Drugmakers look outside labs to offset R&D risk

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The patent cliff is doing more than chipping away at earnings. It's placing even greater pressure on industry pipelines and magnifying just how much it costs to bring a drug to market.

In its fourth-quarter earnings call with analysts, for instance, Merck said R&D spending remains a major target for cost-cutting. The firm has trimmed $100 million off its research budget, vs. the fourth quarter of 2010, by closing sites, and will seek new medicines, both internally and externally. "This includes business development, licensing and targeted acquisitions that bolster our existing portfolio and therapeutic areas," said CEO Ken Frazier.

It's not alone. Other drugmakers intend to be active in business development, including M&A, to augment their pipeline and maximize business opportunities. To strengthen its position in the burgeoning market for therapies that treat hepatitis C virus, Bristol-Myers Squibb recently announced its intent to buy Inhibitex for $2.5 billion and continues to view business development as a key priority, it said in January.

And in a February earnings call, AstraZeneca said it was making its neuroscience division a “virtual model,” meaning it will share the “cost, risk and reward with other research partners active in this field.” (AstraZeneca made this pronouncement shortly after confirming its third round of major layoffs in five years.)

Looking outside their labs to trim R&D costs, both through alliances and M&A, is one way biopharma firms are responding to the rising economics of drug discovery.

The costs are even higher than many in the industry are willing to admit – soaring to the $4 billion to $11 billion range, as opposed to the $1.3 billion price tag the industry often bandies about as the true cost of success, Forbes notes. That is, the $1.3 billion doesn't take into account the failed investments that weigh on company balance sheets.

A report from the Tufts Center for the Study of Drug Development says strategic partnerships may be a smarter way for pharma to stay cutting edge without bleeding money.

Dr. Kenneth Kaitin, a professor and director at Tuft's center told MM&M in a phone interview that there is no blanket solution to keeping a lid on investment, but that strategic partnerships can be a smarter way for pharmaceutical companies to explore a research area as opposed to going through the turmoil and cost of a merger or acquisition.

In addition, Kaitin said, academic partnerships have been a prime example of the benefits of this approach: companies get access to science without the cost of staff, rent or heat, and gain the ability to walk away from project without baggage, because “if the technology doesn't work, you don't own it.”

Kaitin said Pfizer's Centers for Therapeutic Innovation project has been particularly adept at this approach, inserting market needs into the development process by pairing academic and industry researchers at the get-go. He said this approach saves time and money because government-required checks and standards are built into testing and development, as opposed to a hands-off grant approach which requires filling in research holes so promising research can pass government scrutiny.

Indeed, in a fourth-quarter earnings call, Pfizer CEO Ian Read touted R&D cost savings to the tune of a billion dollars.

A series by consulting firm PricewaterhouseCoopers addressing the idea of partnering up and sharing the cost and benefits of development, Pharma2020: Virtual R&D, posits that the future in development includes consolidation, and that “clinical supercentres” will recruit patients and manage trials, independent of the industry.  

According to the 2007 PwC report, this consolidated approach will be more efficient and better able to align itself with regulator needs and requirements.
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