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Harder than it looks

05 Sep 2007 12:57 pm

It's rather common to hear those in favor of price controls on prescription drugs argue that the government does all the real research anyway, and the pharmas just steal it and slap their name on the resulting pill; or that the cost of R&D is wildly overblown.

As a counterexample to these two claims, I (well, Derek Lowe, really) give you: Renin inhibitors.

I notice that the first marketed renin inhibitor seems to be doing fairly well. That's an interesting phrase, "first marketed renin inhibitor". . .

This is a good example of what drug discovery can be like. Renin is a fine drug target – it’s been known for a long time as a key component of blood pressure regulation, and that’s a condition affecting a huge market whose treatment provides a real medical benefit. What more do you want?

OK, let’s make it even more attractive. It’s not that hard to set up a renin assay, and the protein is well-studied. The counterscreens and secondary assays are not a problem; hypertension is fairly well understood. And if you screen for renin inhibitors, you generally find chemical matter to start off with, too. Protease inhibitors vary quite a bit in their drug-likeness, but they’re certainly not impossible on the face of them.

But even after all this, I would not like to be asked to count how many renin inhibitors have been reported over the years, never to be seen again. The first reports I can find go back to the early 1980s. Given the lead time for these things, I can safely assume that these compounds were being made around the time I went the my high school Junior Prom (theme: “Saturday Night Fever”, natch – it was 1978, after all). And here we are in 2007, and the first one has finally made it to market. It wasn't easy, either - the compound was left for dead years ago, and was only kept going by some ex-Novartis people who started their own company and licensed the compound back to Novartis when it finally made it through the rough spots.

So, what’s the problem? Many compounds have been done in by poor behavior in living models (distribution, absorption, and so on). Getting oral bioavailability in this area has been a lot harder than anyone thought, and even the current drug is no great winner in that category. Projects start and stop, difficulties occur, and the years go by. And other mechanisms for going after hypertension have, of course, come to market, starting with the ACE inhibitors (which come from roughly the same disco era as the first run of renin compounds). They took the gigantic market that an early-1980s renin inhibitor would have had, but even so, I don’t think a year has gone by since that someone in the industry hasn’t been working on one. (There's still room to think that a renin compound would have a better profile than the existing drugs, though). And here we are: 2007. A sobering thought, that is.

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Comments (24)

I really like Lowe's blog -- he's pretty well convinced me that even though public institutions do much of the necessary basic research, drug development and trials are hugely difficult and expensive.

On the other hand, the industry is incredibly profitable relative to the rest of the economy, and it spends about three times as much on marketing as it does on R&D. There's plenty of room for improvement.

On the other hand, the industry is incredibly profitable relative to the rest of the economy, and it spends about three times as much on marketing as it does on R&D.

The link you provided doesn’t say what you claim it says. The actual data (click on my name if the embedded link doesn't work) shows that pharmaceutical companies spend just over 17% on R&D (as a percentage of their sales) and about 14.4% on all of their marketing activities.

It is really, really misleading to compare profit levels across industries. Pharma profits have to be high, because pharma development requires a lot of investment in R&D and overhead that must be expensed immediately but that does not yield any return for years and years, if ever. So you have to have a high rate of accounting profit to make this type of investment "profitable" in an economic sense.

By contrast, Wal-mart's biggest investment is in buying inventory, which it then re-sells within a few weeks. So the level of accounting "profits" it needs to make these investments worthwhile are much lower. You will always find lower average long run accounting profits in retail than you will in pharma, even if the real "economic profits" in both industries are the same. The conclusion that this means pharma is somehow evil is just wrong.

I read through some of the comments made on Ezra’s site and Megan (correctly) pointed out the 31.1% figure from the doctored Chart Ezra has up is for “Marketing, Administrative and General” expenses rather than “Marketing, Advertising and Administrative” expenses as the authors of the study incorrectly claimed (you can check the links to the source material they provide at the end of the report and see where they distorted what the Kaiser Family Foundation actually reported). It’s a pretty big deal because General expenses are everything but the cost of manufacturing the drugs and R&D as opposed to just marketing and what many people think of as “paper pushing.”


Also the study seems to be cherry-picking its data from the top ten companies when there is more comprehensive data for the top 20 companies (which make up over 70% of the total sales) or for the industry as a whole which provide a more complete picture. Why they would use the profit figures from only the most profitable companies and deliberately exclude the less profitable ones thereby artificially inflating the profitability of the industry as a whole, I’ll leave that to the readers to figure out.

Yes, the often claimed figure for marketing in pharma is vastly overinflated. Marketing should include the salaries and expenses of the sales staff, advertising, and the support staff and infrastructure for such employees. However, the oft-quoted figure includes all general expenses such as IT, human resources, etc. Many of these expenses would still exist to support the R&D employees since it takes more than just salaries, equipment, and materials to run a research organization. It is a good rule of thumb that on-line bloggers who obscure the truth in this area are deliberately dishonest or cretins.

The debate about whether pharmaceutical companies spend more on R&D than on marketing is meaningless (or at least semi-meaningless). The decisions to allocate money are made (as always) at the margins.

If I spend an additional dollar on marketing, what do I get for it? If the answer is $1.20 or more (typical "hurdle rates" are in the neighborhood of 20%), then I spend the dollar on marketing.

Similarly, I ask what happens if I spend an additional dollar on R&D. Again, if I get about $1.20 (of course that has to be discounted back a couple years to account for R&D timelines), then I invest in R&D.

I will invest money in each area until the return on the marginal dollar is below my hurdle rate. It should become clear, then, that one additional dollar spent on marketing does not come FROM an R&D budget. I make that point explicit because the subtext of complaints about pharmaceutical marketing seems to imply that marketing spending comes at the expense of research. It's simply not true.

So what happens if I have lots of cash and nowhere to invest it? I give it to the investors via dividends, stock buy-back, etc.

Full disclosure: I work at a pharmaceutical company as a chemical engineer.

My apologies for quoting that stat in passing. Hopefully we can at least agree that these companies spend substantial amounts of money on marketing.

ChE's comment is true, but a bit obvious. Yes, of course decisions about marketing budgets are made on the basis of profitability. And yes, I realize that it's not necessarily a zero-sum allocation of funds that we're talking about.

But these marketing budgets are hardly meaningless. That money comes from the cost paid by patients, after all. And the profitability of that investment in marketing is affected by the regulations we impose on these companies' promotional activities. It's not absurd to say that a climate where marketing investments are less profitable may be beneficial to consumers, both in terms of cost and health outcomes.

This is a situation where the person making the majority of the purchasing decision isn't the one actually using the product. It's hard to see how marketing activities under such a system could possibly remain honest and beneficial to all parties. And on a personal note, it'd be nice to see fewer old men celebrating their newly-regained turgidity on my television.

As you said once: academia gives you thermodynamics, but only industry gives you a car engine.

In this case, academia gives you cool mathematical models, which are fun to play with and make you understand things better. It does not have the heart to go through the clinical trial process. That's the kind of things that people go to academia (taking a pay cut) to avoid.

"Marketing" is a whole lot more than just selling things. Marketing includes figuring out what drugs are needed and where to spend R&D. Good marketing will help a company figure out where to spend R&D money to do the most good. A company with bad marketing may spend millions in R&D to develop a drug that nobody wants.

EI

"It's rather common to hear those in favor of price controls on prescription drugs argue that the government does all the real research anyway, and the pharmas just steal it and slap their name on the resulting pill;"

That's a gross exaggeration. The common claim is that the government funds the more risky basic research, and that big pharma only funds relatively risk-free development. This case actually shows that very well. The drug was developed by a small company formed by a disgruntled researcher who quit Novartis when it decided that the drug was not worth the investment.

Speedel was able to develop the drug with a capitalization of less than $300 million (and it wasn't all they were doing). They made use of previous federally funded resarch in open literature that had cost about $40 million. As a result, they get a drug that will reach more than $4 billion in annual sales. That is what is considered too risky by the majority of Big Pharma. They generally want the government to do more for them first, and the government usually complies.

Njorl, a program that generates a drug that gets to market will usually (not always) wind up making money. The huge number of programs that do not generate drugs that get to market cost a lot of money and are largely invisible.

"The common claim is that the government funds the more risky basic research, and that big pharma only funds relatively risk-free development." No. Basic research is just that, work that (among other things) aims toward determining what a protein does, how it is regulated, etc. It has nothing to do with developing a drug. Some of the work often provides evidence that said protein *might* be a good target for pharmaceutical intervention. Full stop. The Speedel compound didn't come from some government lab - it came from Novartis.


"They generally want the government to do more for them first, and the government usually complies." That's conspiratorial, big bad rich corporation nonsense. Federally funded research is done by academics who write grants to study this or that pathway or protein or gene. Nobody is sitting at a meeting saying "Merck would really appreciate it if we funded a bunch of research on X because they think they might want to start up a drug discovery program targeting it in a few years." That doesn't even make sense.

Njorl: can you provide a link for the $40 million comment?

Nobody is sitting at a meeting saying "Merck would really appreciate it if we funded a bunch of research on X because they think they might want to start up a drug discovery program targeting it in a few years." That doesn't even make sense.

That's not what I'm saying happens. It isn't that Merck pushes the government to invest in a field it wants develop, it's that Merck refrains from developing until after the government has invested first. It is a subsidy to the pharmaceutical companies. It is analogous to the government plowing and fertilizing the entire state of Kansas and having farmers plant seeds on the land that looks fertile.

Even so, there are mechanisms in place for pharmaceutical companies to push the government. Grants get written by researchers, true, but they don't necessarily have purely academic motives. It is very common for university professors to follow up a research grant by forming a small company, and getting a small-business inovative research grant. This money is used to leverage investment from a large drug company. It is in the economic interest of the basic researcher to solicit funds from the government that promote the interest of the drug company. Many researchers who are not directly employed by companies have significant economic relationships with them.

I'm not saying this is necessarily a bad way to do things. It is very complicated, and I wouldn't want to spend the time required going over the massive system to look for inefficiencies. What I'm arguing is that the subsidies are there, are significant and should be considered when making policy.

All in all, I think the subsidy issue is probably less significant than the flaws that get exploited in intellectual property laws.

Megan, what Derek Lowe (of the Dodgers?) is telling you is that developing a renin inhibitor is not that hard - they developed slowly because drug companies weren't interested in a class of drugs that are not much better than drugs that beat them to the market. Or, more accurately, it was a question of opportunity cost - it wasn't possible to market them as some blockbuster that they could sell for $2 a pill instead of 10 cents. A government-run drug development program (ignoring the disadvantages of a govt. program) would not be deterred from developing this kind of drug because it could be focused on realizing incremental improvements to public health that may not show well on a balance sheet.

MN-No, Derek is saying that it WAS hard to develop a renin inhibitor. Everyone had a renin program 20ish years ago, and none of them resulted in a drug. Since then, the hypertension field has become even more crowded, which makes entry even less attractive. It also makes entry somewhat less important even to those of us who have hypertension, and we should be glad that those scientists are now working on diabetes or cancer instead

Obviously, at the time of the original research on renin inhibitors, companies were indeed interested in "a class of drugs that are not much better than drugs that beat them to the market." It's that type of approach that explains why we have a bunch of beta-blockers, a bunch of ACE inhibitors, a few calcium-channel blockers, etc. It's also why we have a number of SSRIs for depression, OCD, etc. And that's a good thing, because some of these things work better for some people and not as well for others. The government deciding what to concentrate on would probably work even less well than the government deciding how much wheat ought to be planted. Sometimes the market actually, you know, works.

MN,

No, that is not what Lowe is telling you. He is telling you that these type of inhibitors are very difficult to develop. They are not hard to discover, necessarily, but this depends on the target. These classes of molecules are often very synthetically elaborate (large and complicated); and, as such, are challenging to produce on a profitable commercial scale, and often suffer from severe problems in development due to poor oral absorption and rapid clearance once on board. It was these problems that lead Novartis to kick it out of the pipeline when it merged with Ceiba Geigy, and these problems were quite daunting.

Eriver,

I see I wasted the last twenty minutes writing my reply.

Njorl,

It is not even the case the Merck waits to invest. Pharma funds a lot of academic research, and funds even more basic research in its own laboratories. Merck and others certainly use what they can from the publicly funded work (including publicly trained young scientists), since using it is often times free, but if the government didn't fund a dime, pharmaceutical companies would still exist, but would be funding all the research directly, and with a profit motive, probably doing it more efficiently than academic labs.

Yancey, you're right that we'd do more of the basic research ourselves if we had to. I like the current model a bit more, though, because some things get funded that have no clear present value (but turn out to be huge later).

A key point to make, too, is that if we in the drug industry spent more on academic-type research, the cost of drugs would naturally increase proportionally. . .

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