Every now and then the ipeg blog pays attention to innovation. Although some of our readers think this is not something for a patent blog (we recently were commented by a known blogger in the US that ipeg could not be counted among the top ten patent blogs as we publish not solely on patents and not ‘frequently” enough[1]), we think innovation is a subject worth paying attention to for a patent blog. Weren’t we told at university that patents spur innovation, a long held adagio that seems to be increasingly questioned these days, but that aside.
So what happened in December 2009 on innovation worth mentioning? Firstly the publication by consulting firm Booz & Company’s Fifth’ Annual Study of the world’s biggest corporate R&D spenders – The Global Innovation 1000. Furthermore the EU published its “Industrial Investment Scoreboard” in December 2009. And last but not least a publication by Bernard Munos on the issue of pharmaceutical innovation. Let us focus on the last one. Despite unprecedented investment in pharmaceutical research and development (R&D), the number of new drugs approved by the US Food and Drug Administration (FDA) remains low. To help understand this, Munos did a study and published his findings in the December issue of Nature. He investigated the record of pharmaceutical innovation by analyzing data on the companies that introduced the approx. 1,200 new drugs that have been approved by the FDA since 1950. His analysis shows that the new-drug output from pharmaceutical companies in this period has essentially been constant, and remains so despite the attempts to increase it. This suggests that, contrary to common perception, the new-drug output is not depressed, but may simply reflect the limitations of the current R&D model. The implications of these findings and options to achieve sustainability for the pharmaceutical industry are discussed in his very interesting Nature article[2] .
Some of his findings worth mentioning:
- At present, there are more than 4,300 companies that are engaged in drug innovation, yet only 261 organizations (6%) have registered at least one NME [3]since 1950. Of these, only 32 (12%) have been in existence for the entire 59-year period. The remaining 229 (88%) organizations have failed, merged, been acquired, or were created by such M&A deals (…). Of the 261 organizations, only 105 exist today, whereas 137 have disappeared through M&A and 19 were liquidated. Despite this intense turnover, the fact that 32 companies have survived the entire period suggests that there are ways to innovate that are sustainable.
- The timelines of cumulative NME approvals for the three most productive companies in the industry show almost straight lines, indicating that these companies have delivered innovation at a constant rate for almost 60 years. The outputs from less productive companies(..) show a similar linear pattern, although it is more erratic and with smaller slopes.
- According to the Pharmaceutical Research and Manufacturers of America (PhRMA), the members of which are mostly large drug companies, R&D spending has been growing at an average compounded rate of 12.3% since 1970. Although the overall output of NMEs has therefore stagnated, the industry is producing them more efficiently as it has been able to meet the increase in the cost per NME with a less than commensurate increase in R&D spending. In other words, the industry is better at what it does than it was previously, much of which is to generate data to meet FDA requirements. However, this increased efficiency has not translated into a sustained increase in the discovery of new treatments.
- The growth in R&D spending is needed to offset inflation and the increasing burden of regulation, as well as other factors that could be contributing to greater costs, such as higher failure rates. As inflation has been ~3.7% since 1950 and the annual growth in R&D spending has been 12.3%, one can infer that regulatory and other costs have been growing at ~8.3% annually, which translates into a doubling every 8.5 years. This increase has often been attributed to the increasing prudence of regulatory bodies following the high-profile withdrawals of drugs such as rofecoxib (Vioxx; Merck), Cerivastatin (Baycol; Bayer), Troglitazone (Rezulin; Warner-Lambert) and cisapride (Propulsid; Janssen Pharmaceutica).
- A puzzling trend of recent years has been the gradual erosion in the share of innovation that is captured by NMEs sponsored by large pharmaceutical companies Since the early 1980s, their share of NMEs has declined from ~75%, a level that had been constant since 1950, to ~35% (FIG. 4a). At the same time, the share of NMEs that is attributable to small biotechnology and pharmaceutical companies has almost trebled, from ~23% to nearly 70%. Since 2004, small companies have consistently matched or outperformed their larger competitors. The expected share of NMEs generally follows these trends until 2004, when they stabilize at about 50% each.
- underlying data show that the probability that an NME will achieve blockbuster status is ~21%, a success rate that has not changed in 20 years despite considerable investment to improve the chances of success. This low probability is seen even though large pharmaceutical companies and venture capitalists will seldom proceed with the development of a molecule unless it has blockbuster potential, supported by sophisticated forecasts and reviews by experienced executives. More worryingly, it also suggests that the industry’s most hallowed competencies — customer knowledge, disease expertise and decades of experience — do not seem to be of much help in predicting success.
And then, for the more patent oriented readers, Munos mentions “ Patent Cliffs”[4]:
“It is now possible to combine knowledge of drug” innovation and new-product sales with patent expirations to model how drug companies might survive the large upcoming revenue losses caused by the expiration of patents on key blockbuster drugs, something often referred to as ‘patent cliffs’. (…). the industry must rethink its process culture. Success in the pharmaceutical industry depends on the random occurrence of a few ‘black swan’ products. Common processes that are standard practice in most companies create little value in an industry dominated by blockbusters (…). These include developing sales forecasts for new products, which are inaccurate nearly 80% of the time.
Another example is portfolio management, which has been widely adopted by the industry as a risk management tool, but has failed to protect it from patent cliffs. During the past couple of decades, there has been a methodical attempt to codify every facet of the drug business into sophisticated processes, in an effort to reduce the variances and increase the predictability. This has produced a false sense of control over all aspects of the pharmaceutical enterprise, including innovation.”
[1] despite the fact that we do so every month and consistently since 2005
[2] Made available here with his consent
[3] New Molecular Entity
[4] Sales lost to generics amount to 80% of an NME’s peak sales. The loss takes effect immediately upon patent expiration, and is pro-rated for the first year.