Pharmaceutical companies have great strengths in the marketing of medicines but tend to outsource the uncertain business of early stage innovation to small Biotech firms. For creativity and radical innovation is difficult to do in very large organizations. There are just too many processes, and many of them are not very clear in the first place. On the other hand, a small Biotech has comparatively few staffers that are highly qualified and very highly motivated. The motivation comes from the possibility of inventing a blockbuster drug and the windfall that could arise upon FDA approval.
However, here are some numbers to think about to get a sense of the odds of innovation success from page 3 of this brochure from innovation.org a Pharmaceutical research and industry organization: It takes between 9-15 years to come up with one approved drug starting with five to ten thousand (yes 10,000) compounds. It is not uncommon to find Pharmaceutical scientists who have spent 20 years in the lab working on some stage of the process, and having not seen a single product make it to the market!
At the marketing end of the pharmaceutical business one keeps hearing of blockbuster drugs or those drugs that sell over $1 Billion a year. But it turns out that there are only 125 of these drugs and these too face the "patent cliff" when patents expire and cheaper generics take over much of the market. For example, the blockbuster cholesterol drug Lipitor from Pfizer saw a sales decline of 42% in the first month of coming off from patent.
Another piece of older research by Grabowski and Vernon (1990) reports that of those prescription drugs that made it to the market 4 out of 5 or 80% made less than $250 million dollar after reckoning the R&D costs for the drug. In other words, those 125 blockbusters do have a very long tail of low selling drugs that all went through the travails of the drug innovation process.
Thus, it does makes sense for big Pharmaceutical companies to outsource early stage development to biotech companies and have multiple alliances to ensure that there is a very thick pipeline of products under development. By doing so, the Pharmaceutical company can focus resources and processes around later parts of innovation like clinical trials and marketing. These activities can be made into an efficient routine that delivers results far more easily with a large organization than the uncertain endeavors of creatively coming up with initial ideas that small biotech firms can do well. Contact StratoServe.