Pharmaceutical industry is in a state of crisis. That’s the message Ted Torphy, VP from Johnson & Johnson, sent to us in his Berkeley talk. The reason? A lack of innovation, not in terms of technological ones in R&D, rather, R&D business models innovations.
Developing a new drug is a lengthy and costly process, averaging 11 years and $1bn. And, in addition to big Pharmaceuticals, it involves participations of multiple entities including Academia, Venture Capitals (VCs), Government, and Public Markets. Following graph lists the traditional drug development lifecycle along with its participants (ranked by their contributions) at various stages.
(Just for explanation purposes, Phase I is to test the safety of the drug. Phase II is divided into two sub phases where II a tests if the drug works for the targeted population and II b is to identify the right dose of the drug. And Phase III deals with large scale clinical testing.)
Research suggested that out of $1bn R&D investment, 35-40% went to stages before Phase II b (early-stage development), and the most importantly, success rate jumped up from 1.5% at “Innovation” to 50% when it came to Phase II b. So, in the pharmaceutical world, the stage right before Phase II b is called “Clinical Proof of Concept”, and they want to bring drugs to pass that stage more rapid and economical. To do that, they started to acquire new biotech companies that already have some success in early-stage development instead of investing tremendous resources in their own R&D. This mindset results in the fact that biotech organizations are becoming the source of new products. However, risky nature of this early-stage development together with the requirement of a big lump-sum up-front investment usually turns away interested VCs, which causes an investment gap between basic research and late-stage drug development.
What is the proposed solution? Dr. Torphy recommended “Virtual Integration”. Contrary to “Vertical Integration”, where firms gain top-down controls for everything and “Vertical Disintegration”, where companies outsource to others services/products that are not in line with their core businesses, “Virtual Integration” encourages collaborations or alliances among businesses to share competencies, infrastructure, intellectual capital, risk and rewards.
He argues that this is beneficial to all the stakeholders in the ecosystem. For example, large pharmaceuticals can benefit by expanding pipelines with an external portfolio of product opportunities, minimizing fixed costs and infrastructure while maximizing flexibility. VCs can reduce their capital investments by gaining access to pharmaceuticals’ infrastructure and expertise. Academia, on the other hand, will have the ability to tap into external funding resources.
“Virtual Integration”, in a sense, is Open Innovation, embracing the expertise and resources from partners, suppliers, R&D institutions, etc. But as Dr. Torphy suggested, it is not easy to sell the concept. It requires all the participants to share the same collaboration mindset, to overcome the “Not-Invented-Here” barrier and to create a fluid system to exchange ideas, expertise and resources.
3 replies on “Collaboration Required in Pharmaceutical Industry”
I would imagine that the barriers to virtual integration will be huge. Is there any success stories of this? Morten
It is difficult. Ted demonstrated the difficulty by showing us an email from his boss:
“Ted, what is this??? I don’t see why we are talking about Open Innovation to our competitors. I really think this is not the best use of your time”.
Bringing all the participants together with the same mindset turns out to be a huge challenge.
I’ve heard of one other approach to bridge the valley of death in drug development. A few universities, e.g. Utah, are starting to beef up their technology transfer offices and sending people from companies into the lab.
It’s a great way to combine the company expertise on moving discoveries toward a product but retain the science expertise of the university lab.