Pharmaceutical companies outsource innovation to Biotech firms

Pharmaceutical companies have great strengths in
the marketing of medicines but tend to outsource the uncertain business of
early stage innovation to small Biotech firms. For creativity and radical
innovation is difficult to do in very large organizations. There are just too
many processes, and many of them are not very clear in the first place. On the
other hand, a small Biotech has comparatively few staffers that are highly
qualified and very highly motivated. The motivation comes from the
possibility of inventing a blockbuster drug and the windfall that could arise
upon FDA approval. 

However, here
are some numbers to think about to get a sense of the odds of innovation
success from page
3 of this brochure from
a Pharmaceutical research and
industry organization: It takes between 9-15 years to come up with one approved
drug starting with five to ten thousand (yes 10,000) compounds. It is not
uncommon to find Pharmaceutical scientists who have spent 20 years in the lab
working on some stage of the process, and having not seen a single product
make it to the market!

At the
marketing end of the pharmaceutical business one keeps hearing of blockbuster
or those drugs that sell over $1 Billion  a year. But it
turns out that there are only 125 of these drugs and these too face the
"patent cliff" when patents expire and cheaper generics take over
much of the market. For example, the blockbuster cholesterol drug  Lipitor
from Pfizer saw a sales decline of 42%
in the first month of coming off
from patent.

Another piece
of older research by
Grabowski and Vernon (1990)
reports that of  those prescription drugs
that made it to the market 4 out of 5 or 80% made less than $250
million dollar after reckoning the R&D costs for the drug. In other words,
those 125 blockbusters do have a very long tail of low selling drugs that all
went through the travails of the drug innovation process.

Thus, it does
makes sense for big Pharmaceutical companies to outsource early stage
development to biotech companies and have multiple alliances to ensure that
there is a very thick pipeline of products under development. By doing so, the Pharmaceutical
company can focus resources and processes around later parts of innovation like
clinical trials and marketing. These activities can be made into an efficient
routine that delivers results far more easily with a large organization than
the uncertain endeavors of creatively coming up with initial ideas that small
biotech firms can do well. Contact StratoServe.

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