach to R&D will also shift as technological and scientific advances enable the development of more targeted drugs that will more likely have the desired responses in specific populations.
Many Paths to Dynamic Change The decline in R&D productivity underlies many of the challenges faced by the biopharmaceutical industry. This innovation deficit and the imminent patent cliff have fueled another round of mergers and acquisitions. However, the defensive nature of these traditional mergers and acquisitions raises the question of whether there is value and sustainability in these consolidation strategies.
The PricewaterhouseCoopers Pharma 2020 series presented the argument that despite the many challenges faced, significant improvements in R&D productivity are possible over the next 10 years. These improvements include shortening R&D processes by two- thirds, reducing attrition rates or bringing about earlier attrition, and lowering the costs of clinical trials.10
There is no longer a one size fits all business solution for this industry. The changes to the roles and responsibilities of each of the current functional areas and the overall business models adopted by each company will depend on the nature of their strategic priorities.
3. DiMasi JA, Hansen RW, Grabowski HG, The price of innovation: new estimates of drug development costs, J Health Econ, 2003;22:151–85. 4. DiMasi JA, Grabowski HG, The cost of biopharmaceutical R&D: is biotech different?, Managerial and Decision Economics, 2007;28:469–79. 5. PricewaterhouseCoopers, Pharma 2020: Virtual R&D – Which path will you take?, 2008. Available at:
www.pwc.com/gx/en/phar ma-life-sciences/pharma-2020/pharma2020-virtual-rd- which-path-will-you-take.jhtml (accessed March 2010).
6. Adams CP, Brantner VV, Estimating the cost of new drug development: is it really $802 million?, Health Affairs, 2006;25:420–8. 7. Wadman M, When the party’s over, Nature, 2007;445:13. 8. Cutler DM, The demise of the blockbuster?, N Engl J Med, 2007;356:1292–3. 9. Centre for Medicines Research International, 2005/2006 Pharmaceutical R&D Factbook, 2005. 10. PricewaterhouseCoopers, Theme of the Pharma 2020 series. Available at:
www.pwc.com/gx/en/pharma-life-sciences/pharma-202 0/index.jhtml (accessed March 2010).
VIRTUALIZATION IN PHARMA R&D 5
Figure 1: Increased R&D Spending Against Decline in the Number of New Therapeutics Approved by the FDA
10,000 20,000 30,000 40,000 50,000
0
30 40 50 60
20 10 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004* 2005* 2006* 2007* 2008*
R&D spending ($ millions)
No. of NMEs and biologics approved
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