Drug Mergers Show Lack of Faith in Creating Profitable New Therapies

Without a hint of arrogance or condescension, drug industry entrepreneur Alejandro Zaffaroni politely explains the multibillion-dollar merger and acquisition frenzy now sweeping the pharmaceutical industry: The world’s biggest drug companies have lost faith in their abilities to create profitable new drug therapies. Their costly innovation infrastructures no longer reliably yield either breakthroughs or blockbusters.

“They don’t have the confidence that their R&D; process alone is going to sustain them into the future,” Zaffaroni asserts. “As all these acquisitions indicate, they wouldn’t know how to use their money to do development better than what they are already doing.”

Zaffaroni should know; the drug giants have put their money where his mouth is. Even as Glaxo bids to become the world’s largest pharmaceutical house by offering $14 billion for Wellcome, it is also paying $533 million in cash to acquire Zaffaroni’s Affymax--a high-tech drug discovery company he launched barely five years ago. “What we are providing to Glaxo will put them in a position to be significantly ahead of everyone else,” Zaffaroni insists.

The goal of Affymax isn’t merely to identify valuable drug compounds, Zaffaroni stresses, but to apply new technologies in ways that radically reduce the costs of drug discovery. Typically, the industry maintains, it takes a decade and over $350 million to find a drug and bring it to market. The real challenge facing the pharmaceutical giants isn’t just creating compelling new drugs, it’s fundamentally transforming the economics of innovation.

But as merger and acquisition fever infects the entire industry, Zaffaroni fears that market leaders will be hot to pursue economies of scale rather than the new economics of drug discovery. Efficiencies in research and development will be attained though consolidation rather than through innovation. The pharmaceutical industry, says Zaffaroni, would still rather discover new blockbuster drugs than develop new ways to discover blockbusters.

So as the world’s legal drug lords anticipate their top blockbusters coming “off patent” and thus facing generic competition, there has been a failure of nerve, a failure to cost-effectively manage research investments and a surprising failure to successfully take advantage of emergent biotechnologies.

“Biotech is one of the opportunities that is being missed,” Zaffaroni says. “Typically, a pharmaceutical company has a detective system where people go around visiting these entrepreneurial biotech companies and then deciding whether or not to make an investment. The only way to make these things fly--the only way to really be provocative and effective--is to have a biotech center of your own providing the expertise to monitor the research and contribute complimentary technology to accelerate development.”

Consequently, says Zaffaroni, the real issue is less about managing consolidation than insisting upon integration: “All the companies are telling you, you know, that we have changed,” he says. “But they haven’t. Those companies that don’t do it are going to be dead.”

The best hope for the giants, says Zaffaroni--who has co-founded or run no fewer than five drug-related companies--is to ask, “What are the key variables in medical economics for the development of new drug therapies?” and rethink themselves accordingly. One critical insight is that the drug alone is not a therapy.

For example, says Zaffaroni, medical research indicates that many cases of congestive heart failure are “compliance failures”--that is, people with heart disease who did not take their medicine appropriately. Indeed, many surveys indicate that a significant percentage of patient problems are due to lack of compliance. Zaffaroni argues that pharmaceutical companies have to invest in compliance monitoring technologies and compliance-assured drug delivery systems if they want to help guarantee the cost-effectiveness of their drugs.

Similarly, biotechnology now makes it easier to identify the “gene markers” of individuals who are genetically predisposed to respond very well--or not at all--to certain drugs. “If they don’t have the gene marker for a certain receptor,” says Zaffaroni, “then you’re wasting your time and money treating them with that particular drug.”

In other words, our increasing knowledge of the human genome will allow doctors and pharmaceutical companies to better define the populations that will best respond to therapies. That inherently makes drug therapies better focused and more cost-efficient. The more genetic information that’s generated, says Zaffaroni, the better tailored and targeted drug therapies will become. Your genetic profile will become an indispensable part of the medications you might be prescribed.

“One approach admittedly looks prosaic while the other looks really scientific,” says Zaffaroni, “but they are both essential to creating the most cost-effective process. . . . If you want to be a truly successful company creating the great pharmaceutical products of the future, you’re going to have to change your approach.”

Will the industry forces driving pharmaceutical mergers and acquisitions simply overwhelm the economic analysis offered by one of the industry’s most successful entrepreneurs? Or will it command a new level of introspection by companies that feel compelled to go outside to procure their innovations? Zaffaroni is not optimistic: “These are big companies; they take a very long time to change.”

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Michael Schrage is a writer, consultant and research associate at the Massachusetts Institute of Technology. He writes this column independently for The Times. He can be reached at schrage@latimes.com by electronic mail via the Internet.

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