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Tag: pharma

The Costs of Doing Drug Research

There’s a recent Slate article which is making the rounds, especially amongst those who believe that pharmaceutical and biotechnology companies need to make less money and be more heavily regulated. The core conclusion is that the cost of R&D for a drug is not ~$1 billion as a widely cited study from 2003 established, but actually closer to $40-60 million.

imageDerek Lowe over at In the Pipeline does a great job of rebutting many of the claims in the article, but a few thoughts jump out at me:

  • The first is how anyone could have published a study like this which is off from the most recent/best estimate by a factor of 20x and not expect to see clear evidence reflected in the reality of the bio/pharma industry. Among the reasons why I think this estimate is ridiculous:
    • If the estimate were true, we’d see a lot more biotech startups (which tend to raise around that much in advance of Phase II trials) as there’d not only be a lot greater capacity for venture capital investors to fund them but also a greater likelihood that these startups can hit IPO/critical market without being bought out at an earlier stage.
    • If the estimate were true, I’d expect that instead of a “R&D productivity crisis”, we have a glut of new drugs coming out each and every year.
    • If the estimate were true, I’d expect that a company like Pfizer would, instead of boosting dividends and buying back shares, try to funnel more money into R&D – after all, isn’t it super cheap to build up a drug?
  • The second is more fundamental – why are people so focused on attacking pharma/biotechs on the purported difficulty/costliness of their R&D? I think folks like Marcia Angell who maintain that all the “real work” happens in government-funded universities and research institutions fail to understand the huge amount of screening, development, testing, and research that goes into turning something that’s only fit for an academic paper into something that’s sufficiently manufacturable, well-tested, and well-characterized to actually be useful in large scales in human beings. But even ignoring that oversight, in my mind this is attacking the wrong facet of the drug industry. From a societal well-being perspective, shouldn’t we want to praise them for their R&D? Maybe its duplicative, maybe it doesn’t even add that much value, maybe its not even as expensive as they say it is – but I think reasonable people will agree that more R&D dollars can be a good thing. To me, what we should focus on is not their R&D, but the games they play with advertising & marketing, with the intellectual property system, with not properly reporting things, etc. There are plenty of worthy things to attack the industry for – lets stop attacking them on something we actually want to see happen.

(Image credit)

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Schering-Plough says goodbye via analyst call

image If you follow the biopharma sector at all, then you’ll know one of the most noteworthy deals to be announced in recent months is the $41 billion deal where Merck will buy former rival Schering-Plough.

With the deal closing soon, Schering-Plough’s execs had to deliver one last earnings call with the analyst community which cover Schering-Plough stock.

Generally, these are very dry affairs full of corporate speak with many empty promises, excuses, and boasting (although, occasionally, if you have an interesting enough CEO like NVIDIA’s Jen-Hsun Huang, you get some very interesting commentary). But, this most recent analyst call had a bit of poignancy you don’t usually get in an analyst call, as covered by the Wall Street Journal Healthcare blog:

The earnings call’s invariable bleating about operational sales growth and foreign exchange impact came with notes of nostalgia… Analysts offered kind good byes and good lucks. Executives waxed about the company, and its pipeline of new drugs, that they had built. It will all go to Merck now, Chief Executive Fred Hassan said in closing.

Awwww. Adios, Schering-Plough.

(Image credit – Merck/Schering Plough)

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Playing with Monopoly

imageWith the recent challenges to Google’s purchase of Doubleclick, Microsoft’s endless courtship of Yahoo, and the filing of more papers in the upcoming Intel/AMD case, the question of “why should the government break up monopolies?” becomes much more relevant.

This is a question that very few people ask, even though it is oftentimes taken for granted that the government should indeed engage in anti-trust activity.

The logic behind modern anti-trust efforts goes back to the era of the railroad, steel, and oil trusts of the Gilded Age, when massive and abusive firms engaged in collusion and anti-competitive behavior to fix prices and prevent new entrants from entering into the marketplace. As any economist will be quick to point out, one of the secrets to the success behind a market economy is competition – whether it be workers competing with workers to be more productive or firms competing with firms to deliver better and cheaper products to their customers. When you remove competition, there is no longer any pressing reason to guarantee quality or cost.

So – we should regulate all monopolies, right? Unfortunately, it’s not that simple. The logic that competition is always good is greatly oversimplified, as it glosses over 2 key things:

  1. It’s very difficult to determine what is a monopoly and what isn’t.
  2. Technology-driven industries oftentimes require large players to deliver value to the customer.

What’s a Monopoly?

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While we would all love monopolies to have clear and distinguishable characteristics – maybe an evil looking man dressed in all black laughing sinisterly as his diabolic plans destroy a pre-school? – the fact of the matter is that it is very difficult for an economist/businessperson to really tell what counts as a monopoly and what doesn’t, for four key reasons:

  1. Many of the complaints and lawsuits brought against “monopolies” are brought on by competitors. Who is trying to sue Intel? AMD. Who complained loudly about Microsoft’s bundling of Internet Explorer into Windows? Netscape.
  2. “Market share” has no meaning. In a sense, there are a lot of monopolies out there. Orson Scott Card has a 100% market share in books pertaining to the Ender’s Game series. McDonald’s has a 100% market share in Big Macs. This may seem like I’m just playing with semantics, but this is actually a fairly serious problem in the business world. I would even venture that a majority of growth strategy consulting projects are due to the client being unable to correctly define the relevant market and relevant market share.
  3. What’s “monopoly-like” may just be good business. Some have argued that Microsoft and Intel are monopolies in that they are bullies to their customers, aggressively pushing PC manufacturers to only purchase from them. But, what is harder to discern is how this is any different from a company that offers aggressive volume discounts? Or that hires the best-trained negotiators? Or that knows how to produce the best products and demands a high price for them? Sure, Google is probably “forcing” its customers to pay more to advertise on Google, but if Google’s services and reach are the best, what’s wrong with that?
  4. “Victims” of monopolies may just be lousy at managing their business. AMD may argue that Intel’s monopoly power is hurting their bottom line, but at the end of the day, Intel isn’t directly to blame for AMD’s product roadmap mishaps, or its disastrous acquisition of ATI. Google isn’t directly to blame for Microsoft’s inability to compete online.

Big can be good?

This may come as a shock, but there are certain cases where large monolithic entities are actually good for the consumer. Most of these lie around technological innovation. Here are a few examples:

  • Semiconductors – The digital revolution would not have been possible without the fast, power-efficient, and tiny chips which act as their brains. What is not oftentimes understood, however, is the immense cost and time required to build new chips. It takes massive companies with huge budgets to build tomorrow’s chips. It’s for this reason that most chip companies don’t run their own manufacturing centers and are steadily slowing down their R&D/product roadmaps as it becomes increasingly costly to design and build out chips.
  • Pharmaceuticals – Just as with semiconductors, it is very costly, time-consuming, and risky to do drug development. Few of today’s biotech startups can actually even bring a drug to market — oftentimes hoping to stay alive just long enough to partner with or be bought by a larger company with the money and experience to jump through the necessary hoops to take a drug from benchside to bedside.
  • Software platforms – Everybody has a bone to pick with Microsoft’s shoddy Windows product line. But what few people recognize is how much the software industry benefited from the role that Microsoft played early on in the computer revolution. By quickly becoming the dominant operating system, Microsoft’s products made it easier for software companies to reach wide audiences. Instead of designing 20 versions of every application/game to run on 20 OS’s, Microsoft made it easy to only have to design one. This, of course, isn’t saying that we need a OS monopoly right now to build a software industry, but it is fair to say that Microsoft’s early “monopoly” was a boon to the technology industry.

The problem with today’s anti-trust rules and regulations is that they are legal rules and regulations, not economic ones. In that way, while they may protect against many of the abuses of the Gilded Age (by preventing firms from getting 64.585% market share and preventing them from monopolistic action 1 through 27), they also unfortunately act as deterrents to innovation and good business practice.

Instead, regulators need to try to take a broader, more holistic view of anti-trust. Instead of market share litmus tests and paying attention to sob stories from the Netscapes of the world, regulators need to really focus on first, determining if the offender in question is acting harmfully anticompetitive at all, and second if there is credible economic value in the institutions they seek to regulate.

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