A few weeks ago I commented on what may be the fundamental limit on a stable Pharmaceutical industry — products have to be on the market for at least as long as it takes to replace them. Cash flow significant enough to fund serious research only lasts as long as a drug has market exclusivity. Thus, to first approximation, a firm has to develop a new drug before it runs out of cash from sales of existing products.
Thinking about it a little further, I realized that it already takes an unsustainably long time to develop new products completely from scratch, but that the overall academic/startup/existing firm ecosystem has developed (or in some instances is in the process of further adapting) to enable these long product development times.
First of all, the very basic biomedical research needed to create a key enabling technology (say monoclonal antibodies), or to discover a promising drug target or pathway takes a lot of time — so much time that that research can’t actually be part of a conventional product development cycle. Fortunately, the scale can be small, and there are a lot of interesting scientific discoveries to be made — all of which is a good fit for academic laboratories. Much of this basic research that can later lead to commercial applications is in fact funded through government or foundation-sponsored grant money. Such academic research follows it’s own funding cycle, and it has it’s own reward system that focuses on the production of trained scientists and significant research results, manifested as published papers (and patents). Papers have a much shorter “development cycle” than marketed drugs!
Later, more applied research (which requires larger numbers of people and significant funding increases) is often spun off in the form of a start up company, funded through seed money, angel investing, venture capital, etc. Here the funding cycle and system of reward is based on increasing valuation derived from estimates of future profitability as the firm develops its (as yet unmarketed) products. At the end, the company can go public or be bought by a larger existing firm. In either case, all that early product development work typically occurs prior to, and almost completely uncoupled from, product sales. Of course the true overall cycle time wasn’t really shortened, it’s just that parts of development were structured in ways that had their own sustainable cycle of funding and reward.
The net effect is that an existing drug company can either buy a startup company or launch an internal project based on collaborations (or published research) with a significantly shorter effective development time (at least as experienced by the existing firm). Needless to say, this relationship holds for all sorts of science and technology companies, where government- or foundation-sponsored basic research can take place on a long time scale that is not constrained by the need for short term profits.
Getting back to Pharma, an important implication is that a pharmaceutical firm can benefit if it can apply this sort of decoupling or otherwise off-load development from it’s own internal R&D portion of the overall product development cycle. I have some thoughts on that, which I will put in another post…