Outsourcing, Partnering Sound Sexy But Won't Cure Pharma

Another consulting group chimed in last week to specify how pharma's declining ability to launch new drugs has hurt the industry's financial results.   It seems as if the principal contribution of these large consultancies consists of competing with one another to produce their own, unique measurements, ratios and formulas to show pharma's decline.

This latest autopsy compared new drug development during the years 1996-2004 to that between 2005 and 2010.  No surprise, 40% fewer drugs were launched during the latter period.  More importantly for pharma companies' profit pictures, the average annual sales, five years after launch, of drugs introduced in the more recent period were 15% lower than post-five year averages for drugs that reached market between '96 and '04.  That decline contributed to a 49% reduction in total pharma revenues from 2005 to 2010, even as total R&D spending almost doubled over the same time.

So what do these spreadsheet mavens suggest to rectify pharma's declining position?  In consultant-speak, they recommend companies should "Leverage alternative financing and consortia to access more science...[and] pool R&D efforts."  In other words, hedge the inherently risky business of drug development by forming more partnerships and funding outside researchers in academia, biotechs and startups.

The problem with relying chiefly on data that fit into spreadsheets and PowerPoint graphs is that such an approach produces a blinkered and frequently distorted view of history.  In this case at least two problems affect the recommended strategy and the consulting soothsayers fail to even discuss them.

In the first place, pharmas don't do Big partnerships very well.  The red tape, sluggish pace and general immobility that traditionally plague Big Pharma get tripled when two such companies collaborate on line operations.  The chances for avoiding this may be better if the joint venture and its personnel sever all connection with the parent companies and limit those outside partners to passive equity positions, but even that usually doesn't avoid the problems.  The Merck/Schering-Plough joint venture for Vytorin, and its fumbling of the ENHANCE and SEAS post-market trials, remains the typical pattern.

Especially in those partnerships where both Big Pharmas have to sign off on all expenditures, the operant characteristics are slow, weak and dumb.  In some cases the sales groups and brand teams of the two partners have even focused their competitive fire on each other, rather than on other companies.

The other problem with this partnering-outsourcing recommendation lies in what Gautam Naik of the Wall Street Journal called "one of medicine's dirty secrets."  It seems that a large proportion of the early and even mid-stage results that outside labs obtain on drug compounds, including studies published in the most respected, peer-reviewed journals, simply can't be reproduced.

If pharmas try to fill more of their pipelines with compounds that looked promising because outside investigators obtained positive results from them, such in-licensing companies may show even worse success rates at developing new drugs.  Naik cites a study from Nature Reviews that showed the success rate of compounds in Phase 2 human trials fell from 28% in 2006-2007, to 18% in 2008-2010, much of it due to this declining level of reproducibility.  Bayer, a Big Pharma based in Germany, claims it had to scrap two-thirds of its early drug projects because their "in-house experiments failed to match claims made in the literature."

The economics of academic science appear largely responsible for this growth of questionable results.  Research funding and the availability of jobs for academic researchers depend upon publication.  Pressures to publish have even increased during recent years, as academic budgets grew tighter.  Those pressures, in turn, increased the number of bioscience journals to provide outlets for medical research papers.

Circumstances that apply to tabloids and trash TV also hold, to a lesser degree, for scientific journals -- both compete by "publishing splashy papers."  In the medical science world that typically that means publishing positive results.  In a more refined form, "Dying Martians cure cancer by eating nude starlets" works for prestige medical journals as well as The National Enquirer.

So partnering and outsourcing R&D offer no easy or pat solution for pharma.  The mastodons that ran the Big Pharmas over the past fifteen years produced a score of ill-advised mergers that benefited their own compensation as a result of earnings growth over a few quarters, propelled by layoffs.  The longer-term results consisted of several unwieldy companies that stifled research and contained equity bases requiring mega-blockbusters to improve earnings relative to equity.  This occurred precisely at a time when both pharmaceutical science and health care economics reduced the likelihood of creating blockbusters.  In this respect pharma's top managers were no better than the Wall Street barons who drove the whole US economy into a ditch.  Now it will require some major disruption or, as the capitalist Panglosses put it, "creative destruction," to put things right.

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