Four Reasons Merck's R&D Restructuring May Not Save The Drug Giant (Or The Industry)

Posted: Dec 29 2013, 11:26am CST | by , in News



Last Friday, Wall Street Journal reporters Peter Loftus and Jonathan Rockoff broke the story that Merck is planning a dramatic R&D restructuring.  The goal is to look externally for more programs, rather than to count on Merck’s legendary research labs to provide the bulk of the pipeline.  Four “innovation hubs” will be created, based near Boston, San Francisco, London, and Shanghai.

As Fierce Biotech’s John Carroll pointed out Saturday, this strategy, while perhaps innovative for Merck, is very much in line with the direction the industry has been taking.

Even within Merck, this move may be more evolutionary than revolutionary, given their recent – and generally successful – efforts to significantly improve their business development and licensing (BD&L) capabilities and reputation, scoring consistently higher on BCG’s annual partnering survey, for instance, after a deliberate push in that direction.

The reasons for the industry shift are clear: pharma companies are struggling to develop new products, and internal labs aren’t cutting it.  Unanswered, however, is whether the shift from R&D to S&D (i.e. less research, more search) will be better, or just different.

The root question is really why pharmas struggle to come up with new products – why isn’t pharma as innovative as it needs to be?

The easy answer would be that big pharma has become too bulky, too bureaucratic, insufficiently nimble – it can’t stop stumbling over itself.

Although these descriptors are largely accurate, they may also not speak to the underlying source of the problem: inadequate understanding of the underlying biology.

As smart as we think we are, and as much as we think we’ve learned, we really don’t understand the fundamental basis of most serious diseases – and even in cases where there’s a discrete underlying cause we can identify, human physiology is so unbelievably complicated that effectively targeting the problem can be prohibitively difficult, at least with our current understanding.

Don’t take my word for it – here’s what Merck’s new head of R&D, Roger Perlmutter, told my Forbes colleague Matt Herper in September:

“…if we’re discovering drugs, the problem is that we just don’t know enough. We really understand very little about human physiology. We don’t know how the machine works, so it’s not a surprise that when it’s broken, we don’t know how to fix it. The fact that we ever make a drug that gives favorable effects is a bloody miracle because it’s very difficult to understand what went wrong.”

The point isn’t that we shouldn’t try – indeed, it’s the obligation of everyone in biomedicine to marshal the very best knowledge we have in effort to offer the best possible treatment to patients currently sick – but rather that these attempts are generally associated with intrinsically low probabilities of success, given how much we just don’t understand.

Pharma companies shifting towards externally-sourced programs would be helpful if there are great ideas out there that large companies are missing, or that aren’t being adequate recognized due to internal politics – the famous “not invented here” problem that has traditionally plagued Merck, as well as most other large companies.

It’s also possible that externally-sourced programs will be easier to evaluate objectively and terminate in a timely fashion; this could be a significant benefit, given the industry’s struggle with this exact challenge.

At the same time, sourcing programs externally is unlikely to be a panacea.

First – and most importantly — there simply may not be enough great ideas out there, ideas that meet Merck’s criteria of leading to products “that provide unambiguous promotable advantage.”

Second, you might not know – it might not even be possible to recognize – a promising product early on.  Slews of drugs that proved highly impactful were not recognized as valuable early in their development; cancer drugs Imbruvica (ibrutinib) and Velcade  (bortezomib) come immediately to mind.  Conversely, many products that seemed like blockbusters crashed and burned, highlighting the challenge (many, including me, would say utter futility) of predicting commercial performance early in the game.  As I’ve long argued and recently highlighted (in the context of this important post by David Grainger of Index Ventures), this would suggest a solution (at least for early products) informed by a deep sense of humility, a preference for empiricism, and an approach that enables many quick, cheap shots – effectively the opposite of the “pick the winners” approach.

Third, it’s easy to idealize what you don’t really know.  This is the flip side of the “not invented here” reflex – the idea that external programs may hold the answers to your hopes and dreams.  When you develop a program internally, you tend to know it extremely well, warts and all.  It’s always more difficult to understand external programs as deeply, and they often come with liabilities it can be difficult to recognize or appreciate, even after responsible diligence.  This is true not only in-licensed programs, but also (especially) for early scientific concepts emerging from academic labs; it turns out that a lot of the most promising university data – often (especially!) that published in the top journals – does not seem to be robust or reproducible.  Pressure-testing academic theories remains an important, expensive, and profoundly undervalued industry activity.

Fourth, a specific problem associated with BD&L in general is the separation of transaction and development – the people who go out and do the deals aren’t generally the folks who will spend their days working on the actual program, leading to a significant agency problem.   As I’ve noted, I’d prefer an approach where the folks doing the searching are also the ones who will be working full-time on the program they bring in, and thus have far more skin in the game.

Ultimately, it’s not clear whether the shift from R&D to S&D will save the industry, or represent just the latest temporizing, shape-shifting maneuver for an industry desperately trying to figure out how to survive in a rapidly changing world.

Success may be difficult to achieve, but pharma companies could improve their odds significantly by focusing on what they may be able to control – specifically, how to take more shots for less money (see here, here), and structuring search activities so that they are led by the team members who will lead the in-licensed or partnered projects (here).

Ultimately, significant, long-term investment in basic research may have the biggest impact, although the time horizons are so long, and the risks so high, that only governments, foundations, and brave, rich, ambitious corporations like Google (e.g. Calico) seem willing to take the plunge.

Is it possible Google knows something we don’t?

Source: Forbes

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