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JANUARY 5, 2004
What's Next for Pharma? [Page 2 of 2] Q: Have mergers, and thus larger-size companies, hurt productivity? Milne: The current thought is size has an inverse relationship with creativity. Larger companies are trying to emulate the kind of creativity you get out of biotech companies. There's a feeling that loss of creativity has been one of disadvantages of M&A. Smaller, smarter, more science-driven pharma companies are the wave of the future. Kaitin: We have had firms of all different sizes trying to do R&D the same way -- pursuing drugs in a lot of different therapeutic areas, keeping a diverse portfolio. What we're seeing now is that few companies can continue that approach. Pfizer, with a $7.5 billion research budget, can still do this. But all of the medium-size large pharma firms are talking about new strategies and the end of the blockbuster era. Aventis (AVE ), Abbott (ABT ), Schering AG (SHR ) are talking about it, realizing they have to have a strategy that uses their strengths. All of this is leading to a restructuring of the market. Q: What are the solutions to the industry's productivity problems? Kaitin: One of the major solutions is the establishment of strategic outsourcing and partnerships. Eli Lilly (LLY ) has been doing so well because they've been a leader in partnerships with small biotech companies. That has filled its pipeline and allowed them to keep some of the expensive technologies outside of the company. I think a lot of companies are seeing that's the way to operate. There will be specialists in various aspects of the entire R&D process. You'll have fewer firms that will try and manage from soup to nuts. This change is long overdue. Milne: It's part of the evolution of the R&D paradigm. It's being forced by necessity but will make it more productive. The goal is to spread the risk and resource cost. Even the biotech companies will benefit. They can't keep being companies without profits or products for 15 years. There's going to have to be an incubation period that's dependent on the public sector. But then you'll have a big company come in and take products through trials and bring their resources to bear. Q: Of course, the Tufts Center is known for coming up with the figure of $802 million as the average cost of bringing one drug to market. Is the cost rising? DiMasi: If success rates fall, all things being equal, cost would increase. Q: What about critics who don't agree with the methodology of the development cost study? Have they cast any doubts? DiMasi: No. We used capitalization, which is a very standard process in economics and finance. You're putting a monetary value on the time cost of drug development. There's a cost to putting money into a 10- to 15-year process before any returns are seen. The methods we used to estimate that time cost are standard. If anything, they were somewhat conservatively applied. Q: How is the FDA's role changing? Milne: There are a number of tensions right now that the FDA has to address. They know there are limitations to how much you can evaluate a drug before it reaches the market. They're trying to address that with new post-marketing initiatives and surveillance, which are great. By the same token, [Commissioner] McLellan has said the industry needs to reduce resources going toward R&D because the $802 million figure isn't sustainable. Still, the FDA also expects companies to expand what they're doing. Q: What about the strategy of making more switches from prescription to over-the-counter status –- like we've seen in the last two years with Claritin and Prilosec? Will there be more switches? Cohen: What the agency would have to do is first try to assess which would be switchable. Then they would have to incentivize the industry to switch drugs. Statins, asthma drugs, blood pressure drugs, contraceptives are being looked at next. Britain and other countries are switching statins now. The FDA encouraging switches to OTC status would be a big change for the industry, which generally views switching as hurtful to their businesses. Insurers see prescription-drug growth as a problem that could be alleviated by having more drugs OTC. We will hear a lot more on this issue in 2004. Q: How will the Medicare drug benefit affect the pharmaceutical industry? Cohen: The benefit doesn't begin until 2006, but one of the immediate effects of this legislation is discount cards for seniors given out by pharmacy-benefit managers. These will go into effect next year and will reduce out-of-pocket cost for seniors by an average of 25% off retail prices. Obviously it's not generous, but the card offers some savings. There are a number of things the industry is going to be happy about. The industry is likely to gain volume. Also, the government will not intervene in terms of limiting prices. With [price caps] you could limit investment in R&D down the road. So the industry has gotten a drug benefit it can live with.
 Edited by Patricia O'Connell
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