Over the last several years some widely discernible trends of the pharmaceutical industry's drug development process have emerged.  Much of this is driven by three factors.  The first is that a declining percentage of the drugs produced by research constitute genuine breakthroughs capable of substantially advancing the respective standards of care.  At the same time, both public and private payers have grown increasingly reluctant to pay constantly higher prices for the marginal, incremental improvements that characterize most of the new drugs coming to market.  Given the ceaseless demands of finance-driven pharma companies to maintain the profitability levels they enjoyed during the 1980s and '90s glory days, these factors have combined to shape the R&D pattern.

One prominent feature in the new R&D landscape is that many pharmas have withdrawn from therapeutic categories where clinical development is lengthy, expensive and fraught with regulatory hurdles.  So for example, some companies have reduced or entirely quit cardiovascular research where trials often need to enroll 20,000 or more patients in order to show a statistically meaningful improvement over existing medications.  Instead research budgets have flowed into oncology where regulators will often accept registration trials with only a few hundred test subjects.

At the same time, favorable early results for an oncology compound can shorten the usual time needed to file because regulators know that the earlier availability of some new products will immediately save lives.  In such cases they will permit filing on the basis of Phase 2 results.  Moreover, the specter of imminent mortality in that area will generally make regulatory bodies more tolerant of debilitating side effects there than in other categories.

Autoimmune diseases (MS, rheumatoid arthritis, irritable bowel disease) are another therapeutic area that is receiving more budget and attention.  These conditions and oncology benefit from pharma's knowledge that the chances for another mega-blockbuster such as Lipitor have greatly declined.  In oncology and other areas requiring major therapeutic advances, it is unlikely that any single compound will be able to successfully treat the vast majority of the world's population.  Advances in molecular biology and genetics, on the other hand, suggest that compounds customized for specific genotypes can usefully treat specific population segments.  Lipitor at its peak collected more than $13 billion in sales per year because scores of millions of patients were taking it on lifelong regimens.  Now the pharma companies want to generate comparable revenue by selling far fewer pills.

This has led senior pharma executives at their recent earnings calls to include presentation segments where someone boasts about the number of compounds in oncology or autoimmune disease that the company is advancing through its pipeline.  The implicit message is that three or four such products in oncology or irritable bowel disease can produce the sales of one Lipitor or one Plavix, another erstwhile mega-blockbuster.

Investors should not get taken in by this blather.  For a number of years pharma has been smitten by a shots-on-goal approach to drug development.  That is basically the notion that if they can throw enough mud on the wall, some of it will inevitably stick.  While the idea seems plausible, the facts don't bear it out.  Bill Albrecht, an industry consultant in Newtown Square, has examined new drug submissions over a period of decades.  He found that the result is what he calls a "funnel effect."  With the exception of occasional blips up or down over a one or two year period, Albrecht found that the number of new molecular entities (NMEs) approved by the FDA has remained fairly consistent, regardless of how many NME applications the industry filed each year.

Albrecht doesn't claim to know whether this funnel effect results from the agency's limited capacity to review new applications or some other factor.  The fact of its existence, however, should modulate the enthusiasm of investors prone to believe pharma CEOs who tout their overflowing pipelines.

Another thing to keep in mind about the current pattern of drug development is that it may, at long last, bring about more price competition in pharma.  If only a single drug confers a high remission rate in, say, breast cancer or multiple myeloma, oncologists will use it and insurers will have to pay the enormously high price.  With all the pharmas focusing their efforts in the same five or six therapeutic categories, payers will be able to demand some real price discounting.  The stiff-necked, outlier company that refuses to cut prices and repeats the line its marketers devised about a "revolutionary molecule" is apt to find itself entirely off the formularies of most payers.

Big pharmas have long admired the innovativeness, the enthusiasm and the organizational mobility of biotechs.  Of course, the downside of most biotechs and other small pharmas is their vulnerability to the hazards that may befall their one or two products.  Big pharmas, with their broad product lines across many different categories, traditionally maintained much greater stability.  Now that many big pharmas have quit their efforts to develop new products in cardiovasculars, antibiotics, neuroscience and other fields, they too will suffer the vulnerability that comes from relying on a narrower therapeutic base.

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