Derek B. Lowe, Contributing Editor05.01.14
I was struck the other day by a statistic that just over half the drug companies that got an FDA approval between 1950 and 2011 got only one.
The first thought that goes through your head, hearing something like that, is that there must be a lot of companies who had had one hit (just like a lot of rock bands from the same era), could never repeat it, and faded away into oblivion.
But that’s not necessarily so. It does happen, but I think this is another example of an effect that has plenty of opportunities to fool people in this industry: survivor bias.
In this case, I don’t mean “survived, as in didn’t go into bankruptcy.” The companies that managed to stay alive under their own banners surely found other drugs to keep them going. What I’m talking about is survival as an independent company.
There must have been many organizations during that sixty-year span that got bought out before they ever got their second drug onto the market. In most of these cases, they were actually succeeding rather than failing, and attracted interest because of it.
That proportion of one-time-only approvals may well be a good sign rather than a bad one. We’re probably looking at something like a power-law distribution, with a long tail of one-drug companies leading up to a much smaller cohort of companies that are responsible for a large chunk of the rest, with many of those being brought in from outside.
It’s easy to talk about what a bad thing buyouts and mergers can be for the drug industry—I’ve done a fair amount of that myself over the years. But the economics of drug discovery make it inevitable.
When you think of the huge expense of just getting through clinical trials, then the huge expense of getting an effective sales force together, you can see why biopharma organizations tend to get larger and to clump together.
Mergers Spread the Risk, Cost Savings
There’s a lot of risk to be spread around, and a lot of cost savings to be realized by putting things under the same tent. But you can carry that line of thinking too far. (To get philosophical about it, you can always carry a line of thinking too far—the differences between them lie in how soon they start going off the rails).
Our example of “too far” is surely Pfizer. They seem to be undoing some of the sprawling growth of the last twenty years or so, which would seem to be an actions-speak-louder admission that things didn’t quite work out the way that they were supposed to. Along the way, though, they certainly took out a lot of other organizations, whose discoveries-in-progress now all accrue to Pfizer.
How Many Discoveries Would Have Been Made Without Megamergers? The question we’ll never be able to answer is how many discoveries would have been made if Pfizer had never gone on its buying binge in the first place, but that would require the world to be such a different place that it’s hard to even seriously ask the question. Most of the smaller companies involved were going to be bought, one way or another —if it hadn’t been Pfizer, then it would have been someone else.
Now, asking what the industry would be like if Pfizer hadn’t done its series of humungous mergers (as opposed to its smaller buyouts) is a more legitimate question. Those didn’t have to happen; they were all wars of choice.
So how many of those 56% really did find just one drug and fade out on their own? Not many, is my guess.
There are a few small companies that have been undone by success. They’re like Mark Twain’s crack about the fellow who lost two farms by drawing to an inside straight in poker: the first one he lost when he didn’t fill the hand, and the second one he lost when he did.
But if a small company is ruined by having a drug approved, it’s usually because it never worked out quite the way that they planned. A good example is Nitromed, whose combination cardiovascular drug BiDil made it to market.
The drug sold so disastrously that the company gave up on it three years later, and not long afterward was bought for pennies on the (former) dollar.
A Small Company Whose Drug Bombs WIll Quickly Vanish From Sight
A small company whose drug takes off may well get taken over; a small one whose drug bombs will quickly vanish from sight. That illustrates that if it weren’t for constant startup funding, we probably wouldn’t have many small drug companies at all. One way or another, they don’t stay small.
So survivor bias makes such statistics a lot harder to interpret than they first look. The same is true, in a less dramatic form, for companies in other industries.
That is why evaluating the long-term performance of mutual funds and stock indices can be so tricky. The S&P 500 of 1980 is not the S&P 500 of today; you can’t really treat it as the same entity over that span of time. But drug discovery is such a death-or-glory business that the churn is both more frequent and more violent than usual.
That goes for the inner workings of individual companies, too. The Pfizer of 1980 sure as heck isn’t the Pfizer of today, and neither are any of the other companies in the business. They can’t be.
If nothing else, patent lifetimes would make sure of that. Big consumer product companies can continue to sell the same name brands for decades, albeit with revamped packaging and occasional addition of the great taste of fish (among other things!)
The clock is ticking for every drug on the list. Yes, the clock is even ticking for the biologics, although admittedly at a slower rate.
Chaotic Change and Discovery: Reinvent Yourself or Die
Chaotic change is built into the whole structure of commercial drug discovery. We have to reinvent ourselves or die (or buy someone, I suppose, if reinvention fails too many times).
Surely this is a reason why our sector is such a favorite of retail investors of all sorts, from the dedicated and knowledgeable to the utterly clueless. (Well, some people seem dedicated to being clueless, but you know what I mean).
This constant change means that there’s always another story (and another story stock), and there’s always another place for hope to do its eternal springing.
If the last wonder drug, and its accompanying wonder stock, didn’t quite work out, then the next one surely will. People keep this up until they run out of patience or run out of money – once someone gets a taste for chasing after these things, the latter is the more likely outcome.
No one goes around buying up investors. It’s also the reason we’re subject to so many reorganizations and outright managerial fads.
There’s always an eager market for the latest discovery about how to run a company, because most drug companies are desperate to one degree or another. So we get them all, whether they’re of any possible use or not.
All this makes the “one-and-done “ statistic, on closer inspection, not something to be amazed at, or even to despair about. It’s probably exactly what it should be.
Just the fact that we’ve been keeping up under these conditions for sixty years —now that might well be something to be amazed about. CP
Derek B. Lowe
Contributing Editor
Derek B. Lowe has been employed since 1989 in pharmaceutical drug discovery in several therapeutic areas. His blog, In the Pipeline, is located at www.corante.com/pipeline and is an awfully good read. He can be reached at derekb.lowe@gmail.com.
The first thought that goes through your head, hearing something like that, is that there must be a lot of companies who had had one hit (just like a lot of rock bands from the same era), could never repeat it, and faded away into oblivion.
But that’s not necessarily so. It does happen, but I think this is another example of an effect that has plenty of opportunities to fool people in this industry: survivor bias.
In this case, I don’t mean “survived, as in didn’t go into bankruptcy.” The companies that managed to stay alive under their own banners surely found other drugs to keep them going. What I’m talking about is survival as an independent company.
There must have been many organizations during that sixty-year span that got bought out before they ever got their second drug onto the market. In most of these cases, they were actually succeeding rather than failing, and attracted interest because of it.
That proportion of one-time-only approvals may well be a good sign rather than a bad one. We’re probably looking at something like a power-law distribution, with a long tail of one-drug companies leading up to a much smaller cohort of companies that are responsible for a large chunk of the rest, with many of those being brought in from outside.
It’s easy to talk about what a bad thing buyouts and mergers can be for the drug industry—I’ve done a fair amount of that myself over the years. But the economics of drug discovery make it inevitable.
When you think of the huge expense of just getting through clinical trials, then the huge expense of getting an effective sales force together, you can see why biopharma organizations tend to get larger and to clump together.
Mergers Spread the Risk, Cost Savings
There’s a lot of risk to be spread around, and a lot of cost savings to be realized by putting things under the same tent. But you can carry that line of thinking too far. (To get philosophical about it, you can always carry a line of thinking too far—the differences between them lie in how soon they start going off the rails).
Our example of “too far” is surely Pfizer. They seem to be undoing some of the sprawling growth of the last twenty years or so, which would seem to be an actions-speak-louder admission that things didn’t quite work out the way that they were supposed to. Along the way, though, they certainly took out a lot of other organizations, whose discoveries-in-progress now all accrue to Pfizer.
How Many Discoveries Would Have Been Made Without Megamergers? The question we’ll never be able to answer is how many discoveries would have been made if Pfizer had never gone on its buying binge in the first place, but that would require the world to be such a different place that it’s hard to even seriously ask the question. Most of the smaller companies involved were going to be bought, one way or another —if it hadn’t been Pfizer, then it would have been someone else.
Now, asking what the industry would be like if Pfizer hadn’t done its series of humungous mergers (as opposed to its smaller buyouts) is a more legitimate question. Those didn’t have to happen; they were all wars of choice.
So how many of those 56% really did find just one drug and fade out on their own? Not many, is my guess.
There are a few small companies that have been undone by success. They’re like Mark Twain’s crack about the fellow who lost two farms by drawing to an inside straight in poker: the first one he lost when he didn’t fill the hand, and the second one he lost when he did.
But if a small company is ruined by having a drug approved, it’s usually because it never worked out quite the way that they planned. A good example is Nitromed, whose combination cardiovascular drug BiDil made it to market.
The drug sold so disastrously that the company gave up on it three years later, and not long afterward was bought for pennies on the (former) dollar.
A Small Company Whose Drug Bombs WIll Quickly Vanish From Sight
A small company whose drug takes off may well get taken over; a small one whose drug bombs will quickly vanish from sight. That illustrates that if it weren’t for constant startup funding, we probably wouldn’t have many small drug companies at all. One way or another, they don’t stay small.
So survivor bias makes such statistics a lot harder to interpret than they first look. The same is true, in a less dramatic form, for companies in other industries.
That is why evaluating the long-term performance of mutual funds and stock indices can be so tricky. The S&P 500 of 1980 is not the S&P 500 of today; you can’t really treat it as the same entity over that span of time. But drug discovery is such a death-or-glory business that the churn is both more frequent and more violent than usual.
That goes for the inner workings of individual companies, too. The Pfizer of 1980 sure as heck isn’t the Pfizer of today, and neither are any of the other companies in the business. They can’t be.
If nothing else, patent lifetimes would make sure of that. Big consumer product companies can continue to sell the same name brands for decades, albeit with revamped packaging and occasional addition of the great taste of fish (among other things!)
The clock is ticking for every drug on the list. Yes, the clock is even ticking for the biologics, although admittedly at a slower rate.
Chaotic Change and Discovery: Reinvent Yourself or Die
Chaotic change is built into the whole structure of commercial drug discovery. We have to reinvent ourselves or die (or buy someone, I suppose, if reinvention fails too many times).
Surely this is a reason why our sector is such a favorite of retail investors of all sorts, from the dedicated and knowledgeable to the utterly clueless. (Well, some people seem dedicated to being clueless, but you know what I mean).
This constant change means that there’s always another story (and another story stock), and there’s always another place for hope to do its eternal springing.
If the last wonder drug, and its accompanying wonder stock, didn’t quite work out, then the next one surely will. People keep this up until they run out of patience or run out of money – once someone gets a taste for chasing after these things, the latter is the more likely outcome.
No one goes around buying up investors. It’s also the reason we’re subject to so many reorganizations and outright managerial fads.
There’s always an eager market for the latest discovery about how to run a company, because most drug companies are desperate to one degree or another. So we get them all, whether they’re of any possible use or not.
All this makes the “one-and-done “ statistic, on closer inspection, not something to be amazed at, or even to despair about. It’s probably exactly what it should be.
Just the fact that we’ve been keeping up under these conditions for sixty years —now that might well be something to be amazed about. CP
Derek B. Lowe
Contributing Editor
Derek B. Lowe has been employed since 1989 in pharmaceutical drug discovery in several therapeutic areas. His blog, In the Pipeline, is located at www.corante.com/pipeline and is an awfully good read. He can be reached at derekb.lowe@gmail.com.