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Risk and Reward in R&D

Posted on: 02 May 03

Summary

Investing in R&D requires long-term planning and the willingness to take risks. Only about 15% of new drugs entering development subsequently reach the market, and the overall expense can be in the or
Investing in R&D requires long-term planning and the willingness to take risks. Only about 15% of new drugs entering development subsequently reach the market, and the overall expense can be in the order of US$800 million (1, 2). Making the decisions Pharmaceutical companies employ a number of sophisticated models and procedures to help them in their R&D decision-making. These models draw together disparate pieces of information related to R&D such as potential sales, technical risk, resource availability, outsourcing opportunities, competitor activity, opportunity costs and strategic fit within the company’s product portfolio 1. Despite the role that financial and marketing models play in decision-making at both the early and late stages of development, human judgement continues to play an important role in these decisions 1. When a drug progresses through the R&D process, decisions made along the way can be reappraised and the lessons learned can be applied to future projects. Taking into account the views of personnel with previous experience on projects can enhance the quality of decision-making, but this depends on how well information is shared within the company. There are two types of R&D models that are often described by industry observers to explain the manner in which pharmaceutical companies operate 3. The ‘traditional’ model is focused on the large-scale output of blockbuster drugs to help the company achieve commercial dominance. In this model, the operational units of the company tend to function as fairly separate entities 3. The criticism of this model is that it allows inefficiencies to creep into the system and that it encourages people to be risk-averse in their decision-making 3. At the other extreme, the ‘modern’ R&D model is more focused on the company being innovative, flexible and dynamic in its decision-making 3. This model places much more emphasis on technological breakthroughs in the project being carried out and is therefore considered to be more linked to innovative thinking. In reality, most companies operate systems using features of both models that are best suited to their goals. However, as companies grow larger and their lines of communication become stretched, the impact on decision-making must be taken into account. One of the attractive features of many small companies is the dynamism in their decision-making, which helps keep them innovative. However, this dynamism must be effectively coupled with a realistic commercial strategy, as the costs of R&D are high and the competition for the world market is fierce. When it comes to commercial strategy, it is the major pharmaceutical companies who are considered to be the experts. Using the Outsourcing Option The pharmaceutical industry has made a concerted effort to restructure and reorganise its functions and processes in order to maximise the efficiency of its R&D operations, thereby achieving fast development times and a prolonged competitive advantage in the marketplace. In addition, the industry has begun to proactively outsource much of its work, in order to concentrate on its core R&D competencies. This has particularly been the case for clinical development, highlighted by the fact that Contract Research Organizations (CROs) are now involved in around 60% of clinical work 4. Clinical development accounts for around 40% of pharmaceutical R&D investment and is therefore costly and resource-intensive 1. Companies face an ongoing challenge in resource and cost allocation when a drug reaches the stages of clinical trials. With their experience in running large-scale international trials, CROs can provide companies with valuable objective advice and feedback so that the company can get the best out of the clinical development process. They can also help in other areas such as regulatory strategy. The skills of a CRO should complement those within the pharmaceutical and biotech company for there to be a realistic chance of R&D success. In this respect, long-term partnerships are beneficial as the two parties can learn how best to work with each other to get the best out of the project. Looking at the market Justifying R&D spending is a difficult exercise, as the costs of the drug development process are increasing and several technological hurdles remain. Furthermore, as drug development times lie between the 10 and 12-year range, predictions must be made about the future healthcare environment. A great deal of attention needs to be paid to epidemiology and demographics and this information should factor in R&D decision-making 5. This will ensure that companies are developing drugs that, if successful, will have a market when they reach the public 5. For example, the next 15 years will see significant demographic changes in all developed nations, most significantly a dramatic rise in the population of over 65s 2. As the elderly have the greatest need for healthcare there will be considerable areas of unmet need that the pharmaceutical industry can target. The pharmaceutical industry has always cited its heavy investment in R&D as being the reason as to why it needs to charge high prices for its drugs 6. For the public and governments to be convinced that the current levels of profitability that companies enjoy are fair, the industry must continue to produce innovative new drugs that will contribute to advances in healthcare 6. Furthermore, the industry must show that it is actively trying to tackle areas of unmet need and address issues over access to the new medicines it develops 6. References 1Kermani F and Findlay G (2000). The Pharmaceutical R&D Compendium. CMR International. www.cmr.org 2Outlook 2002. Tufts Center for the Study of Drug Development. http://csdd.tufts.edu 3Hall J (2002). 21st Century R&D Strategy: Atlantic or Pacific? Bio IT World. www.bio-itworld.com 4M. Mathieu. Parexel’s Pharmaceutical R&D Statistical Sourcebook 2002. 5Sykes R (1997). The Pharmaceutical Industry in the New Millennium: Capturing the Scientific Promise. www.cmr.org 6Kermani F. (2000). Global Pharmaceutical Pricing: Strategic Issues and Practical Guidelines. Urch Publishing www.urchpublishing.com

Faiz Kermaini & Pietro Bonacossa

Last updated on: 27/08/2010 11:40:18

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