Thinning drug pipelines, burgeoning development costs, and a lack of innovation suggest that the traditional pharmaceutical drug development process is too costly and inefficient to survive in its current format. Many pharmaceutical company executives blame these problems on increased regulatory scrutiny, escalating labor costs, and downward drug pricing pressures as the generic drug market continues to grow. However, a recent analysis by Bernard Munos, founder of InnoThink — a partnership to advance drug research into breakthrough innovation — suggests that big pharma’s current woes can primarily be traced to flawed business practices that have guided the pharmaceutical industry (largely unchanged) for the past 60 years.
A Lack Of Innovation And Productivity
According to Munos, from 1950 to 2008, the FDA approved 1,222 new drugs (1,103) and biologics (119). Interestingly, over the same period, the annual investment into new drug R&D has dramatically increased — growing at an average compounded rate of 12.3% per year according to the Pharmaceutical Research and Manufacturers of America (PhRMA) — to roughly $50 billion per year today. Despite this massive R&D investment, the number of new drugs approved each year over the past 50 years or so has remained fairly constant, averaging roughly 25 to 30 per year. In other words, spending more money on R&D initiatives did not help to improve innovation or drug development productivity in the life sciences industry.
In addition to stagnant productivity and a lack of innovation, today’s pharmaceutical industry faces several major financial and business challenges. First, longer R&D cycles and increasing regulatory scrutiny are causing R&D costs to spiral out of control. Second, the impending patent expiry of many blockbuster drugs — those exceeding annual revenues of $1.5 billion — threatens to cut total drug sales revenues by as much as 41% by 2015. To that end, by the end of 2012, 20% of big pharma’s current sale revenues will be susceptible to generic drug encroachment. Third, generic prescriptions drugs are predicted to represent 17% of total global pharmaceutical sales by 2014, up from 10% in 2008. Finally, healthcare reform legislation and increasing downward pricing pressures imposed by insurance companies and third-party payors are driving down drug reimbursement costs and squeezing the margins of many branded prescription drugs.
Drug makers have attempted to adjust to these conditions by controlling costs through job cuts, corporate restructuring, and M&As. For example, over the past four years alone, the world’s 10 largest pharmaceutical companies have eliminated over 200,000 jobs or 18% of the 2010 aggregate, global pharmaceutical workforce. During the same period, M&A activity has skyrocketed with several major acquisitions (Pfizer/Wyeth and Merck/Schering Plough) as big pharma companies scurry to bolster their biotechnology product offerings. While both strategies are likely to help to control costs and bolster company stock prices in the short term, neither is likely to help to improve productivity nor spark the innovation that is drastically needed at most big pharmaceutical companies.
The Demise Of The Blockbuster Drug Business Model
There is a growing consensus among pharmaceutical company executives and industry insiders that the blockbuster drug business model is no longer viable or sustainable in today’s highly competitive global marketplace. According to a study of recently approved drug sales (329 for which data were available) conducted by InnoThink, the probability that an NME (new molecular entity) will achieve blockbuster status was approximately 21%, a success rate that has not changed for the past 20 years — even with massive financial investments into pharmaceutical R&D. Nevertheless, most big pharma company executives continued to rely on the blockbuster drug model, despite the historically low success rate, as the main business driver for the life sciences industry. Therefore, it should come as no surprise there is a plethora of anecdotal evidence that suggests the blockbuster drug model mentality either hindered or killed development of many innovative and potentially beneficial NMEs simply because they lacked true “blockbuster potential.”
There is general agreement among most industry analysts that big pharma companies must change to remain productive and relevant. These changes include: 1) improved R&D productivity, 2) a continuation of drastic cost-cutting measures, and 3) a strategy to rapidly garner market share in emerging markets. While some analysts contend that conventional M&A strategies can address these issues, there is a growing consensus that fundamental changes to big pharma’s business model are necessary to ensure its survival.
Among those calling for seminal changes is Jean-Pierre Garnier, the former CEO of GlaxoSmithKline (GSK), who in 2008 boldly stated, “The leaders of major corporations including pharmaceuticals have incorrectly assumed that R&D was scalable, could be industrialized, and could be driven by metrics and automation. The grand result: a loss of personal accountability, transparency, and the passion of scientists in discovery and development.” More recently, Eli Lilly CEO John Lechleiter echoed similar sentiments when he declared, “At a time when the world desperately needs more new medicines, we’re taking too long, spending too much, and producing far too little. The engine of biopharmaceutical innovation is broken.” Finally, InnoThink’s Munos is a bit more sanguine about the lack of innovation in pharmaceutical R&D. He predicts that within the next three years there will probably be “an implosion of the old model” of drug discovery and development.
Historically, the life sciences industry has operated by using a “closed innovation” business model where ideas are generated internally and ultimately commercialized using vertically integrated internal corporate resources. This process is mainly driven and protected by patents and IP, and product development is frequently done internally and secretly without much input from external sources.
In marked contrast, an open innovation model — most recently embraced by open source software developers and information technology companies — is much more nimble and flexible and relies on both internal and external resources for product development and commercialization. The open innovation business model is more commonly referred to as “crowdsourcing.” And, as the name implies, it leverages the collective external expertise of a network of contributors (the “crowd”) to help develop products that originated as internal ideas.
While most of crowdsourcing’s better-known successes have been realized in the software industry (e.g. Linux software and the Google Android operating system), the possibility of applying it to pharmaceutical R&D has been proposed and is gaining support. Over the past few years, several big pharma companies including Eli Lilly, GSK, Merck, and Pfizer have begun to apply the crowdsourcing concept to early drug discovery and development. Lilly has been the most active in this area and has helped to create or spin out three open innovation projects called InnoCentive, Your Encore, and The Lilly Phenotypic Drug Discovery Initiative, or PD2.
InnoCentive was the first Internet problem-solving platform designed to connect companies with research challenges with external solutions providers who receive prize money if they are successful. Like InnoCentive, YourEncore is a Web-based solutions provider that has assembled a large network of retired and veteran scientists who serve as paid experts to help companies at various stages of drug discovery and preclinical development. In contrast, Lilly’s PD2 initiative asks external investigators to submit promising compounds (through a secure confidential Web-based platform) for evaluation. In exchange, Lilly provides no-cost access to a variety of disease-relevant screening assays. External investigators who submit compounds receive a full data report, and if assay results are promising, they can serve as a basis for collaboration agreement between investigators and the company. These three open innovation entities form the basis of Lilly’s Fully Integrated Pharmaceutical Network (FIPNet) model, which is designed to access ideas, resources, and talents beyond “its walls” through collaboration with external academic research scientists, nonprofits, and biotechnology firms.
GSK has taken a different tack from Lilly. Rather than creating Web-based, open innovation platforms, the company is attempting to remove patents and intellectual property as barriers to new drug discovery. To that end, GSK has released 800 compound and process patents into the public domain and last year offered 13,000 potential antimalarial NMEs to academic researchers to encourage identification of promising lead candidates. Also, like Lilly, GSK was a founding member of InnoCentric and has very recently publicly voiced its support for adoption of an open innovation approach to pharmaceutical R&D in several therapeutic areas.
Both Lilly and GSK are also partners in the Collaborative Drug Discovery initiative, a public-private partnership that created a proprietary software platform that allows participants to selectively share collaborative drug discovery data. Other big pharma companies, including Pfizer, Merck, and Johnson & Johnson, have also signaled a willingness to participate in various open innovation projects like the Sage Bionetworks, the Neglected Tropical Disease Global Network, and the International AIDS Vaccine Initiative.
A Novel Idea: Crowdsourcing Clinical Drug Development
Most of big pharma’s experiments with open innovation have almost exclusively focused on drug discovery, the first step in the drug development process. This is likely because it is the least regulated part of the pharmaceutical drug commercialization process. Nevertheless, although substantial financial investment is required for discovery research and preclinical drug development, the most costly part of the pharmaceutical drug commercialization process is usually human clinical trials. And, human clinical trial costs are rising, mainly because of regulatory agencies’ increased emphasis on drug safety.
Some analysts contend that clinical development represents as much as 33% of today’s total drug R&D costs. In support of this, InnoThink’s Munos determined that approximately 387, 125, and 100 clinical trials were conducted to garner regulatory approval for various indications for three blockbuster cancer drugs: Avastin, Erbitux, and Rituxan, respectively. Accordingly, the UK-based research firm CMSInfo calculated that in 2005 spending on U.S. clinical trials was nearly $24 billion; this amount is expected to exceed $32 billion by the end of 2011.
Tomasz Sablinski, M.D., Ph.D., managing director at Celtic Therapeutics (a private equity drug development firm) and chief architect and founder of Transparency Life Sciences (TLS), suggests that a possible way to cut costs and make the clinical drug development process more efficient is by applying a crowdsourcing and open innovation model to human clinical trial design.
Sablinski, a former clinician with over 12 years of experience managing clinical drug development at several major pharma companies, contends the cost of clinical drug development is skyrocketing and the process is becoming much less efficient because pharma has been forced — due to mounting financial pressures — to outsource many clinical trial activities to CROs. “While CROs are happy with their current workloads, the growing number of new drugs entering clinical development has resulted in longer clinical development times and more costly trials” says Sablinski. In support of his open innovation business idea, he added, “There is an enormous amount of untapped clinical development and trial design expertise out there. Why not take advantage of it?”
The TLS open innovation model aims to combine the collective knowledge of a network of veteran clinical drug development individuals and firms with the latest advances in biosensors, wireless home-health devices, medical software apps, and telemedicine (distance medicine) technologies. Sablinski believes he can use this approach to speed clinical development and identify new uses (repurpose) for discarded NMEs or previously approved prescription medicines. Not surprisingly, the centerpiece of TLS’ unique approach is a robust, collaborative intelligence, Web-based system. This system, which is currently being developed, will help TLS to electronically manage the interactions between the company and external contributors and capture, analyze, and disseminate real-time clinical data to its network of scientists and collaborators.
“The obvious place to start is finding new clinical indications and uses for generic drugs,” says Sablinski. “We already know a lot about their modes of actions and their safety profiles, and repurposing them for other indications has a higher probability of success than developing new or novel drugs.” Sablinski’s “drug repurposing” idea is not unprecedented. According to Munos, “Researchers at the Institute for Advancing Medical Innovation at the University of Kansas are working on several molecules, including one that is an old antifungal that has been found to be highly effective against some types of cancer.”
Support for Sablinski’s concept has been growing since he introduced it several years ago at several open innovation conferences. InnoThink’s Munos thinks the idea can be a “potential game changer.” Others like Daniel Reda, a serial entrepreneur, IT expert, and cofounder of CureTogether.com, a patient-focused drug development website, offered, “Tomasz’ approach, if it works, would give previously discarded or undeveloped expensive drugs a chance to positively impact many lives.” Others applaud Sablinski’s attempt to improve clinical drug development by integrating cutting-edge mobile healthcare and monitoring technologies into the clinical drug development paradigm.
On the other hand, Jean-Jacques Garaud, M.D., head of Roche Pharma Research and Early Development, is not as optimistic about Sablinski’s ideas. He contends the crowdsourcing concept is neither new nor novel and is already part of established pharma R&D activities. “Companies already source ideas, technologies, compounds, etc. from an external network of contributors that include academic groups, service providers, and biotechnology companies,” says Garaud. “The difference between this and Sablinski’s approach is the use of new technologies and tools that expand the network’s reach, improve flexibility, and simplify reward mechanisms for contributors.” Finally, he cautions, “Due to the nature of pharma (e.g. high costs, high risk, regulatory constraints) an ‘open source’ or a pure virtual open innovation model seems unlikely to be a viable option.”
There is no question that open innovation drug discovery models are gaining traction at several major pharmaceutical companies. However, wholesale adoption or “buy in” of the open innovation model by the pharmaceutical industry faces several major challenges.
First, the open innovation model would likely elevate the regulatory requirements associated with drug development because of the increased number and diversity of contributors to the process. Consequently, implementation of the model would require careful design, ongoing and regular contact with regulators, and a large investment and commitment of overhead in project management and information technology support.
Second, there are major concerns about how patents and other intellectual property generated during the open innovation process will be handled and managed. Perhaps the biggest question that must be answered is, who will own the patents? While patents and IP are the lifeblood of the life sciences industry, Jackie Hunter, senior VP of science environment development at GSK, contends that wholly owned IP does not always automatically lead to success and creation of commercial value. For example, she noted in a recent publication that large companies typically commercialize a miniscule portion of their patent portfolio. Further, Hunter asserts that contrary to popular belief, open innovation can actually drive IP creation. However, for this to work correctly in an open innovation context, she stresses that all contributors must agree at the outset of the project on patent ownership and all commercialization and royalty-sharing provisions.
Third, open innovation will likely require an unusually complex reward system for contributors that include fees for service, fees for success, and milestone and royalty payments. Put simply, which open innovation contributors will provide the initial capital investment to drive projects, and how will monies be disbursed to individual contributors if a project is successful? Some open innovation advocates contend that the use of in-kind contributions such as access to tools, reagents, and expertise can obviate the need for up-front cash contributions and help to better manage the reward system. Whether or not this idea is viable remains to be determined.
Finally, open innovation proponents contend that the process is designed to help mitigate risk by distributing it among individual network contributors. However, as big pharma companies continue to become increasingly risk-averse, it isn’t clear what percentage of risk they will be willing to assume in open innovation drug development projects. To many, this represents the greatest impediment to adopting the open innovation model for pharmaceutical drug development and commercialization.
The Potential For Growth
While it is still too early to determine if open innovation will become an integral part of new drug development, Roche’s Garaud believes that it has the potential for growth in a variety of areas that include:
- exploratory research and entry into new therapeutic areas
- support for niche or developing technologies
- sourcing solutions for chemical synthesis, assay and animal model development, and biomarker identification/validation
- repurposing of molecules for new indications and combination drug therapies
- innovative marketing
- drug safety and postmarketing surveillance.
Despite the uncertain future of open innovation in the pharmaceutical drug development process, there is no question big pharma’s business model is in desperate need of repair. And, perhaps more importantly, it must be fixed soon. Otherwise, pharmaceutical companies will no longer be able to continue to discover and develop the innovative, new medicines that are required to address unmet medical needs.