Portfolio Management in New Drug Development - Innovation and Marketing in the Pharmaceutical Industry - page 83

3.1 Introduction

The pharmaceutical industry stands among a very select set of industries tasked
with the dual objectives of improving human health and creating shareholder value,
while being under a tight global regulatory microscope. The combination of finite
patent shelf life of existing drugs, long drug development cycles of 4-16 years
(Rodriguez 1998 ), high probabilities of failure at every stage of development (Blau
et al. 2004 ), the escalating costs of developing and launching drugs (Munos 2009 ;
DiMasi and Grabowski 2007 ), and the gargantuan postlaunch market risks (one
example being the withdrawal of Vioxx ® ) make for a volatile landscape that phar-
maceutical firms have to navigate. While all of these conditions seem on face value
to be deterrents to R&D spending, pharmaceutical firms have in fact continued to
invest heavily in new drug development and lead all industries in terms of collective
R&D spend (Jaruzelski et al. 2011 ).
Munos ( 2009 ) reports that the number of new molecular entities 1 (NMEs)
approved by the US Food and Drug Administration (FDA) since the 1950s has not
increased commensurate with the amount of R&D spend. Part of the reason is rising
costs of obtaining regulatory approval. DiMasi and Grabowski ( 2007 ) estimate that
cost of developing an NME (up to approval for marketing) is about $1.3 billion (in
2005 US dollars) when factoring in cash outlays, cost of time, and capitalizing fail-
ures, while the cost of biologic drugs is only marginally lower at $1.2 billion.
Garnier ( 2008 ) acknowledges that the R&D productivity has declined as a result of
increasing costs and lack of improvement in output rates, possibly due to the fact
that drugs that are “easy to develop” have already been invented, leaving the indus-
try with greater challenges to continually produce a sequence of blockbusters.
There is a broad consensus among pharmaceutical firms that successful portfolio
(i.e., “a collection of projects”) management of new drug projects is a necessary condi-
tion for long-term survival (Munos 2009 ). The strategic choices for a pharmaceutical
firm are to either be a low-cost generics provider or keep generating blockbusters from
a portfolio of projects that provide the cash flows to support further R&D investment.
Those firms which run out of cash get acquired by firms with deeper pockets, leading
to cyclical waves of merger and acquisition activity (DiMasi 2000 ).
It is estimated that the pharmaceutical industry will lose $90 billion in branded
sales over the 2010-2014, a prime example being Lipitor ® , the most profitable pre-
scription drug in history, which went off patent in November 2011 (IMAP 2011 ).
Pfizer, which markets Lipitor ® , loses a $11 billion annual revenue stream which
accounted for about a sixth of its 2010 revenues. Thus, the stakes are high for firms
in maneuvering to successfully replace lost revenues with new drugs coming from
the R&D portfolio. Pharmaceutical firms are increasing investments in R&D portfo-
lios in lieu of this “patent cliff,” evidenced by the growth in the number of new drugs

1 A new molecular entity (NME) is a medication containing an active pharmaceutical ingredient
(API) that has not previously been approved for marketing in any form (Munos 2009 ). This usually
excludes biologic drugs.