The Life Sciences Innovation System

1
The Life Sciences Innovation System

• Scott Stern
• Northwestern University
• Northwestern Judicial Symposium
• The Pharmaceutical Industry
• Economics, Regulation and Legal Issues
• May, 2009

2
The War on Cancer

• "I will also ask for an appropriation of an extra
  100 million to launch an intensive campaign to
  find a cure for cancer, and I will ask later for
  whatever additional funds can effectively be
  used. The time has come in America when the same
  kind of concentrated effort that split the atom
  and took man to the moon should be turned toward
  conquering this dread disease. Let us make a
  total national commitment to achieve this goal.
• Richard Nixon 1971 State of the Union Address
• ?The 1971 National Cancer Act provided budgetary
  authority for National Cancer Institute, and
  ushered in a long period of basic and applied
  research transforming our understanding of the
  causes and potential treatments against various
  cancers

3
A 25-year history of slow and steady evolution of
NIH funding.
4
A mixture of public and private funding
Annual cancer funding 14.4 billion
5
After 1990, a decline in mortality
the War on Cancerdid everything it was supposed
to do. It supported basic research handsomely. It
set up application programsthe EORTC European
Organisation for Research and Treatment of
Cancer and U.S. clinical trials programs. The
incidence of cancer in this country started
dropping in 1990 and has continued to drop every
year since, and so has mortality. And the
morbidity from cancer, comparing 1971 to 2005, is
like night and day.So, every benchmark of the
mandate has been hit. Vincent DeVita, M.D., NCI
director, 1980-1988
6
Over time, Federal investment in life sciences
research has come to dominate public investments
in non-defense basic research
7
Up until the early 1970s, the pharmaceutical
industry was mostly isolated from molecular
biology and genetics (and vice versa)

• The Pharmaceutical Industry

• Molecular Biology

• Founded in the 1930s, rapid progress exemplified
  by Watson and Cricks discovery of the DNA double
  helix
• Focused largely on non-human simple organisms
• Primarily conducted within biology departments
• Few academic med centers
• Restrictions on patenting and commercialization

• Primarily focused on small-molecule chemical
  synthesis approach focused on well-defined
  therapeutic needs
• Research focused largely around random drug
  screens
• Conducted primarily by vertically integrated
  pharmaceutical companies
• FDA regulatory barriers

8
So What Happened?

• Key Scientific and Technical Breakthroughs
• Boyer and Cohens Development of Gene Splicing
• Gel Electrophoresis
• A Growing Pool of Public and Private Funds for
  Basic Research in Molecular Biology Related
  Fields
• The War on Cancer
• The Emergence of Venture Capital
• A Changing Institutional Environment
• Bayh-Dole, encouraging university technology
  commercialization
• Diamond v Chakrabarty, allowing IPR over living
  organisms
• Clarifying the Prudent Man Rule, encouraging
  venture capital

9
The Traditional Relationship Between Science and
Technology (Brooks, 1993)
Science Understanding why Hypothesis ?
Empirical Testing ? Theoretical Refinement
Technology Recipes for how Practical and
Useful Techniques
New Knowledge
New Tools
Instrumentation
Research Practice
Social / Environmental Impact
Efficient Development
Instrumentation Tools
Raises New Questions
10
The Linear Model at Work

• The technology consequence of scientific
  knowledge often occurs long after the period of
  initial scientific discovery
• Brocks Unlikely Bacteria
• 1967 Thomas Brock discovers Thermus Aquaticus
  in Yellowstone National Park geysers, classified
  as an extremophile
• Deposited in the American Type Culture Collection
• 1983 Kary Mullis conceives of a recipe -- a
  DNA replication scheme requiring DNA polymerase
  that can resist extreme temperature variation
• After initial attempts locally, identification of
  TaQ at ATCC
• 1989 Thermus Aquaticus, Molecule of the Year
• PCR is the foundational technology for DNA
  replication in all of modern molecular biology
  biotechnology
• In part because Science allows knowledge and
  materials to be disclosed, certified, and stored
  for long periods, scientific knowledge can be the
  seed corn for geographically dispersed
  technological innovation

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The Harvard Oncomouse

• Leder Stewart, Harvard 1984 develop an
  Oncomouse
• First mouse with genes inserted to predispose
  mouse to cancer
• A significant advance along two dimensions
• Advancing basic research into the role of genes
  in cancer
• An input into applied research focused on cancer
  therapies
• Oncomouse is a dual discovery
• On-going scientific discovery AND
• Translation, innovation economic growth
• Harvard is granted US patent in 1988 signs an
  exclusive license with DuPont
• Distribution through Jackson Laboratory
• Distribution comes with controversial licensing
  restrictions on use (e.g., reach-through rights
  and article review)

13
The traditional linear framework fails when
knowledge has both basic and applied value.
Since its inception, biotechnology research has
been at the center of Pasteurs Quadrant, and so
individual discoveries both rely on and have
influence on both science and commercialization.
Dual Knowledge in Science-Driven
Industries Innovation in Pasteurs Quadrant
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Innovation in Pasteurs Quadrant

• Both the promise and challenges arising from
  pharmaceutical innovation are centered in
  Pasteurs Quadrant
• Fundamental Science Being Applied on Human
  Subjects with Enormous Commercial Stakes
• The Development of general purpose technologies
  grounded in fundamental scientific breakthroughs
• A Collision between Multiple Norms and
  Institutions, each of which holds on to its own
  power and conventions
• Allows us to undertake a more systematic
  assessment of innovative productivity

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Innovative Productivity in Biomedical Research
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Is this Progress????
the War on Cancerdid everything it was supposed
to do. It supported basic research handsomely. It
set up application programsthe EORTC European
Organisation for Research and Treatment of
Cancer and U.S. clinical trials programs. The
incidence of cancer in this country started
dropping in 1990 and has continued to drop every
year since, and so has mortality. And the
morbidity from cancer, comparing 1971 to 2005, is
like night and day.So, every benchmark of the
mandate has been hit. Vincent DeVita, M.D., NCI
director, 1980-1988
17
One can see computers everywhereexcept in the
productivity statistics

• Robert Solow, 1987

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One can see biotechnology everywhere.except in
the new drug approval statistics
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Pharmaceutical Productivity Crisis New Drug
Approvals
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Despite increasing expenditures on RD
Number of new drugs
RD by US-based drug companies MM
Source New York Times, FDA, PhRMA
21
The Promise of Biomedical Innovation

• Biomedical RD budget is large and growing
• More than 100 BN from public and private sources
• Dramatic scientific progress, from genomics to
  stem cells to RNA interference
• Large potential for commercialization
• Thousands of targets
• More than 500 drugs in clinical trials
• The Potential of Personalized Medicine

22
The Biomedical Productivity Paradox

• Massive investments in innovation, yet the level
  of new FDA drug and biotherapeutic approvals is
  comparable with the 1980s
• Despite more than 30 years of dramatic scientific
  progress (from genetics to systems biology), most
  therapies and clinical practice have their
  origin in older science and more traditional
  technologies
• Though the biotechnology industry includes
  thousands of companies (and more than 500 public
  companies), most therapies are commercialized
  through established pharmaceutical companies and
  regulated under the traditional FDA paradigm

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What is Going On?
Source PHRMA Profile, 2007
How can we continue to support new drug
development if the cost of drug development is
increasing so dramatically over time?
24
What is Going On?

• Getting the Statistics Right
• The Best is Yet to Come
• We Need to Fix the System

25
Getting the Statistics Right
Number of New Molecular Entities approved per
year in the US
Source FDA, Tufts CSDD
In part due to an overhang cleared during the
early years after PDUFA, the reduction in
approvals since the late 1990s may simply be a
return to trend (Berndt, et al, 2004)
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Getting the Statistics Right
Source PhRMA, NIH Biomedical RD Price Deflator
While most discussions of increasing cost compare
nominal expenditures, the cumulative impact of
biomedical price inflation significantly reduces
the measured growth rate in RD expenditures
(Cockburn, 2007)
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Getting the Statistics Right
While costs are certainly rising, pharmaceutical
sales have also experienced dramatic growth, in
part due to a large number of blockbusters
(multi-billion dollar global annual sales
products)
28
Getting the Statistics Right
Source Berndt, Cockburn, Grépin (2005) The
Impact Of Incremental Innovation In
Biopharmaceuticals Drug Utilization In Original
And Supplemental Indications.
Moreover, a high share of revenues for many drugs
come from applications and indications that are
only discovered after market introduction, and
these uses are not always approved through formal
FDA approval
29
Getting the Statistics Right

• Tracking the long-term trend in the drug approval
  rate
• Distinguishing nominal versus real expenditures
• Accounting for the dramatic growth in revenue per
  approval
• Incorporating post-approval application and uses

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The Best is Yet to Come
The diffusion of the electric motor took more
than 40 years from commercial introduction to
having a significant impact on the practice of
American manufacturing
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The Best is Yet to Come
                                                
                                             Figu
re 1
Indeed, after the mid-1990s, we could see
computers in the productivity statistics
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The Best is Yet to Come

• Biopharmaceuticals is going through a familiar
  process of disruptive (i.e. costly) technological
  change from chemistry to biology. Do not be
  surprised if this takes quite a long time to
  materialize.

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The Best is Yet to Come
Compounds in preclinical development
Compounds in Phase I trials
Source Pharmaprojects/Goldman Sachs, PAREXCEL
Pharmaceutical RD Sourcebook 2005/2006
While the rate of approvals slowed during
2000-2005, there has been a dramatic increase in
the number of promising compounds at earlier
stages of the drug approval process
34
The Best is Yet to Come
The life sciences revolution has created the
potential for multiple (potentially simultaneous)
technology shifts each with significant and
long-lived transitions
35
We Need to Fix the System

• The Biomedical RD productivity paradox is
  grounded in the microeconomic, strategic, and
  institutional environment in which biomedical
  innovation is commercialized.
• IP Gridlock
• The Biotech Chasm
• Navigating a Commercialization Path
• Rethinking the Regulatory Process

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Unraveling Gridlock Openness is associated with
a sharp increase in new research, mostly
concentrated in more diverse and novel projects
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We Need to Fix the SystemThe Biotech
Chasm(Guedj and Scharfstein, 2006)

• Biotechnology firms tend to display a high degree
  of optimism during the earliest stages of
  clinical trials, reflecting their focused
  strategy and entrepreneurial culture
• At least in part, this is grounded in the
  incentives associated with a narrow portfolio
  What else is there to do if we cannot go forward
  with our most promising compound?
• Pharmaceutical firms tend to be more conservative
  in their assessments
• Investment decisions require approval by managers
  who are not tied to a particular project
• Many different projects at the firm means that no
  one project is critical and worth betting the
  farm

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We Need to Fix the SystemThe Biotech Chasm

• Study single-agent cancer trials with Phase Is
  beginning in 1990-2002 period
• Identify 235 drugs of public companies
• Track progression through clinical phases
• Measure performance in Phase II
• Compare firms with small and large drug
  development portfolios

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We Need to Fix the SystemThe Biotech Chasm
160 Drugs of Big Firms
75 Drugs of Small Firms
While some companies have big portfolios and
revenues from the product market, many biotech
firms have only 1 or 2 key projects and no
post-approval products
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We Need to Fix the System The Biotech Chasm
While larger companies have lower transitions to
Phase II trials, small biotechnology companies
have a much higher rate of failure from Phase II
to Phase III, in part because the clinical
indications for Phase III are inferior
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We Need to Fix the SystemNavigating a
Commercialization Path
Product biotechs
Tool biotechs
CROs
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We Need to Fix the SystemNavigating a
Commercialization Path
An increasing number of collaborations and
alliances throughout the industry as the
principal path towards commercialization
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We Need to Fix the SystemNavigating a
Commercialization Path

• Moving towards a market for ideas
• Tremendous opportunities to take advantage of the
  division of innovative labor
• Entrepreneurial energy, speed, flexibility
• Provision of high-powered incentives
• Straddle the university-industry interface
• Use Intellectual Property to facilitate
  transactions
• Continue to provide access to focused downstream
  pharmaceutical firms who are more experienced at
  commercialization
• The market for ideas is highly imperfect
• A strong reliance on IP regardless of novelty
  or importance
• Easy to contract on the tangibles hard to
  contract for transfer of tacit knowledge
• Over time, increasing transactional complexity as
  we move to an innovation network

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We Need to Fix the SystemNavigating a
Commercialization Path
Gridlock Even if each individual deal makes
sense, the complexity of the exchanges results in
high transaction costs and potential for
duplication and waste.
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We Need to Fix the SystemRethinking the
Regulatory Process
Discovery
Proof of Concept
Market
Laboratory Validation
Real World Validation
Product Designed
Product Validated
Scale-up
Concept
Preclinical
Phase II/III
Manufacturing / Regulatory
Basic Science Labs
Phase I

From Norbert Riedel, Baxter
The regulatory process is premised on the idea
that individual companies are seeking to
commercialize blockbuster drugs by pioneering new
categories.
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We Need to Fix the SystemRethinking the
Regulatory Process

• While a high regulatory burden can be recouped in
  the context of a blockbuster, there is no
  regulatory framework for the rapid development
  and experimentation with personalized medicine
  applications
• The entirety of the patient population is smaller
  than a traditional clinical trial
• While a high level of secrecy for clinical trial
  data was sensible if each blockbuster drug may be
  pioneering a new category, massive duplication
  and inefficiency if firms are competing in a
  single market, and are reinventing the wheel in
  terms of clinical lessons
• Rather than a trade secrecy model, make clinical
  trials even failed trials a part of Open
  Science (clinicaltrials.gov, etc)

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What is Going On?

• Getting the Statistics Right
• The Best is Yet to Come
• We Need to Fix the System

49
Policy Implications

• Moving Towards a More Accurate Debate About the
  Opportunities and Challenges for Biomedical
  Research
• The productivity crisis is not quite as dire as
  is sometimes claimed
• The time horizon for the commercial and social
  impact of the biomedical revolution is still
  reasonably far into the future where are we
  relative to electricity and computers?
• As biomedical innovation increasingly draws upon
  and contributes to scientific advance, an
  opportunity to enhance the openness of
  commercially oriented research, enhancing the
  productivity of cumulative discovery and
  innovation
• Unraveling Gridlock in the Biomedical
  Anti-Commons
• A Focus on Translational Research
• A New Paradigm for Personalized Medicine
• Providing incentives and support for the
  disclosure of clinical trial insights (a market
  for failure)

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Policy Implications

• Biomedical science is progressing more rapidly
  than the capacity of institutions to adapt to the
  new environment. To the extent that innovative
  productivity is grounded in the effectiveness of
  the institutional environment, how can we
  encourage institutional experimentation and
  adaptation?
• Offering incentives and encouragement for more
  open approaches to early-stage drug development
  and broader use of clinical tools
• Spurring alternative approaches to technology
  licensing and commercialization, particularly for
  research with its origins in university research
• Experimenting with different approaches to the
  effective regulation of personalized medicine