Drug Truths

A site devoted to teaching about drug discovery and development.

Will Royalties to Inventors Really Improve Productivity?

with 5 comments

A Forbes article called “Serial Lifesaver” by Matthew Herper focused on Dr. Peter Hirth, the CEO of the biotech company, Plexxikon.  There is no debating that Hirth has had a very productive career in the biotech industry.  He’s played a key role in the discovery of three successful drugs, including Recormin for anemia (sold by Roche), Sutent for kidney cancer (sold by Pfizer) and the recently approved Zelboraf for melanoma (to be sold by Roche).  Herper’s piece set out to find the reasons behind Hirth’s stellar track record.

Herper concludes: “Hirth’s serial success stands out vividly in a pharmaceutical industry that has for years suffered from a profound innovation drought.  He says that large companies should learn from what Plexxikon has done with a staff of only 43, explaining that if he were running a big business like Pfizer, he would form small units of 40 or 50 researchers and fund them sparingly but promise them royalties on any drugs that succeeded.  Productivity, he says, would go way up.”

There are a few issues with this statement.  First of all, in big companies like Pfizer, the drug discovery project teams do, in fact, contain 40 – 50 scientists.  This was true in my day with the teams in disease areas such as osteoporosis, atherosclerosis, ophthalmology and urology.  Yes, there were larger teams in broad disease categories such as Neurosciences, but this area was made up of teams working on depression, schizophrenia, addiction, etc.  Breaking this zone down into its components shows the 40 – 50 scientist concept still holds.  During my Pfizer tenure, the one exception was in oncology, where we had a group in excess of 200.  Contrary to the view that size is detrimental to productivity, this group was the most productive we had at the time as judged by the number of clinical candidates it produced relative to the group’s size.

Joshua Boger, an excellent scientist in his own right and the former CEO of Vertex, recently said that, in his experience, the relative size of the respective discovery groups doesn’t matter – it’s having the right people.  I absolutely agree with him.

But the bigger issue for me with Hirth’s statement is the fact that the overall process of going from an idea to the discovery of a clinical candidate to the conversion of this candidate to an approved new medicine DOES take an army.  It’s amusing to read “Plexxikon created Zelboraf… (and) Roche helped the tiny biotech test it.”  This “help” undoubtedly involved literally hundreds of Roche scientists to develop a formulation that enabled Zelboraf to be tested in the clinic, synthesize Zelboraf in sufficiently large quantities for clinical testing, run the necessary toxicology studies in animals to show that the drug was safe, and carry out the full gamut of Phase 1, 2 and 3 trials to justify FDA approval.  My guess is that if you created a list of all the people who were involved in the discovery and development of Zelboraf, it would number at least 500 people.

And that bring me to my final issue with Hirth’s stance, that of royalties.  There are often seminal discoveries made in the development of a new medicine that extend beyond the discovery laboratory.  Many a drug program has been saved by a key observation in the clinic on a drug’s activity, or a breakthrough new formulation that allows the drug to be suitable to be made into a pill or capsule, or a key toxicology study.  I would argue that such a royalty scheme is unworkable because, in my experience, you would have to grant royalties to at least a dozen people who have made a seminal contribution.  Unless the royalty was miniscule, it would greatly cut into the revenues for the company.

And finally, it is my experience that scientists are an extremely highly motivated bunch.  They are driven by making use of their scientific talents to discover and develop something that, if successful, could benefit millions of people around the globe.  I am not sure that the potential for a royalty would cause them to work harder.  They are already incredibly dedicated.

Written by johnlamattina

September 16, 2011 at 8:13 pm

Posted in Uncategorized

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5 Responses

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  1. I agree that Hirsh’s model is a bit simplistic in that it ignores the additional years, capital and expertise that is needed to “monetize a good drug idea”. However it does reflect a useful philosophy that too often is obscured by those years and “crowds” of teams/experts. It has three principles: Every scientist should understand the nature of their industry and how it creates things of value to society (no they do not need an MBS for this.) They should then consider adapting their thinking and work to add value in that framework. And similar to Hirsch’s POV, they should be rewarded (beyond a base salary) proportional to the portion of value they create or add – especially for new elements of value that prove themselves.

    An example. Twenty years ago, I led a group of project managers that had to guide/influence the silos that were developing drugs for a major firm. Beyond the bread-and-butter of good project management (PMBOK-like) practices, I encouraged them to stretch their heads (as well as their team members) to look for ways that would drive more value out of the areas they touched and influenced. That took learning (and then teaching) what made for a valuable product or service. Not just cost-lowering (which was the dominant value-creation lever at that place and time), but understanding things like the (at that time) new idea that adding considered costs or risks could pay out hugely for the firm. To understand the now-old “rule of thumb” that a day earlier on the market was worth roughly $1MM in today’s monies. This was provocative and yet helped change how those managers, their teams and ultimately the firm looked at the ROI of R&D.

    Despite protests that it would incur costs, I guided them on a key project as a pilot to remove barriers to launch fully, immediately upon approval – something that had NEVER been done before in the firm. The approach not only incurred additional costs at risk, but required persuasion, teaching and struggling with all of the inertia organizations impose. Besides being successful and teaching the organization an important principle, I explained to my stressed-out project leaders what I fervently wished – that they would get even 0.01% of the new value they would be creating for the firm to compensate going beyond the call of duty. For pursuing the best interests of the firm despite resistance. This was intended to be a teaching moment, not a promise or lament. The problem remaining twenty years later is that we still have not found good ways to incent or reward those masses of teams to think, let alone act out of the box. Nor to educate them on what creates value so many steps beyond (but dependent upon) their actions. My team took it bruises and did indeed win an “award” that included monies. Regretfully it was only 0.00001% of the value they had created… But I guess at least it was a start. I submit that regardless of the size of R&D teams this is a philosophy that should be baked in. Maybe it is easier with smaller groups?

    Terry McCormick

    September 19, 2011 at 2:57 pm

    • Terry,
      The $1 million/day comment has echoed in the PFE R&D labs for decades. We often tried to look for ways to streamline processes to do things faster and better, so I have no qualms about that. We also rewarded people for the discovery of drugs that made it to market in the form of stock options. In these cases, we would identify the key 8 – 10 people who had the most meaningful impact on the program from conception to launch. These people were also recognized in other ways, generally in promotions, scientific awards, etc. Make no mistake, such people are lionized in R&D organizations as “drug hunters”. You can do this in a company of any size.
      – John


      September 19, 2011 at 3:08 pm

      • John –

        I agree that this can be done on any size, but still say it may be easier in smaller firms. My point is that the rank and file in larger firms often have more understanding of their department or individual goals, and that their mindset is disconnected from the “big picture”. This needs to change in order for firms to get out of their doldrums; I recently helped design an end-to-end process touching all of R&D for one of the largest firms. I was surprised to find that more than 90% of functional leaders (director and above) that I interviewed or worked with, still could not describe how their dept. goals aligned with overall R&D or corporate goals. They could not “find” the overall R&D Balanced Scorecard (a very common fad) that was supposed to align all department efforts. This was commonplace “decades ago” and again I am surprised that it still resides among us. And I have worked with most of the top 10 firms over the past decade.

        You mention that 8-10 might be substantially rewarded by options, etc. of the 500+ that were involved with a successful development & launch. I think that incentives should reward those that innovate throughout the pipeline stages, and at least inform the 90% that lack the opportunity to be lions of what it might take to be a “cub”. Not to reward what is your basic job, but to incent those that are game changers with something more than a chance of “0.00001%” of the value they might create. If you work the numbers, folks might be more motivated if they perceived an incentive on the order of 0.01% to 0.1%, as I described the reasons for having the courage to enact change to my staff way back when. I myself would love to find an investment that paid out 1000:1 to 10,000:1 (and that I did not have to fund until the returns were proven.)

        Terry McCormick

        September 19, 2011 at 5:27 pm

  2. John, I believe that one of unintended consequences of a royalty based model would be additional secrecy surrounding individual research project. It would provide additional incentives for scientist to “horde” information in hopes of someday monetizing their discoveries. As has been correctly portrayed in a number of your blog entries, major discoveries were very often the result of serendipitous events. A culture of collaboration between scientist and research projects is the most conducive to serendipitous research findings, not a culture of individual rewards.

    It is very hard to imagine that a lack of motivation has been the cause of the often publicized research “drought.” More than anything, the current R&D struggles are the result of poor collaboration and opaque transparency of pharma’s research labs, not of individual motivation. It would be even harder to imagine that awarding royalty to individual contributors would be able to fix this problem

    Jim Krol

    September 19, 2011 at 8:37 pm

    • Jim,
      You raise a great point. Fostering collaboration can be challenging and doing so in an organization fighting for royaties would be counterproductive to an endeavor where collaboration is essential. – John


      September 20, 2011 at 4:46 am

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