Should a Big Pharmaceutical Company Invest in Internal R&D?
On the surface, this appears to be a strange question. After all, the pharmaceutical industry prides itself on its ability to discover and develop new medicines. Yet, this ability is being challenged as the industry’s productivity didn’t live up to expectations in the last decade. The complete outsourcing of R&D was recently put forward in a November 2 article on Investopedia by Stephen D. Simpson entitled: “Should Pfizer Forget R&D Altogether?” Here is what Simpson had to say:
“Maybe the answer is for Pfizer not to worry so much about its own pipeline. Spending billions of dollars in R&D doesn’t change the fact that the odds of any single compound making it to market are long, indeed. Perhaps it makes more sense, over the long run, to save on R&D and wait to license, or acquire, drugs (or companies) once they have either made it to market or shown strong enough signs of efficacy and safety to de-risk the proposition. It would be a bold and potentially risky strategy. But then, is it really riskier to pay a heavy premium for Celgene, Biogen Idec or Shire than to invest over $1 billion and 10 years in a competing drug whose odds of success are likely below 15%?”
Before getting to the specifics of Simpson’s proposal, it is important to understand the nature of a company’s R&D budget line. First of all, everything is included in that figure, not just internal R&D costs but also things like the expenses generated in running co-development programs for clinical candidates partnered with other companies and milestone payments made to small companies whose early stage candidate it has licensed. Second, the size of an R&D budget is largely driven by “D,” not “R.” The research component of a pharmaceutical company’s budget tends to be only about 15% of the total due to the tremendous costs involved in developing a clinical candidate from Phase 1 through NDA approval.
In addressing Simpson’s proposition, it must be noted that companies are already outsourcing a significant part of their pipeline. Martin Mackay, President of AstraZeneca’s R&D division, has recently said that their goal is to have 40% of their pipeline generated through licensing of compounds. My sense is that this is a goal shared by a majority of pharmaceutical companies, and, as I’ve previously written on my blog, I support this strategy. But should a company like Pfizer be totally dependent on outside sources for its future?
Simpson’s comment that companies would be better off acquiring drugs that have shown enough signs of efficacy and safety to de-risk the proposition is, frankly, naïve. A compound can show promising signs of efficacy in Phase 2 studies and you can license it at that point. However, you will still need to invest heavily in the Phase 3 programs needed to get the drug approved. Given the needs these days to perform very costly outcomes and differentiation studies, the bulk of the development costs remain in this aspect of Simpson’s strategy. Furthermore, a program is never totally de-risked – there are a number of examples of drugs that prove to be disappointing commercially because of adverse events found post-launch when the drug gets used by millions of people.
So perhaps then, Big Pharma should forgo the licensing of compounds and simply buy companies, as Simpson suggests. This strategy has been used by Pfizer with its acquisitions in the last decade of Warner-Lambert, Pharmacia and Wyeth. History teaches that this strategy has its issues. Beyond the internal disruption not just to your entire organization but also that of the acquired company, these mergers have not been viewed as being financially attractive due to the premium that the acquiring company must pay and the lack of sustainability of the merged pipeline to meet long-term growth targets. Besides, you cannot just assume that the smaller company will automatically roll over and let itself be purchased, nor can you assume that smaller companies will be available on-demand.
While Simpson didn’t directly address the complete shut-down of a company’s early research activities, others have. I also find this problematic. As noted above, the “R” component makes up only a small percentage of the overall R&D budget. And, when internal efforts deliver new products, you own them completely – no milestone payments, no royalties, no co-marketing deals. Thus, these products are more profitable. Even Simpson acknowledged that “Pfizer has some encouraging drugs that should come out soon” and most of these are internally derived. But it is also important to have a strong internal cadre of scientists to help evaluate the strength of the supporting data of compounds being considered for in-licensing. A good research organization provides this. Many a deal has been squashed by internal scientists based on their rigorous reviews.
Any company forgoing internal R&D risks its future. It is not something I would recommend.