There's trouble ahead for Pharma...

Pharma, Drug Industry, or as many of us fondly refer to it as "Big Pharma" is headed for trouble. There are four main sources of trouble for the industry and while this is no uncommon knowledge, it is worth repeating here:

1. Size:

No one wants to admit it, but pharmaceutical companies have bloated to sizes that are unfathomable within the realms of meaning or logic. Once companies get this big, all they care about are Excel files in which employees are mere cells if not columns. Every effort to fight costs is seen as an exercise in employee reduction.

Recently, I came across a rather depressing rebuttal to Scientific American's "1,000 Scientists in 1,000 Days", by Josh Bloom, a former employee of Wyeth, with a PhD in Chemistry and more than a few years of experience to boot, that complained about the jobs moving to cheaper locations.

While he paints a sobering picture and may create the impression that building careers in science and engineering may not help kids in the future, the point that the layoffs in big pharmaceutical companies have gotten out of control.

Consequences of size

The large scale of the organizations in question exponentially worsen the problems they face. Instead of taking responsibility, executives appear to stake out defensive walls and target large swathes of employees and lay them off. It is not surprising then that scientists like Josh Bloom appear disenchanted.

2. The buck-passing routine

Blaming the FDA or the federal government or pretty much any other entity but themselves has become a favorite with executives in some of these companies. With Senators and Congressmen acting as mouthpieces to their donors, the executives and the organizations, this has only become too easy. The Supreme Court has not helped with its irresponsibility in assuming that a laissez-fair state of donations is somehow constitutionally acceptable.

Company executives should exercise and assume strategic vision and indulge in creative solutions, not pass the buck and appear spineless.

3. Loss of exclusivity - the patent "cliff"

With many patents about to expire in the near future, about 110 drugs will lose their exclusivity between 2012-2014. This represents a significant loss of income for various pharmaceutical organizations. Before you herald your sympathy though, you should realize that the fact that the companies will be affected by the patent "cliff" was in open view, and should not come as a surprise to anyone.

Relying way too much on one and only one strategy - exclusivity to "blockbuster" drugs has led to the issue at hand, again something that these high priced bell-hops executives should have hedged against with alternates.

Simply acquiring companies and slashing jobs has of course been the only and ineffective alternate.

4. Conservative R&D

"Throughout the centuries, there were men who took first steps, down new roads, armed with nothing but their own vision." -- Ayn Rand

Cheesy? Yeah, maybe, but here is the deal. Drugs were released, not by MBAs equipped with pretty PowerPoint slides, but by people who struggled through starting companies and double mortgaged their homes. When these companies became acquired by larger organizations, R&D turned to becoming conservatives.

In trying to come up with new drugs, organizations have adopted the same age-old strategies, and used smoke-screens instead of real and deliberate attempts at innovation. This of course, has meant that only 21 molecules were introduced last year, as opposed to 26 the year before.

The Dendreon success story

When Provenge finally won approval, it should have served as an eye opener for many pharma executives that status quo is not a good R&D strategy. There are so many avenues available in genetic repair, personalized medicine and others that remain unfunded or under-funded because everyone wants "someone else" to do it, so that they can swoop in later on, acquire them and lay people off..

Companies that buck the trend and take risks to forge new paths will succeed while others will be left behind to acquire their way to oblivion.

5. Falling, falling, falling...

So, between 2009 and 2010, R&D investments fell over 3%, down from $70bn to $68bn. While that might seem small, according to Reuters, it is bound to fall more.

There are fewer IPOs slated for biotech organizations this year.

Investment in biotech start-ups is also down.

Conclusion

It is time that pharmaceutical companies got serious and set the right priorities. Companies need to trim fat, starting at the top. Stop passing the buck and take responsibility to make sure investors get positive returns on their investments. Make sure there is enough R&D funding and finally, remember they are in the business to improve people's health...

References:

1. Some numbers:

http://www.reuters.com/article/2011/06/26/pharmaceuticals-rd-idUSL6E7HO1BL20110626?feedType=RSS&feedName=rbssHealthcareNews&utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+reuters%2FUShealthcareNews+%28News+%2F+US+%2F+Healthcare+News%29&utm_content=Twitter

2. On vanishing science jobs:

http://www.nypost.com/p/news/opinion/opedcolumnists/america_vanishing_science_jobs_V3TzWwPRZsmTh1sGmtVr8L?fb_comment_id=fbc_10150227908749349_17158421_10150228481934349#f2951ecb507bb

3. Scientific American's 1000 scientists in 1000 days:

http://www.scientificamerican.com/page.cfm?section=calling-all-scientists

4. Genetic Editing:

http://www.guardian.co.uk/science/2011/jun/26/doctors-breakthrough-repairing-genetic-defects

5. On passing the buck:

http://chaaraka.blogspot.com/2011/06/on-scott-browns-unfactual-rant.html

http://www.boston.com/news/nation/washington/articles/2011/06/27/biotech_industry_lobbies_against_medicare_cost_panel/

Follow up - Venture Capital stats for 2009 track the prediction for "cautious optimism" in 2010

The first post of this decade and year had the following shimmering title, "Welcome to 2010: Biomed Research is down, Innovation is dying and healthcare is reform is dead".

While the title itself did not contain the words "venture capital", the post talked about venture capital in 2010. At the point when I wrote the article, we heard that venture capitals will shrink in 2010. I will attach a related article/blog post at the bottom.

Today, the National Venture Capital Association (which must be getting a lot of hits for a website on a Friday night) announced a summary of venture funding that went on in 2009. As anticipated, venture funding was down in 2009. Reporters and bloggers, including yours truly are still mulling the data and the interpretations to be made. Let us make a cursory examination as follows.

Positive Developments

One of the first things to strike me from reading an article on the report was the fact that venture funding actually picked up in Q4. This is still in line with the theory that there will be cause for "cautious optimism".

Key Conclusions

From the report and the few articles I have read so far that have been based on the released data, here are a few conclusions we can draw:

1. Biotechnology, just with the sheer size of the funding needs still led in 2009, a year which saw the lowest volume and dollars flow through the venture funding system.

2. Biotechnology funding through venture capital also rose in Q4 of 2009, a ver good development and prognosticator, in the face of falling NIH funding and such.

3. In the interest of those who believe that the location of startups matters or that one region is better for start-ups than the other - well, all of them did equally poorly. You could brag about Routes 128 and such, but the economy blessed its vagaries equally on everyone.

4. Funding also fell across various industries and stages of start ups. There was a very small increase in funding for early stage companies in terms of dollars, but fell steeply in terms of deal volume.

Let's read tea leaves

Over the weekend and the next few days you will see colorful charts with pies, lines and numbers all over. Does this mean much to you?

Not really. The economy worsened over 2008 and 2009, demand fell consequentially and thus venture funding also fell. You can call it "the great panic of 2008", or whatever else that comes to your mind, but the facts remain simple.

What happened last year, was a regular, cliched, run of the mill slow down. This year, in all likelihood will be different. Thus, there will be the much celebrated "cautious optimism" in 2010. What else did you expect?

We all knew. Now we have Excel sheets to prove the facts.

What should an entrepreneur do?

My advice from the previous post still holds true. Bootstrap, be stingy and spendthrift. And may science (or technology) and good horse sense be with you.

References:

1. My post on the state of funding in 2010:

http://chaaraka.blogspot.com/2010/01/welcome-to-2010-biomed-research-is-down.html

2. Link to NVCA reports, data, etc:

http://www.magnetmail.net/actions/email_web_version.cfm?recipient_id=157364061&message_id=913826&user_id=NVCA

3. The Minnesota take:

http://www.medcitynews.com/index.php/2010/01/minnesota-start-ups-seeking-venture-capital-suffer-disastrous-2009/

4. The New England take:

http://www.boston.com/business/articles/2010/01/22/venture_capitalists_reawaken/