Back to School 2005: Innovation & economics
Entering the second half of the decade, and a five full years after the genomics bubble popped, the biopharmaceutical industry and its financiers are beset with doubts about business models, the ability to raise money, the still slow pace of product development, and an increasingly hostile public policy environment.
This risks loss of faith in the reason for this industry to exist, which is to bring innovation to the bedside. Thus it's time to declare an end to the griping and talk about solutions. It is now imperative to rekindle faith in innovation all along the value chain.
Indeed, innovation is required to maintain the industry's exceptional economic performance, which is required to attract investors. And only truly new medicines are likely to maintain the argument for premium pricing in a public policy environment where all the pressures are to drive prices to the bone.
The 13th annual Back-to-School Issue focuses on this symbiosis of innovation and economics.
This year's discussion assumes that one key determinant of the biopharmaceutical industry's economic well being - pricing - is in fact out of industry's hands. Given this assumption, the corollary is that profitability can remain exceptional only if the economic equation is transformed by innovations upstream.
Back-to-School argues that these economic transformations will not be accomplished by simply finding cost-cutting solutions, which tend to be one-off improvements.
Instead, the most relevant metrics should be improvements in the yield of products and the time to market. Innovations that change these outcomes, coupled with best practices in project selection, will result in long-term economic benefits to the industry and its investors, while rewarding payers and patients with meaningful therapeutic improvements or the solutions for unmet needs.
Given this framework, this year's essay looks at a few key areas where redefining best practices could result in long term economic impact:
Translational Science: Altering the way in which novel science is prepared for commercialization is the only way to fix the economics of emerging technologies.
Product Development: Improving the predictive value of preclinical processes is required to increase the number of actual products yielded from the candidates taken into the clinic. By the same token, improving the yield requires improving the informational value of early stage trials, as well as breaking free of the rigid Phase I, II, III paradigm.
Commercialization: Improving the contribution of successful clinical candidates to the bottom line means moving to protocols designed to provide evidence that treatments are relevant in actual medical practice and reimbursement, and more rapidly jettisoning candidates that cannot provide such evidence.
Regulation: Capturing any of the value requires regulators to embrace and enable upstream innovations that predict clinical benefit, and to do away with requirements that do not.
Finally, Back-to-School argues that the outlines of this transformed R&D paradigm already exist, that some of the pieces are already in place or close to it, and that the other pieces are within reach provided there is the requisite political will among key players.
Setting the Scene - The symbiosis of innovation & economics
Industry profitability - and investor returns - can remain exceptional only if innovations upstream result in fewer clinical failures and shorter time to market, while at the same time creating treatments that healthcare providers will pay for.
By now it is obvious: Pricing power of developers has given way to the reimbursement power of the payers, led by the Centers for Medicare & Medicaid Services. It is a zero-sum game where the willingness to pay is increasingly based on evidence of clinical value.
In this case, clinical value is not determined by the ability of a drug to show a non-random treatment effect in one or two well-controlled clinical studies, as defined by the existing approval paradigm. Instead, it is a system of comparative outcomes, where multiple drugs in a class face benchmarked pricing, and, unless a medicine meets an unmet need, any reimbursement advantage hinges on showing clear comparative benefits over alternative treatments.
Thus, the top line is determined by the ability of innovators to manage the intersection of biology and medicine, developing products that provide clinical benefit worth paying for (see "Bring Back Medicine," BioCentury, June 10, 2002).
Meanwhile, the bottom line is determined by the ability of drug developers to change processes upstream so that the economics of development are altered.
According to Derek Winstanley, chairman of Quintiles Transnational Japan KK, to reduce development costs by $100 million, developers need to reduce timelines by 19%, or improve trial success by 26%, or cut out-of-pocket preclinical costs by 30%. To reduce development costs by $200 million, developers need to reduce times by 41%, or improve trial successes by 32%, or cut out-of-pocket preclinical costs by 60%.
Lower out-of-pocket costs obviously play a role in the equation. But for these purposes, Back-to-School argues that many of these improvements are obvious, such as electronic data capture; and if they are obvious, they should be done.
Instead, to accomplish the symbiosis of innovation and economics, attention needs to be paid to two metrics: improving the yield of projects and reducing time to market.
In the first case, there are plenty of benchmarks to go around. One of the more striking is data presented at the Drug Development Science conference earlier this year by Peter Corr, senior vice president of science and technology at Pfizer Inc. (PFE, New York, N.Y.), who calculates that failure accounts for 75% of cumulative R&D costs.
Another picture is provided by the European Federation of Pharmaceutical Industries and Associations. Based on data culled from 10 major pharma players in the U.S. and Europe for the period 1991-2000, once products were in the clinic, EFPIA found that 38% dropped out in Phase I, mainly because of safety and blood level issues; 63% of those entering Phase II failed, mostly for lack of efficacy; 45% of the remaining candidates failed in Phase III; and 23% of the ones that made it through the clinic failed to be approved by FDA.
Doing the arithmetic results in a cumulative clinical failure rate of almost 90% (see "Rates of Attrition,"