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Point of View : Apr 1, 2008 (Vol. 28, No. 7)

Defending Pharma Companies

Innovation Is Alive and Well in the Therapeutic Drug Industry
  • J. Leslie Glick, Ph.D.

Marc-André Gagnon’s point of view piece in the February 15 issue of GEN maintains that, by and large, pharmaceutical companies have departed from the mission of developing innovative therapeutics in favor of marketing me-too drugs so as to maximize earnings. At first blush this might seem true, but the evidence points to the contrary.

Gagnon makes the point that the pharmaceutical industry “has a great monopolistic capacity.” Citing Alfred D. Chandler’s 2006 book, Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries, Gagnon states that “barriers to entry have been so high since the 1920s that not one new company has managed to become one of the world’s top 30 pharmaceutical firms since then.” That statement is simply not true.

A list of the world’s 50 largest pharmaceutical companies (size determined by the volume of healthcare revenue reported for 2006) was obtained from Wikipedia, and financial data contained therein were confirmed by accessing the archives of the U.S. Securities and Exchange Commission.

Dates of company origin were obtained from various sources, including company histories archived by Funding Universe. Of the 30 largest companies on that list, three—Teva, Eisai, and Alcon—were formed in 1935, 1941, and 1945, and represented the twenty-first, twenty-fifth, and twenty-seventh largest companies, respectively.

Two biopharmaceutical companies on that list, Genentech and Amgen, were formed more recently and placed nineteenth and fourteenth, with revenues of $9.3 billion and $14.3 billion, respectively. Genentech, founded in 1976, achieved revenues that were almost as large as the $10.6 billion reported by Schering-Plough (16 on the list), whose U.S. origin dates back to 1876.
Amgen, founded in 1980, was larger than Schering-Plough, and its revenues were almost as large as the $15.7 billion reported by Eli Lilly (13 on the list), also founded in 1876. Other rapidly growing biopharma companies moving up fast on the list include Genzyme and Gilead Sciences, each reporting over $3 billion of revenue for 2006. Genzyme (33 on the list) was founded in 1981, and Gilead Sciences (35 on the list) was founded in 1987.

Gagnon implies that compared to other industries, acquisitions/mergers are especially characteristic of the pharmaceutical industry. He writes, “Access to the market is so restrained that smaller firms have no choice but to let themselves be bought by bigger players.” Acquisitions and mergers are common in practically every mature industry, but every so often a newcomer ventures forth, finds a niche, and becomes a major player.

Moreover, as I discussed last year in this column (April 15, 2007, pg. 6), while a few companies may dominate an industry, it does not guarantee who will be ahead a few years later. Dramatic turnover has become increasingly common among the leaders in any given industry.

Stressing the extensive amount of funds the pharmaceutical industry spends on marketing and sales, Gagnon claims that, “Research and development have become secondary for the dominant firms.” That is hardly the case.

The U.S. Congressional Budget Office reported in 2006 that for U.S. pharmaceutical companies, R&D expense as a percentage of revenues from prescription drugs "has hovered around 19%"e; since the early 1990s, thereby establishing the pharmaceutical industry "as the most R&D-intensive industry in the U.S. manufacturing sector."e; In contrast, all U.S. manufacturers spend an average of barely 3.5% of product revenues on R&D.


Me-Too Drugs

Having presented some of the financial evidence that disputes Gagnon's argument, I must emphasize that even though the pharmaceutical industry remains committed to developing innovative therapeutics, there is substantial support for his assertion that drug companies market me-too drugs so as to maximize earnings.

The reality, however, is that the prevalence of me-too drugs occurs in waves, based on technological advances made possible by mostly unpredictable discoveries in the underlying basic science. The development of antibiotics is a classic example of therapeutic innovation based on an unpredictable discovery years earlier. Because of the still substantial holes in our knowledge of the requisite basic science, technological advances are more unpredictable in the pharmaceutical industry than in other industries. Me-too drugs simply represent the exploitation of such advances and fill the gaps between them.


Gene Therapy

A couple of examples will illustrate how difficult it is to predict the length of time it takes to develop a radically new therapeutic following a relevant seminal scientific discovery. In the 1940s it was established that one could genetically alter bacteria by means of isolated DNA. Theoretically, this discovery suggested that gene therapy might be realized sometime in the future.

It was not until the 1960s that the first reports appeared indicating that mammalian cells could also be genetically altered by means of isolated DNA. Years later, in 1990, the first successful example of gene therapy was demonstrated, albeit for a very rare, life-threatening disorder—severe combined immunodeficiency in a child lacking the normal gene for adenosine deaminase.

A fair number of gene therapy clinical trials have been initiated since then and many are ongoing. If perfected, gene therapy might be of enormous practical value, saving countless lives and resulting in huge market opportunities. Yet, thus far, over 60 years following the discovery that isolated DNA could genetically transform cells, only a handful of companies have marketed gene therapy for a couple of conditions, and the number of patients treated, mostly outside of the U.S., is relatively small.

In contrast, the discovery of recombinant DNA in 1972, clearly the seminal event for the modern biotechnology industry, quickly paved the way for a wide variety of innovative therapeutics, beginning in 1982 with FDA approval of genetically engineered human insulin. According to BIO, over the next 14 years, 106 recombinant and mAb products plus a few tissue-engineered products were approved by FDA for 392 indications.


Personalized Medicine

On the knowledge front, recent years have witnessed significant advances in genomics and proteomics, resulting in the identification of numerous biomarkers, the elucidation of the molecular architecture of the cell, and the emergence of pharmacogenomics. We are now at the threshold of personalized medicine-targeted therapy based on genotype-dependent diagnostic results.

For example, in the February 21 issue of Nature, Daniel J. Rader and Allen Daugherty identified 38 clinical and preclinical trials, each trial directed at one of 38 new therapeutic targets for atherosclerosis or its risk factors.

G. Steven Burrill has aptly summarized the potential benefits of personalized medicine: “The right drug for the right patient at the right time.” Burrill also points out the potential benefits for the developer of the medicine: smaller, quicker, and less costly clinical trials for proving efficacy in the target population, resulting in a better safety profile and a higher probability that the medicine will reach the marketplace.

Personalized medicine thus represents a new paradigm for the pharmaceutical industry. Because the costs of product development should drop significantly, attractive returns on investment will no longer require blockbuster-sized sales. The market leaders will no longer depend on a few megabillion dollar products but rather will generate many more products, each focusing on a smaller but still substantial market niche, ultimately achieving better clinical results. Pharmaceutical companies unable to compete effectively in this game-changing scenario will eventually be marginalized.

Opportunities now abound for the development of innovative therapeutics. Current drugs benefit just a limited number of patients with neurodegenerative diseases, and at present there is no cure for such diseases. With respect to cancer, standard drug treatment benefits only a minority of all cancer patients, and the one-year survival rates for various cancers are unacceptably low.

The practice of personalized medicine will indeed be game-changing, and those drug firms that don’t change their game will be the losers. Those that do will be among the winners. The question is not whether drug firms focus on innovative therapeutics but rather which firms will grasp the new paradigm and represent the new big pharma.

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J. Leslie Glick, Ph.D., is an independent corporate management advisor and a former adjunct professor of technology management in the graduate school of the University of Maryland's University College. Dr. Glick, a cofounder of the Industrial Biotechnology Association, which eventually became the Biotechnology Industry Organization, also cofounded and ran three biotech companies, one of which was Genex. E-mail: jlglick@ix.netcom.com.