The structure and business of biopharmaceutical companies including the management of risks and resources

CHAPTER

The structure and business of biopharmaceutical companies including the management of risks and resources

7 James Samanen

James Samanen Consulting LLC, Phoenixville, PA 19460, USA, YourEncore, 100 Canal Pointe Blvd, Suite 209 Princeton, NJ 08540, USA, Former Discovery Research Portfolio Management GlaxoSmithKline, 709 Swedeland Road, King of Prussia, 19406, USA

CHAPTER OUTLINE 7.1 Introduction ................................................................................................................................. 227 7.1.1 The business of biopharmaceutical research and development ....................................227 7.1.1.1 The successful drugs also pay for the failed drugs .............................................. 227 7.1.1.2 Revenue challenges ........................................................................................... 227 7.1.1.3 Revenue opportunities........................................................................................ 230 7.1.2 The science of biopharmaceutical R&D .....................................................................230 7.2 The Organization of Biopharmaceutical R&D .................................................................................. 231 7.2.1 Biopharmaceutical R&D is drug discovery and drug development.................................231 7.2.2 The logical organization of biopharmaceutical R&D ....................................................231 7.2.3 Stage-gate organization – the project pipeline ............................................................232 7.2.3.1 The project pipeline............................................................................................ 233 7.2.3.2 Not all projects start at the first stage .................................................................. 233 7.2.4 Stage-related goals ..................................................................................................234 7.2.5 Attrition..................................................................................................................235 7.2.5.1 The Attrition-based pipeline ................................................................................ 236 7.2.6 Risk – how it influences POS, cost, value and commitment .........................................237 7.2.7 Resource – who does what, when and where ..............................................................238 7.2.7.1 Association of resource with stage – matrix of work ............................................. 238 7.2.7.2 Association of resource with business units – overarching organization ................ 238 7.2.8 In-house vs. in-license .............................................................................................240 7.2.9 In-house vs. out-license ...........................................................................................241 7.2.10 Big vs. small ...........................................................................................................242 7.2.11 The necessity of standard operating procedures .........................................................243 7.3 Project Management in Biopharmaceutical R&D............................................................................. 244 7.4 Portfolio Management in Biopharmaceutical R&D........................................................................... 244

Introduction to Drug Research and Development. http://dx.doi.org/10.1016/B978-0-12-397176-0.00007-8 Ó 2013 Elsevier Ltd. All rights reserved.

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7.5 Cost Reduction Experiments in the Business of Biopharmaceutical Discovery and Development ........ 245 7.5.1 Process improvement.................................................................................................245 7.5.2 Reducing resource – vertical disintegration ..................................................................245 7.5.2.1 The need to downsize........................................................................................... 245 7.5.2.2 Vertical integration vs. vertical disintegration (Decentralization) .............................. 245 7.5.3 Increasing success through changes in the organizational model ...................................249 7.5.3.1 Big and small at the same time............................................................................. 249 7.5.3.2 Planning for failure – POC at chorus (Lilly) and flexion therapeutics ....................... 250 7.5.3.3 Open innovation ................................................................................................... 250 7.6 Conclusion................................................................................................................................... 251 References ......................................................................................................................................... 251

ABSTRACT Successful drugs have a good return on investment by bringing in considerably more revenue than the expenses of discovery, development, and manufacturing. Successful drugs pay for all drug projects, those that fail and those that have yet to fail or succeed. Most research and development (R&D) projects fail. Since R&D is the future of the company, a lot is at stake in the business of R&D. This chapter considers the organization of biopharmaceutical R&D, as well as various organizational experiments, that are already under way, that deal with the enormous risk and cost of biopharmaceutical R&D. There is a fairly uniform sequence of events involved in the discovery and development of biopharmaceuticals. The Stage-Gate Organization of the project pipeline is described along with stagerelated goals. The high attrition in the industry is examined as well as reasons for project failure, particularly in the clinic. The fact that most projects fail in the biopharmaceutical industry means that risk, the probability that a project will fail, influences a number of key behaviours in biopharmaceutical R&D. The manner in which risk influences probability of success, cost, value and corporate commitment is considered. Not all discoveries occur within a company – many are in-licenced. Reduced revenues challenge a company’s ability to develop all its assets, increasing the demands on project and portfolio management, and for out-licencing or partnering. In large biopharmaceutical companies, resource tends to be organized into business units, therapy areas, line departments, and platform technology groups. In the new era of reduced profits many companies are moving away from vertical integration towards decentralization, performing many to most functions in other companies, and in the extreme, towards virtual drug discovery and development. The risks and benefits with the external allocation of resource via outsourcing and partnering are discussed. Experiments with the organizational model of biopharmaceutical R&D are explored which aim to reduce risk, increase success and efficiency, including attempts to be big and small at the same time, planning for failure, and open innovation. There are also external revenue challenges, including generics competition and thirdparty payer constraints. On the upside are a number of opportunities to increase revenue, including new biologics and new areas of exploration – epigenetics and gene therapy – and by expanding markets into rapidly developing countries. Managers face complex challenges to the business of biopharmaceutical R&D. But, regardless of the type of company or set of partnered companies, academic institutions and service organizations that perform biopharmaceutical R&D, to a large extent the sequence of events in which a drug is discovered and developed will always be the same. And as long as the industry can continue to find new therapies that positively impact the lives of patients, it will continue to be an exciting and challenging industry.

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Keywords/Abbreviations: Return on investment (ROI); New molecular entity (NME); Innovation gap; Epigenetics; RNA interference (RNAi); Stage-Gate (milestone) concept; Life cycle management; Project/ pipeline/portfolio; Paralogue synergy; Mergers and acquisitions; Proof of concept (POC); Probability of success (POS); Estimated present net value (EPNV); Pharmaceutical Research and Manufacturers of America (PhRMA); Standard operating procedure (SOP); Good clinical/manufacturing/laboratory practice (GC/M/LP); Vertical (dis)integration; Contract Research Organization (CRO); Virtual drug discovery and development (VD&D); Centres of Excellence in Drug Discovery (CEDDs); Open innovation; Biopharmaceutical; Generic drugs; Brazil, Russia, India, and China (BRIC); Biologics; Gene therapy; Stage-Gate Organization; Paralogue; Target discovery; Lead discovery; Lead optimization; Preclinical evaluation; Full development; Registration & launch; Reimbursement; Attrition; Pipeline; Risk; Cost; Value; Resource; Therapy area; Platform technologies; In-licence; Out-license; Repurposing; Matrix of work; Intellectual property (IP); Project management; Portfolio management; Process improvement; Vertical disintegration; Vertical integration; Decentralization; Outsourcing; Partnering; Virtual pipeline; Chorus; Flexion therapeutics; Open innovation; Precompetitive research.

7.1 INTRODUCTION In this chapter, unless a distinction is made in the text, the term biopharmaceutical industry is used to cover both the conventional pharmaceutical industry and the manufacturers of biopharmaceuticals.

7.1.1 The business of biopharmaceutical research and development The biopharmaceutical industry is a big business. As ranked by percentage return on revenues, the pharmaceutical industry ranked second in 2008, behind the mining & gas production industry (1). Many of the products are big money winners. Table 7.1 lists the top 10 best-selling drugs in the US in 2010. Companies that make a lot of money want to continue to make a lot of money, but as we will see, it’s a tough business.

7.1.1.1 The successful drugs also pay for the failed drugs In any company, the cost of research and development (R&D) is paid for by the drugs that bring in revenue for the company. As will be discussed later in this chapter (Section 7.2.5) most R&D projects fail. A successful drug is one that brings in considerably more revenue than the expenses from the discovery, development, manufacture and sales of the drug. Such drugs have a good return on investment (ROI). The successful drugs pay for all drug projects, those that fail and those that have yet to fail or succeed. Since R&D is the future of the company, there is a lot at stake in the business of R&D.

7.1.1.2 Revenue challenges Ideally the cost of developing the drug should be less than the amount of money that will be made on the drug. This can be displayed in a cash flow diagram (Figure 7.1), where the expenses incurred during the R&D of the drug are displayed as negative cash flow and revenues from the sales of the drug create positive cash flow. But there are many challenges to the outcome that revenues will exceed expenses. Until product launch, the cash flow is negative, in terms of the expenses incurred from the R&D of the drug. Upon launch the sales of the drug bring in revenues and hopefully the revenues are greater than the expenses and cash flow becomes positive. It is also to be hoped that the volume under the cash

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Table 7.1 The Top 10 Best-Selling Drugs in the US (2e10) Drug

$ Billion

Type

Company

Date of Patent Expiration

Reference

1

Lipitor

7.2

Pfizer

2011

(3)

2 3 4

6.3 6.1 4.7

AZ BMS GSK

2015 2012 2010

(4) (5) (6)

5

Nexium Plavix Advair Diskus Abilify

Cholesterollowering statin drug Antacid drug Blood thinner Asthma inhaler

4.6

Antipsychotic drug

2014

(7)

6 7 8

Seroquel Singulair Crestor

4.4 4.1 3.8

2012 2012 2016

(8) (3) (9)

9 10

Actos Epogen

3.5 3.3

Antipsychotic drug Oral asthma drug Cholesterollowering statin drug Diabetes drug Injectable anaemia drug

Otsuka/ BMS AZ Merck AZ Takeda Amgen

2012 2013

(8) (10)

flow positive curve is considerably larger than the volume under the cash flow negative curve to make up for the expense of discovery. Optimally the volume under the cash flow positive curve is larger than the negative cash flow of at least some of the failed projects. Additional Phase III clinical trials required by regulatory agencies can significantly increase the prelaunch expense. Astoundingly, only two out of 10 marketed drugs return revenues that match or exceed R&D costs (12). The launched drug should have one or more patents that protect the drug from generic competition. The period of patent protection, however, is initiated well back in the drug discovery phase when the drug is initially synthesized and shown to have significant biological activity. Lengthy clinical trials reduce the

FIGURE 7.1 A hypothetical cash flow vs. time plot (11). Cash flow is the difference between revenue and expense.

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229

period of patent protection. Companies typically run clinical trials postlaunch to expand the set of indications for a drug (Phase IV), which could add to revenues but cut into the period of patent protection. Upon patent expiration, other companies may enter the market with considerably cheaper generic nonbranded drugs, which rapidly reduce revenues of the branded drug. Generics share of the market was 49% in 2000, rising to 74% in 2009 (12). The 10 best-selling drugs in Table 7.1 will all lose patent protection by 2016. In the US, congress created a ‘period of exclusivity’ to ensure that at least some of the revenue stream is protected from generic competition. It has been estimated that the branded pharmaceutical companies will lose $100 billion dollars in the US sales between 2010 and 2013 (13). In recent years third-party payers have become the most important force in determining the market for a new drug. They tend to focus more on the ‘value’ (i.e. cost) of a drug over the innovation or patient need (14). (More attention could be paid to the financial aspects of the business, but we must consider such detail to be beyond the scope of this chapter.) Working against the relentless challenge of patent expirations, biopharmaceutical companies strive to find new drugs. Innovation feeds the engine. But here too, there are problems. A simple measure of innovation is the number of ‘new molecular entities’ (NMEs) that the FDA approves each year (firstever approval of a drug). As seen in Figure 7.2 (15,16,17), pharmaceutical companies have spent more on R&D each year, while except for a spike in the late 1990s, the number of NMEs has remained essentially the same. The increasing distance between NMEs and Pharma Spend in Figure 7.2 is often referred to as the ‘innovation gap’, e.g. Ref. (18). One may argue that while NME is perhaps the simplest measure of innovation or productivity, since it removes the subsequent filings and approvals on a drug, NME rarely defines the most valuable version (indication and/or formulation) of an asset. Better formulations and more lucrative indications tend to be further back in the pipeline and reach approval after the NME. Nonetheless it is the measure of innovation or productivity most employed by industry analysts.

FIGURE 7.2 NMEs per year vs. total R&D spend in billions of dollars (US$ 2008) (prior to 1984 first New Chemical Entity (NCE) approvals).

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Risk is enormous in the pharmaceutical industry. There is only a 2% probability of success (POS) that a project will go all the way through discovery and development (19). Discovery and development times are always long. It takes on an average about 14 years for a project to go all the way through discovery and development (20).

7.1.1.3 Revenue opportunities On the upside are a number of opportunities to increase revenue: Expanding Markets – Brazil, Russia, India and China Countries. Beyond the industrialized economies that have long been the main market for pharmaceuticals, there are a number of countries whose economies are rapidly expanding, such as BRIC. The market for pharmaceuticals in these countries has been estimated to be over $130 billion, collectively larger than Japan, and growing rapidly (21). China alone is predicted to become the second largest pharmaceutical market by 2016. Many drugs have yet to be marketed in these countries. Biologics. Biologics present new opportunities in challenging therapy areas (TAs). As discussed in Chapter 5, biologics are on the rise as an important contributor to the biopharmaceutical pharmacopeia, such that 43% of the drugs approved in these TAs from 1998 to 2008 were biologics (22). With technological advances in the discovery and development of biologics, 80% (most!) of the TAs are now amenable to either strategy (22,23). The current treatments for type 2 diabetes discussed in Chapter 6 illustrate this point. New Approaches – Epigenetics and Gene Therapy. Science marches on! New opportunities present themselves over time that were either unheard of or too speculative to consider in earlier eras. Two areas that are receiving a lot of attention currently are the areas of epigenetics and RNA interference (RNAi). Epigenetics is the study of factors that modulate genetic transcription without changing the DNA or RNA of a cell. This study has led to the identification of at least two mechanisms which can be modified by drugs – DNA methylation and histone modification. Drugs that involve these mechanisms have shown efficacy in cancer (24). Other indications are likely to emerge as well. RNAi. It has long been known that short strands of RNA can bind to native RNA and interfere with genetic transcription (25). It has taken a long time to figure out how to create drugs that mimic RNAi or to develop formulations that allow for short strands of interfering RNA to get through the cellular and nuclear walls and deliver the interfering RNA into the nucleus. Such a formulation recently demonstrated success in human patients with solid tumour (26). A truly revolutionary use for RNAi is to block the transcription of abnormal proteins arising from abnormal genes. It is too early to determine the full extent of indications that will come from drugs with mechanisms involving epigenetics or gene therapy, but the potential shines bright for drug discovery in these areas. The other major area where biopharmaceutical companies can modulate their revenue challenges is through restructuring the way in which they conduct R&D. Before we discuss these changes we need to understand the organization of biopharmaceutical R&D. Then the various experiments that are under way to deal with the enormous risk and cost of biopharmaceutical R&D will be considered.

7.1.2 The science of biopharmaceutical R&D Biopharmaceutical R&D is all about science – whether it’s the discovery of a new protein implicated in tumour growth or it’s the discovery of a genetic biomarker implicating a better outcome for patients. Different kinds of science are involved in each of these discoveries. The nature of the work in

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231

biopharmaceutical R&D is highly varied. It may require the hands and observational insight of a highly trained PhD or MD, or a robot that performs repetitive tasks in a highly precise manner. Neither work is less valuable. There is a common misperception that pharmaceutical companies are about small-molecule drugs and biotechnology companies are about biologics or biomolecular drugs. The term biopharmaceutical is often applied to companies that pursue biologics or biomolecular drugs and not small-molecule drugs. As adumbrated above, here the term biopharmaceutical will be used to mean both – small-molecule drugs and biologics or biomolecular drugs. A more precise term may be bio/ pharmaceutical, which this author has used previously. This chapter does not intend to discuss the enormous subject of the science of biopharmaceutical R&D. A good start for that subject is the recent book by Rick Ng (11) and other chapters in this book. This chapter will discuss the organization and management of biopharmaceutical R&D with a particular emphasis on discovery. A useful guide on managing the science may be found in the recently revised book by Bamfield (27).

7.2 THE ORGANIZATION OF BIOPHARMACEUTICAL R&D There is a sequence of events leading to the discovery and development of biopharmaceuticals. Until recently, all these events were performed by employees of the large biopharmaceutical companies. As will be discussed subsequently, many of these activities are now performed in a variety of institutions external to the biopharmaceutical company. At the end of this chapter we will consider some of the experiments that companies are conducting on both the organization and the process of biopharmaceutical R&D. It will take a long time before the results of the experiments become evident. But, by in large, the sequence of events is essentially the same regardless of the organization of the work.

7.2.1 Biopharmaceutical R&D is drug discovery and drug development Drug Discovery encompasses all scientific exploration giving rise to the discovery of a clinical candidate. The clinical candidate is a chemical or biological substance which can be produced in large quantity and has been shown to impact a specific disease mechanism in cellular and animal disease models, suggesting therapeutic benefit to patients. Drug Development encompasses all scientific exploration of the clinical candidate to prove its safety and efficacy in humans and its therapeutic benefit to patients. There is considerable feedback between development and discovery, such that observations in the clinic can lead to the identification of new clinical candidates that take advantage of these observations. Discovery and development encompass different stages in the R&D process, yet they share common goals to discover and develop drugs that all R&D can support, with minimal expense and with maximum value.

7.2.2 The logical organization of biopharmaceutical R&D Biopharmaceutical R&D is organized by what happens first and what happens next in a logical order of events (Figure 7.3). Regardless of the type of company or set of partnered companies and service organizations that perform biopharmaceutical R&D, to a large extent the manner in which a drug is

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FIGURE 7.3 Logical organization of drug discovery and development. This figure displays eight stages of R&D. Stage names may vary among companies. Different companies may split stages, e.g. in Chapter 3, target discovery is shown as target identification and target validation: Some companies combine lead discovery and lead optimization.

discovered and developed will always be the same. By analogy, it will always make more sense to install the components of a motherboard and then the components that connect to it, before a computer is surrounded with its casing. What may change in biopharmaceutical R&D is the organization that supports the process. If one considers a disease mechanism to involve a sequence of interactions between proteins and DNA or RNA, the biological target is the entity in that disease mechanism which is to be inhibited or augmented through interaction with a drug. At the beginning of drug discovery work is focussed on target progression or target validation, which is the development of a body of evidence that correlates the biological target to a desired potential therapy. For some disease areas, such as antibacterial and antiviral therapy, one only needs to kill the bacterium or virus in vitro. For these therapies target validation is achieved early in target discovery. Target validation for other disease areas, such as psychiatric disorders, is only truly achieved when the drug is proven to work in the relevant clinical population. Late discovery and early development is engaged in molecule progression – identifying and developing agents which are proven efficacious and safe in humans. It is only in the clinic where the true medical indication for the biopharmaceutical agent is elaborated.

7.2.3 Stage-gate organization – the project pipeline The organization and application of work in biopharmaceutical R&D is best managed in a stage-gate organizational structure (28). Each stage encompasses a body of work that involves several goals and several disciplines – a work matrix. Each gate (milestone) is an organizational decision to commit resource to the next stage. Figure 7.4 displays eight stages starting with target discovery and ending in registration & launch, as well as typical gates or decision points where progress is assessed (the

7.2 The organization of biopharmaceutical R&D

233

FIGURE 7.4 Stage-Gate (Milestone) Organization of biopharmaceutical R&D – the pipeline.

vertical arrows in Figure 7.4). A ninth stage could be added for life cycle management, which relates to the activities around optimizing the market potential of the drug. Most biopharmaceutical companies find it useful to have one or more committees focus the organization to a decision at each milestone. There are often sub-milestones as well, some of which are shown in Figure 7.4. The goals of each stage are discussed in Section 7.2.4. In drug discovery the focus is on the drug target, whereas in drug development the focus shifts to the drug candidate identified in lead optimization.

7.2.3.1 The project pipeline A biopharmaceutical company will work to discover and develop more than one drug at a time. Each drug discovery or development effort is referred to as a project. The set of projects is referred to as the portfolio. All projects in the company are expected to go through all these stages of work. When viewed by the various stages of work, the portfolio of projects is called the pipeline, as outlined in Figure 7.4. A subset of projects in the portfolio may be called a programme, e.g. the cancer programme.

7.2.3.2 Not all projects start at the first stage There can be many situations where a particular company finds it can start a project at some stage other than the first stage of target discovery. In-Licencing. If a company or nonprofit laboratory has developed a particular target (and any related small molecules or biologicals) through one or more stages and publishes the information that led to project progression or offers its work for sale, another company may be enticed to initiate in-house work at that point in the pipeline (Section 7.2.8). Mergers and Acquisitions. Upon a merger or acquisition the assets of two companies are joined. To the new company at least some of the projects will seem to have come into the middle of the pipeline. Of course, these projects began in a predecessor company. Paralogue Synergy. Targets often bear genetic similarities to other biological targets, such targets are called paralogues. Thus work on Target A1 could allow a company to readily initiate work on Target A2, which is its genetic sibling, starting at or near the same stage as Target A1, depending on how readily transferable the work is from Target A1 to Target A2. It is often the case that the project team working on Target A1 will develop selectivity assays to ensure that they develop agents that act

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on Target A1 and not Target A2. In the process they may discover agents that are more efficacious against Target A2 than A1. Such agents would be shelved by the A1 project team, but should be made available to a subsequent A2 project team that forms around Target A2 should a relevant potential disease indication be envisioned. This synergy within a company is particularly useful.

7.2.4 Stage-related goals Different work is performed in each stage of discovery and development. There are overarching goals for each stage, which must be met to progress to the next stage. Some work may be deferred to later stages, e.g. see Section 7.5.3.2. Below are the typical goals of each stage (see also the discussion in Chapter 3). In target discovery, the project team strives to improve (1) target validation: define and execute a set of experiments that establishes the target in relation to proposed therapeutic intervention and (2) target tractability: express and purify the target protein; ensure that suitable quantities can be obtained from a stable cell line for future assay work; determine suitability of native protein for assay development; and identify tool agents to assist in assay development. In lead discovery (target to lead), the processes that identify small-molecule leads are considerably different from those that identify biomolecular leads (see Chapter 5 on Small Molecules vs. Biomolecules). For small molecules, the project team strives to (1) develop an in vitro assay with a tool agent that will identify other agents which interact with the target through the desired mechanism of action; (2) create variants of the target and assay amenable for screening preferentially in high-throughput mode; and (3) identify first agents (hits) through screening. The various screening strategies have been discussed elsewhere in this book. Once potential hits have been identified medicinal chemists get involved in determining which families of hits are sufficiently druggable to justify chemical exploration of the series to identify lead series for lead optimization. See following chapters 8, 3, 15 and Refs (11,29). Lead Discovery for Biologics. The processes that identify biomolecular leads are considerably different and vary according to the type of macromolecule. In general, this stage is considerably shorter for biomolecules. It is beyond the scope of this discussion to delve into the process of biomolecular discovery. The reader may wish to refer to Refs (30–32). The mode of action of a biomolecular drug can differ considerably from the mode of action of a small-molecule drug. A small molecule invariably is designed to interact with a biomolecular target, as is the case with biomolecular drugs, but the pharmacology of biomolecular drugs is considerably more diverse. In the classical lock-and-key model, the biomolecular drug could be the key, as in hormone replacement therapy, it could bind to the key (ligand binding) or it could be an extracellular portion of the receptor, as in decoy therapy, and it can even have enzymatic activity, e.g. Estrogen Replacement Therapy (ERT) (Chapter 11) and tissue plasminogen activator. A company’s portfolio nomenclature system needs to account for these diverse possibilities. Small molecules often mimic a biomolecule that is the natural ligand for the target of interest, at least in the manner of binding to the target. There are a number of marketed drugs that are natural ligands for targets (33). In Lead Optimization (Lead to Candidate), the project team strives to (1) achieve desired levels of potency, efficacy, selectivity and pharmacokinetics; (2) prepare analogues (variants) of the initial leads

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235

and assay for potency and selectivity, developing a structure–activity relationship to catalyse the design of future analogues with enhanced properties; (3) evaluate better analogues in animal disease models and (4) narrow down to a single drug candidate to recommend for clinical trials. Both the small-molecule project team and the biomolecular project team perform similar activities in this stage, with respect to generating and evaluating variants of the lead but the actual goals, strategies and processes vary considerably. In Preclinical Evaluation (Candidate to Phase 1), the project team strives to (1) perform more animal toxicity studies, importantly by the route of administration intended for clinical trials; (2) prepare sufficient quantity of drug substance for at least Phase 1 clinical trial and (3) formulate the drug for the route of administration intended (a) for clinical trials and (b) for the final product (or begin investigations). In proof of concept (POC) (Phases 1 and 2), the project team strives to (1) in Phase 1 – determine safety in normal healthy volunteers, starting with minimal dose, escalating to desired dose and (2) in Phase 2 – evaluate drug in patient population and determine efficacy (POC). Increasingly, patients are included in Phase 1 to seek POC at an early stage. Anti-infective agents achieve POC in Phase 1. In full development (Phases 3 and 4), the drug candidate enters Phase 3 where it is fully evaluated in the patient population to determine final approvable indications and conduct any final trials required for approval by regulatory agencies. Thereafter Phase 4 clinical trials are conducted that might expand the indications of the drug. Phase 4 trials occur after registration and launch. While these are the goals for each of these stages of development, the work that must be accomplished for each project may vary significantly, depending upon the TA, and corporate strategy. Some work may be deferred to later stages, e.g. see Section 7.5.3.2. In some companies, the TAs manage a project up to POC and other business units take over the asset from there as product development. In Registration and Launch (Reimbursement), the project team gears up to (1) register the drug with the regulatory agencies for approval to market; (2) get approval for reimbursement from third-party providers and (3) prepare for launch. Active management of the postlaunch period is critical to maximize revenues and minimize expenses. Many of the line departments that were involved in the development of the drug and even some of the departments involved in discovery may get involved in postlaunch activities.

7.2.5 Attrition Everyone is most interested in the projects that succeed. The challenge is that most projects in biopharmaceutical R&D do not succeed. Figure 7.5 outlines the high attrition in the industry. The FDA determined that a 10% improvement in compound attrition would save $100 million per drug (35). The reasons for attrition in discovery have yet to be tabulated across the industry. There have been studies on attrition in development however. It was shown in 1991 that 60% of attrition in Development arises from poor pharmacokinetics and safety (human and animal) (Figure 7.6) (36). These are issues that arise in Development but can be prevented prior to clinical trials. By 2000 PK issues had dropped below 10% (36), but 45% of attrition still arose from issues that are preventable prior to clinical trials. Each drug that reaches the market bears the discovery and development costs of all the other project failures. The true cost of a drug reaching the market has been estimated to be US$ 0.8–1.0 billion and is likely higher today (37,38). Analyses of attrition in discovery likely occur within individual biopharmaceutical companies and within private consortiums of biopharmaceutical companies. It is unfortunate that industry-wide data

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FIGURE 7.5 Attrition across the pipeline (19,34). Data from leading pharma (19). Gilbert et al. show essentially the same level of pipeline attrition (34).

FIGURE 7.6 Reasons for project failure in the clinic. Data from Ref. (36).

on attrition in discovery is not available to the public. Attrition cannot be reduced unless it is tracked and acted upon.

7.2.5.1 The Attrition-based pipeline If a company wants its internal R&D to supply new drugs to market, year-on-year, it must account for attrition in its pipeline. To adequately account for attrition, the R&D organization should, in principle, make sure that each stage is at least larger than the subsequent stage by the percentage of attrition that typically occurs at each transition. Figure 7.7 shows a hypothetical pipeline, using industry attrition rates, that would provide one launch in a given year. In this scenario, the discovery pipeline would need to be considerably larger than the development pipeline to keep the development pipeline filled. In fact, 78% of the projects in the entire pipeline would need to be in discovery. Unfortunately, the pipeline is not scalable – if four launches are needed due to future patent expiration of marketed blockbusters, a company with this hypothetical pipeline would need to begin with 228 projects in target discovery (by simple multiplication). One would wonder if the company would have the capacity for such an increase in the pipeline. Historically acquisitions made up the difference, but reducing attrition would have dramatic impact.

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FIGURE 7.7 Hypothetical pipeline based on industry attrition and one launch per year, based on the data in Figure 7.5.

One could call the attrition-based pipeline a sustainable pipeline. As we have discussed in The Sustainable Pipeline Myth, the big biopharmaceutical companies seem to have abandoned the sustainable pipeline some time ago, and fill the gap with in-licencing (39).

7.2.6 Risk – how it influences POS, cost, value and commitment The fact that most projects fail in the biopharmaceutical industry means that risk, the probability that a project will fail, influences a number of key behaviours in biopharmaceutical R&D. Risk in Discovery and Development. At the beginning stages of discovery, there is a scant evidence that a proposed therapy might work. Those blockbusters that command billions of dollars in sales today were in with the pack of wild ideas at the beginning of drug discovery. Risk that the proposed therapy might not come to fruition is so pervasive in drug discovery, it is often not discussed as such – it’s seen as ‘work’. At the beginning of discovery the risk of failure in the clinic is part of the aggregate risk that the new project faces, even though work to reduce the clinical risk generally does not occur until a candidate is identified. Every experiment or trial performed along the way addresses a single component of the aggregate project risk. In development (especially late stage), there is a mounting body of evidence that the proposed therapy might succeed. Risk is less obvious, so it needs special formal attention. However, it can be tightly managed. Thus as work is performed in a project to remove risk, the POS understandably increases, see Figure 7.8.

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FIGURE 7.8 The relationship between risk, POS, cost, value and commitment as a project progresses through the stages of discovery and development.

Value in Discovery vs. Development. Discovery is the start of the value chain, but given the low POS, quantitative estimations of the potential value of the project are meaningless. In development (especially late stage), because most of the risk has been dispensed and is more readily defined, determinations of Estimated Present Net Value (EPNV) are important. The potential value of the discovery portfolio, however, is not ignored, and can be dealt with in a qualitative manner. Cost, Value and Commitment in Discovery and Development. As work progresses on a project in discovery and development, the overall cost of the project understandably increases. But as POS increases, the potential value of the project also increases and consequently corporate commitment to the project increases. In other sections we will see how these factors influence key behaviours within the organization of discovery and development.

7.2.7 Resource – who does what, when and where Resource, the modern euphemism for employees, is a huge part of the organization of biopharmaceutical R&D. Who does what and when is the constant part of resource, dictated by the logical organization of biopharmaceutical R&D. Where the work gets done varies widely between companies.

7.2.7.1 Association of resource with stage – matrix of work At each stage of discovery and development, different disciplines work at different and often multiple stages (Table 7.2). These disciplines are organized into line departments, some of which work in specific stages, while other disciplines are needed at all stages of R&D – human resources, finance, corporate intellectual property (IP), licensing (Section 7.2.3.2 (In-Licencing)), alliance management, and marketing (In discovery, marketing influences the selection of biological targets through the desired product profile). More will be discussed about the application of resource in later sections.

7.2.7.2 Association of resource with business units – overarching organization The line departments that perform stage-specific work on projects are organized into various business units that have their own budgets and operate relatively autonomously of other business units. Typically R&D is divided into discovery and development, as shown in Figure 7.3. These can be individual divisions each with a head that reports to the head of R&D. Occasionally a company may acquire a small company that focusses on a particular disease area, or class of biological target, or platform technology and keep the companies as solely owned subsidiaries.

Table 7.2 Application of Disciplines to Multiple Stages of Discovery and Development. The Table Exemplifies the Types Disciplines that may be Needed in a Project at Different Stages and is Neither Complete nor Correct for Any Particular Company. Job Titles may Vary for the Same Discipline Within the Same Company and between Companies

Task Gene cloning Gene expression Protein synthesis Protein purification (Polyclonal/monoclonal) antibody generation and purification In vitro assay development Cell or tissue preparation In vitro screen performance In vivo assay development Animal preparation and care In vivo screen performance Screen analysis Screen performance Screen analysis Assay statistics Clinical statistics Tool compound design Tool compound synthesis Analog design Analog synthesis Bulk synthesis Process optimization

Cell biology Biology Biology Biology Biology Biology Biology Biology Mathematics Mathematics Mathematics Mathematics Chemistry Chemistry Chemistry Chemistry Chemistry Chemistry Medical & clinical care Clinical trial execution Finance and marketing Product development

Yes

Discovery Lead discovery Yes Yes Yes Yes Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes Yes

Yes Yes Yes Yes

Candidate discovery

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Yes

preclinical evaluation

Development Proof of Full develop- Registration concept ment & launch Yes

Yes

Yes

Yes

Yes Yes

Yes Yes

Yes

Yes

Yes

Yes

Yes

Yes Yes

Yes Yes

Yes

Yes Yes

Yes

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Discipline Cell biology Cell biology Cell biology Cell biology

Target discovery Yes Yes Yes Yes

More

Less

Resource Level:

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Some recent examples within the GlaxoSmithKline (GSK) Empire include the following companies which became autonomous business units upon acquisition: Stiefel Laboratories, a business unit focussed on dermatology; Sirtris, a business unit focussed on sirtuins and Domantis, a business unit focussed on a unique type of protein that mimics antibody structure.

7.2.7.2.1 Therapy areas The bulk of the organization in biopharmaceutical R&D tends to be organized under TAs. TAs are clusters of diseases for which the company is pursuing therapies, e.g. allergy & respiratory; cardiovascular and metabolic diseases; inflammation; infectious diseases; gastrointestinal; neuroscience (and pain); oncology; and ophthalmology. Each TA has budgetary and resource control over the majority of resources within each area. The resource within each TA is typically organized into line departments based on areas of expertise, e.g. medicinal chemistry, biology, drug metabolism/pharmacokinetics, formulations, toxicology, clinical, etc. Most R&D organizations establish a 3–5 year business plan for each TA, containing the long-term goals of the TA (40). At the end of that period the organization may make organizational adjustments that could include re-clustering of diseases in the TAs, and initiating or eliminating work on certain diseases. At least once a year each TA reviews its progress towards its annual goals and towards the completion of its business plan. This review is often referred to as the portfolio review. Typically, in that review the budget for the next year is established.

7.2.7.2.2 Nonaligned resource – platform technologies For some areas of expertise it may be more economical or efficient to avoid the duplication of resource across TAs and business units. Such areas of expertise may be organized as service organizations to the TAs. Other areas of expertise may be focussed on performing all the work in specific stages, e.g. the departments needed to perform lead discovery and preclinical evaluation may be organized into individual organizations that have responsibilities for managing projects in those stages. These tend to include but are not limited to (1) biology and biochemistry staff engaged in screening activities and protein crystallography, (2) chemistry staff focussed on early lead discovery, analytical chemistry, computational chemistry and molecular modelling, and bulk preparation of clinical trial materials, (3) cell biology staff engaged in genetic/genomic disease–target association and biomarker activities, (4) biology and biochemistry staff engaged in preclinical and clinical drug metabolism studies, pharmacokinetics, and toxicology and (5) finance, legal, alliance management, information management, IT support, and operations management. Inevitably, however, such line departments will need representatives to each TA or dedicate certain staff to each TA. There will always be tension between the TA’s and nonaligned resource.

7.2.8 In-house vs. in-license Big Pharma have had the capability to do it all in-house. Attractive biological targets or clinical candidates may be in-licenced at any stage (Figure 7.9). In-licencing costs will vary and are likely to be higher in later stages. Deloitte and Thomson Reuters recently published a study of the internal rate of return for the top 12 biopharmaceutical companies (41). Within their data set was a chart showing the origin of late-stage

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FIGURE 7.9 In-licencing can occur at any stage.

projects. The percentage of ‘self-originated’ (not acquired) projects in the late-stage pipelines of these companies ranged from 0% to 30% – with an average of only 12%. Dimasi et al. found that acquired assets have higher success rates in Phases 1 and 2 than selforiginated assets (42). Thus, when determining corporate performance, it may be better to separate projects that originated via in-licencing from those that began in target discovery.

7.2.9 In-house vs. out-license Big Pharma have the resources to take a project all the way from target discovery through to product launch. There are several circumstances in which it may be attractive to out-license the project to keep developing value. Insufficient Funds. No corporate budget is so large that a company can do everything. Every company no matter how large has to make choices, prioritize, and possibly put aside some assets at almost any stage of discovery or development. It is typically assumed that the assets that ‘don’t make the cut’ in a portfolio funding exercise have issues that make them less attractive than those that do make the cut. There are circumstances, however, where valuable assets do not make the cut: (1) the company has to decide between two similar assets, both of which are similar in value and (2) the company has made a strategic determination not to pursue certain kinds of assets (e.g. a few years ago it was anti-infective agents and cardiovascular agents, more recently it has been neurological targets). Out-licencing could potentially save and enhance the value that has been created in such assets. An interesting out-licencing example is that of Tadalifil, marketed by Lilly as Cialis in the US. As with Viagra, the former GlaxoWellcome (GW), in partnership with ICOS, found some unique

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properties in its phophodiesterase V (PDE-V) inhibitor during clinical trials as an antihypertensive agent. The GW management chose to not develop erectile dysfunction agents, and terminated the agreement with ICOS, who went off and formed an alliance with Lilly to develop the drug (43). As the market for such agents proved to be enormous, years later the subsequent GSK agreed to codevelop Vardenafil, the Bayer PDE-5 inhibitor, and marketed it as Levitra. An interesting exercise would be to calculate how much value was captured by GSK in this class of drugs compared to Lilly and Pfizer. Repurposing. As a potential drug moves through the pipeline, the set of indications initially envisioned for the drug is ultimately narrowed to one or two indications by the time the drug is proposed to regulators. Often the first proposed indication is the one most likely to gain approval, with follow-on studies planned to expand the number of indications for the drug later on. Even when more than one indication is ultimately approved for a drug, the set of indications tends to fall within the same TA. While the company may find it attractive to go after disease indications that fall into other TAs, it may be more attractive to out-license the drug to another company to explore such alternate indications. Such activities may be seen as ‘squeezing water from a stone’ within the parent company, especially if the market for the alternate indications is smaller than had been experienced with the initial indications. But those smaller markets may be perceived as a fresh opportunity for another company. Repurposing can include totally serendipitous discoveries that had not been envisioned for the drug, e.g. the aforementioned realignment of PDE-V inhibitors from hypertension to erectile dysfunction. The discovery that thalidomide works in leprosy is another classic example (44). The Pfizer PDE-V example is a case where the repurposing occurred within the parent company, and the GW PDE-V example is a case where changing partners played a role. Chong and Sullivan argue that the screening of old drugs for new purposes ought to occur via a public collection of all 9900 drugs approved since 1938 (45). Small Start-up Companies. Of course, small start-up companies typically lack the resources to take a project all the way from target discovery through to product launch. If the proposed indication falls into a niche market where larger pharma lack the marketing expertise, it may behove the start-up to build in the resources to take the project to launch. But most often the small start-up will see outlicencing as a huge win, even if it means dissolution of the company to keep the asset moving, as most of the employees will benefit from the sale of the company. Larger companies will have a life after out-licencing and will use the revenues from sale of an asset to keep other assets moving through the pipeline.

7.2.10 Big vs. small Large and small biopharmaceutical companies are typically characterized as polar opposites. The large companies are characterized as sluggish behemoths and the small companies as agile but unstable. Medium size may be better in many respects, but are presently considered to be (1) unable to survive late-stage failures of important development projects or (2) overly exposed to patent expiration of key products. The Tendency to Get Big. Biopharmaceutical companies tend to get larger for two reasons. Success in the clinic tends to bring considerable new revenue to the company. The smaller companies tend to

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invest the new revenue back into the company either through increasing the spend on R&D or through acquisitions. The larger companies use acquisitions to fill gaps in the pipeline or in corporate strategy and bring new revenues into the company, and reduced the impact of patent expirations (46). Since 1988 mergers and acquisitions have been responsible for the number of biopharmaceutical companies in the Pharmaceutical Research and Manufacturers of America (PHRMA) to shrink from 42 to 11 (46). Many consider mergers to be a zero sum game that enrich the banks and lawyers that participate in the merger activities but from an industry perspective reduce competition and jobs (47,48).

7.2.11 The necessity of standard operating procedures A certain amount of bureaucracy is necessary in a biopharmaceutical company, especially if it intends to market a product in the Western world. Governmental regulatory authorities approve and oversee the manufacture and marketing of biopharmaceuticals through a number of approval processes and standard operating procedures (SOPs). A licenced company is expected to follow the SOPs agreed to at the time of approval. The set of SOPs that regulate biopharmaceutical companies are given the acronym GXPs, because of the variations – there are standard clinical procedures in Good Clinical Practices, standard manufacturing practices in good manufacturing practices (GMPs), and standard analytical procedures in Good Laboratory Practices (GLPs). While the structure of SOPs is necessarily embedded in a biopharmaceutical company, there is a tendency to develop SOPs for nonregulated procedures to enhance efficiency of corporate approval processes that may also increase the bureaucratic burden of the company. The need for SOPs tends to be proportional to the size of corporate structure and the size of business units within the corporate structure. SOPs are intended to streamline standardized approval processes with the assumption that if the SOP is followed the regulatory or authorizing body does not need to be informed. The SOP presumably provides a safe, low-risk, reproducible procedure that if followed exactly will ensure successful completion of the task (e.g. certain chemical or biological processes). Under SOP-regulated processes the regulatory or authorizing body needs only to be informed if conditions prevent the SOP from being followed. Under those circumstances the SOP may be revised or approval for a temporary variance from the SOP may be sought. An important aspect of the approval process is the element of presumed risk inherent in the process being approved. If the risk is low, verbal approval is sufficient. If the risk is high a standardized approval process with subsequent SOPs may help to mitigate risk. Most daily tasks are low risk. Some daily tasks that are high risk (e.g. work with dangerous chemicals or microorganisms) may need SOPs to ensure safe and successful completion. Needless to say, but importantly, there is also a factor of decision-making speed that is important in this continuum of approval processes. Little to no progress would be made if all decisions required formal approval by a senior manager. The word bureaucracy tends to be applied to systems that are inordinately slowed by the decision-making process. The nonstandard processes tend to occur in the discovery and preclinical stages. Even then, such work is likely performed with the awareness of a need for creating a GMP or GLP standard process in the clinical stages and is therefore likely to be well documented. Clear documentation in the discovery phase is also very important in case, perhaps many years later, a patent dispute requires clear identification of certain timelines (for example the first preparation of a particular compound).

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7.3 PROJECT MANAGEMENT IN BIOPHARMACEUTICAL R&D Programs and projects are the life blood of the company. They must be managed properly. A project is a way of organizing resource. It is a group of individuals who are assembled to perform different tasks on a common set of objectives for a defined period of time (49). Projects need a leader who can define the work objectives and criteria for success and recruit staff from all relevant areas of expertise. The need to organize a project is most apparent when more than two departments contribute resource at the same time. Oversight/management of the matrix of work, on a particular asset at each stage in R&D is performed by a project leader. Rarely does a project leader manage the project through all stages of discovery and development. Keeping on a project leader into the next stage requires familiarity with the nature of work and decision making, which varies dramatically at each stage. Familiarity with relevant line department leaders is useful. There will be a greater tendency to allow project leaders to stay on in smaller companies where such familiarity is possible. Professional project leaders, if given sufficiently empowered staff and authority, could in principle manage a project through all stages. The level of professionalism in project management tends to be stage-related. In the stages of drug discovery, where, as noted earlier, risk is high and potential value is low, project leaders tend to be parttime volunteers that may lack the requisite skill set to manage a project. Late-stage development projects, where most of the risk has been dispensed and actual value is determinable, tend to be run by certified professional project managers (50). Senior managers must ensure each project has an adequately trained and fully empowered project leader.

7.4 PORTFOLIO MANAGEMENT IN BIOPHARMACEUTICAL R&D The Project Management Institute maintains The Standard for Portfolio Management (e.g. second edition, 2008) which is a trans-industry guide. The book lists all executive functions that impact the corporate project portfolio which include the following functions (51). • • • • • • • • • • • •

Categorize and provide portfolio views of projects Evaluate project progress against milestone criteria Select and approve projects for inclusion in the active portfolio Approve projects for advancement into the next stage Select and approve projects for removal from the active portfolio Identify and analyse portfolio risks Develop and monitor portfolio risk responses Prioritize projects Balance or align the project portfolio to current prioritization and strategy Develop and execute portfolio adjustment action plan Review and report portfolio performance with respect to prioritization and current strategy Review and report portfolio resource alignment with prioritization and strategy

Portfolio management is what senior management makes of it. If one or more persons in a company manage these functions, then the company practices portfolio management. The persons performing these tasks may not have a portfolio manager job title or work in a department of

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portfolio management. There may be duplicate positions based on stage of discovery or development. Some of these persons may be located in finance, corporate strategic planning, resource management, or report directly to the head of R&D. Some of these functions may have been delegated to managers of line departments. It is important that the individuals who perform these tasks communicate with each other. If no one in the group of managers can say that his or her group performs most of these functions, there could be alignment problems with portfolio management in the company (52).

7.5 COST REDUCTION EXPERIMENTS IN THE BUSINESS OF BIOPHARMACEUTICAL DISCOVERY AND DEVELOPMENT At the beginning of this chapter, challenges to the business of biopharmaceutical discovery and development were outlined. Critics of the industry have been sounding the alarm for years. Many of the large biopharmaceutical companies are now working on ways to remedy the situation. We call them experiments because there are risks associated with all the approaches being taken to reduce cost, reduce risk and increase success and the outcomes have yet to be demonstrated.

7.5.1 Process improvement Within the line departments, removing inefficiencies can help reduce cost. The principles of Lean Six Sigma (53) can be applied to many of the processes in drug discovery (54). While it is important that at least one staff member is trained in the principles, that one individual can foster the creation and mentoring of process improvement project teams throughout the company. Process improvements are attractive because they can be measured in weeks and months. More challenging experiments are the organizational changes that will take years to come to fruition.

7.5.2 Reducing resource – vertical disintegration 7.5.2.1 The need to downsize In previous decades biopharmaceutical companies were sufficiently profitable that the line departments in R&D could staff to over-capacity. That way they could handle fluctuations in demand. Fulltime employees, however, not only get paid even in periods of low demand but the company also pays for sick time, vacations, medical expenses, and contribute to their pensions. As the years go by most employees get salary increases and bonuses. In terms of corporate finance, employees are an everincreasing ‘fixed cost’. In previous decades, employees, especially those with many years of service, were considered to be the life blood of R&D because the wild increases in revenue that this fixed cost created were greatly appreciated. But between 2001 and 2010 as profits declined and new revenues were harder to come by, the fixed cost became more of a burden.

7.5.2.2 Vertical integration vs. vertical disintegration (Decentralization) The resource for each discipline in biopharmaceutical R&D may reside within a single company or several-to-many companies. In-house location of resource simplifies coordination, fosters synergy, but

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increases fixed cost. Historically, Big Pharma tended to execute all stages of R&D in-house. Such an organization engages in vertical integration (VI). VI is the process of performing all R&D, manufacturing and distribution within a particular company. As just noted, as fixed cost becomes a burden to big pharma outsourcing becomes attractive. Vertical disintegration is the move towards performing many to most of these processes in other companies (55). Thus vertical disintegration is another way of describing outsourcing, or externalization or decentralization. As will be described later in this section, if most of the functions of R&D are externalized, then the company practices virtual discovery and development (Figure 7.10). A number of industries have gone through the transformation – e.g. automobiles, aerospace, Information Technology (IT) and the motion picture industry. The Wikipedia notes that one major reason for vertical disintegration is to share risk with other companies. Noted Andrew Witty (GSK CEO), ‘Externalising R&D enables GSK to capture scientific diversity and balance expenditure and risk in drug development. In the future, we believe that up to 50% of GSK’s drug discovery could be sourced from outside the company’ (56).

7.5.2.2.1 Outsourcing and partnering – what and why Outsourcing is the external allocation of resource through for-profit contract research organizations (CROs) and nonprofit laboratories funded by academia or philanthropic organizations. Outsourcing usually involves the contracting out of a business function – commonly one previously performed inhouse – to an external provider. The outsourced work is usually governed by a contract where the parent company defines the work to be done in detail. Some of the potential benefits to outsourcing can include cost savings, access to greater expertise and improved quality, although the realization of these benefits needs to be demonstrated. A partnership is usually broader in scope than outsourced work. With a partnership the partner owns the assets it creates but receives funding from a company to help the partner conduct the work and to give the company first right of refusal to the acquisition of assets once the work is completed. Some of the potential benefits to partnering can include access to talent, enhanced capacity for innovation (a presumed talent of the partner) and risk reduction (the partner absorbs the risk).

FIGURE 7.10 From a vertically integrated company to one that practices virtual discovery & development. Each box represents an area of expertise.

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Theoretically any expertise may be outsourcing and any strategic area may be partnered. One could argue that certain functions must remain in-house to keep the company intact, such as operations, finance, marketing, legal, project management, and portfolio management. Besides these functions, the company must identify so-called core competencies, which are essential to defining the business strategy. Particular in-house expertise may be lacking in any company, big or small. Expertise, with respect to knowledge, experience, talent, flexibility, and ability to handle all work, is roughly proportional to staff size – knowledge, experience, talent, flexibility, and ability to handle all work. Outsourcing and partnering can augment in-house expertise. An important consideration in weighing which areas of expertise to outsource is to identify those areas where close collaboration is required. Since 2000, the pharmaceutical industry has cut almost 300,000 jobs, about as many people as currently work at the three largest drug makers – Pfizer, Merck, and GSK combined (57). These layoffs tend to be attributed to actual or anticipated decreases in earnings. Pfizer and Merck also had to contend with their respective takeovers of Wyeth and Schering-Plough. Coincident with these layoffs is an activity that explains how the remaining staff has dealt with the loss of headcount – increased utilization of CROs, collaborations with academia, small start-ups, and even with peer pharma, through what has come to be known as precompetitive research. Precompetitive research may be defined as noncompetitive, cooperative research which leads the way to competitive development in the future by addressing key requirements of a new technology. An example is the recent agreement between Lilly, Merck, and Pfizer to share genomics data on lung and gastric cancers in Asia (58). This externalization of effort has reached 50% of the R&D budget at GSK (46,59). If the GSK model is followed by all big pharma, we can expect a continuation of these dramatic layoffs well into the new decade. We can also expect further externalization of R&D spend by big pharma. When the extent of externalization reaches 50%, it is safe to assume that all line departments are forced into a position of rationalizing the in-house need for every skill set within R&D. Any competency that can be found outside the company by contract or collaboration will be removed from the company. Dixon, Lawton and Machin argue that ‘insufficient overall investment is available today to support the growth of new vertically integrated companies from a research base, as occurred in past decades’ and that ‘the process of creating and selling a drug can no longer be optimally accommodated within one vertically integrated business, and that vertical disintegration into “discovery”, “development” and “marketing and sales” businesses is needed’ (60). Clearly, the business factors that favoured VI are no longer operating in the biopharmaceutical industry. Another challenge with VI comes with the need to invest in new technologies. When a company desires to embrace a new technology it requires an investment in new equipment and staff. The company may need to sell off equipment and let go of staff involved with old technology to afford the new technology. If a particular technology is thriving in company A and company B cannot afford to invest in the technology to the extent of company A, company B would be better off partnering with company A rather than trying to duplicate the services of A within B. In an era of booming technology, a company that partners with new technology firms may be able to harness more technology than a company that feels compelled to bring it in-house. VI demands a large internal budget, which is composed largely of fixed costs – laboratories and staff. Company loyalty was important with VI, since the staff was viewed as irreplaceable talent. Staff that stays within a company for decades becomes more expensive as salaries increase, and as medical

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expenses increase. Big pharma have long been accustomed to these expenses. The recent downturn in profitability (only 0.7% profit growth in 2009 over the previous year, compared to 10.4% in 2008, 15.9% in 2007, 8.1% in 2006 and 2005 – among Fortune 500 companies) (1) brings a challenge to the assumption that such costs are necessary. Big pharma discovery and development must now argue for its existence as an internal competency. Outsourcing may lower cost, but can add contract issues (e.g. the need to pay for contracted work even if a project terminates). Big pharma are presently moving to outsource, while small pharma and CROs move to add staff to accommodate more work. CROs tend to specialize in no more than a few stages of R&D.

7.5.2.2.2 Virtual drug discovery and development A maximally outsourced company is one in which the only competencies remaining are those that keep the company intact, such as operations, finance, marketing, legal, project management, and portfolio management. All the other competencies are outsourced: biology, chemistry, toxicology, clinical sciences, statistics, and analytical sciences. Such a company engages in virtual drug discovery and development (VD&D). This type of company may be difficult to distinguish from a CRO, especially those that offer a wide variety of services, such as Quintiles and Covance. A company that engages in VD&D is one that displays the following characteristics. • The employees are limited to a small core group responsible for strategic (project & portfolio) management, IP management, electronic data capture, regulatory strategy, and financial control. • Project teams consist of a project manager that oversees the work of a collection of academic and nonprofit groups and CROs. • The company maintains control over IP, financing, electronic data capture and data submission to regulatory authorities. The last characteristic is the one that most readily distinguishes a VD&D company from academic and nonprofit groups and CROs – it holds the reigns. It owns the patents. It is the financial conduit through which its collaborators get reimbursed for their services. It makes the final submission to regulatory authorities. Depending on the clout of its financial partners, a VD&D company may be less visible that it’s major partners. A company that engages in virtual discovery in-licences its assets from discovery organizations. A company that engages in virtual development out-licences or partners with the companies that are capable of performing clinical trials. A small VD&D company may simply be an extension of a venture capital company with office space shared with the Venture Capital (VC). If the company has less than a dozen ongoing projects, it only needs a set of offices to house its set of project managers.

7.5.2.2.3 The virtual pipeline Today, for the big biopharmaceutical companies, where only 12% of projects are self-originated, the R&D pipeline is a virtual pipeline in which the trajectory of work still starts in target discovery and proceeds through to approval and launch but that thread of work winds its way through a number of companies. This is depicted in Figure 7.11 below in a portfolio of five targets the drugs of which are ultimately marketed by Company 1. In this scenario, Company 1 took only one target through discovery to a clinical candidate and all the way through development to approval and launch. The rest

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FIGURE 7.11 An example of a portfolio of five targets that are taken through to approval and launch by Company 1. In this example only Target A was worked on in Company 1 through all the stages of R&D. The other four targets were brought through discovery and most or all the stages of development by other companies. The drug targets and their subsequent drug candidates were transitioned to subsequent companies via out-licencings, mergers, acquisitions and partnerships.

of its portfolio came from one or more companies through mergers, acquisitions or in-licencing. With Target E, Company 1 partnered with another company to gain approval and launch in order to comarket the drug from Target E. In a virtual pipeline, the project team becomes a virtual project team or more accurately a series of project teams that may never interact with each other.

7.5.3 Increasing success through changes in the organizational model 7.5.3.1 Big and small at the same time Big companies tend to be considered overly bureaucratic and slow to adapt to changes in the market place or to the latest technological advances. At least some of the large pharma are experimenting with reducing the bureaucracy of the large company by being ‘big and small at the same time’ (61). This quote was from Tachi Yamada, who was then head of GSK R&D and managed the reorganization of corporate R&D into Centres of Excellence in Drug Discovery (CEDDs), each staffed by roughly 350 researchers. In 2008 GSK took the concept a step further by splitting the CEDDs into discovery performance units (DPUs) of roughly 60 researchers, to get closer to the agility of a small start-up (59,62,63). By 2009 there were 35 DPUs. Each DPU had full control over its own budget which could be spent internally or externally to deliver their best-possible pipeline. The goals in each of these moves were to drive accountability deeper into the organization, reduce central oversight as much as necessary and foster a ‘biotech-like’ atmosphere in a very large biopharmaceutical company. Time will tell whether the DPU experiments works as being big and small at the same time.

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7.5.3.2 Planning for failure – POC at chorus (Lilly) and flexion therapeutics The overall order in which things are done in biopharmaceutical R&D are logically based on what needs to happen before something else can happen. There are some activities, however, which are performed in preclinical investigation and Phase I on the premise that that the project will be successful. As noted earlier, however, the clinical stages of R&D are the most expensive stages in the pipeline. Thus, if a reason for failure can be discovered earlier in the pipeline than in the clinic, then remediating the situation or terminating the project at an earlier stage will save the company a lot of money. The POC milestone is critical for any project. With that decision the project team now knows it is working with a potential commercial product. Subsequent studies will help to determine the magnitude of its commercial value. For projects where POC is highly questionable, the team may decide to postpone some work that would normally be conducted in Phase I or II to Phase III in order to get to an early decision. Types of deferred work could include defining the best formulation, extended toxicology studies, manufacturing process optimization and pilot studies to identify other indications. Eli Lilly created a separate division, Chorus, to do just that (64). It also fostered the creation of Flexion therapeutics which only conducts Phase I and II trials with the goal of getting to POC in a short period of time (29 months vs. 40 months) at lower cost ($4 million vs. $22.8 million). Of course the Phase III trials for projects coming out of Chorus or Flexion may be longer than usual to perform the work that had been deferred from Phase I or II. Industry estimates of attrition suggest that more projects fail at POC than at any other development milestone. Projects conducted in the manner of Chorus may not get to launch quicker, but failure at POC would have been determined in a shorter time frame with less cost, freeing up resources to work on other projects. And since the successful drugs pay for those that failed before launch the overall cost of bringing a drug to market could be reduced.

7.5.3.3 Open innovation Prior to the sequencing of the human genome, genetic information that was relevant to biopharmaceutical discovery was considered to be unique and highly patentable. Companies prided themselves on their own genetic research that provided unique insights into disease. Since the sequencing of the human genome once private insights are now of public knowledge. Biopharmaceutical companies have realized that the new insights are more likely to occur outside their walls than inside. New technologies that significantly augment the multifaceted discovery and development process are becoming available at an ever-increasing rate. Rather than moving a company forward, the purchasing of new equipment may actually prevent the company from accessing even newer technologies in a few years hence. So partnering with a company with a unique technology may be a more cost-effective and agile strategy for keeping up with new technologies. Open innovation and precompetitive research collaborations (described earlier) are strategies that are now seen as strategies that let biopharmaceutical companies explore new avenues of biomedical research at a fraction of the cost of bringing in the requisite staff and equipment to conduct the research in-house. Hunter and Stephens note that such strategies do not eliminate the possibility of IP protection. They describe IP as the currency of open innovation (65). Of course the price tag for innovation is related to where it impacts the biopharmaceutical pipeline. Advances that give rise to new discoveries in target discovery will not be as valuable as a Phase III drug that is ready for marketing.

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7.6 CONCLUSION Managers of biopharmaceutical drug discovery and development face complex challenges in the business of R&D. While many aspects of the way the business of R&D is conducted will change in the coming years it is unlikely that the basic R&D process outlined in Figure 7.3 will change dramatically. As long as the industry can continue to find new therapies that positively impact the lives of patients, it will continue to be an exciting and a challenging industry.

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