Innovation in the Pharmaceutical Industry: The Process of Drug Discovery and Development - Innovation and Marketing in the Pharmaceutical Industry - page 41

by the bevy of generic drugs, the between-molecule competition can also intensify,
fostered by changes in the marketing efforts of rival non-bioequivalent brands. Over
time, as incumbent fi rms or new entrants release novel and improved branded alter-
natives in the same class, physicians and patients will gradually move away from
the older active molecules and the associated branded or generic drugs. Thus, the
market share of an old molecule (regardless of its branding) will gradually decline
over time at the expense of new active molecules launched in the same class.

2.3 Business Models in Drug Discovery and Development

2.3.1 Scale and Scope Effects in Innovation

The lengthy, costly, unpredictable, and research-intensive process of drug innova-
tion calls for organizational settings that can help streamline operations, defray part
of the costs, and enhance process effi ciency. Two concepts from economics are
often invoked to address such issues.
Economies of scale refer to reductions in unit cost as the size of the fi rm's opera-
tions and the usage level of inputs increase. In contrast, economies of scope arise
when, due to diversifi cation in the product portfolio of the fi rm and in the presence
of synergies across processes and activities, the same set of outcomes can be attained
more effi ciently , i.e., with less resources such as time, effort, or expenditure.

Economies of scale in drug discovery . Pharmaceutical companies typically organize
their R&D efforts by therapeutic category based on the key systems in the body
(e.g., respiratory, cardiovascular, digestive, central nervous system), then by
research program (disease area), and ultimately, by specifi c project. Large research
efforts tend to become less costly per program (and consequently, by project) in the
presence of economies of scale from a large portfolio of research programs. In this
case, the enormous R&D cost of drug discovery can be spread over a greater num-
ber of related research programs and projects.
Large pharmaceutical fi rms often invest in 10-15 distinct research programs run
simultaneously. Several programs in the same therapeutic category can tap into the
same pool of knowledge about the pathways related to particular biotargets or
molecular processes. The new fi ndings can be applicable across multiple programs.
The more intensive use of the fi rm's research talent and resources, the shared lab
facilities and expertise, along with the enhanced rates of equipment utilization and
reduced downtime can ensure reduction in the marginal cost of R&D. In turn, the
declining marginal R&D cost of the fi rm makes the undertaking of risky new proj-
ects more affordable because of lower incremental costs.
Long-term market presence and cumulative experience in a therapeutic category
can bring about strong learning and reputation effects. Researchers have found that
fi rms focusing on drug discoveries in therapeutic categories in which they already
have expertise (e.g., Merck with cardiovascular and cholesterol problems, Eli Lilly