In this article, I will try to give you an idea of why biotech is much more efficient than big pharma in developing drugs. My main focus is on the organizational side of the matter.
Costs for drug development are insanely high!
A report (November 2017) by Prasad & Mailankody estimates the average costs of bringing a single cancer drug to market to be $648 million.
This figure, however, is even much higher in another paper from DiMasi, Grabowski & Hansen stating it is near $2.6 billion.
Matthew Herper together with Bernard Munos did an analysis of 100 drugs that made it to market and came to the conclusion that the median cost per drug developed is a staggering $5.8 billion. On reason is the enormous failure rate. Matthew Herper says in his article that 90% of these costs come from starting clinical trials that don’t reach the market.
However, Prasad & Mailankody may touch a sore spot. Although their report takes only into account 10 companies, their results tells us something about the efficiency of smaller companies compared to larges ones.
So why do these smaller companies, like biotech startups, have lower costs?
One reason is that the Biotech startups don’t need to carry the historical costs of previous failures. If they don’t succeed, they just fail and disappear. Another reason is definitely a smaller overhead and less bureaucracy (Kaitin). I’ve heard many stories of truly creative teams in biotech that dissolved after a takeover by big pharma. This bureaucracy probably makes it also more difficult for them to walk away in a timely manner from the to be failures.
Another paper by Joshi states that the absorptive capacity of the Biotech sector is much higher. Absorptive capacity is “the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends”. Or in other words, big pharma is navel-gazing and biotech is open towards to world. They are much more aware of new technologies and knowledge and they have the ability to implement them much quicker. They are just more flexible and can more easily change the route they take based on the newly learned knowledge. Biotech firms are interconnected in a network of interdependent technologies, routines, and individuals. Joshi concludes that knowledge flows more easily when it spans company boundaries rather than it spans organizational hierarchies.
If the above is indeed true this can also mean that pharma companies are doing a lot of duplicate work, or at least more than biotech does. Bountra thinks this duplication is one major factor of lost resources. Bountra: “Everyone reads the same scientific literature, goes to the same conferences and speaks to the same opinion leaders. Then they go back into their labs” and work al in their own world for the coming six to seven years. This again results in more failures.
Small is beautiful!
I’m not an expert in the field, but based on the information I could find, I truly believe that small biotech companies are more efficient because they are small. So big pharma can, in my opinion, go in two directions.
Or they become portfolio managers and specialize in managing the different biotech companies they buy. They can still focus on late phase clinical trials and sales. This is a path some are already going into, although I don’t think big pharma is conscious of their future role yet. Have they already incorporated this into their strategic vision today?
Or they completely revamp their R&D model and make much smaller and research teams that can operate more freely and can more easily interconnect with the outside world.
Anyway: the future is small and Biotech.
Last modified: May 4, 2018