Some really interesting facts and figures on the effectiveness (or lack thereof) of Big Pharma R&D that is permeating the blogosphere today. Matthew Herper in a Forbes piece did a really nice analysis of 98 pharma companies who have taken at least 1 drug to market in the past 10 years. Effectively, he added up the total R&D dollars reportedly spent at each company and divided it by their number of approved drugs to arrive at "average cost of approved drug". The numbers were staggering. Let me say that again, the NUMBERS were STAGGERING.
On the worst case side, Abbott had calculated costs of $13.1 B per drug. This is likely an overreport as Abbott also spends a lot on diagnostic products, and those diagnostic sales didn't sneak their way into the numerator -- so let's throw them out. But in the number two slot, we have Sanofi at over $10 B per drug and AZ comes in number 3 at over $9.5 B per drug. Ugggh! This is scary and obviously unsustainable and it takes no economics Ph.D to conclude that either.
The numbers also seem to show a correlation with size. It seems that companies (all BIG PHARMA) that produced 8-13 approved drugs during this span, spent an average of over $5.5 B per drug. While if you look at the 66 (of 98) companies that brought only 1 drug to market during the decade, they spent a median of only $350 M. Why?
We have a few reasons to float. Some of the smaller companies were "lucky" in that they hit the market with their first shot. Just like BIG PHARMA to call that luck though. Rubs me a little bit the wrong way. However, there is much truth to the point that companies that are pursuing a lot of drug candidates at one time, usually in different therapeutic areas, have more failures and therefore experience more costs. The cost of failure as it were. These are almost always Big Pharma. Why? Because they have an ongoing business, and money that can support these multiple efforts. That much appears true. Plus Big Pharma says with success, it spends even more on post-approval safety tracking -- also no doubt true.
Additionally, I would add that small companies that FLOP and lose all their investors' money, without ever getting any drug to market, aren't in this analysis at all. Therefore the cost of failure is artificially low with the small companies as you left them out of the study. Big companies have this costs as part of their overall portofolio of projects. But, the figures also seem to suggest to me that to run an ongoing concern, that hopes to keep revenues and profits rising, requires an infrastructure to support it. It takes multiple projects to keep going. So Big Pharma necessarily has to spend more and therefore does become less efficient (less profitable). It also tends to take on bigger bets and not kill them as quickly -- because it has the money. Ironically, it doesn't after it loses the money and thus we're now in a cycle of diminishing returns.
One caution though, if you expect to get multiple drugs to market, you appear to need to be a Big Pharma with bigger infrastructure. It's a bit of an insurance policy too. There is probably a balance in there somewhere but how to find it. I'm going to comment further on this point in the next post -- based on another Fierce Biotech article today about pharma/biotech growth leaders and shrinkers.
The Forbes article also seems to confer winning status on someone like BMS -- with 9 drug approvals in the decade and only $3.3 B spend per drug to get there. An enviable record given some of the other results. See table for the 98 companies here. See also further commentary on this topic in In the Pipeline and Fierce Biotech.
Posted by Bruce Lehr Aug 12th 2013.