Decelerating change in the pharmaceutical industry

Medical progress will have come to a complete halt by the year 2329. I reach this anti-Kurzweilian conclusion from a 2012 paper – Diagnosing the decline in pharmaceutical R&D efficiency – which demonstrates that, far from showing an accelerating rate of innovation, the pharmaceutical industry has for the last 60 years been seeing exponentially diminishing returns on its research and development effort. At the date of the anti-singularity, the cost of developing a single new drug will have exceeded the world’s total economic output. The extrapolation is ludicrous, of course, but the problem is not. By 2010 it took an average of $2.17 billion in R&D spending to introduce a single new drug, including the cost of all the failures. This cost per new drug has been following a kind of reverse Moore’s law, increasing exponentially in real terms at a rate of 7.6% a year since 1950, corresponding to a doubling time of a bit more than 9 years (see this plot from the paper cited above). This trend is puzzling – our knowledge of life sciences has been revolutionised during this period, while the opportunities provided by robotics and IT, allowing approaches like rapid throughput screening and large scale chemoinformatics, have been eagerly seized on by the industry. Despite all this new science and enabling technology, the anti-Moore’s law trend of diminishing R&D returns continues inexorably.

This should worry us. The failure to find effective therapies for widespread and devastating conditions – Alzheimer’s, to take just one example – leads to enormous human suffering. The escalating cost of developing new drugs is ultimately passed on to society through their pricing, leading to strains on national healthcare systems that will become more acute as populations age. As a second-order effect, scientists should be concerned in case the drying up of medical innovation casts doubt on some of the justifications for government spending on fundamental life sciences research. And, of course, a healthy and innovative pharmaceutical industry is itself important for economic growth, particularly here in the UK, where it remains the one truly internationally competitive high technology sector of the economy. So what can be done to speed up innovation in this vital sector?

The problem for the pharmaceutical industry is particularly acute, as the healthy revenues they depend on from existing medicines are threatened by the expiry of their patent protection. One common response has been to reorganise – to try and rationalise the industry through mergers, or to change the way research and development is done. The net effect seems to be the same – to reduce expenditure on R&D. One of the world’s largest drugs companies – Pfizer – is on a three year plan to reduce its R&D expenditure from $9.4 billion to 2010 to $7.8 billion in 2012, with further cuts to come; this has involved the closure of famous laboratories like its site in Sandwich, UK. Unless this genuinely does make R&D more efficient it’s difficult to see that this is much of a long term solution for the companies, and it isn’t clear how it improves the supply of more medicines.

What seems at first to be a more positive response is the idea that fast-moving new biotechnology companies can exploit the new science emerging from universities and develop innovative new therapeutic approaches which, if they show signs of working, can be acquired by big pharmaceutical companies at a later stage. It’s certainly the case that more and more new therapeutic molecules are biological macromolecules rather than the small molecules of traditional medicinal chemistry – antibodies and antibody fragments, other proteins and peptides, and perhaps soon nucleic acids like the si-RNAs. Some of these molecules have already had a significant clinical impact (e.g. herceptin and avastin), but the idea that there has already been a biotechnology revolution is probably overstated, as argued by Michael Hopkins and coworkers in their article The myth of the biotech revolution.

One problem is that the venture capital money small biotech start-ups rely on is hard to get, and this seriously limits the scale of the sector. The total invested by VCs in biotech and pharma in the UK in 2012 was just £38 million – a tiny fraction of the annual total R&D spend of the pharmaceutical sector in the UK, which was £4.85 billion in 2011 (The data sources here are ONS and the British Venture Capital Association). The financial crisis has hit venture capital hard – there’s been more than a four-fold drop in investment in biotech and pharma since 2006.

But there are a couple of other problems too. Although the total sums handled by venture capital and private equity in the UK are large – £5.7 billion in 2012 – the fraction of this that goes into fast growing technology companies is rather small. Investments in financial engineering are more attractive than the risky world of new technology, as I discussed in an earlier post on Bad Capitalism. The £420 million spent financing the early stages or later expansion of companies developing new technologies contrasts with the £3.8 billion spent on management buyouts, management buyins and refinancing deals, often getting their value from the different tax treatment of debt and equity.

And of the sums that are invested in the technology sector, only a small fraction ends up in biotech and pharma. More than five times more – £198 million in 2012 – goes into software and internet companies. This reflects the fact that innovation isn’t uniformly easy – innovation in the digital realm has lower barriers to entry and is cheaper than innovation in the biological realm, as I discussed in this earlier post, Innovation Stagnation. This allocation of money is probably entirely sensible and rational from the point of view of the markets, but it doesn’t help us meet the broader societal needs for new drugs and treatments.

The final response is to rely even more on the state and the non-profit sector for this R&D funding. I say even more to remind us how much state funding already goes in to provide the underpinning advances in life sciences that the pharmaceutical and biotechnology industries depend on. This is dominated in the USA by the huge budget of the National Institutes of Health – $38 billion. But even in the UK, the Medical Research Council spends £550 million, the Wellcome Trust spends another £750 million, and big medical charities put in substantial further sums – £330 million from Cancer Research UK, for example, this largely arising from individual donations and fundraising. The difficulties of the pharma and biotech industries put pressure for more of this state and non-profit spending to be moved downstream, closer to the clinic and the market. The result is an increasing number of calls for translational funding, and schemes such as the £180 million in the Biomedical Catalyst Fund, providing government grants directly to start-up companies. In fact, substantial amounts – perhaps the majority – of the funding directed to start-up companies through venture capital funding in the UK originates from government agencies of one sort or another (the total money raised by venture capital and private equity from government agencies in 2012 – £424 million – actually exceeds the total investment in technology companies, but of course some of the government investment will have been into non-technology areas).

I don’t know what the fundamental problem is here. Is it a question of how research is organised and funded, is it a question of the regulatory environment and the broader issues about how healthcare is organised and paid for, or are we making some fundamentally wrong assumptions about how to think about the biology? One has to be optimistic in the long run that the astonishing progress in the life sciences of the last twenty or thirty years will ultimately yield the benefits we hope for and need. But this story is a salutary reminder that not all innovation is accelerating, and for all our scientific success in creating fundamental understanding of biology, our current system of innovation isn’t as successful as it should be at translating that into better health.