POPI is committed to disseminating its research results within and beyond the academic disciplines of the contributing faculty and student researchers. To date, close to thirty working papers and manuscripts have been generated from projects focusing on various aspects of drug development, manufacturing, or the pharmaceutical marketplace. Many have gone on to appear in respected journals or periodicals.
To aim beyond academic audiences, POPI's three co-directors have recently entered into an agreement with Oxford University Press to prepare a book-length manuscript. This book, under the working title The Other Drug Crisis: A Prescription for the Continued Health of the Pharmaceutical Industry, will appeal to a general business readership.
The following is a brief summary of this work-in-progress, taken from the prospectus prepared for the publisher. It is followed by summaries of several of POPI's most recent working papers.
A crisis is looming in the U.S. pharmaceutical industry, driven by a big shift in the environment within which the industry functions. Once largely science-driven, the industry is becoming increasingly market-driven, pushing pharmaceutical firms to consider new ways of doing business, new approaches to management, new approaches to financing. The industry finds itself at a crossroads, in a transition period.
From where does the pressure to change come? A variety of internal and external pressures are responsible. From within, the extraordinarily high cost of drug development-estimated at upwards of $350 million per approved new chemical entity, or NCE-compels firms in the industry to find ways to maximize their investment and ensure commercial success. More and more, this cost pressure is affecting how firms regard project management, manufacturing, distribution, and marketing.
From without, several factors are combining to put pressure on the industry. Throughout the world those who pay for drugs and medical care-third-party payors and individual consumers-are faced with rapidly rising healthcare costs. Governments, hospitals, managed care organizations, and insurance companies are seeking value for money from the pharmaceutical industry. Increasingly, these payors are demanding general information or even some specific measurement that demonstrates a given product will deliver that value. So, pharmaceutical firms are finding, more and more, that they must analyze systematically whether their products make economic "sense" for the purchaser in some definable way. This difficult task of demonstrating cost-effectiveness and value for money is exacerbated by the fact that a new drug can be both cost-saving and cost-generating-the answer may depend on whose perspective is adopted: that of society, of the healthcare provider, or of the payor.
On top of these pressures is how the industry is seen, which adds to the pharmaceutical industry's vulnerability. The U.S. industry has been enormously profitable, and thus suspect in the eyes of consumers and regulators. Certain economic characteristics of the industry make it an easy target for simplistic-and potentially disastrous-cost-cutting approaches, many of which have been tried in other countries, not only failing to control costs but gutting the pharmaceutical industries in those countries.
Today, there is a genuine and legitimate concern that regulatory cost-cutting initiatives in the United States, coupled with the growing cost of drug development, could result in a significant decline in the industry's research and development, potentially putting an end to the innovation that brings us the tremendous advancements in medicine we have come to expect-and require-from this industry.
There is much discussion about the "drug crisis" in America-the crisis of drug abuse. The crisis looming in the legitimate pharmaceutical industry is the other drug crisis. It takes on different meanings depending on one's perspective. From the point of view of a pharmaceutical company executive, the looming crisis may be a sizable drop in revenues and profits, and the inability to maintain the financial successes that comes with innovation. To the scientist, or from society's perspective, it might be that there will be a major reduction in the research for treating and curing disease. From the perspective of a health policymaker or health provider, it might be that concern over whether the mandate to care for people can be fulfilled.
The book will focus on this potential crisis and offer a prescription for correcting the situation. It will be based largely on research conducted through the Program on the Pharmaceutical Industry at MIT, under the sponsorship of the Alfred P. Sloan Foundation.
This paper focuses on the impact on the established pharmaceutical industry of the revolution in molecular biology as a means to explore radical innovation. The pharmaceutical industry provides a particularly interesting context within which to study this problem for two reasons. One, established pharmaceutical firms show enormous variance in their response to the dramatic changes entailed by the revolution in the biological sciences that began in the early 1970s. Two, several firms appear to have been able to handle these changes in a relatively "routine" fashion, integrating them smoothly into existing operations and emerging from the revolution as dominant players in a very differently structured industry.
To explore these issues, the authors draw on detailed qualitative and quantitative data about the innovative performance of ten major pharmaceutical firms during the period 1960 to 1994. Those firms that were able to take advantage of the revolution in molecular biology routinized flexible communication across disciplinary and product boundaries without sacrificing depth in either discipline or product knowledge. They managed the tradeoff between specialization and integration by maintaining tight links to the publicly funded research community and by using resource allocation mechanisms that placed a premium on unroutinized communication within the firm. These resource allocation mechanisms were in turn made possible by tight connection to the external community.
Thus, those pharmaceutical firms who survived the revolution in the biological sciences by routinizing ability to undertake major innovation were able to do so primarily because of their ability to take creative advantage of a thriving publicly funded research community. This result raises a number of intriguing practical and theoretical questions about the degree to which the adoption of integrative competence can be a subject of managerial choice.
Scale and Scope in Drug Development: Unpacking the Advantages of Size in Pharmaceutical Research (Iain Cockburn and Rebecca Henderson)
Pharmaceutical companies display large and persistent differences in their innovative capabilities. Using detailed data gathered at the project level from inside the R&D labs of ten major pharmaceutical companies, Cockburn and Henderson examine the roots of differential performance in the development of new drugs. One of the most interesting features of these data is the ability to distinguish between "discovery" and "development" efforts: the processes of identifying potentially valuable new compounds in the lab, and of subsequent testing and fine-tuning these drug candidates in human trials.
In previous work, the authors found substantial advantages to size in drug discovery, stemming as much from economies of scope and the ability to absorb R&D spillovers as from economies of scale per se in performing pharmaceutical research. Here Cockburn and Henderson contrast these results with the factors which determine success in the drug development phase, where the technology of R&D is very different and where larger amounts of money are spent. While they find no evidence of straightforward economies of scale, they again find some evidence that larger firms benefit from the ability to take advantage of economies of scope. In contrast to their previous findings in drug discovery, however, this result is not robust to the inclusion of controls for firm effects. These results have interesting implications for the theory of the firm, as well as for policy-oriented interest in the links between market structure, firm size, and performance in this important industry.
Product Demand in Pharmaceutical Markets (Scott Stern)
This paper estimates a model of product demand within a number of pharmaceutical markets, where each market is composed of a number of substitute therapies (FDA-approved molecules). Each molecule may be sold by the pioneer (the patent-holder) and generic competitors. A model of consumer choice, relying on the institutional details of pharmaceutical decisionmaking, is developed to derive the regression framework. This framework includes two important features. First, Stern explicitly parameterizes the substitutability among molecules and between pioneer and generic products. Second, the endogeneity of firm-level choice variables (price and advertising) is accounted for by the use of instrumental variables. In so doing, the two important dimensions of product differentiation in this industry during the 1980s are analyzed.
There are three principal findings. First, alternative pioneer products are relatively strong substitutes; in contrast, pioneer products often are substantially differentiated from their generic competitors. Second, pioneer firms wield market power, in part because they are multiproduct firms. Not accounting for the economics of multiproduct pricing reduces the degree of measured market power by up to 27 percent. An important corollary to these first two findings is that competition among pioneer firms provides an important check on pioneer market power. Finally, and perhaps most importantly, the differentiation between pioneers and generics is higher in those therapeutic categories which have experienced innovation. This finding implies that in these categories during the 1980s, the relatively more important competitive threat facing pioneer firms was innovative entry by research-intensive firms rather than imitative entry by generic producers.
Organizational Design, Product Market Focus, and Rational Drug Design: An Exploratory Mapping (Scott Stern)
This paper maps the links between the design and maintenance of the R&D organization and the character of the other sunk investments firms make over time. Previous research has documented that different pharmaceutical firms manage their R&D labs differently and that these differences seem to be related to research productivity (Gambardella 1992; Henderson and Cockburn 1995). These differences include the size and diversity of the R&D effort, the degree to which contact with the university and biotechnology community is supported, and the degree to which scientific publications are encouraged. Support for external linkages and scientific publication have been linked to the adoption of "rational drug design," in which the search for therapeutic compounds is guided by knowledge of the underlying molecular biology of a disease. A central issue, then, is why some firms have been much slower than others in directing their R&D effort to be "rational."
This author argues in this paper that there existed large differences in the marginal returns to pursuing a "rational" drug design strategy. Interfirm differences arise from very specific sunk costs-therapeutic category-specific investments reflecting the historical product portfolio of firm.
For example, by the early 1970s, Eli Lilly had made substantial sunk investments in the insulin and anti-infectives markets. These sunk investments included a sizable sales force, an in-house expertise in FDA regulatory management in these therapeutic categories, and a cadre of pharmacologists expert in these categories. The character of these investments shaped Lilly's aggressive policy towards exploiting the new products and processes promised by the early years of biotechnology. Indeed, the most straightforward application of these techniques were in therapeutic categories where Lilly already had a market presence and was maintaining specific investments (such as the insulin market). Lilly's therapeutic category focus and strategy can be compared usefully to firms such as Bristol-Myers, American Home Products, or Roche. These firms were much less aggressive in pursuing external linkages with the biotechnology community until the late 1980s. Both corporate records (annual reports, etc.), contemporary commentary, and printed discussions at well-known industry conferences support the view that it was not that these latter firms were unaware or unappreciative of the developments in molecular biology, but rather that the developments that had occurred were not easily applicable to the therapeutic categories in which they had historically made investments (e.g., women's health, as in the case of American Home Products).
No matter how "rational," the identification of an important metabolic pathway is but the first (and perhaps least expensive) step in bringing new pharmaceutical products to market. The total cost of bringing products to market is highly dependent on the particular resources the firm has at its disposal-such as FDA expertise in the category. Thus, it should not be surprising that firms with highly path-dependent investments reacted very heterogeneously to genetic engineering. Instead, we can analyze this heterogeneity to gain insights into the ways that past actions condition future strategic behavior.
Improving the Effectiveness of Pharmaceutical Project Management (Frank Basa and Thomas Allen)
This questionnaire survey study of forty-five drug development teams examines how the locus of decision influence between project leaders and departmental managers affects the performance of drug development projects at the U.S R&D laboratories of six large, multinational pharmaceutical firms. The study examines a series of relationships among locus of decisionmaking influence, project leader characteristics, organizational support for teams, projects phase, leadership structure, and project performance.
In this sample, project performance is higher when team members perceive departmental managers to have greater influence over go/no-go decisions during both early and late phases of the development process. Project performance is also higher when project leaders have greater influence over clinical decisions during later phases. The technical knowledge of the project leader is related to project performance in a complex fashion. Technically knowledgeable project leaders are more effective during late phase projects. During early phases, project leaders who are rated as having greater technical knowledge head lower performing teams.
Benchmarking Pharmaceutical Manufacturing Performance (Charles Cooney)
The need to have product available in case someone wants to buy it has created a "just-in-case"-rather than a "just-in-time"-strategy. A mindset that manufacturing is a cost rather than a profit center causes the industry to address cost savings in subprocesses rather than maximizing profit from production. Concern with regulatory pressure creates fear when considering change. The result is the use of large inventories, long cycle times and, incentives to minimize local costs rather than maximize global profits.
The author presents results from a benchmarking study of pharmaceutical manufacturing practices, which show substantial variance in performance in all areas of manufacturing. Using data collected from multiple plants engaged in manufacturing, the performance of the activities of inbound logistics, bulk active synthesis, formulation and finishing, and outbound logistics were evaluated. Opportunitied have been identified for improving material flow, cycle time, supplier relationships, and technology transfer. The impact of these improvements on profitability is modeled with a lifecycle analysis that incorporates both cost and profit associated with change.
The economic implications are significant. Savings from a 20 percent reduction in manufacturing cost is comparable to the cost required to develop a new drug.
An understanding of manufacturing performance with an understanding of the impact of change on profits provides an additional competitive strategy to complement improvement in research productivity. The benchmarking results suggest many points to implement improvements in manufacturing.
Improvement in Subjective Work Performance After Treatment of Chronic Depression: Some Preliminary Results (Stan Finkelstein, Ernst Berndt, et al.)
The authors analyze the relationship between depression and patient-assessed or clinical-rated work performance among chronically depressed patients followed over a twelve-week period in a large clinical trial.
The data have been collected in a multicenter, double-blind design comparing sertraline, a selective serotonin reuptake inhibitor, with imipramine, a tricyclic antidepressant, in twelve academic centers nationwide. Incorporating work-related questions from a portfolio of rating scales used to assess depression, the authors construct several alternative measures of work performance, at baseline and at week 12 of the clinical investigation and examine how they change with improvement in the symptoms of depression.
As depressive symptomatology subsides following treatment, patients report substantial improvement in the authors' measures of work performance. Eighty-six percent of the patients in the cohort report some improvement from baseline to week 12. The extent of improvement in work performance is highly correlated with improvement in the symptoms of depression measured by the change in Hamilton Rating Scale for Depression.
Treatment of depression with antidepressant medications results in substantial improvement in subjective work performance among the patients studied.
Workplace Performance Effects from Chronic Depression and Treatment (Ernst Berndt, Stan Finkelstein, et al.)
This working paper focuses attention on a particular element of the overall impact of health on workplace productivity: the relationship between health status and the productivity of employees while at work. It is likely that the impacts of health status and health care interventions on at-work productivity are quantitatively important and increasing over time.
Specifically, the authors study the impact of depression and its treatment of work performance. Though often under diagnosed, its prevalence has been estimated to be as high as 10 percent in adults of working ages. Berndt, Finkelstein, et al. use preliminary data from a clinical trial of 635 chronically depressed patients who were treated with one of two antidepressant medications for twelve weeks.
The core hypothesis is that a person whose depression is more severe will perform less well at work; hence,if treatment reduces or eliminates the condition, it will lead to improvement in work performance. Depression status is measured by the commonly used Hamilton Rating Scale for Depression. Work performance is assessed using a collection of indexes constructed by the authors from questions that explicitly asked about work performance from six different behavioral surveys used in the clinical trial. Multivariate regression models were used to test the hypothesis under varying sets of assumptions.
Based on their analysis of this preliminary clinical trial data, the authors found evidence strongly supporting their research hypothesis. An implication of these findings is that employers clearly have a substantial stake in the mental health of their employees and in ensuring that appropriate diagnoses and treatment are provided.
Economies of Scale in the Pharmaceutical Industry (Peter Temin, Stan Finkelstein, and Bart Clarysse)
Conventional wisdom about the United States pharmaceutical industry is based on the observation that there is market power in the sales of individual drugs. This market power is thought to derive from patent monopolies on new drugs and from economies of scale in pharmaceutical R&D, in shepherding new drugs through the regulatory process and in marketing. Economic analyses of the industry have been concerned largely with measuring and alleviating this power. But the pharmaceutical industry cannot be seen simply as a collection of monopoly markets. There also are economies of scope within the pharmaceutical industry, and virtually all firms in the industry sell a multiplicity of drugs. Many, if not most markets, for individual drugs have at least some competition, either because the patent has expired or because there exist closely substitutable drugs. And since patents are only temporary, new drugs have to be introduced continually to maintain market power.
It is natural to ask whether the positions of firms in the pharmaceutical industry are similar to the position of firms in the markets for individual drugs. The authors pose two questions here. First, do the economies of scale noted so prominently in drug discovery and introduction imply that economies of scale are also a feature of drug firms? Second, did regulatory changes that are thought to have altered the economies of scale in drug introduction affect the importance of economies of scale for drug firms? Two such changes are the 1962 Drug Amendments, which are thought to have increased economies of scale in the introduction of new drugs and the 1984 Waxman-Hatch Act, which is thought to have decreased the cost of entering the market for older drugs. Using a new data set of firms in the pharmaceutical industry, the authors argue that the drug industry as a whole does not appear to be characterized by economies of scale. The pharmaceutical industry resembles an "average" industry more than it does industries dominated by economies of scale like the automobile or aircraft industries. In addition, most of the effects predicted to follow from changes in the regulatory and technological environment have not taken place.
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