John Pientka

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The Key to a Successful M&A = Data

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John Pientka

Big Pharma’s Dirty Little Secret: It’s Actually No Good at Developing New Drugs

For years big pharma has rationalized high drug prices in the US with the argument that they need the profits to invest in research to make more and better medicines to cure our ills and improve our health. Too bad they are lousy at it. But there is hope.

The news articles pop up fairly regularly. Roche, or Eli Lilly, or AstraZeneca or Johnson & Johnson announce that they have abandoned another drug trial because of the proposed medicine’s demonstrated ineffectiveness.

Big Pharma – the world’s largest pharmaceutical companies are now in the same vilified class as big tobacco and big oil. They spend zillions on lobbying our legislators so that they can gouge us on prices and addict us with opioids. Their executives are wealthy beyond the dreams of Midas. Unfortunately, they really can’t do the one thing they claim justifies their existence. They can’t develop new drugs. They are living off their legacy medicines and manipulating the patent system to prevent generics from knocking them out.

According to a new Iqvia Institute (a company that supports health information technologies and clinical research) report: “Emerging biopharma companies (EBP) accounted for “72% of the total [drug] R&D pipeline in 2018, compared with 61% in 2008… Large pharma companies—those with more than $10 billion in annual pharmaceutical sales—have seen their share drop from 31% to 20% over the same period.”

Venture capitalists and private equity managers are driving this shifting of productive research. Emerging biopharma companies are defined as companies that are estimated to spend less than $200 million annually on R&D and have less than $500 million in revenue. Think about it. Almost three quarters of new drugs are being cranked out by organizations that are spending less than $200 million a year in R&D.

What is big pharma doing with the billions in R&D they are spending? The cost of developing new drugs by big pharma has gone up. One analysis showed a staggering 145% increase from 1997 to 2008. The authors’ estimate that about 85% of this growth was due to “out-of-pocket” costs (labor, equipment, etc.) and 47% to an increased failure rate. The key question is why such a monumental rise in costs occurs to them while it appears smaller firms don’t suffer from it.

Standish Fleming in Forbes states the answer succinctly: “Pharma’s cost problem stems from a business model dating back to the emergence of molecular medicine between 1970 and 2000. During that period scientific insight in molecular biology and technical excellence drove the development of the modern pharmaceutical industry.

Large-scale, multinational companies emerged, based on a quality strategy of R&D, epitomized by companies like Merck, whose technical prowess led them to prioritize in-house production to the exclusion of all else. Unfortunately, with clinical success rates below 10% even the most admired and innovative company in the world could not produce the products needed to sustain itself.

While big pharma has warmed to external sources of innovation from biotech, they continue to pursue a strategy that stresses large-scale, narrowly-focused research, rather than breadth of opportunity. The high-quality, low-volume, high-cost strategy makes companies particularly vulnerable to the failure rate.

As a result, limited output has left the industry dependent on monopolistic pricing and a target for potentially devastating political intervention. Under the current business model, pharma cannot reign-in drug prices without accelerating the decline…” In other words, big pharma’s business model is broken and we are paying for it.

To add insult to injury, in order to maintain the monopolistic pricing model big pharma has resorted to patent evergreening. This is where small “tweaks’ to a drug’s formula are made and then claimed as a new drug worthy of extending the patent.

One of the most recent and egregious examples of this is when Richard Sackler, former chairman of opioid giant Purdue Pharma, was listed as an inventor on a new patent for an opioid addiction treatment. Yes, this is the same Sackler who gave us the opioid crises in the US.

Patent No. 9861628 is for a fast-dissolving wafer containing buprenorphine, a generic drug that has been around since the 1970s. Commentators fear the patent could keep prices high and make it more difficult for poor addicts to get treatment. You just can’t make this stuff up.

But there is hope. Regulating drug prices in the US – as does most of the rest of the world – will disrupt big pharma’s current business model thereby forcing the industry to drop it and get more drugs from the more efficient business models of the emerging biopharma companies.

Time to write your Congressional Representative and Senators.

By John Pientka

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John Pientka Contributor
Principal of Pientka and Associates
John is currently the principal of Pientka and Associates which specializes in IT and Cloud Computing. Over the years John has been vice president at CGI Federal, where he lead their cloud computing division. He founded and served as CEO of GigEpath, which provided communication solutions to major corporations. He has also served as president of British Telecom’s outsourcing arm Syncordia, vice president and general manager of a division at Motorola. John has earned his M.B.A. from Harvard University as well as a bachelor’s degree from the State University in Buffalo, New York.
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