Innovation in the Pharmaceutical Industry: The Process of Drug Discovery and Development - Innovation and Marketing in the Pharmaceutical Industry - page 72

The question of whether the pharmaceutical industry is truly in a productivity
crisis, or simply going through a slow growth phase (marked by dramatic shifts
toward new knowledge and technologies), is further compounded by the signifi cant
delay between R&D spending and the actual drug commercialization. This delay
makes the assessment of the relationship between R&D expenses and fi rm produc-
tivity rather diffi cult. Besides, while basic research performed in government-
funded research labs may not result in patentable drugs, it can boost the applied
research in the private sector, from which the majority of drug patents originate. The
deferred but signifi cant benefi ts of R&D spillovers from the public sector make the
attribution of R&D outcomes in the private sector increasingly diffi cult. For all
these reasons, any assessment of productivity based on simple counts of regulatory
approvals is bound to remain a rather crude proxy for the true pharmaceutical output
(Cockburn 2007 ).
Emphasis on more incremental innovations . The competitive dynamics following a
major patent loss might be steering the pharmaceutical industry away from its
one-of-a-kind, blockbuster orientation and more toward incremental, follow-on inno-
vations. There is a sound economic rationale in the pharmaceutical fi rms' endeavors
to capitalize on their specialized technical knowledge and other existing assets. Most
large pharmaceutical fi rms have invested in vast sales forces. As most of these fi rms
are focused on certain therapeutic categories, their drug representatives would have
good contacts and rapport with the physicians specializing in the treatment of a cor-
responding set of disease types. If the fi rm has new drugs forthcoming in the same
category, the established contacts represent a co-specialized downstream asset that
can be leveraged effectively even after the expiry of existing patents.
Besides, incremental drug innovations are easier to generate. Because of their
structural proximity to approved drugs, there is a lower risk of failure. Incremental
drugs are also more amenable to preplanning than blockbuster drugs. The associ-
ated cannibalization hazard or the threat of splintering the market might be more
than offset by process effi ciencies, reduced uncertainty, and desirable continuities in
the product pipeline. By maintaining a stack of incrementally improved drugs in
their product pipeline, and by releasing these follow-on drugs on a schedule timed
around the patent expiration dates of older drugs, a fi rm can simply switch its manu-
facturing and marketing support to the next patent-protected successor drug, with
little need for extra costs in production or distribution. A sustainable and smooth
fl ow of new products, brought out by a robust strategy of sequential incremental
innovations, can overcome the uncertainties associated with the pursuit of block-
buster drugs and generate steady streams of cash instead.
Infl ux of generic alternatives . Not only are fewer drugs introduced to market these
days but there is also a decline in the sales of new drugs launched within the last 5
years at the expense of a gain in the sales of generics (Fig. 2.4b ). The market share
of generics has risen from 49 % in 2000 to 78 % in 2010. In fact, the IMS Institute
estimates that 80 cents of every dollar spent on drugs in developed markets is spent
on generics. Consumer spending on branded and unbranded generics has risen by
4.5 % and 21.7 %, respectively, while spending on branded drugs has declined by
0.7 % in 2010, indicating a shift to lower-cost alternatives.