The Price of Innovation:The Price of Innovation:Internal R&D DecisionsInternal R&D Decisions

Glenna M. Crooks, Glenna M. Crooks, PhPh.D..D.

Presented at National Health Policy Forum Session, Presented at National Health Policy Forum Session, “Pharmaceutical Marketplace Dynamics,”“Pharmaceutical Marketplace Dynamics,”

May 31, 2000May 31, 2000

Corporate Culture Corporate Culture

!! MissionMission--driven driven –– Discovery, development, education of prescribers, patients Discovery, development, education of prescribers, patients

and caregivers, adherent use and caregivers, adherent use

–– Return to shareholdersReturn to shareholders--equity financed, not debt, tax or equity financed, not debt, tax or philanthropy financed philanthropy financed

!! ObjectivesObjectives--focusedfocused–– Measurable, reported quarterly, annually and hourly Measurable, reported quarterly, annually and hourly

–– Direct personal impact on job, salary, bonus Direct personal impact on job, salary, bonus

!! Organizational styleOrganizational style–– Hierarchical, multidisciplinary, teamsHierarchical, multidisciplinary, teams

–– Data driven, riskData driven, risk--balancing,“learning” stylebalancing,“learning” style

–– Scripted with outsiders: trade secret and legal requirementsScripted with outsiders: trade secret and legal requirements

Source: Business Week, May 1, 2000Source: Business Week, May 1, 2000

Capital Market ImpactCapital Market Impact

Index 13/3/00 15/3/00 % Change

Biotech Select 579.17 485.62 -16.2

Large cap 426.86 361.02 -15.4

Mid cap 445.85 383.62 -14.0

Small cap 382.14 320.24 -16.2

Genomics 889.46 673.10 -24.3

Pharmaceutical Company ShareholdersPharmaceutical Company Shareholders

Board of DirectorsBoard of Directors

Marketing Sales

Marketing Marketing SalesSales

CEOCEOCEO

ManufacturingManufacturingManufacturingClinical Affairs

Clinical Clinical AffairsAffairsR & DR & DR & D

Public AffairsPublic AffairsPublic Affairs

FinanceFinanceFinance

Bus DevelopmentBus DevelopmentBus Development

LegalLegalLegal

ClinicalClinicalClinicalBasicBasicBasicRegulatoryRegulatoryRegulatory

MarketingMarketingMarketing SalesSalesSales

PlanningPlanningPlanningResearchResearchResearch

• Product Manager• Promotion Manager• Customer Manager

•• Product ManagerProduct Manager•• Promotion ManagerPromotion Manager•• Customer ManagerCustomer Manager

DistributionDistributionDistribution

Customer Service

Customer Customer ServiceService

SellingSellingSelling

TrainingTrainingTraining

IDIDID Etc.Etc.Etc.CNSCNSCNS

Quality AssuranceProductionMaterials Management

Quality AssuranceQuality AssuranceProductionProductionMaterials ManagementMaterials Management

“Small” Company Shareholders“Small” Company Shareholders

Board of DirectorsBoard of Directors

CEOCEOCEO FinanceFinanceFinance

Bus DevelopmentBus DevelopmentBus Development

R & DR & DR & D

LegalLegalLegal

ClinicalClinicalClinicalBasicBasicBasicRegulatoryRegulatoryRegulatory

IDIDID Etc.Etc.Etc.CNSCNSCNS

Discovery and Development Discovery and Development

BASICBASICRESEARCHRESEARCH

GovernmentGovernment-- NIHNIH

Private SectorPrivate Sector-- BiomedicalBiomedical

ResearchResearchCompaniesCompanies

-- NonprofitNonprofitFoundationsFoundations

TRANSLATIONTRANSLATIONRESEARCHRESEARCH

GovernmentGovernment-- NIHNIH

Private SectorPrivate Sector-- BiomedicalBiomedical

ResearchResearchCompaniesCompanies

-- NonprofitNonprofitFoundationsFoundations

APPLIEDAPPLIEDRESEARCHRESEARCH(Development)(Development)

Private SectorPrivate Sector-- BiomedicalBiomedical

ResearchResearchCompaniesCompanies

KnowledgeKnowledgeAboutAboutDiseaseDisease

ConsumersConsumers

CuresCuresTreatmentsTreatmentsandandPreventionPrevention

Source: FDA Council Congressional Briefing Series, “Molecules toSource: FDA Council Congressional Briefing Series, “Molecules to Miracles” 1997.Miracles” 1997.

Source: PhRMASource: PhRMA

R&D as a Percent of Sales forR&D as a Percent of Sales forResearchResearch--based Pharmaceutical Companiesbased Pharmaceutical Companies

and U.S.Industrial Sectors, 1998and U.S.Industrial Sectors, 1998

Development ProductivityDevelopment Productivity

New DrugNew Drug

1010

99

88

77

66

55

44

33

22

11

YEARSYEARS

INTRODUCTIONINTRODUCTION

REGISTRATIONREGISTRATION

PRODUCT APPROVAL,PRODUCT APPROVAL,SURVEILLANCE & SURVEILLANCE & MANUFACTURINGMANUFACTURING PHASE IVPHASE IV

PHASE IIIPHASE III

PHASE IIPHASE II

PHASE IPHASE I

CLINICAL TESTSCLINICAL TESTS

(HUMAN)(HUMAN)

PRECLINICAL TESTSPRECLINICAL TESTS

(ANIMAL)(ANIMAL)

SYNTHESIS EXAMINATIONSYNTHESIS EXAMINATION

& SCREENING& SCREENING

DEVELOPMENTDEVELOPMENT

BASIC

RESEARCH

11

22

55

1010

2020

SUBSTANCESSUBSTANCES

10,00010,000

SUBSTANCESSUBSTANCES

ALLOCATION OFALLOCATION OFRESEARCH FUNDINGRESEARCH FUNDING

17%17%

37%37%

20%20%

12%12%

*Does not add to 100%, 7.9% for other, plus rounding

Source: PhRMASource: PhRMA

Three of Ten Marketed Drugs Produce Revenues Three of Ten Marketed Drugs Produce Revenues that Match or Exceed Average R&D Coststhat Match or Exceed Average R&D Costs

ScienceScience--Related Decision MakingRelated Decision Making

!! Internal resources Internal resources –– Research capacity, basic research information, research Research capacity, basic research information, research

technology, understanding of disease mechanisms, animals for technology, understanding of disease mechanisms, animals for early tests, raw materialsearly tests, raw materials

!! Product featuresProduct features–– Toxicity, tolerability (AE/other), abuse potential, HazmatToxicity, tolerability (AE/other), abuse potential, Hazmat

!! External support External support –– GovernmentGovernment--supported research infrastructure, available supported research infrastructure, available

CRO/development partner, patients, investigatorsCRO/development partner, patients, investigators

!! Manufacturing challengesManufacturing challenges–– Raw material availability, ability to formulate acceptable produRaw material availability, ability to formulate acceptable product, ct,

plant capacity, packaging/shipping costs plant capacity, packaging/shipping costs

Source: PhRMASource: PhRMA

Development of 152 Global* Drugs Development of 152 Global* Drugs by Country of Origin, 1975by Country of Origin, 1975--19941994

GovernmentGovernment--Related Decision MakingRelated Decision Making

!! Role Role –– Controls market entry, penetration, behavior, Controls market entry, penetration, behavior,

profitability, business regulationprofitability, business regulation

!! Policy action, analysis and implications Policy action, analysis and implications –– Authorizes, appropriates, oversights, collaborates, Authorizes, appropriates, oversights, collaborates,

purchases, regulates through FDA, EPA, DEA, purchases, regulates through FDA, EPA, DEA, DoT, DoD, CommerceDoT, DoD, Commerce

–– Enforces/ignores patents, counterfeitsEnforces/ignores patents, counterfeits

–– Sets and shifts policiesSets and shifts policies--R&D and 936 tax credits, R&D and 936 tax credits, technology transfer, market exclusivity technology transfer, market exclusivity

CustomerCustomer--Related Decision MakingRelated Decision Making

!! Role Role –– Controls market access, penetration, behavior, Controls market access, penetration, behavior,

profitability, civil tort liabilityprofitability, civil tort liability

!! Policy action, analysis and implications Policy action, analysis and implications –– Patient demographics, levels of compliancePatient demographics, levels of compliance

–– Clinical disease knowledge and managementClinical disease knowledge and management

–– Willingness to treat (antiWillingness to treat (anti--lifestyle bias), definitions lifestyle bias), definitions of value, desire and/or need for product, patients of value, desire and/or need for product, patients access to product or product informationaccess to product or product information

–– Willingness to pay/reimburseWillingness to pay/reimburse

–– Likelihood of litigation Likelihood of litigation

ChannelChannel--Related Decision MakingRelated Decision Making

!! RoleRole–– Controls market access, price, penetrationControls market access, price, penetration

!! Policy action, analysis and implications Policy action, analysis and implications –– Special handling and distribution required, Special handling and distribution required,

training, knowledge and size of prescriber training, knowledge and size of prescriber population, special issues in dealing with population, special issues in dealing with consumer/patientconsumer/patient

Source: Wyeth Ayerst Prescription Drug Benefit Plan design SurveSource: Wyeth Ayerst Prescription Drug Benefit Plan design Survey Report, 1999y Report, 1999

CompetitionCompetition--Related Decision MakingRelated Decision Making

!! Role Role –– Controls market access/entry, penetration, Controls market access/entry, penetration,

behaviorbehavior

!! Policy action, analysis and implications Policy action, analysis and implications –– Nature of competitive products, generic and Nature of competitive products, generic and

therapeutic substitutes, replacement technologies, therapeutic substitutes, replacement technologies,

–– Nature of promotional costs such as size of Nature of promotional costs such as size of competitive sales forces, need for DTC, availability competitive sales forces, need for DTC, availability of marketing fundsof marketing funds

VALUEVALUE

PR

ICE

PR

ICE

Traditional AssumptionTraditional Assumption

VALUEVALUEP

RIC

EP

RIC

E

Current ClimateCurrent Climate

Price and Value ConsiderationsPrice and Value Considerations

ImageImage--Related Decision Making Related Decision Making

!! Role Role –– Controls public image, market cap of company, Controls public image, market cap of company,

support for regulatory and marketing activitiessupport for regulatory and marketing activities

!! Policy action, analysis and implications Policy action, analysis and implications –– Level of shareholder interest, founder interestLevel of shareholder interest, founder interest

–– “Fit” within corporate mission, contribution to “Fit” within corporate mission, contribution to society, impact on image and share price society, impact on image and share price

–– Activist support or opposition within regulatory and Activist support or opposition within regulatory and market arenas, negative press from antimarket arenas, negative press from anti--activistsactivists

Source: The EconomistSource: The Economist