Decentralized R&D the “winning strategy”? – Apple begs to differ

There is a provocative piece in Aug 20 2012 issue (by Connie Guglielmo) of Forbes on Apple’s R&D, countering Pharma (and Tech) trend of decentralizing such efforts. Besides creating many high-level jobs and even more $B, is this creating a sustainable competitive advantage? The link is to a brief online version – the print issue is more in-depth. 

For comparisons, Apple, (the highest value firm in the world) has ONE R&D center, compared to peers like Intel that have 30 or more sites. Its R&D productivity is markedly better than its competitors in measures cited in the print article.  Other details vs. peers:

However Apple’s arena and core strategy are significantly different from what BioPharma faces, or can craft.  (the old “you can’t get there from here” argument.)  I have helped design better performance for “virtual” R&D at some of the largest BioPharma’s, and see that, like it or not, decentralized R&D is the future for the winners in this arena.  Reasons include the complexity of biological systems vs. consumer goods, Apple’s real product being new disruptive  business models (with marginal regulation), and the timeline from idea to ROI

*- Various sources FY 2011 and FY 2012

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“The Truly Staggering Cost Of Inventing New Drugs”

Another provocative piece in Forbes  that implies the cost of developing a new drug could be as high as $12B!!  This approach has a number of flaws (as does: “Best Drug Companies.. “)  All produce (provoke?) some interesting insights from commenters.    Funny how some other provocative media posit that it costs 1/200th of that – only $55M!  Quite a range.

Some of the underlying problems with these approaches are things we have noted elsewhere here like offsetting the R&D investment by five years or so.  This is because the median (maximum) R&D spend averages about five years ahead of launch.  Cause and effect should have a rational link to one another.  Also, the $12B in spend does not parse out tax or marketing effort spending that “hides” in many cash flow statements.   There are many other insights one need to really unravel and understand the value and success-drivers in Pharma R&D.  Some additional related discussions are here in Derek Lowe’s blog, where again, additional comments are again rich in insights. 

My thoughts:  The span of comments following both articles reflects this topics’ complexity and some of its confounding issues. Some missed points:

  1. Understanding and managing performance should not begin by comparing apples to acorns. NME approvals are not dollars and it can be misleading to represent it as the key metric.  A better (best?) way is to measure the net present value (NPV) of the approved drugs’ revenues against the NPV of aggregate R&D spending.
  2. Some swag estimates can be applied to remove the tax avoidance and “what portion is for marketing of Phase IV” confounders, etc. However each firm has very different situations and reasons for such allocations. Therefore, these approaches may be useful for overall industry measures but fail when trying to compare firms to one another (unless you have that internal data across all.)
  3. So, there are plenty of statistics and analytics we can apply (and we keep trying (- myself included.)  But we end up misleading ourselves to at least some degree.

Beyond understanding these issues, what is our PURPOSE? To improve the performance of R&D and to what ends?  To uncover those (past or future) winners and losers?  To lambaste management or justify our POV?  Or just to learn and from that, do better?

One useful perspective is to just look at what the industry has done overall in terms of surviving or growing.  If it serves society well, society rewards it.  The fact is that returns on the industry were in the high teens in the 1980s and 1990s (and maybe earlier.)  The past decade has seen industry ROI drop in half.  Maybe stabilized and maybe reversing that trend.  The key is, what are we doing to change that decline? Can we do more of them or additional things (and they need to be new, not just six-sigma)? What firms are winning comparatively and can others follow suit?  Exploring some of those actions and their apparent results are the focus of this blog.


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“The Best Drug Companies Of The Past 15 Years?”

Matt Herper in Forbes’ “the Medicine Show” posts a point of view by Bernard Munos on what firms have done best in terms of approved drugs since 1995.  The link is here (, as are my comments on this provocative topic.  The table and implied results can confuse or misdirect people on achieving the best performance in R&D, so I repeat my concerns here: 

  • TJMC: I just feel that the number of drugs approved is NOT a reasonable measure of R&D performance. I helped on a number of “me too” projects with marginal profile advantages (and value to society or the bottom line) … the results of such strategies speak for themselves. The 21 approvals cited in the article for Novartis is a simplistic extract from the FDA public database, but it includes quite a few of those marginal innovations.  I posted similar analyses here, but removing such a “double counts” of “me-too’s”, etc.:

    To be sure, Novartis still comes out high in the “league tables” with seventeen truly novel “New Medical Entities” from 1995 to 2010. But the pattern then changes dramatically changes – Look at where Pfizer sits – summing all of its acquisitions’ innovations (I know, shocking…) *

    Such “novel innovation” is a more reasonable measure of R&D, but the even better measure is the WORTH of those innovations. Yes Lipitor was an incrementally innovative statin, but it hit society’s sweet spot and they were willing to pay a huge premium for that drug. Still, many approvals included in Bernards’ numbers are products with marginal market success, and a number failed to pay back their cost of development.

    Measures of apples-to-apples financial ROI for R&D have been done internally in major firms for decades, with increasing sophistication. The problem is that for tax, competitve advantage reasons and the like, cross-industry data in depth is NOT available. Still, we should not create these misimpressions when we know better. The true cost is not $12B, nor is it 150MM. Somewhere in the $1.5-2B range seems plausible, but again you have to check your divisor – true innovative drugs? Or approvals of me-too follow-ons, or salt variations?

    Finally, if you net out the cost per drug, then DO THE SAME FOR THE PROFITS THEY CREATE.  The Net Present Value (NPV) of Lipitor over ten years of exclusivity is a LOT larger than $12B. Typical drugs that will have seven years exclusivity but have a more modest $1B per year peak sales has a NPV of about $2.5B (8% discount.) Seems convenient or coincidental that is about what most think the average R&D cost is.  Of course, if you launch it a year sooner by better R&D operations, or launch a biologic with 12 years exclusivity, the values go up to $3.3B and $5B, respectively. (So who wants to do synthetic patented R&D?) BTW – Lipitor was on sale in 1997. Losing exclusivity in 2011, it still is projected to sell $2-4B/year for several years forward. A staggering NPV of when launched of over $50B.

    * Even using Bernards’ numbers, one should add together Pfizer + Pharmacia + Wyeth numbers. After all, GSK and Novartis benefitted from the R&D innovations of their parents/acquisitions. So the “ranking” is a bit different – that way Pfizer would have 36 approvals. I am NOT saying that alone is a good thing in itself.  Apart from Lipitor, …


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Innovation Upturn? New Medical Entities /$ Increasing!

A recent posting on Derek Lowe’s “In the Pipeline” presents a dismal view of the returns on R&D in Pharma.   BCG had included a graph (from Bernstein Research) of the trend of new molecular entities (“nme”) per $B spent over the past six decades.  Supposedly adjusted for inflation, the graph suggests that fewer than one nme is being approved per $B spent on R&D in the industry overall.   This backward focus may give a huge misimpression of what is happening now, including some cause for optimism (?)


There are several problems with this analysis, not the least of which infers that we were creating around 50 “nme’s” per year, per $B back in 1950.   But the biggest problem is using “new molecular entities” as the key metric for our industry.  I have been looking at the effects of improvements on how we are doing drug R&D for several years, and strongly recommend that firms focus on “New MEDICAL Entities” (“NME’s“) instead of nme’s.  Approved NME’s in theory offer greater value to society and are a better signal of R&D productivity, and future returns.  More on the nme versus NME arguments at the bottom.  However the Lowe posting caused me to look at my data from that aggregate perspective to surprising results!

What could be the reasons for this reversal? Is it financially significant?

This chart reflects the yearly NME’s approved by the FDA, versus PhRMA-cited spending.  It shockingly shows an inflection point in 2006, and recent information (like the projected drop of 3% in overall spending in 2010), suggests the industry is actually improving its R&D returns and innovation!

First, some explanations on the analysis then the implications:

The denominator is PhRMA spending cited in the 2006 Congressional Budget Office report on the industry.  However since the results of NME approvals depend on actions and spending that occurs mostly five years earlier, we apply a lag to better connect investment to results.  For instance, the five NME’s approved in 2005 are divided by the industry R&D spend of $21.7B from the year 2000.   Scale and slope change slightly if one does not lag the data,  but the trends and the inflection point remain the same.

The NME data is from the FDA’s public database, culled of very similar follow-ons, salts and obvious use approvals (versus the initial first in class therapeutic form.)  Details on this approach and its rationale are here as part of a larger analysis to reveal what R&D improvement initiatives are doing to R&D returns on investment (initially impact of mergers, later on outsourcing, six-sigma and IT tools.) 

Implications:  I would like readers to think and comment on what may have caused the above reversal.  Are we getting smarter – with a five-year lag that prevented us from seeing this?  Has the change been hidden underneath “me-too” drug approvals – and has the FDA been tightening the screws on them so a greater proportion of true NME innovation is “flourishing” (maybe)?  Are the investments in outsourcing, shifts from small molecules to biotech, six-sigma, translational medicine, … at work finally?  What are your thoughts?

Thinking forward:  As I noted the Bernstein graph and so much of our gloom is based on retrospective analysis.  Ours is a complex industry that tries to serve society, is regulated, takes a heck of a long time and lots of money.  Resulting in so much historic data that it affects our thinking.   We often fail to look at the bottom line, or to really look forward.   This uptick in NME productivity MAY NOT reflect a large increase in the value (and resulting revenues and profits) that society will be happy or willing to pay.  That connection or proof is still to be made.  However, this could be one of the first signals of a turnaround that will have a positive effect on BioPharma.  Again, comments?  Ideas supporting or challenging that notion?

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In-progress: NME’s .vs mergers

Note: The following focuses on New Medical Entities (NME’s.)  These are defined as the novel, initial member of a chemical family for a drug.  The data is derived from the public FDA database on approved drugs for past years.  From that, the count of simple variations on the initial innovation are subtracted.  These may include dosage forms, salts, and simple modifications to the core structure (e.g., “adding a methyl group” that does not dramaticaly improve efficacy/safety.)  Many other industry analyses focus on the approval of the larger pool of “New Molecular Entities”, which we will call “nme’s” on this site to differentiate from the innovator.  The first to market innovator “should” reap significant benefits from society (price, and market share) over those that follow-on. This is not always true. 

Most of my focus is on how individual firms are applying new tools and techniques to improve returns on their R&D investments and assets.  Part of that is looking also at potential confounders like merger effects (most of the charts and initial comments below on this page.)  A surprising recent insight came from the aggregate of this data here, showing a reversal of innovation (and hopefully productivity and profits) for the overall industry.  Continue reading

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Another R&D model sea-change?

Recently, GlaxoSmithKline announced a “new” approach to drug discovery through a series of “long-term partnerships” with “academic superstars”.*   The first of these  was signed with Prof. Mark Pepys, head of medicine at the Royal Free and University College Medical School in London.   He was recently recognized by GSK with their “GlaxoSmithKline Prize” in 2007 “for his excellent work … identifying specific proteins as new therapeutic targets and developed novel drugs with potential use in amyloidosis, Alzheimer’s disease and cardiovascular disease”.  This builds on his decade long role as director of the University College London Centre for Amyloidosis and Acute Phase Proteins. 

Other blogs have erupted with comments and rancor because of an unfortunate comment that “big Pharma is useless at discovering new drugs and has to get its ideas from somewhere else”.  This is unfortunate in that it was taken as an insult to smart, hardworking individuals that have been striving to keep the industry afloat with new ideas and candidates against horrible diseases.   However, as reflected in my most recent post, we have recognized that “uselessness” for years. (see “R&D Laments“.)   This quickly follows recent comments from GSK suggesting it might be a media finesse, or a new corporate “smoke and mirrors” dodge now that mergers have been discredited for that purpose.  However, this may reflect a valid sea-change, similar to those I periodically post on, with reasonable risks and rewards.  One that also reflects a new reality for firms that would formerly have mandated Prof. Pepys to leave academia and to become a  GSK employee.  History has shown many such “superstars” being enjoined, “devoured’ in this manner for decades.  The shortfall of innovation supply vs. needs (demands)  of Big Pharma is altering the negotiation power typically held by corporations. 

My point is this, and it is consistent with the urgency for improved R&D Returns by seeking sea-changes to change business-as-usual:  There remains a need to spread risk out, with one path being  contracting with academia.  However, there is also a “race for the gold” for  the best approaches to really address complex conditions like Alzheimer’s, cancer, aging, Parkinson’s and the like.  And like it or not, some teams are indeed “superstars” in their depth and breadth in one of these specific areas (perhaps several per disease arena.)  So locking up Prof. Pepys is perhaps smart business, and yet it had to be done in a different manner than in the past due to the shift in power I mentioned, along with how to manage the “new decentralized R&D”, addressing how intellectual prowess is distributed globally.   Finally, I wonder if some of GSK’s own research uncovered a new understanding of the best risk/reward path on amyloidosis that mapped to Pepys’ research.  Hence, buy out and lock out competitors.   And this might be far less expensive than buying out a small biotech with comparable portfolios.

This also reflects what I have seen in clients that recognize that innovation limited to internal resources (regardless of R&D budget) will not be enough.  Besides board-announced shifts in strategy or model/organization, they are working to be the best collaborators with wherever expertise or “superstars” might live.  As with the surge in biotech alliances ten years ago, the winners will be partly determined by luck, but more and more winners will be those that work to be the very best operationally within this new model of decentralized R&D.


  • Internally-sourced innovation cannot suffice to address remaining complex conditions.  The locus of power and “IP gold” has shifted
  • Firms CAN use their current IP to identify the best external avenues or “gold” to collaborate with, and to “lock it up” away from competition
  • Those that arrange their organization, process and technology to facilitate secure, but facile collaborations will win a majority of limited “superstar” resources

* – the original FT article is here:

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Continued laments on R&D performance

Poor performance of Pharma R&D seems to have never left the newsservices or the hearts of all in the industry.  It is interesting to see the stories of 2011 echoing back for a decade.  Here are some current “news” items with pundits and leaders declaring “action” and “concerns” (few citing viable new directions however, and the case still remains out on whether mergers in this arena create value to shareholders or society)  For instance, just in February 2011:
“.. must swallow bitter pill”                                   Great “wordsmithing”, but …
“…dire warning on meager R&D productivity”       David Redfern of GSK targets R&D returns of 14%
“…Painful Changes to Trigger more M&A”             Mergers yield results or merely distract?  

 So let’s go back along memory lane;   

 You can search your own and I encourage others to read the actual articles, but some highlights year to year:   

2001 “… surprising conclusion that rather than improving R&D productivity the impact of genomics (will increase costs of NME’s)”  2002 “… On the surface, it seems that R&D productivity is back on track”  2003 “… reconfiguration of the value chain, ongoing global consolidation and M&A and plummeting R&D productivity  2004 “… A large, unmet need exists for improved research and development (R&D) productivity, as declining New Chemical Entities   2005    “… is focusing on improving its research and development (“R&D”) productivity by focusing on select therapeutic areas”  2006 “… could be the start of a break-out from the R&D productivity doldrums that has plagued the major Pharmas in recent years”  2007 “… industry will not be in a strong position to capitalize on opportunities unless R&D productivity improves”  2008 “… a time when the pharmaceutical industry needs to challenge traditional thinking in order to improve its R&D productivity”  2009 “… KINDLER: It is true that past transactions have sometimes often impeded R&D productivity”  2010 “… view mergers and acquisitions as a quick-fix solution with no evidence of long term gains in terms of R&D (returns)”  

All told, the first graph above provides a sense of the constancy of this issue.  Its magnitude is reflected in the frequency of “hits” – over one hundred such articles per year!  Ironically, the last article is titled:  “Should we be concerned about R&D productivity?”   When are we going to really do something about this decade-long abyss?   Have we really tried?   If GSK thinks we can go from 11% to 14% returns on R&D investments from 2011 to 2014, how?   Can it be measured on such a short term basis?  

Industry value has dropped nearly 30%

This second graph can give the impression of an apparent irrevocable trend, but leaders can outperform the median.   I believe the answer to these questions is yes, but we need more than mergers that distract, and more than phantoms of promise like HTS in the 1990’s, or genomics/proteomics…   We need a coherence of focus and a methodology that is honest and encompassing.

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Outsourced R&D… a flawed Architecture?

I find this blog post and especially the following discussion comments a powerful argument for careful planning and management of “decentralized R&D”.   This is another name now given to constructs with new areas of R&D that are outsourced.  Lots of good ideas and points made on all sides so long as you avoid stepping on the emotional land mines.

I added my two cents and only wish we could have such a robust discussion here.  What I comment on and will have as a later topic is how to design to prevent such failures as what is described for Boeing.  Good R&D Architecture is based on many things, but a key design component is what core R&D capabilities your firm has, what it must have for success in the target state, and how you will build in and measure those critical capabilities.   I have crafted and been requested to create these “Capability Impact Assessments” and “Capability Transform Frameworks” for a number of firms that are using them to try and avoid the Pharma version of the Dreamliner.  BioPharma R&D must evolve to survive and thrive.  But it needs careful (but bold!) thought and management.  More later as a major “sea change” topic on the home page.

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Corante’s “Big Pharma’s Lost Stock Market Decade”

Take a look at the posting and discussions on Derek Lowe’s excellent blog:  

Industry underperformed others

  Another version of his chart is here, showing the last two years .vs. Lowe’s decade view.  It reveals the same result: the industry has underperformed the S&P 500.   Three firms have increased about half as much:  Merck, Pfizer and Bristol-Myers.   Is this pipeline-driven?  Stock price reflects many other factors beyond R&D performance.  The stock market is a forward-looking entity, which gives benefits to “more transparent” industries whose R&D returns follow closely on the heels of investments (like Apple.) 

Rewards of Process Improvements

Less transparency in Life Science firms translates to higher perceived risk and lower P/E’s.  So stock prices may not reflect improvements in risk, process or operational performance (“OP”).   Firms are also subject to external influences (increasingly conservative FDA, healthcare policy, …)  But if R&D drives success in this industry, have any recent R&D improvements had an impact?  How can we tell?     

Previous analyses suggest BioPharma firms can improve their performance by focusing on process and operations.  One example is this graphic derived from a Tufts Center for the Study of Drug Development analysis.  Here, firms showing better “OP”  also outperform  the industry average with greater commercial effectiveness (“rewards”).*   Many up to that time would call this a coincidence.  While not proving causality, the correlation is too high to ignore.   I am working to recreate this model for succeeding time periods to answer questions raised in the prev. paragraph.  I will post that here, if viewers ask for it.    

What might we hope to see?  Five years ago, halfway into this “lost decade”, Pharma’s began to recognize and (really) act upon their lack of performance.  They made diverse (and for some, very large) investments into new technology, shifts to biotech, OP initiatives… – all targeted to improve returns on R&D efforts.   Such changes are dramatic, but since BioPharma R&D has a long product cycle,  results of those investments have yet to become obvious (in terms of approved new drugs.)  Hoped-for improvements may begin to appear this year for some firms, after several years of work.   Firms seldom publish shorter term metrics like number of new candidates per unit of work or staff or approved products per such measures.  But other measures might reveal in some ways how operations have created their promised value.   Improved attrition, marketplace information, and decision processes may take even longer to prove out by better rewards from the marketplace.  How are you measuring short-term progress on improvement initiatives?    

*(Dimasi, Drug Information Journal 34(4):1169-94.)

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McKinsey article hits close to home…

While I have been using the name “R&D Returns” for years, I welcome this article from McKinsey.  Here, they call attention to the value of balanced R&D architecture and management.  Some of the sea-change tools cited on my home page here address HOW to improve R&D performance in the areas the article highlights. 

I also think that some of the value-levers they cite are actually more powerful; have more upside in practice.   Requires (free) registration to view:


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