In a Landscape of 'Me Too' Drug Development, What Spurs Radical Innovation?
Pharmaceutical companies are criticized for not producing more breakthrough drugs. But new research by Joshua Krieger and colleagues shows that, given a financial windfall, drug giants turn on the innovation.
New research finds that large pharmaceutical companies, typically conservative in their pursuit of novel drug development, are more willing to undertake radical innovation after receiving an unexpected cash windfall.
The pharmaceutical industry has a tendency to concentrate on “me too” drug development—therapies that are chemically similar to established drugs—rather than on riskier, novel drugs. Critics say this tendency helps explain why therapeutic breakthroughs are increasingly less frequent.
“When firms are making investment decisions—not because of their constraints but because their cash reserves have suddenly expanded—they tend to put that extra budget towards more exploratory projects,” says Harvard Business School Assistant Professor Joshua Krieger. He co-authored the study Developing Novel Drugs (pdf) with Danielle Li, Massachusetts Institute of Technology; and Dimitris Papanikolaou, Kellogg School of Management.
On balance, novel drugs with unproven chemical formulas are riskier to pursue because they are less likely to win approval from the US Food and Drug Administration. These drug candidates, which cost tens of millions of dollars or more to develop, face a less than 10 percent chance of approval. Me toos have greater than 20 percent chance of reaching the market, and generally require lower investment.
For patients, of course, it’s the novel blockbusters that can be the most life-changing.
Tracking a windfall
To understand the effect of financial windfalls on drug development choice, researchers looked at more than 12,000 drug candidates from 3,108 firms, eventually narrowing the field to 270 companies that had at least one drug already approved by the FDA.
The cohort included small, one-drug firms and large firms with about 100 products in their portfolios. They examined all companies that held at least one drug patent on the market as of 2003.
The researchers focused mainly on small-molecule drugs, not biologics. That’s because of how the compounds are structured chemically. The complicated chemical makeup of biotechnology drugs makes them too difficult to compare in terms of structural uniqueness. However, the researchers also found that cash windfalls led to an increase in the number of biologics developed.
To gauge the impact of receiving what economists call a “cashflow shock,” researchers looked at the introduction of Medicare Part D, which expanded coverage for patients over the age of 65. That would result in more drug sales, although not the same increases across all drugs and all companies, Krieger says.
The study’s findings suggest that a doubling in a company’s product exposure to the benefits of Medicare Part D led to a 15 percent increase in the development of new drugs. And almost all of that additional development involved novel drug compounds.
“The firms that were producing drugs covered by the Medicare expansion and that had patents that were far from expiration, were the ones that got a bigger expected cashflow infusion,” Krieger says. “They put that cash to work, so it seems, by working on more drugs, and the additional drugs they worked on tended to be more novel.”
The rewards of research
Do those investments pay off? Researchers examined revenue, stock returns, clinical value, and the population impacted by the novel drug. And they quantified the risk of those investments, coming up with a risk-reward determination.
According to the study, “novel candidates are, on average, more valuable—they are more clinically effective; have higher patent citations; lead to more revenue; and to higher stock market value.”
The researchers were careful to note they didn’t have enough information to say whether a firm’s risks were worth the rewards on each project. For example, they couldn’t determine the relative development costs of novel drugs relative to me too drugs; they could only note whether a project was pursued.
For a real-life example of the value generated by developing a novel drug, take Novartis’ Gleevec, whose drug classification name is imatinib. It was invented as a treatment for chronic myelogenous leukemia, and by the study’s measures was quite a novel drug. Novartis shares jumped almost 7 percent the day Gleevec was approved by the FDA.
The drug proved effective and became a Novartis bestseller for years, but sales began to fall in 2016 once the Gleevec patent expired. Last year, Novartis’ revenue from Gleevec dropped more than 40 percent, Novartis reported in a recent SEC filing.
The example demonstrates the central dilemma faced by drug makers, and underscores their caution in investing in too many risky projects. Even after creating, at great time and cost, a successful therapy, and then beating long odds to win FDA approval, the rewards can wane as quickly as a patent expires. And most drug candidates wash out long before even making it to market.
That said, finding projects to work on when their cash supply increased was not difficult for pharma firms. Companies tended to “either have projects on the shelf or projects that they are excited to go do when they get a little more buffer or get a little more cash,” Krieger says.
Ask yourself a question
What’s the lesson for drug makers?
“If you only work on incremental drugs, you're likely to get more drugs approved—but you're less likely to have blockbusters,” Krieger says.
Since cash windfalls are difficult to count on, yet companies seem to have plenty of worthy projects waiting in the wings, drug makers might want to ask themselves what it would take to get more innovation rolling down the runway.
“It's a good thought exercise to say, ‘What if we had all the cash we needed versus the cash that we actually have today,’” Krieger says. “Is our focus on incremental drug development really because of resource constraints, or risk appetite?”
by Rachel Layne