Big pharma's new business model

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  • Nobody endured the lessons of new drug development harder than Pfizer

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  • There's something unanticipated in drug research that can't be industrialized

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  • Public programs like Medicare don't want to pay for new drugs that are incremental improvements

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Lipitor, the hugely successful cholesterol-lowering drug, went off patent at the end of November, and generics are now on the market. The event is a turning point not only for Lipitor's maker, Pfizer, but also for the entire pharmaceutical industry. Big drug makers aren't chasing drugs like Lipitor anymore, or uncovering compounds the same way.

Over the past two decades, pharmaceutical firms became the world's most profitable companies on sales of hits like Lipitor. They generated huge profits—at its peak, Lipitor generated $13 billion in annual revenue—by targeting everyday maladies. The earnings were used to place lots of bets in search of similar successes. Investors rewarded drug companies based on the number of molecules in their pipelines. Industry-wide, total research spending grew to almost $70 billion last year from about $20 billion in 1999.

Nevertheless, drug makers squandered a lot of resources and learned some costly lessons. The first was that their scientific strategies for discovering drugs were no longer effective.

When Lipitor was discovered, drug development mostly involved screening millions of random compounds against a molecular target. Companies bet that bigger screening programs would make them more likely to find new blockbuster drugs. So they spent money on larger labs, more Ph.D.s, and rows of tools for vetting molecules.

But doubling the screening effort didn't mean finding twice as many drugs or replacing expiring blockbusters with equivalent successes. Research wasn't a scalable endeavor, and eventually firms weren't returning the cost of the capital they consumed.

Nobody endured these lessons harder than Pfizer. The company built the world's largest pharmaceutical research center in Groton, Conn., a 160-acre site with more than 5,000 employees at its peak and 2.7 million square feet of research space. But the only major drug to come out of the sprawling facility in the last 20 years was the smoking-cessation drug Chantix.

The pharmaceutical companies learned from this experience. They took advantage of new science that allowed drug discovery to become a much more targeted endeavor—focused around precise information about the molecular fingerprints of disease.

In this kind of "rational" discovery process, size matters less than precision. Drugs are designed around the individual biological receptor they're targeting rather than being screened out of a library of random compounds. Deploying bigger tools no longer counts as much as having concentrated expertise in the particular pathway that causes a disease.

The second lesson drug makers learned was that big bureaucracies were hostile to the kind of risk-taking and scientific focus needed to do good research. At most companies, the majority of new drugs are discovered by a handful of scientists with repeated successes. There's something unanticipated in drug research that can't be industrialized.

In recent years, pharmaceutical companies started to carve up their sprawling research enterprises into smaller, more focused teams. The right size of a research team is now said to be 20-40 people. To get at new science early, drug makers rely on collaborations with academic research teams and licensing deals with smaller biotech outfits.

Finally, drug makers learned that the big primary-care medical needs—like lowering cholesterol levels—were no longer good clinical problems to go after. Companies are now aiming many of their new drugs at more serious maladies like cancer and Alzheimer's, where successful new pills can command premiums over today's mediocre medicines.

It's not that we have licked routine conditions like high cholesterol and hypertension. But there are "good enough" generic drugs available. Private health plans and public programs like Medicare don't want to pay for new drugs that are incremental improvements.

The drug makers have a lot of recent success to show for their changed business models. Pfizer's experience with its highly effective and targeted lung cancer drug Crizotinib, approved in August, validates the new model. That drug went from lab bench to patient bedside in about six years, rather than the 10-15 years it usually takes a new drug to reach the market.

Wall Street analysts have turned bullish on the industry again. Analysts argue that drug pipelines are at an inflection point, with many of the compounds representing "game changing" innovation. There are 3,000 drugs in development in the U.S. today compared to about 2,000 a decade ago. More of these medicines target unmet needs like Alzheimer's and stroke, where the advances in care can be substantial. Almost a third target forms of cancer, some of which are poorly treated today, like cancers of the brain and pancreas.

But the industry still faces obstacles. The most significant is the way its development process is regulated by the Food and Drug Administration.

Regulatory requirements have grown enormously over the past few decades, increasing costs and deterring new investment. Direct outlays on clinical trials can top $1 billion and the average cost of enrolling a single patient in a Phase 3 drug trial now exceeds $26,000. Higher costs are visible at every stage of the development process.

According to the Tufts Center for the Study of Drug Development, in 1999 drug makers had to perform a median of 96 procedures on patients enrolled in clinical trials—collecting data with things such as X-rays, blood draws and biopsies. By 2005 the number of tests performed on each patient grew to a median of 158. Drug trials, too, have become large and time-consuming. Their average length ballooned to 780 days in 2005 from 460 days in 1999.

There are ways to make the regulatory process more effective but also more efficient. Adaptive clinical trial designs, which allow drug makers to adjust a trial based on accruing results, can help drug companies learn more about the patients most likely to benefit from a new medicine. Bayesian statistical methods, which don't require patients to be randomized to unrealistic treatment groups, can help companies learn more about drugs from real-world data. These are just a few ideas that have been talked about for years by public and private-sector scientists as ways to modernize regulation. None has been meaningfully advanced.

Drug makers are renewing themselves by realizing that their research success wasn't tied to the scale of those endeavors, but their precision. Today, the continuation of these scientific advances depends on their regulators reaching a similar understanding.

Dr. Gottlieb, a resident fellow at the American Enterprise Institute, was FDA deputy commissioner from 2005-2007. He consults with and invests in drug companies.

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