Viehbacher on R&D: Smaller Teams "Not Enough"

I couldn't help thinking Sanofi Aventis CEO Chris Viehbacher was having a bit of a dig at his old employer, GlaxoSmithKline, this morning. Check out this response to yours truly's question, after the 2Q results announcement, about what the French group is doing to re-invigorate its R&D: "If you think that just by creating a smaller team you make them more biotech-like....well, that's not enough, in my experience," he said.

Surely the veiled (or not-so-veiled) reference here is to the biotech-imitating drug performance unit structure at GSK, announced last year by CEO Andrew Witty (who, remember, nabbed the top-job off Viehbacher)? It's hard to imagine what other "experience" Viehbacher might be referring to--he joined GSK in 1988 after a stint at PwC.

"I don’t think [the R&D solution] is anything to do with structure. No one has found the answer yet, I don’t believe," he continued. (Ok, he's right there.) "We need to find a different way," Viehbacher continued.

What is that different way? Well, we won't know for sure until the third quarter, when the company plans to say more about how it's turning around its 13,000-strong R&D organization. From today's comments, though, expect a much more porous interface with academia and external partners (yes, big change there), less rigid (or perhaps no) budget and instead a more "grant-like" funding set up, and lots of stuff about culture, governance, and flexible processes.

For all of today's poo-pooing of structures, these are changing, though. In a June 2009 release announcing a new R&D model--and declaring the ambitious goal of becoming "the most effective R&D organization in the pharmaceutical industry by 2013" (take that, Glaxo!)--Sanofi Aventis talked about "grouping researchers in more productive structures", and strengthening “exploratory structures” that work in close collaboration with outside entities, and deploying reactive “entrepreneurial units” to encourage the emergence of innovation. The French group has already begun consolidating scientists at the same locations to foster intimacy (and, let's face it, to save costs).

Viehbacher's point, though, is that structural changes "should follow your vision," they should be the means rather than the ends. Doubtless GSK agrees with that, and, to be fair, this company's R&D experiment is just as much about cultural, process and governance change as it is about structure.

Indeed, for all Viehbacher's talk of a"'new way" (and I'd call it that, too, if I was running my own ship and wanted to stand out) there are more similarities between GSK's and Sanofi's (and indeed other Big Pharmas') R&D re-invigoration efforts than contrasts . Externalization, flexibility, entrepreneurial culture, increased accountability, more appropriate reward structures....you get the picture.

Given Viehbacher's 2013 goal, though, of course there's a race on to see who can find the best R&D model--driven perhaps as much by old rivalries as Big Pharmas' compelling need to sort out the innovation engine before everything goes OTC or generic.

Reassuringly, Viehbacher did today keep referring back to innovation as the heart of the company (although they and others, as we well know, are now officially "global diversified health care companies", not "innovation-driven R&D-based companies"). He also asserted that core pharmaceuticals would "always be more than half the company," despite--you guessed it--planned expansions in OTC and generics.

Image by Flickr user Nebbish1 and used under a creative commons license

How Close Avastin Really Came To Adjuvant Colorectal Cancer Use

Six events. Six additional cases of recurrence out of the 2,710 patients being treated in the C-08 trial of Roche/Genentech’s Avastin in adjuvant colorectal cancer, and there would have been an entirely different outcome.

Six more cases at the interim look and everyone would be using Avastin in adjuvant colorectal cancer patients. That’s how close the study was to meeting the early-stopping rule at one year, lead investigator Carmen Allegra said at Roche/Genentech’s on-site ASCO analyst event.

To be sure we hit this home hard enough: if just an additional six events had occurred at the one-year interim look, than the trial would have been stopped early. As the full analysis of data presented at ASCO made clear, at one year (not coincidentally, the time period that patients received bevacizumab), there was a significant benefit for the drug. A 40% advantage, to be precise. Lots of zeroes in the p-value to make the statisticians happy. More than enough benefit to drive utilization even before FDA approval.

Contrast that to the actual end of the study. At the pre-specified three-year endpoint, when there were 603 events, disease-free survival had dropped out of significance. The end result for Avastin was 77.4% versus 75.5% for chemo alone. But the eventual failure is old news, previewed in April and heard round the world.

The study investigators, and Roche/Genentech executives, were very keen on the one year results in unveiling the full dataset from C-08, stressing that the drug was extremely effective while being given and it was only after bevacizumab was stopped that the benefit diminished. Their take-away was that more study was needed with a longer duration of treatment with bevacizumab.

That’s not to say there wouldn’t have been valuable and appropriate questions raised about long-term tolerability and about the level of benefit versus alternatives and about the cost-effectiveness. However, it’s awfully close to taking what was ultimately a negative trial and finding it instead to be a runaway success based on an interim peek.

What the experience does show is exactly why long-term follow-up is important (both to see whether there’s a spike in hypertension, or hey, that benefit seems to disappear pretty quickly). It also underscores the value of designing a trial for a more clear-cut look at overall survival, which wouldn’t leave us with the potential variability from the disease-free surrogate. It’s also much harder to make a cost-effectiveness argument when you have data in hand to show that lives are saved.

For more on the implications of the C-08 data release, including the potential to establish Avastin as adjuvant therapy in other cancers (and possibly still colorectal), and the potential need for caution given tolerability and cost concerns, check out this week’s “The Pink Sheet” here and here.--Mary Jo Laffler

image from flickr user Shovelling Son used under a creative commons license

Is Biotech Running GSK?

"Smaller, biotech-like units" have been the name of the game at GlaxoSmithKline ever since the CEDDs (Centers of Excellence for Drug Discovery), round one, were announced post-merger in 2000.

Fast-forward eight years and now it's not just biotech's size that's influencing the pharma giant. These days biotech CEOs are showing GSK pod-chiefs how to run an R&D business--and, since earlier this week, one is running part of GSK himself.

Christoph Westphal, former-CEO of Sirtris, which GSK acquired for $720 million in April (one of our Deals of the Year Nominees), will now head up the externally-focused CEDD (or CEEDD), along with Sirtris' VP Corporate Development Michelle Dipp. While remaining at Sirtris' premises, Westphal will "challenge the norm and stretch us to consider new ways of working" in drug discovery, according to GSK's head of Discovery Patrick Vallance.

The idea is that Westphal’s experience founding, running and investing in biotech will help the CEEDD attract promising assets into GSK’s pipeline via alliances and partnerships.

Westphal’s appointment isn’t the first of incoming CEO Andrew Witty’s attempts to infuse the group with biotech-like management, accountability and creativity. Ian Tomlinson, former CEO of Domantis (which GSK acquired in 2007 to beef up its next-generation biologics capabilities) is a senior R&D exec at the Big Pharma. And earlier this year, Witty invited Actelion CEO Jean-Paul Clozel to talk to GSK CEDD heads about how biotech manages research—and give them a few lessons from one of Europe’s few biotech success stories. (Actelion has since signed a deal with GSK on sleep drug almorexant.)

The moves make sense. GSK’s CEDDs are supposed to be run as more or less autonomous units with their own P&L responsibility, but structure alone doesn’t create a mindset. Thus far the CEDDs haven’t exactly revolutionized Glaxo’s pipeline, even though several other Big Pharma, including Roche and Pfizer are trying similar things. “The challenge is to make the CEDD heads entrepreneurial,” comments one analyst--and to incent them to perform, or else.

Witty’s June announcement of the latest CEDD-like iteration, 50-person-strong Drug Performance Units focused on specific biological pathways and competing internally for resources, sends a clear message: We’re no longer just pretending to be like biotech, cushioned within a comfortable, cash-rich bureaucracy. We are a series of biotechs.

And as is abundantly clear out in the real biotech world, there ain’t many safety nets about.

jacket image by flickr user ckount used under a creative commons license

Pfizer's Newfound Flexibility

The restructuring at Pfizer that will see the group split into business units may or may not improve productivity, boost the bottom line, or resonate positively with investors. But one thing's for sure: Pfizer's move should lead to a more flexible, nimble company. If they're not quite Gumby, they're no longer Pokey either.

Our take on the new structure--and on Pfizer's slimmed-down R&D focus--will be in the next issue of IN VIVO.

In the new Pfizer, the company's business units--comprising mature products, emerging markets, oncology, specialty products, and primary care--will be managed independently.

Essentially the groups will vie for resources with one another, manage their own P&Ls, and as Pfizer R&D chief Martin Mackay tells us, essentially run the show. "It really empowers those business unit heads to run P&Ls so they will have tremendous responsibility to maximize revenues of the projects we have in those groups but also to make sure the business is thriving at the earlier stages," he says.

Mackay and the rest of the executive leadership will then decide how to dole out Pfizer's dollars between these different businesses. "Of course a lot of strategy is simply down to where do you allocate your resources," he says.

Running smaller units under the umbrella of a large pharma isn't a new concept; GSK's centers of excellence in drug discovery (CEDDs) similarly compete with one another for corporate resources, albeit earlier on in the value chain. In some ways Pfizer's move is less ambitious than GSK's experiment, started way back in 2001 and aimed in part at mimicking the entrepreneurial essence of a biotech firm.

The CEDDs though still have to prove their worth 8 years on--GSK may talk about a broader pipeline but the proof of the pipeline is in the marketing, to stretch a phrase. And if the CEDDs were really thriving, new initiatives like GSK's drug performance units, announced over the sumer, mightn't be necessary. (It's worth noting too that GSK has also recently created an oncology unit--GSK Oncology--which takes different DPUs out of various CEDDs.)

But Pfizer's new structure ought to by its very nature (in that the units are later-stage development and commercialization focused) thrive or fail more quickly.

And when Pfizer decides its time to pull the plug on a unit--presto!--it's already wrapped up in an easy to spin-off or sell package. And it should, by then, have plenty of practice in offloading unwanted assets. As part of the research reshuffle, Pfizer is pushing forward with its efforts to monetize shelved programs. Earlier this year, it spun-off both RaQualia and Esperion 2.0.

“We’ll be much more active in out-licensing assets,” Mackay promises. “It will vary between single assets and small groups of assets, depending on what is the best deal for both parties.” Pfizer, he says, is in active discussions with potential collaborators. “We’ll be much more creative than we’ve been in the past in this particular arena.” For more on Pfizer's externalization program, see this piece in today's Pink Sheet Daily.

image from flickr user jessedybka used under a creative commons license.

Pfizer to Tin Man: Drop Dead

You're axing what?

Pfizer is, according to today's Wall Street Journal (not to mention at least one astute blogger last week), giving up on R&D in heart disease, obesity and bone health.

The big news here is the abandoning of cardiovascular medicine--Pfizer's profit center driven by $17+ billion annual revenues from Lipitor and Norvasc--but of course there are exceptions to consider. Pfizer isn't dropping its late-stage programs, like the much-written about apixaban, for example.

But the strategic shift, not wholly unexpected and certainly not conflicting with statements made by Pfizer leadership lately (including comments by R&D chief Martin Mackay and head of strategy Bill Ringo at FDC/Windhover's Pharmaceutical Strategic Alliances meeting last week) says a lot about where Pfizer--and Big Pharma generally--is moving.

Where's that? Toward a greater emphasis on specialty therapeutic spaces like oncology (look for a feature on Pfizer's oncology ambitions in the next IN VIVO) and into large molecules like next-generation biologics, of course. By now this is not a surprise, but just how Big Pharma manages to transform itself while at the same time dealing with massive patent expirations and the demands of dividend- and buyback-hungry shareholders remains to be seen. Nevertheless, pulling out of the increasingly genericized cardiovascular space and some other primary care areas should speed this transition.

Some of the smaller top-tier companies, like Bristol-Myers Squibb, can make do with focused business development strategies--the acquisition of Adnexus, for example, or the please-let-it-be-over-soon-we're-so-sick-of-it Imclone takeover. For Pfizer such add-ons won't do the trick. But Bill Ringo noted at PSA that although Pfizer on the whole would have trouble moving the growth needle with a string-of-pearls strategy akin to BMS's, it could do so within the context of specific disease areas. Cardiovascular R&D is clearly not one of those areas.

Layoffs are likely (as of now still no official word from Pfizer on the cuts). But look also for more Pfizer spin-outs like the Japanese business RaQualia and the second incarnation of Esperion, as well as out-licensing deals, to help smooth the transition. Pfizer has, by its own estimates, too substantial a Phase II pipeline to take through to pivotal trials. "We need to be more creative with development," noted Mackay at PSA, and he said RaQualia was a good example of that creativity at work, as was the apixaban deal, which could be replicated in the other direction with Pfizer partnering on one of its own Phase III candidates. What should be worrying to Pfizer and other pharmas is that despite a Phase II glut these companies have a difficult time determining which post-proof-of-concept projects will succeed in Phase III and at the regulators.

Pfizer isn't the first pharma to abandon what most would consider its core therapeutic space. GSK and AstraZeneca, for example, sustained for years by the profits from GI franchises, each exited the bulk of their R&D in that area (witness AZ's spin-out of Albireo, though that pharma has noted it remains active in GERD research whereas Pfizer seems unlikely to continue in hypercholesterolemia R&D).

So where does the Tin Man turn when his new ticker gets rusty? And where do those small pharma and biotech companies in need of a partner for their next-big-thing HDL raiser or anti-hypertensive turn? In this up-is-down, black-is-white pharma shift to specialist drugs, perhaps primary care becomes the domain of a few specialists while the rest of the industry piles into oncology and orphan drugs.

One further irony: even as its exits cardiovascular research, Pfizer wants to remain one of those few remaining primary-care specialists. Bill Ringo noted exactly that at the PSA and in this article in IN VIVO -- as other Big Pharmas cut back primary-care commercial programs to boost their presence in specialist marketing, Pfizer, while certainly doing the specialist thing, is going to keep its primary-care capabilities, theoretically giving itself a comparative advantage as an in-licenser when it comes to those increasingly rare, and expensive, late-stage primary care candidates.

Cephalon Learns Some Old Tricks to Protect Old Products

You can’t teach an old dog a new trick. But some recent product lifecycle management strategies by Cephalon suggest that you can teach a maturing company some old tricks to save old products.

It is probably a sign of Cephalon’s advancing age (passing the 20-year milestone in 2007) that the company is now at the stage where strategies to combat loss of exclusivity are as important as new product development.

It is employing some clever strategies: not exactly new but aggressively executed.

The first strategy uses pricing to create niches for new products and to lengthen the tail of a franchise. Specifically, Cephalon is using high, pre-expiration price hikes to create attractive slots for follow-on compounds and, intriguingly, for its own generics. (See here).

Two examples demonstrate Cephalon’s approach: Provigil (modafinil), the company’s current flagship product heading toward loss of exclusivity in April 2012; and Actiq, which began facing generic competition in the third quarter of 2006.

Cephalon has begun taking big price increases on Provigil (12% in August). The company’s investor relations VP, Chip Merritt, told an investment meeting earlier this month that that increase is just the start. “You should expect that we will raise Provigil prices to try to create an incentive for the reimbursers to preferentially” move to the next generation product, Nuvigil (armodafinil), which has been approved by FDA but not yet launched.

Similar price increases on Actiq in the two quarters prior to the start of generic competition for the fentanyl lozenge created room for another oral dosage form, Fentora.

But it also, created an opportunity for Cephalon to introduce its own "authorized" generic at a price that the company found attractive. Having three products in the oral fentanyl field (Actiq, Fentora and a generic) has permitted Cephalon to maintain a franchise at about $120 million per quarter since Actiq lost exclusivity. That’s higher than the quarterly sales that the company had from Actiq alone prior to its pre-expiration price hikes.

The second strategy of Cephalon’s young adult period is to find alternative exclusivity protections for a recently introduced product. That may, technically, be more of a product development strategy than protection of an aging product, but in Cephalon’s case, it was a way to take an old product (with thirty years of experience in Europe) and make it a new product with five to seven years of exclusivity (See "Wacky World of Generics: Treanda Edition").

The product is Treanda (bendamustine). Approved earlier this year for the first time in the US, the product treats an orphan indication (chronic lyphocytic leukemia – 15,000 new cases per year). The orphan indication gives it seven years of exclusivity for that use. But Cephalon has other plans for the product, so the company has found another form of exclusivity – and this is the clever part. As an old compound, it does not have a listed patent in FDA’s Orange Book. That means that there is nothing for companies who want to challenge the patent to challenge. That could lead to up to six and a half years of effective protection for the product.

Cephalon is performing its tricks well. The company just needs to pay attention to the patients using its products and regulators and payers who may develop an attitude towards the company that could come back to haunt it. When the company took the aggressive Actiq price increases, the web began to fill up with plaintive accounts of cancer patients trying to afford the medication. Too much of that and it won’t matter how long the company is able to stretch the life of products.

Is Big Pharma Ready For Minibusters?

Some things are easier said than done.

That’s the opinion of one biotech CEO commenting on claims by some large drug companies that they are moving towards smaller, more targeted drug products. While the strategy may sound good, they can’t do it, he says.

“Once you’re invested in a big model, you’re invested in it,” the biotech CEO maintains. The biotech CEO based his arguments on two key points:

1) The enormous scale of large pharmaceutical companies invested in R&D through to sales and marketing dictates they must sell large products aimed at broad patient populations.

2) The long and established blockbuster culture of large pharmaceutical companies creates an imposing hurdle to retooling business strategy to focus on smaller, niche products.

On the first point, the biotech CEO compared the total size of an average biotech company to just one product sales force of a big pharma company. On the second point, he said size impedes agility. “Big companies move slowly.”

In addition, he says a culture of assumed successorship—“my father worked there, I work there, my son will work there”—is a challenge to creative thinking and leads to complacency.

We’ve argued that the creation and implementation of FDA’s postmarket powers in the form of risk evaluation and mitigation strategies (REMS) means companies will be pushed more towards well-defined, marketable populations as a result of tighter controls. To read more, click here.

It’s not that the blockbuster drug, one with a billion dollars in annual sales, is dead, but those products will become increasingly rare and will be found in more specialty markets as opposed to primary care.

That means more products with annual sales in the $200 million to $500 million range, or minibusters.

So who is ready for the move towards more targeted, minibuster products? Well, biotech, of course.

The biotech CEO says the size and culture of biotech companies allow them to be more focused and reshape their strategies without scrapping the overall framework of their businesses. In other words, more agile and less exposed to complacency.

That leaves a conundrum for large pharmaceutical companies. It’s not enough to downsize and shed jobs, he maintains. That just reduces your size and cuts costs. The expectations from shareholders will remain the same. The question, he says, is “now what do you do?”

He highlighted blockbuster products as the great “gift” and “curse” of Big Pharma. It brings great long-term success to a company but also conditions management to overly rely on that product, focusing little attention anywhere else.

Can pharma companies make the minibuster model work? The jury is still out, and will be for quite some time. But at least one executive is skeptical.

Novartis' Herrling Talks China with PharmAsiaNews

Every major pharmaceutical company has a "China" strategy. Novartis is among the most aggressive: it is currently the fourth biggest supplier of medications to hospitals in that country and aims to make China one of its top 10 markets by 2010.

Reporters from FDC Reports' PharmAsia News, a sister publication to IN VIVO Blog, sat down recently with two Novartis execs well versed in all things China: Paul Herrling, Head of Corporate Research and En Li, VP and head of research for Novartis Institutes for BioMedical Research Shanghai. The two were in Shanghai to discuss Novartis’ R&D plans in China and the Pacific Rim at the China 2008 Pharmaceutical R&D Summit.

Herrling (pictured right), who also serves as chairman of the Novartis Institute of Tropical Diseases in Singapore, was in town to give a keynote address to the summit. He also visited Novartis’ China R&D center, which broke ground on its permanent headquarters in Shanghai’s Zhangjiang Hi-Tech park April 2. Novartis, which has more than 2000 full-time employees in China, has said it plans to make an initial investment of $96 million to build the R&D center, focusing on treatments for diseases with a high prevalence in that country. (Our 2006 take on the NITD and its ilk can be found here.)

PharmAsia News: In your keynote talk, you mentioned Novartis' efforts in China to develop Western medications based on traditional Chinese medicine. Can you elaborate on your strategy?

Paul Herrling: China wanted for a while at first for us to come here and establish our research institutes because of a number of reasons we've heard like patents [and] talent development. And we weren't quite sure at what level China was - it was clear that it was going to be a tremendous market, because, mostly in the U.S., a significant part of our scientists in the lab are Chinese.

And at that time, that was about 10 years ago, of course, there was nothing for them here to come back to. And that's why they were all there. So we started by setting up yearly mini-symposia where we would put 10, 15 Chinese scientists, 10, 15 Novartis' scientists in an air of choice. And just sit together for three days and talk. And actually the first of these discussions started around traditional Chinese medicine, how could we make use of that for our kind of drug discovery efforts. And that's how the Shanghai thing started.

And essentially it was a way to expand the diversity of our chemical libraries. Because what's turned out is that, during the combinatorial chemistry climb, people could all of sudden make a lot of compounds. But at the same time, the hit rates would trend to zero because the criteria on which these libraries were made were chemical, not biological. So the chemists would do what would be easy to stick on beads and to vary it easily and quickly, which was not necessarily the same that biology needed.

And Novartis was a company that actually never gave up their natural compounds, whereas most big pharma companies got rid of their natural compounds. We still have a group now of more than 50 people. And they were very much a proponent of trying to do exactly what I described in my talk, use traditional Chinese medicine as a guide to where to find active ingredients. …

So we did this symposia for 10 years and during these 10 years in which I started doing that … you wouldn't recognize China then, between then and now. Because as I always like to describe it, when you went to Beijing at that time, you know the big avenues? With the small streets on the side and the big central one? Well, when I came here the first time, the center one was filled with bicycles and the few cars had to go on the side. And now you go look at it.

And all of China has changed that way, completely. And in our era, it was very clear what we saw in the symposium, like three, four years ago, is that now the Chinese were doing major efforts to create an environment in China to get Chinese scientists abroad back into the country. …

Another aspect 10 years ago that was very clear - health, pharma was absolutely not a priority in China at that time. Food, housing, heavy industry, all of that [were] and they had no resources for research-based companies. They bought what they needed or they copied what they needed locally. And that changed. So over these 10 years talking to the Minister of Science & Technology, the Health Minister, you could see that the interest changed.

And at a certain time, about three years ago, I recommended to our bosses, now is the time for En Li's institute. And they decided, yes, they would do that and actually we decided to establish our own research institute here.

PharmAsia News: Given the debate in China about whether to build an R&D facility or a virtual one, why did Novartis decide on a bricks-and-mortar approach?

Herrling: If you think that this environment is going to be important for pharma in the future - and it is, we're totally convinced that it is one of the most important emerging markets - and it's also clear that the culture and the specifics are different than in the U.S. and in Europe. And my conviction is you can't learn without getting wet. That is, the best way to get into the mindset, to understand the local science, talent and the needs also of the patients, is by actually doing research here.

So that was the decision then that we would do that, and create this institute first as a real antenna to what the environment here is, and to learn the peculiarities. In fact, what En's institute is focusing on first - he mentioned patients - is to focus on diseases that are more predominant in China than they are in the West. And that's hepatic cancers and nasopharyngeal cancers. And to try to understand what the differences are, in particular. So these are a few thoughts. And it's going to be an integrated research and development [center].

Part one of this two-part interview appeared May 5 in PharmAsia News. To access the full interview, please visit PharmAsiaNews for a 30-day free trial.

Changing of the Change Agents: Exit Wyeth’s Ruffolo, Enter OrbiMed’s Dolsten

We just heard the news that Bob Ruffolo, Wyeth’s R&D boss, is retiring.

A few points to make: first, from our auslander’s point of view, Ruffolo took a Wyeth research group which had already been significantly improved in the almost reverse takeover by the former Genetics Institute crowd (including its head of R&D Pat Gage) and made it a lot more business-like.

Ruffolo is not an executive to suffer fools (or those he thought fools) gladly. He rubbed a lot of people the wrong way – including colleagues running competitive R&D organizations, who didn’t like his outspokenness. And he was a particularly harsh and public critic of the FDA (at least when he talked with us – as you can read in The RPM Report here)

But he ran an organization which got stuff done. In the otherwise horribly dry year of 2007, Wyeth managed to push through two drugs (Torisel and Lybrel) – punching far above its R&D weight (Wyeth is on the small side of Big Pharma’s R&D organizations).

Wyeth is already ahead of the game this year, with two approvals, both of which your blogger had – incorrectly – written off (and we weren’t alone): Relistor (methylnalrexone), which they’d licensed from Progenics, and Pristiq, which is an isomer of their near-patent-expired anti-depressant Effexor. Pristiq in particular ran into FDA trouble last year, with the agency dinging it twice – first for its major depression indication, then for its use for post-menopausal hot flashes. Still hasn’t been approved for the latter – but scooted in on the former.

And Ruffolo has been the outspoken exponent of the statistical strategy of R&D – that for all the theories on how to improve the odds of drug discovery and development, with new markers and “model” diseases (á la Novartis – see an IN VIVO discussion here), ultimately R&D is a numbers game. You’ve got to put a certain number of compounds in the front end to get out a set number at the back end.

Science isn’t making us any better at improving those odds, Ruffolo would almost take pride in pointing out. It was Ruffolo, speaking at Windhover’s Pharmaceutical Strategic Alliances meeting in 2005, who, at least to our knowledge first among major R&D chiefs publicly, noted that attrition rates in Phase II were going up. Before you knew it, everyone was talking about it. And Ruffolo kept insisting that the only real solution to the attrition problem was to add in more compounds.

So now enter Mikael Dolsten, the former head of Boehringer Ingelheim research, whom not so long ago the IN VIVO Blog had named as a potential candidate for the top R&D job at Pfizer. (OK – we spelled his name wrong there. We may be spelling it wrong now. But we’re not alone – either Wyeth spelled it wrong in their PR (they use an “h” in Dohlsten) or Boehringer spells it wrong in theirs (they leave out the “h”).

In the brief interregnum between leaving Boehringer and landing at Wyeth, Do(h)lsten parked himself as a private equity partner at the OrbiMed, the health-care focused investment firm. Which leads us to speculate: damned few Big Pharmas are going to be able to pay themselves for all their development programs, a fact that most of them are as yet unwilling to admit. Project financing is eventually going to play a role in this game.

When we first wrote about Dolsten, one recruiter told us he was a “change agent.” So was Ruffolo, of course. But Dolsten’s few months at OrbiMed could make him a change agent of a very different kind.

Cordaptive Was a Red Rag to FDA Bull

In an article in this month's IN VIVO, we suggested that Merck’s presenting Cordaptive to FDA might be likened to waving a red rag at a bull.

Admittedly, we added a few mitigating statements, and the overall tone of the article was positive, reflecting a number of analysts' bullish outlook for the drug. Cordaptive is, after all, a seemingly uncontroversial combination of extended-release niacin (an age-old product with plenty of safety data) with the anti-flushing agent laropiprant, whose effects are, we're told, restricted to just that--minimizing the nasty (but non-fatal) side-effect that has limited niacin's uptake.

In the event, though, the bull/rag analogy was right on: FDA yesterday issued a not-approvable letter for Cordaptive. (And, adding insult to injury, it said it didn't like the name, either.)

Ok, so given recent events, we probably all should have seen this coming. FDA also late last week rejected Merck’s application for a fixed-dose combination of Singulair and Claritin, as we reported here (and updated here.) Notwithstanding FDA’s rather stringent requirements for all combination drugs (sponsors must prove each component’s safety and efficacy as a standalone and show that the combination affects neither), one might be forgiven for suspecting that the red rag is actually a combination drug application on Merck headed paper.

Merck is after all one of the ENHANCE sponsors (alongside Schering-Plough); that saga called into question the clinical effectiveness of yet another combo, Vytorin. It probably didn't help that Merck also recently halted enrolment in one Cordaptive trial that was designed similarly to ENHANCE.

Still, ENHANCE’s effects have rippled—and will continue to ripple—far beyond Whitehouse Station. FDA this month poured cold water over Isis’ cholesterol-lowering hopeful, mipomersen—yes, the one that Genzyme in January agreed was worth $325 million up front and up to $825 million in development and regulatory milestones. The partners need outcomes studies, the Agency says, for all indications other than the highly specialist, and life-threatening, familial hypercholesterolemia. (Luckily for Genzyme, the deal terms aren’t confirmed, so watch out for lower-value Version B of the deal--and, we'll venture to suggest, a tonne more regulatory contingencies and conditional language in tomorrow's term-sheets.)

Now Merck’s doing outcomes studies with Cordaptive, but results from their 20,000-patient THRIVE trial won’t be out until 2012 or so. Small wonder, then, that some analysts have already removed four years’ worth of revenues for the drug, and its follow-on, MK-0524b.

This is the last thing Merck needs. From 2010, $4.2 billion worth of its products start to lose patent protection—Cozaar/Hyzaar that year, and Singulair two years later. Cordaptive and its follow-on could have helped fill about a third of that hole, according to analyst Catherine Arnold at Credit Suisse; now they’ll barely have any impact at all.

Nor does FDA’s harsh stance on safety requirements and outcomes studies bode well for two further Merck late-stage candidates. Can CETP inhibitor anacetrapib survive the aftermath of Pfizer’s torcetrapib blow-out? And does taranabant (a cannabinoid receptor inverse agonist) really have a chance, given FDA’s unswerving rejection of Sanofi-Aventis’ rimonabant (Zimulti)?

Maybe we’re being too cynical. Maybe it’s just a question of time: time for THRIVE results to pour in, and/or for Merck to sort out whatever the actual problem is with its Cordaptive NDA. “We plan to meet with FDA as soon as possible and submit additional information to enable the agency to further evaluate the benefit/risk profile of MK-524A,” was all a Merck spokesman would reveal to IN VIVO Blog. (The European regulators this month approved the combo--albeit as Tredaptive--though as we saw with rimonabant, a green light across the Atlantic is irrelevant to FDA.)

So nobody knows what’s wrong, and we’ll only spend one paragraph speculating. It’s tempting to assume that laropiprant is the culprit, since this is the only NCE component of the cocktail (and a couple of journal papers point to elevated liver enzymes associated with the compound). Merck’s Senior Director for Cardiovascular Clinical Research, John Paolini, MD, PhD, told us in March that since laropiprant--a selective prostaglandin D2 receptor-1 antagonist--acts on the final step in the flushing pathway, the chances of any unwanted additional effects are reduced, at least in theory. The company also boldly ventured that Cordaptive’s safety profile is “similar to that of extended release Niaspan.” But “similar” may well not be good enough (assuming this theory is right). Particularly when you’re tampering with a side-effect that, if uncomfortable, is hardly fatal.

What we know for sure is what my quicker-off-the-mark colleagues have already said: there’s no such thing as a low-risk drug. Certainly, combination products don’t any longer represent no-brainer life-cycle extension tools. When it comes to getting past the FDA bull, it seems they’re up there with even the newest of NCEs.

photo by flickr user pmorgan used under a creative commons license

Acceleron Deals ACE-011 and More to Celgene

Privately held Acceleron yesterday announced a broad co-development/co-promotion alliance with Celgene on Phase Ib lead project ACE-011 in bone disease and a further three discovery-stage compounds.

The upfront money looks good, given the compound's stage of development: Acceleron will receive $50 million, including a $5 million equity investment. That's close to the total upfront average for Phase II deals in 2007--$58 million, according to Windhover's Strategic Transactions Database. Celgene has also committed to a further $7 million minimum investment in a potential Acceleron IPO.


Development, regulatory and commercial milestones could reach $510 million for the ACE-011 program, and $437 million apiece for the three discovery-stage programs. (Since they're not split out into pre-and post-approval, we won't comment on size.) Acceleron will shepherd the projects through Phase IIa, and then hand them off to Celgene for later-stage development.


ACE-011 is an activin receptor IIa mimic that inhibits activin, a negative regulator of bone mass--you can read more here, and more here in our profile of Acceleron. The company specializes in the regulation of bone and muscle growth to treat a variety of diseases, and has raised nearly $100 million over three venture rounds and a debt placement since 2004.

IPOs are a rarity these days, but just in case, the Celgene deal sets Acceleron up nicely. And the young company still holds some cards: muscle loss, neuromuscular, and metabolic programs remain unpartnered.

image from flickr user bk-robat used under a creative commons license

The Blockbuster Model is Dead, Sort Of

The numbers are in, and it’s not a pretty picture.

No, we’re not talking about today’s Potomac presidential primary. We’re referring to the latest IMS Health figures on the state of the pharmaceutical industry, and as Diana Conmy, corporate director of market insights put it, they are “sobering and possibly a little alarming.” Conmy was kind enough to preview the 2007 numbers for the Health Industry Group Purchasing Organization’s National Pharmacy Forum; the official data won’t be released for a couple more weeks.

Unfortunately for industry, Conmy’s numbers don’t leave much to cheer about. The US market growth for pharmaceuticals and biotech products slowed to 3.8% in 2007—the worst growth rate since 1961.

Part of that is a result of tough comparisons against the big pay-off pharma received from Medicare Part D in 2006. But a lot is simply due to a general market slowdown for the drug industry. While some of the latter months of 2006 saw market growth approaching 12%, by December 2007, month-over-month growth was in the negative range, Conmy reported.

And if you’re thinking the next big launch will turn around that trajectory, think again. New chemical entities aren’t contributing as much to market growth as they have in the past. In fact, if you look at the average launch curves for the top 10 new chemical entities over the past several years, 2007 had the weakest results since 2003. “Fewer of these NCEs are top-performing, contributing much less to growth,” Conmy said.

So what does this mean for the blockbuster model? Well, as Conmy put it—and Windhover publisher Roger Longman keeps driving into our heads—“the blockbuster model isn’t dead, but perhaps the primary care-driven market is.”

And it sure seems that way: 2007 marked the first time that industry saw a decline in the number of primary care blockbusters (29 in 2007 versus 33 in 2006), IMS data show. At the same time, there was an increase in specialty care blockbusters (30 in 2007 versus 25 in 2006).

That’s evidenced by the fact that the primary care market declined over the last seven months of 2007, contributing a negative 18% to overall market growth for the year, while specialty care contributed a positive 118%. The growth rates per therapeutic area tell the same story: specialty care grew 10.5%, while “branded products” grew 2.9%--a rate almost a full percentage point below the total market.

In fact, of the four launches for 2008 that Conmy believes have blockbuster potential, three are specialty products: UCB’s certolizumab (Cimzia) for Crohn’s disease, Bristol-Myers Squibb’s ipilimumab for melanoma and Wyeth’s desvenlafaxine (Pristiq) for depression. (The fourth potential blockbuster on Conmy’s list is MedImmune’s respiratory syncytial virus antibody Numax.)

So is there any good news in all these doom and gloom? Luckily for pharma, there are lessons to be learned. Here’s the bottom line: specialty care is increasingly where pharma needs to be. And given the generally slower uptake of specialty care products, executives may have to adjust their expectations when it comes to launch curves.

That kind of “slow and low” attitude has another benefit in today’s increasingly risk-averse environment. “You might hear manufacturers say that ‘our strategy is more lower octane, so we can have a more controlled environment, we can make sure it’s safe, and we don’t have any major incidents,’” Conmy says.

That’s quite a departure from the “fast and furious” model of the DTC-infused primary care market. My, how far we’ve come.

Nissen Weighs in on ENHANCE

You know what he's going to say ...



Remind you of this?

Novo Scraps Inhaled Insulin

The dismal failure of Pfizer/Nektar’s Exubera loudly called into question whether inhaled mealtime insulin was commercially viable at all.

The answer—surprise, surprise--is that it’s not, at least according to Novo Nordisk. The Danish firm announced last night that it was scrapping its Phase III inhaled insulin program, which uses Aradigm’s AERx liquid aerosol system.

The slight irony here is that the (already painfully delayed) AERx program was killed because it failed to show “sufficient clinical or convenience benefits” over the various insulin analogs already available to patients—including, prominently, those using Novo’s own FlexPen, a discreet and simple-to-use injection device.

Novo’s decision doesn’t mean that other late-stage inhaled insulin wannabes, including Lilly/Alkermes and MannKind will follow suit. But as we argued in this IN VIVO feature, Pfizer’s snafu means the going will be tough. Novo was at best going to be third to market, and the brick-sized device (far larger than Lilly/Alkermes’) had long been recognized as a problem—that’s why Novo had begun a next-generation program in-house. And the product required refrigeration.

So the writing was on the wall. In fact it’s somewhat of a relief that Novo has finally put this long and expensive project to bed, taking a non-recurring cost of about $260 million (DKK 1.3 billion), which will hit 2007 operating profit. Mads Krogsgaard Thomsen, CSO and EVP of Novo Nordisk had already last year acknowledged that “this is not going to be a huge product.” Now it won’t be one at all.

Not that this spells the end of pulmonary delivery for Novo. The problem with all of the current batch of inhaled insulins, according to Thomsen, is that they’re short-acting, meal-time insulins that must be taken alongside basal insulin—the ones available with tiny, pain-free injection devices. Exubera's failure showed that patients (and payors) understandably, were reluctant to add onto that regime something even more complex. And Pfizer, for reasons we outline here, failed to reverse the treatment sequence by persuading physicians to prescribe insulin earlier on.

So given that meal-time insulin is typically a fifth or sixth step in diabetics’ chain of medication (which progresses from diet-and-exercise, through oral anti-diabetic drugs to GLP-1s and then basal insulin) why did drug companies focus their inhaled efforts on this and not basal insulin? “Becase we had no choice,” says Thomsen, technological limitations meant that prandial insulin was the only one which could be formulated for inhalation.

Those limitations are no longer, he continues. Novo now intends to focus on developing pulmonary forms of basal insulin and GLP-1. We outlined in a feature last summer the importance of glucagon-like-peptide (GLP-1) analogs (and Phase III GLP-1 analog liraglutide in particular) to Novo’s business, so it’s no surprise that GLP-1s feature in the firm’s fresh set of pulmonary delivery plans.

These are a way from the market, however—liraglutide itself can’t be formulated for inhaled delivery because its half-life is too short; nor can Lilly’s first-to-market Byetta. Still, “we’re not starting from scratch, either; we have an inhaled, bioavailable GLP-1 candidate in late-preclinical trials,” asserted Thomsen on a conference call following today’s news.

Novo’s shares were down nearly 4% this morning; chances are Aradigm might have a bad day when the US exchange opens. But Novo’s put on a brave face. “We’re going from being followers in a commercially unattractive area, inhaled meal-time insulin, to leaders in a highly commercially-attractive area—a new generation of inhaled long-acting basal insulins and GLP-1 analogs.”

Biotech’s Original Sin

If you’re of a particular religious bent, you believe we’re born into the world stained with original sin, which we struggle to overcome in order to find grace.

To trivialize thousands of years of theological debate into a self-serving metaphor: biotech, too, is tainted with its own version of original sin that it must overcome. In this case, we're stuck with the sin of hype. And we pray for the grace of business sustainability.

It is part of the fun of the annual JP Morgan health-care extravaganza to identify in company meetings the stain and then see why it’s essential. Sirtris, that hottest-of-discovery companies, is a more interesting than average example of this essential biotech trait.

Sirtris has never been shy of elaborate media coverage (including our own). And like everyone else, it dances close to the edge of credibility. In a press release previewing its JP Morgan presentation on its lead anti-diabetes candidate, the company’s head of development described its sirtuin targets as “the genes that control the aging process". Not “genes that help control” aging. But the genes.

OK, admits Christoph Westphal, the company’s CEO and a co-founder of Alnylam and Momenta, it would probably have been wiser to qualify the claim. On the other hand, he says, a phalanx of scientific papers says that activating SIRT1 (the first of the sirtuins Sirtris is targeting) does extend life – a lot -- in yeast, worms, fruit flies and mice.

But the overly loose language creates a larger penumbra of scientific interest around Sirtris’s most advanced compound, SRT501, a formulation of resveratrol. New data from a one-month, 98-patient study, showed the drug “trended” to lower fasting glucose levels and, more definitively, significantly improved results on the oral glucose tolerance test.

That’s pretty good for a Phase Ib study. And Sirtris should report out a more probative Phase II trial sometime in the second half of 2008.

But that drug needs more than its clinical data if it's to generate the kind of publicity and momentum that can lead to a blockbuster deal and its life-supporting non-dilutive cash. SRT501, however good its data is, won’t likely win a huge partnership: it’s got no composition of matter patent.

The follow-ons do, says Westphal, and they’re 1000x more potent than resveratrol. But they’re further behind. The first of these NCEs is likely to begin a Phase I trial in a few months but—as with all more potent molecules—brings with it higher risks of unforeseeable toxicities, which is why early-stage molecules for primary-care diseases – particularly those on brand new targets -- don’t generally see high-value deals.

Sirtris needs to keep the interest--okay, the hype--going until its NCEs can stand on their own feet. It has to validate its target with a molecule that won’t drive all that much licensing value so that the follow-ons will. And that’s one reason why Sirtris tells people not to expect a deal within the next 18 months or so – by then, it should have more clinical data on the target itself and, with luck, proof-of-concept data on its NCE.

Granted the company can do all that, the partnering road will be lucrative. There’s huge interest in diabetes among Big Pharmas hit by withdrawals (cf. Avandia) or left out in the cold by Januvia’s success and the difficulty of differentiating their own new DPP4’s (which are marginally efficacious in any event).

Getting there, however, is expensive. Which gets to another Sirtris innovation: it employs just 50 people but created its NCEs with the essential and inexpensive help of 40 full-time chemistry contractors in China. That’s why the company’s progress so far has kept its annual burn rate at a relatively moderate $25 million. (We're a big proponent of limiting uneccessary infrastructure, but even we don’t know of any biotechs who’ve been able to generate that kind of cost-effective discovery productivity through off-shoring. If you have other names, please send them our way.)

But the burn will now get hotter as clinical costs mount. Sirtris will need all its $130 million in cash and more. It wouldn’t have the money it has now if it didn’t have its publicity – and it probably wouldn’t have that publicity if it didn’t dance pretty close to the edge of hype.

That’s biotech’s original sin. Where there’s biotech, there’s hype. And without it, there’s no biotech.

The R&D Productivity Crisis: Is There a Bright Side?

Lots of interesting responses to our post on the historically bad year for new drug approvals this year.

One top R&D exec at a big pharma company focused on the last line: “Something needs to change.”

“It does and it is. If we can steer clear of major disruptions I am convinced that we can turn this round. A lot of change needs to happen, but directed at improving the process of choosing targets, getting them into man and to proof-of-concept quickly then streamlining a clumsy development engine.”

Another reader in a Big Pharma R&D organization writes somewhat less optimistically:

“I am sure everyone in the industry is thinking of ways to ‘innovate’ out of this situation and I believe the next year or two is going to be interesting for us all.”

And then there is this pragmatic response from the VC side:

“Depressing but very interesting. This shows why venture capitalists should leave it to the pharmas to try to get drugs approved!”

Speaking of depressing, we also received congratulations from a colleague at another publication for managing to work in a Philadelphia sports reference in a post about NME approval statistics. The depressing part is that it has been 25 years since a major Philly sports team won a championship. Yikes.

There is lot’s more to say about the state of R&D productivity. We have taken a deeper dive into the numbers on TheRPMReport.com, and coupled it with some of the observations of top industry executives at The RPM Report's FDA/CMS Summit.

There is one surprise: as bad as the past several years have been by all conventional measures of R&D output, there is a glimmer of hope. The optimistic view, that we are on the brink of an unprecedented flow of innovative new products—just might be right. (You do have to be a subscriber to The RPM Report to read our complete analysis, or sign up for a 30-day trial to get a taste of what you are missing.)

Please Note: our initial count of drug approvals in the IN VIVO Blog was off by one. It turns out there were 17 new molecular entity approvals, not 16—Fresenius Kabi’s hypovolemia agent Voluven (hydroxyethyl starch) was approved December 27.

Voluven was approved under the 505(b)(2) mechanism as equivalent to other blood volume enhancers, so it definitely does not add to our benchmark statistics (innovative commercial therapies, or ICTs). The extra NME also doesn’t change anything else in our analysis: 17 NMEs is still the lowest total since 1983, as is 19 novel molecules (NMEs plus novel biologics).

Voluven is nevertheless an interesting approval: it is the latest example of the emerging follow-on biologics pathway at FDA.

What’s that? You think there is no such pathway? Not so. Congress has yet to enact a legislative pathway for follow-on versions of biologics regulated under the Public Health Service Act. But for biologics that happen to be regulated under the FD&C Act (like human growth hormone, insulin, insulin-like growth factor, etc. etc.) follow-on approvals keep trickling out of the agency. Look for more on that topic as well, coming soon in The RPM Report.

Another Dismal Year for New Drug Approvals

When does a drought stop being a drought, and just become a desert?

That question has to be raised when contemplating yet another disappointing year for innovative pharmaceutical launches in the US.

FDA approved just 17 new molecular entities in 2007—the lowest single year total since 1983, when there were 14 NME approvals.

FDA’s official tally will probably be 19, including two therapeutic biologics approved by the Center for Drug Evaluation & Research. FDA began including biologics in its total in 2004, so that makes historical comparisons difficult. But even if you count all 19, this was still the worst year since 1983.

That’s 25 years ago, folks. Gandhi won best picture. Toto won album of the year. A Philadelphia sports team actually won a championship.

If you want to understand the decline in productivity industry wide, consider this: total R&D spending by brand-name companies in 1983 was $3.2 billion, compared to $43 billion in 2007. In other words, the industry spent $228 million per NME approved in 1983, compared to $2.5billion each in 2007. Or, if you prefer, the extra $40 billion in R&D spending brought with it a total of five additional therapies.

Big Pharma didn’t have anywhere near as many mouths to feed in 1983 either. The entire domestic brand business was just under $17 billion, according to data reported by the Pharmaceutical Research & Manufacturers of America trade association. Domestic sales of brand companies today are ten times higher. (If you haven’t read Roger Longman’s post yesterday about the importance of adjusting industry infrastructures, please do so now.)

Of course, looking at any single year doesn’t tell you anything about the overall health of the new product flow in the industry. Pharmaceuticals do have a relatively long commercial life, so as long as there is a health bolus of new products every few years, things should be fine.

Unfortunately, looking across multiple years doesn’t make the picture any brighter. Last year was the worst for new product launches since 1983. The second worst? 2005. Third worst? 2006. Fourth? 2002. In fact, FDA has approved more than 30 novel molecules only once this decade, when it cleared 36 in 2004. FDA approved more than 30 every year in the second half of the 1990s.

Or consider this: over the past three years, FDA has approved a total of 61 new molecular entities and novel biologics. The agency approved 60 in 1996 alone.

We like to track our own statistic, Innovative Commercial Therapies. That represents our attempt to measure the number of truly novel molecules (no enantiomers, metabolites or pro-drugs, where the basic question—is it safe and effective in humans?—has already been answered; no diagnostics; and no non-commercial products like biodefense agents developed by the Department of Defense.)

We think that gives a more accurate indication of the real output of big pharma and biotech pipelines. That only makes the picture that much grimmer: there were just 14 ICTs in 2007. Below are the statistics over the past decade.

If you divide that chart in half, you can see that FDA approved a total of 199 ICTs in the six years from 1996 through 2001. That compares to just 122 in the six years from 2002 through 2007, a decline of 39%.

Okay, enough gloom and doom. Looking on the bright side, at least there were fewer first time generic launches in 2007 than there were new molecular entity approvals. As we reported last year, for the first time in memory the industry suffered a net loss of patented medicines in 2006.

Of course, it was a close race. By our count, there were 14 first time generic launches in 2007, balanced against the 16 NMEs. And boy is it hard to imagine the crop of new drugs launched in 2007 matching the commercial peaks of the brands that lost exclusivity—products Norvasc, Ambien, Lamisil, Coreg, and Protonix.

And, since the industry suffered a net loss of two patented molecules in 2006, that means that the entire pharmaceutical industry has only stayed even in the number of patented medicines on the market for the past two years. That, to put it mildly, is not a recipe for sustained growth in the industry in the years ahead.

Bear in mind that, not only is the absolute number of new product approvals declining, so is the likely peak market size for new products. In other words, at a time when the industry desperately needs the pipeline to pump out more new products than ever, it is getting only a trickle.

Something needs to change.

Please Note: This post has been updated.

Our initial count of drug approvals in the IN VIVO Blog was off by one. It turns out there were 17 new molecular entity approvals, not 16—Fresenius Kabi’s hypovolemia agent Voluven (hydroxyethyl starch) was approved December 27.

Voluven was approved under the 505(b)(2) mechanism as equivalent to other blood volume enhancers, so it definitely does not add to our benchmark statistics (innovative commercial therapies, or ICTs). The extra NME also doesn’t change anything else in our analysis: 17 NMEs is still the lowest total since 1983, as is 19 novel molecules (NMEs plus novel biologics). Voluven is nevertheless an interesting approval: it is the latest example of the emerging follow-on biologics pathway at FDA.

What’s that? You think there is no such pathway? Not so. Congress has yet to enact a legislative pathway for follow-on versions of biologics regulated under the Public Health Service Act. But for biologics that happen to be regulated under the FD&C Act (like human growth hormone, insulin, insulin-like growth factor, etc. etc.) follow-on approvals keep trickling out of the agency. Look for more on that topic as well, coming soon in The RPM Report.

New Year's Resolution 2008: Create Infrastructure Strategy

It’s January 2 and so, in case you haven’t already settled on your New Year’s resolutions, we’d like to suggest one: figure out your infrastructure strategy.
A good place to start is with the number of people you need to do the job you’re in business to do. Since you will always have failures, you need a minimum number of programs to achieve a minimum level of return. Once you’ve figured that out, staff to that number of programs.

The problem is determining when a program achieves its minimum level of success. To answer that question, we’d ask another: for what are you looking to get paid?

As it stands today, companies can get paid -- pretty well, too – for doing a variety of jobs: creating INDs, for example (like Plexxikon); or getting a compound through proof-of-concept (like Exelixis or Vertex); or taking a product from Phase II to approval (like New River). It is by no means always necessary to do all of these jobs -- and therefore no need to staff them.

Think about the drug business like professional sports: the same guys who play in the NBA aren’t ever likely to qualify for Wimbledon; and none of them are likely to end up playing for the New England Patriots or worrying Tiger Woods. The physical requirements are different from sport to sport. And where they’re not, the training and focus required to perform at a high level in any one sport usually precludes excelling simultaneously at another.

The real question is to figure out what game you’re playing – and which team you need to play it. Presumably, you’ll need different players for the IND game than if you play the Phase III game. And you’ll need different numbers of players for each game.

Most Big Pharmas, thanks to tradition, feel they need to play all the games and therefore staff themselves to compete in each. But in fact they have traditionally played only one game – the commercial game. The only way a Big Pharma wins is by launching a product successfully (remember: what you get paid for doing determines which game you’re playing).

In terms of infrastructure, therefore, Big Pharma is playing at a huge disadvantage. The math goes something like this: to get one discovery compound to Phase I, you need to start with about eleven programs – and by the time you’ve gotten your one successful compound into Phase I, you’ll have spent $23 million in cash, without adding any capital or opportunity costs. (See a more in-depth analysis here). Infrastructure: 50-75 people.

On the other hand, to be relatively sure that you’ll get one discovery program all the way to market, you probably need to start with more than 100 programs – or a discovery cash outlay of more than $200 million. Rough estimate: 500 – 750 people. That math works, incidentally, only if discovery infrastructure is scaleable – that is, if ten times the people can actually do ten times the work. Given discovery’s requirements for rapid feedback and a certain anti-bureaucratic creativity, it seems more likely that at some point, the larger the discovery organization, the less productive it is.

In any event, in the worst case, if you’re making your money at Phase I, you need just one-tenth the discovery infrastructure you need if you’re not getting paid until a product reaches the market.

Same logic with development. If you’re getting well paid by a licensee or acquirer for moving a compound from Phase I to Phase III – not from Phase I to the market – you need fewer compounds to succeed because you don’t have any FDA or launch risk in your business. Fewer compounds, fewer employees. Nor do you need the same kind of infrastructure our discovery-focused player required. You need a different kind of infrastructure for finding new compounds to develop.

For this logic to work, you need to get paid, on a relative basis, about as well for doing a more focused job as for doing the traditional soup-to-nuts work of the traditional Big Pharma. And in fact you can. Phase II compounds now generate upfront licensing fees of $70 million and up – with royalties in the high teens or higher (and there is an increasingly competitive marketplace of companies willing to buy out those royalties, in case you want your returns right away). Domain Associates has done well for itself in-licensing a Phase I compound or two, wrapping a company around it, and hiring no more than a dozen people to manage the compounds’ development, largely through a network of CROs – then selling off the result at huge profits to J&J (Peninsula), or Forest Laboratories (Cerexa), or Merck (NovaCardia).

You can argue how repeatable those models are and therefore how much additional infrastructure you might ultimately need. Celtic Therapeutics – the new follow-on private equity fund building on PE predecessor Celtic Pharma (see here and here, for more) – figures that Domain’s math of onesies and twosies won’t work consistently. Given standard clinical failure rates, Celtic is thus amassing a larger portfolio of projects for which they’ll need a larger number of managers. But because Celtic is focusing only on later-stage development, it will still only need a relative handful of workers (20 projects = about 65 people, says Celtic managing director Stephen Evans-Freke).

We admit that we are oversimplifying the infrastructure debate to make a point. There will be companies who do multiple jobs and will require multiple infrastructures. A Big Pharma might be able to get paid for Phase I to Phase II primary-care development (e.g., Bristol-Myers Squibb’s deals with AstraZeneca and Pfizer) and simultaneously get paid for launching new specialty medicines… or vice-versa. There will be Big Pharmas who can create INDs and get paid – in cash or kind – for distributing them to development partners (Lilly is doing something like this with its Nicholas Piramal relationship).

But the key will be figuring out which jobs you can consistently get paid for. And then to stop doing the jobs – and thus hanging on to the related infrastructures –you’re not getting paid for.

How Much Does Pfizer Want to Succeed?

Yesterday, Pfizer’s Jeff Kindler ended the speculation around what we think is his most important appointment, elevating development chief Martin Mackay to the top R&D job (an appointment, by the way, which we predicted--here).

As the WSJ’s health blog pointed out, Kindler has chosen managerial continuity. If Mackay does some of the requisite R&D reforming, it will at least come from within the Pfizer context – and theoretically won’t generate the antibody response an outsider’s initiative would (like Peter Corr’s attempts when the former Warner-Lambert chief was briefly R&D boss).

Second, Mackay is not John LaMattina. He clearly recognizes the need to change Pfizer—as he’s noted to IN VIVO and as he’ll explain at Windhover’s FDA/CMS Summit on December 6.

But two big issues will determine how successful Mackay can be—one more or less in his control; the other out of it.

The first: just how far is he willing to go in reforming Pfizer R&D? A $7.5 billion annual cost, it is vastly too expensive for what it produces. And it’s got too many people working on too many projects to manage effectively.

To succeed—our view, of course--Mackay will have to reduce headcount; start and objectively judge experiments in development (like its Project Fisher, a parallel to Lilly’s Chorus division); figure a way to push biologics into the mainstream of Pfizer’s discovery and development and create systems for monitoring the likely but as yet unknown safety challenges they’ll present; push for independent (and probably independently traded) R&D organizations, on the models of Genentech or Theravance, to whose output Pfizer will have post-Phase II options; and figure out ways of partnering Pfizer’s own de-prioritized drug candidates.

Among other things. But that’s enough for right now.

Problem is: Pfizer’s commercial and financial sides (including its CEO) will have to accept and adapt to the kind of output a revitalized Pfizer R&D must generate—high-value specialty drugs, including biologics. That will mean a smaller, more focused commercial Pfizer--or even Pfizers (we’re all for disaggregation and spinouts—therapeutically focused mini-Pfizers, for example). When Pfizer has followed its instincts, taking a mass-market approach to specialty drugs, it’s failed: witness the disappointing performance of Rebif in multiple sclerosis or the disaster of its inhaled insulin, Exubera.

We know and respect Martin Mackay. And we know he has his work cut out for him. But if he does his bit, Pfizer then needs to let him succeed.

Smaller Big Pharma and the Hybrid Future

Two R&D Heads are better than one

[Updated below.] Today's final panel at PSA featured the heads of R&D at two of the industry's smaller Big Pharma, Tom Koestler, PhD, EVP and president of Schering Plough Research Institute and Elliott Sigal, MD, PhD, EVP, CSO, and president of R&D at Bristol-Myers Squibb Co.

Sigal suggested the industry's challenges in R&D would be best met by a best-of-both-worlds solution: "Some people in large pharma say, 'I want to be a biotech company', but that's not necessarily a good idea. You need to pick the best of pharma and the best of biotech and move on to a next-generation model," he said. Big biotech, like Amgen and Genentech, similarly need to adopt small-molecule strategies to thrive in the longer term, he noted.

BMS has employed this very strategy, embracing biotech risk hedging strategies in its blockbuster deals with Pfizer and AstraZeneca this year (we wrote about those deals here and here). Tom Koestler noted that Schering-Plough has maintained a handful of joint venture agreements to spread risk--notably that company's cardiovascular partnership with Merck, an asthma and COPD deal with Novartis, and its large-molecule JV with Johnson & Johnson (think Remicade).

So what's it take to embrace this hybrid model? A realization that complete vertical integration is not only not necessary, but perhaps detrimental. Co-development and co-commercialization deals, targeted approaches to geography and customers, streamlining manufacturing, and innovative sales and marketing approaches are all part of the model, according to Sigal. If you've got enough opportunities, why not de-risk the portfolio in high risk or expensive areas like metabolic disease?

"We need a new business model, an evolving business model, and R&D needs to evolve in that direction," Sigal said. "You're never too big that you can't benefit from a good collaboration."

UPDATE: For a look at the WSJ Health Blog's coverage of Koestler and Sigal's talks, click here.