Case closed on R&D?

The pharmaceutical industry has adhered to a 'closed' model for drug discovery and development for many years. Individual companies plough millions into in-house R&D in a bid to discover new molecules with therapeutic properties.

Only a tiny proportion of those showing potential will run the gauntlet of lab-based testing, clinical trials and regulatory hurdles. Those that emerge, blinking, into the light of the market will be exclusively owned during the period of patent protection – and are heavily promoted to recuperate the prohibitive R&D costs and maximise profit.

This strategy of 'betting' on in-house R&D to find potential medicines making it to market has paid off handsomely for shareholders for many years. But could the tactics of big pharma be set to change forever? Some experts certainly think so, pointing to a number of factors conspiring to bring this once stable model of 'closed' development into question.

Patently obvious?
New drugs are the life-blood of the pharmaceutical business. Without new therapies to sell, the industry is in limbo, relying purely on the strength of ageing brands. But with the patents on many 'blockbuster' medicines launched in the glory days of the 1990s due to expire over the next few years, big pharma is starting to feel very exposed.

According to Barbara Ryan, an analyst at Deutsche Bank, patents worth a projected $30bn in revenue are due to expire between 2010 and 2013. With the ensuing rise in generics flooding the market, pharma companies will need to raise their productivity in order to keep profits flowing.

So it is a worry for the industry that the drugs pipeline, at least in some quarters, appears to be running dry. While pharma R&D spend has increased, the number of new drug approvals has remained relatively flat.

In its 2007 report 'The Innovation Gap in Pharmaceutical Drug Discovery and New Models for R&D Success', Northwestern's Kellogg School of Management suggests three potential factors behind this crisis.

The first is over-saturation. The researchers ask if pharmaceutical companies have made all the breakthroughs they can with current technology.

Secondly, the authors cite increased risk-taking. In recent years, the pharmaceutical industry has shown a greater appetite for investments that have proven less than safe; for example, focusing on biologics and genome-based therapies, which are often harder to develop and can struggle to receive regulatory approval.

Finally, they suggest that excessive growth and corporate stagnation could be to blame. Have pharmaceutical companies, and their R&D processes, become too big and set in their ways to produce true innovation?

Whether it is one factor, or a combination of them, the cost of R&D is increasingly becoming a burden as innovation and the associated pay-off from new drugs fail to materialise.

Developments rising
It is not just the dearth of new products hitting the market that is a cause for concern for the industry. The cost of R&D is increasing too. Together with expiring patents, this represents a potential time bomb for R&D divisions across the industry.

The recent PricewaterhouseCoopers report Pharma 2020: Virtual R&D, Which path will you take? highlights the issue, stating: 'If pharma is to remain at the forefront of medical research and continue helping patients to live longer, healthier lives, it must become much more innovative, as well as reducing the time and money it spends on developing new therapies.'

It goes on to claim that incremental improvements are no longer enough, stating: 'the industry will need to make a seismic shift to facilitate further progress in the treatment of disease.'

Offshore and more
How can pharmaceutical companies achieve this seismic shift in R&D practice? In the UK we have already begun to see part of the answer: outsourcing.

Outsourcing, or offshoring, is proving to be a common strategy in cutting development costs in R&D, particularly in economies in which it is expensive to operate, such as the UK. RSA has seen a rising trend of terminating researcher contracts when projects end. These skilled workers are being replaced via outsourcing, or through the creation of new R&D departments in countries where labour is cheaper.

According to Reuters Business Insights, 15 per cent of pre-clinical drug research operations are now outsourced. And this figure is set to rise: the UK Life Science Leaders Survey 2010, carried out by the Science Technology & Innovation Partners and sponsored by RSA, revealed that 57 per cent of supply chain managers in UK life science business expected offshoring to increase over the course of the next two years.

Yet offshoring as a purely cost-saving measure may not be a long-term solution: for it to be sustainable, wages must remain low (which is not a given) and consideration must be given to the other risks it carries, such as hidden costs related to differences in culture and loss of control over IP.

Open innovation
Many experts are now arguing that for the industry to adapt to these rising development costs, new approaches towards innovation itself are needed. Such is the need for a step change in the discovery model that pharmaceutical giants are now willing to break their long established inward-looking mentality, in favour of a more collaborative system of drug discovery and development.

Such open collaboration has the potential to benefit the industry as a whole. The process is often called 'open innovation' – a term coined by Henry Chesbrough, professor and director at the Centre for Open Innovation at Berkeley.

'Open innovation' means recognising the value of external ideas, and using internal R&D to add value to them and take them to market for profit. The model encourages sharing IP between companies, in order that they can be employed in the best possible way.

In the technology industry, the open source movement (where permission to use intellectual property is freely available to all) has enabled some companies to benefit from the wider knowledge base, before specialising and working with ideas and before taking their product to market.

Another industry where an open collaborative approach has blossomed is the film industry. Hollywood studios do not own the entire process of creating and releasing a film: many smaller companies, from talent agencies to special effects to scriptwriters, are involved in the many separate constituents that must come together to produce a successful film.

Indeed, some pharmaceutical companies are already forming partnerships with smaller biotechs to boost early stage discoveries. Open innovation doesn't only mean looking to start-ups for partners. Academia is a huge resource of innovation and development capability with which the pharmaceutical industry is increasingly forming partnerships. According to the UK Life Science Leaders Survey, 62 per cent of R&D leaders believe that collaborations between academia and industry will increase in the coming years.

The sector is also likely to see an increasing reliance on contract research organisations (CROs) in both preclinical and clinical R&D. These organisations frequently use heavily automated, bioinformatics-based experimentation systems to develop new potential therapies.

Pharmaceutical companies are hoping that this more open, partnership-based approach to drug discovery will finally lead to further innovation with realistic costing models.

Evolve or die
Ultimately, the increased use of offshoring is likely to result in job losses within the UK pharmaceutical industry. RSA, for example, has already seen a movement of staff displaced from the pharmaceutical industry to the CRO sector – and this is likely to continue. While the roles may be similar, salaries are likely to be lower. More forward-thinking staff may move to organisations that develop the technologies used by CROs to facilitate the R&D processes.

To stay relevant, staff within UK pharmaceuticals must demonstrate their value and show that they have the skills and competencies above and beyond those that exist in CROs, or their activities will be outsourced and their roles will eventually be made redundant. To survive, they must remain at the forefront of their science.

Despite these changes, increases in a collaborative approach to R&D have the potential to create more opportunities should smaller, more innovative companies take hold in the UK.

The skill sets that in-house staff will need are also set to change to meet the needs of this newer, more collaborative approach. The ability to manage external partnerships, often from a distance, will become critical. This will require excellent communication and time management skills, plus the ability to operate across cultural and language barriers.

Future choice
Outsourcing routine tasks will enable staff within pharmaceutical companies to concentrate on a more focused, expertise-driven approach to drug discovery. Yet, if too much is outsourced or off-shored, the UK risks losing its competitiveness and knowledge base.

For the smaller, more innovative biotech and research companies, a move towards open innovation in the sector could herald new business opportunities and subsequent employment opportunites. For big pharma, a collaborative approach to R&D has the potential to break the deadlock we are seeing in R&D innovation and generate the blockbuster brands of the future.

The Author
Dr Kay Wardle is pre-clinical R&D practice leader and managing director of RSA Executive Search

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