Pharma's Dilemma Is Biotech's Opportunity

Despite all of the regulatory baggage being heaped on the large drug makers in Washington, their biggest drags may be inside their own laboratories.

While the large drug makers still churn out new and effective products from their own research efforts, when you consider the money they pour into research and development, the pace of innovation that they produce often pales in comparison to some of the biotech and specialty pharma brethren.

The standard refrain on Wall Street is that the drug giants no longer do innovation well. But nobody has really answered the question of why. Increasingly, it looks like the kind of scientific risk taking and detailed know how that is a prerequisite for seizing on truly novel drug ideas may simply not coexist very well inside the confines of a large company.

The launch in 2006 of a new government drug benefit for American senior citizens may add another layer of complexity to these woes, forcing big drug makers to get still bigger at the very time that they should be getting smaller.

If innovation and drug development were their only imperative, pharmaceutical companies would be going in exactly the opposite direction, morphing themselves into smaller, more focused firms with dominant intellectual property positions in the genetic and molecular markers that drive specific diseases.

More and more, scientific discovery is turning on detailed knowledge of more specialized therapeutic niches, on ownership of proprietary knowledge and on commanding intellectual property rights over the molecular signatures and protein targets that trigger different diseases. This scientific shift is the result of a fundamental change in the orientation of research--focusing more on the genetic and mechanistic basis of disease, as opposed to our old trial and error process, where interesting chemicals were screened randomly against the molecular targets that trigger disease, with the hope that one of those chemicals would stick to its intended target.

Consider the brain. For two decades, neuroscientists have been making slow progress in understanding the anatomical and functional structures of the brain, as well as its electrical circuitry. All their efforts have not translated into a deep understanding of the molecular level of disease, or the development of new therapies for the most devastating brain disorders. Drugs for Alzheimer's and Parkinson's treat symptoms but not the underlying cause of these diseases.

Now researchers are looking at the brain's circuitry at the level of individual molecules, and all kinds of pharmaceutical innovations are pouring out. Highly targeted new drugs that aim to arrest the progression of Alzheimer's disease already fill the pipelines of a half-dozen biotechnology companies.

Often the molecular machinery that causes one person's disease is not the same as what triggers another's. Companies will need to develop batteries of drugs, each targeted to pockets of people whose genes express certain molecules and receptors. It is a model that favors smaller, focused companies that have assembled commanding patent positions and in-depth expertise in specific therapeutic areas.

Being big often mitigates against the ability to collect scientists and expertise in a particular area. There are plenty of biotech companies that are known as good cancer companies or good at AIDS. When was the last time anyone referred to a big drug maker according to where its science really excelled?

The big drug makers are trying to fix this by focusing their research on a handful of therapeutic areas. But science isn’t a process easily shared among hundreds of people all working in the same department. It often comes down to a small team of like-minded researchers, or even a single standout free to take risks and unencumbered by a corporation’s bureaucratic decision making. How many pharmas can promise that to their scientists?

The political and regulatory pressures are going to continue to push big drug companies to get still bigger. Not least among these external drivers is the new Medicare drug benefit. Big drug companies know that after the new regulatory changes resulting from the Medicare drug benefit are put into place, a lot of the art of selling drugs is going to be how well the companies can negotiate with a handful of very large pharmacy and therapeutic committees inside the biggest health plans or the drug benefit managers that contract with employers and medical plans. These companies are known as Pharmacy Benefit Managers or PBMs for short.

One advantage of being big is that the drug companies will be able to offer a single PBM a drug option in just about all the major therapeutic categories. Need a hypertension pill, we have one. A pill for high cholesterol? Got that. An anti-impotence drug? We have that too. A big drug maker will be able to offer a single PBM a full slate of drugs at a package discount, getting the plans to buy their premium drugs but also forcing them to take the products that are not as enticing.

This kind of negotiation has long been a fixture in the device industry, where hospitals save money by contracting with entities called group purchasing organizations to negotiate package deals on medical products. The GPOs act as a middleman between the hospitals that purchase medical products, and the manufacturers that sell them. Through a GPO, a company like Johnson & Johnson, for example, will offer a hospital a good price on their latest heart stent, so long as the hospital also buys the company’s sutures and its band aides.

In a world increasingly defined by a smaller number of very large drug purchasers, bigger isn’t bad when it comes to negotiating sales and marketing new drugs. But so far, it hasn’t suited the science very well. Whether the drug giants are able to maintain the entrepreneurial focus on long-shot research efforts that they need to produce blockbusters, or become even more dependent on biotech to fill their pipelines, is the question. All of the innovation may well come from the smaller players, who will be less encumbered by regulation and more free to focus on their labs.

The odds are that the recent wave of link-ups between big pharmaceutical companies and smaller biotech means the drug giants have already seen this future, and are coming to grips with it. When the dust settles, and we take stock of the new marketplace, the question that will remain is whether it was the science drove them there, or was it the government regulation?

Scott Gottlieb, M.D., is a resident fellow at the American Enterprise Institute.

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