Los graves problemas que deben afrontar las grandes empresas del sector farmaceutico y su futuro incierto.

Big trouble for Big Pharma

Dec 4th 2003 | NEW YORK
From The Economist print edition

Why Big Pharma urgently needs a new business model

WHEN GlaxoWellcome and SmithKlineBeecham announced their merger in 2000 to form GlaxoSmithKline (GSK), the world's second-largest drug firm, its new boss, Jean-Pierre Garnier, said that the merged firms would be “the kings of science.” This week GSK unveiled its crown jewels: a full pipeline of compounds in research and development, the result of a £2.6 billion ($4.5 billion), 16,000-researcher-strong effort. 82 new drugs and 20 vaccines are in development, 44 of them moving into later-stage trials.

Yet if Mr Garnier hoped that these numbers would impress his shareholders, he had to think again: GSK's share price actually fell on the news. Like investors in many other big drug firms, GSK's shareholders have little confidence that many of its new compounds will earn them a cent anytime soon. Of the 20 drugs that GSK plans to put into final-phase human testing in the next three years, the chances are, on current industry averages, that less than half of them will make it to market.

Next, consider Merck. On November 20th, news that the firm was stopping development of a diabetes drug after finding tumours in lab mice was met with dismay—and a wave of selling that knocked 11% off the firm's already-battered share price. With another vaunted project—an experimental anti-depressant—also failing last month, Merck's near-term pipeline now looks horribly empty. Even an upbeat profit forecast for next year, on December 3rd, did not cheer investors much.

Merck and GSK are not alone. In 1998-2002, according to Lehman Brothers, Big Pharma firms launched on average 59 drugs per year. In 2002-06, reckons Lehman, they will launch just 50 per year. Moreover, as many patents for the industry's existing products expire in the next five years, competition from generic-drug makers will threaten $30 billion (one-fifth) of annual sales in America alone, says AT Kearney, a consultancy.



When the drugs don't work

Big Pharma now faces two big challenges. First, control costs better. Stuart Walker, head of the Centre for Medicines Research International, reckons that total industry spending on R&D will reach $50 billion this year, over 25% up on 1998. Sales and marketing overheads have soared, too. In the past four years, says Dean Hart, head of North American sales at Takeda, a Japanese drug firm, the number of sales representatives employed by drug firms in America has risen by 54%, to 90,000. Each rep costs on average $200,000 a year.

Sales, general and administrative expenses account for 17% of a typical big American firm's revenues, says Christopher White of AT Kearney. In the drug industry, such overheads (even excluding the big American sales forces) account for 33% of revenues. Standard management practices such as consolidating procurement, outsourcing personnel and finance functions and automating transaction processing all compare poorly with other industries, says Mr White. Many firms still make pills in-house, a job perhaps better done by a contract manufacturer.

But the tougher challenge is to improve the productivity of R&D. As Mr Walker points out, it is not just the number of new products that has fallen in recent years, but also their originality. Less than 30% of drugs launched last year were first or second in their class. The proportion was far higher in the late 1990s. Roughly 40% of R&D spending by Big Pharma is now on “line extensions”—improving existing drugs, not creating entirely new ones.

Many big drug firms have begun to license more of their technology and products from outside companies, especially biotechnology start-ups: having slumped in recent years, the value of biotech firms is now rising again. Novartis has set up a big R&D centre in Cambridge, Massachusetts, in part to better position itself to collaborate with outside academics. Eli Lilly's InnoCentive subsidiary runs a website where problems confronting drugmakers, such as how to generate a particular compound in chemical synthesis, are posted to be tackled by more than 25,000 registered problem-solvers as far afield as Russia and China. For a reward of $10,000-100,000, the firm gets a solution that would have cost more time and money to solve itself.

Others hope to improve the way they manage in-house R&D. Wyeth is encouraging its researchers to perform their tasks better by changing how it pays them. Unusually for the industry, its scientists get to share a bonus pool which depends, in part, on how many new drugs they launch each year. There used to be a temptation for Wyeth's early-stage researchers to throw their work “over the wall” before it was ready to the scientists who run clinical trials, says Robert Ruffolo, the firm's head of research. Because early-stage researchers now share incentives with later-stage scientists, the later-stage researchers have begun to “pull” the development of the most promising compounds forward. A corresponding “push” from early-stage workers hastens the process. GSK fundamentally reorganised its R&D in 2001, splitting its more creative arm into smaller “centres of excellence”, and enlarging the arm that enjoys economies of scale. Mr Garnier claims that his “best of both worlds” strategy is now paying off.

The industry's bloated overheads appear to be driving its decisions on the sort of drugs it seeks to develop. Like a supermodel who will not get out of bed for less than $10,000 a day, Big Pharma has decided that it is simply not worth investing in anything but a blockbuster. This means that lesser, albeit interesting, compounds fall by the wayside. An oft-quoted figure from the Tufts Centre for the Study of Drug Development puts the average cost of bringing a new drug to market at $897m. But as F.M. Scherer, an economist, points out, this is an average cost for big firms producing drugs for chronic diseases. Other firms can bring drugs for other complaints—infectious diseases or rare conditions, say—to the market for around $100m-200m.

Big Pharma also needs to do something about its poorly trained, generalised sales force, which is simply not equipped to chase smaller, more specialised markets. Most sales calls end, at best, with just a few seconds of a doctor's time, laments Mr Hart of Takeda. Some reps do not even make it past the reception desk before dropping off their free samples. Drug firms lag behind other industries in the way they use information technology to discriminate between profitable and unprofitable customers. Only one in five drug companies invests in any salesforce training beyond initial courses offered to recruits. Who, after all, needed to bother with trifles such as training and IT when, without much effort, a drug such as Lipitor, Pfizer's cholesterol-lowering medicine, was making sales of $8.6 billion last year alone?

Can Big Pharma achieve transformation without changes at the top? The bosses of big drugs firms have been horribly slow to grasp the enormity of their problems. Until recently, Merck's boss, Raymond Gilmartin, has been reluctant to license much technology from outside, instead putting his faith in the firm's own scientists. With Merck's in-house R&D now struggling, it will be no surprise if Mr Gilmartin's head is the first to roll.