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Who Discovers and Why

Progress Through Craziness

This weekend there was an interesting article in the International Herald Tribune by James Kanter and Carter Dougherty, on pharmaceutical research in Europe versus the US. I’ve written on this topic myself, pointing out that most European companies, when they’re expanding at all, are doing so in the US rather than in their own countries.
Having pharmaceutical sales in the US is essential, since we still have the least-regulated pricing of any major market. This, for better or worse, is where you come to make up for the price controls in Europe, and the article points out that the European governments like to talk about being world leaders in innovation while simultaneously clamping down on the rewards for it. But why would you need to do the research here as well? Kanter and Dougherty:
“Although the knowledge created by pharmaceutical research eventually spreads across borders, companies have learned that it pays to start in America. Setting up there gives companies with new products a substantial home market, without having to recruit a multilingual, European sales team, or to navigate the patchwork quilt of national rules on marketing and pricing in Europe. Being close to important U.S. medical professionals and other opinion makers from an early stage also helps smooth clinical trials. The United States produces, by volume, far more new drugs than Europe because U.S. research spending exceeds that in Europe by roughly 50 percent, said (Charles) Beever, of Booz Allen Hamilton.”
And if you’re starting up a small pharma or biotech company, it’s easier to do it over here:
In Europe, where capital is harder to raise and investors less willing to go out on a limb, the story can be getting financing at all. Investors sank $114 billion into U.S.-based companies that pioneered novel drugs over the past decade. Companies clustered around European biotechnology hubs, like Cambridge, England, and Uppsala, Sweden, garnered barely a quarter of that amount over the same period, although some industry leaders have raised substantial funds. The lack of a single European stock exchange and the persistence of a risk-averse investment culture have played a critical role in America’s ability to steal a march on Europe, said Sam Fazeli, biotechnology industry analyst at Nomura International in London.
“Unfortunately in Europe, we are only just coming to terms with the fact that drug failures are part and parcel of the life of a biotech company,” he said.”

Hey, if we want to get technical about it, failure itself is part and parcel of doing any kind of research. And that brings up another reason I think that R&D tends to thrive more over here: by the standards of many Europeans, Americans are not completely sane. I’ve worked in Europe and with many colleagues from France, Germany, and Italy, and I really believe this. (Some of them have told me as much after they got to know me well.)
In the US, we tend to give chances to wilder ideas than in many other countries, and there’s less stigma attached to their failure. That’s a little-appreciated feature of scientific progress: it depends on the willingness to look like an idiot. Keep in mind, most of the paradigm-breaking new schemes that people dream up just don’t work. You have to be ready to risk your time, your effort, your money and your reputation to get anything big to happen, and that (for many reasons) is just plain easier to do here.

11 comments on “Progress Through Craziness”

  1. steve says:

    I used to believe America had better research and business and such because we’re risk-takers while they’re statists. I can’t maintain that belief anymore, since we have worse healthcare per dollar, education is lagging other countries (how often do you hear about creationists in France? Never.) and Americans are relatively scientifically illiterate.
    Nowadays I’m inclined to think that America’s standard of living is only high because it’s bought with borrowed foreign money. The trade deficit last year was $617 billion. The US is getting and spending 80% of the world’s savings. And much of our scientific progress was done by foreigners. About half the grad students and postdocs I see are foreign. That’s also starting to trend to our disadvantage. Europe recently overtook America in scientific publications. I’m usually optimistic about America, but Warren Buffet, who recently called America “Squanderville”, is betting against the dollar, I’ve read.

  2. John Thacker says:

    The trade deficit last year was $617 billion. The US is getting and spending 80% of the world’s savings.
    Because we remain the best place to invest. The trade deficit reflects that, it’s a sign of capital investment in the US. And because some things don’t get counted as trade in the same way, like people coming to get educated.
    About half the grad students and postdocs I see are foreign.
    Because we have the best universities in the world, and people want to come here to study. It’s been that way for a while, half the grad students and postdocs have been foreign for a long time.
    And we have worse healthcare “per dollar” largely because we spend more on it, a lot of it on “inefficient” spending where people are going to die anyway, or on things which are new and thus expensive. That’s one of the prices of having health care technology on the bleeding edge, and paying for new things. Most people are willing to pay quite a lot for a few more months, or a few percentage points higher chance of survival. It’s related to how people are willing to pay way too much for the brand-new, slightly better drug rather than use the almost-as-good older much cheaper one. (The US has staggeringly higher numbers of expensive diagnostic machines like MRIs compared to most countries, and impressive survival rates on cancer and other diseases. Not too good on some simple things like infant mortality, for a host of reasons.)

  3. Peter Ellis says:

    I’m interested by that “by volume” qualifier. How does it pan out if you look at new drugs per head of population? If you don’t compensate for that, you’re biased towards the US simply on size grounds.
    Also, how about new drugs per dollar spent?
    Either of those would seem to be a better measure of whether restrictive licensing and language barriers really do act to counter innovation.
    The fact that they chose an inappropriate measure simply makes me wonder what axe they have to grind.

  4. DV Henkel-Wallace says:

    Access to startup capital makes a HUGE difference, I can tell you (I’m in the middle of a funding round myself). Also having people who aren’t afriad of looking like idiots (since most new ideas are “idiotic” at first) is also crucial (by the way bio is not ass strong in this regard as IT).
    Having worked and lived in the US and Europe, I have to agree with you that the US is head an shoulders above the EU. But what about India? Lots (in absolute numbers, not relative to their population) of smart people, quite a few of whom have been inculcated in the American system.

  5. Mike says:

    The current population of the European Union (~450 million) exceeds the population of the United States (~290 million). Not compensating for this difference would present a bias in favor of Europe, not in favor of the US.

  6. Jim Harris says:

    Let’s not give the impression that the funding situation is good in America. There is no money for early-stage drug developers here or there. Because the VCs have fled the scene in the US (bubble), pharma will have smaller pipelines in 3-4 years than they have now. If you have a Phase 2 or 3 compound, however, you have more money and more potential licensing offers than you can entertain. Pharma and VCs are in a race for the dunce award.

  7. Peter Norman says:

    Interesting to see that the original article cites Vernalis as an example of seasoned biotech company that succeeded in developing a drug- frovatriptan.
    Hardly the best of examples since Vernalis is the new name of British Biotech, whose history of drug development and financial success is welll known. The development of frovatriptan, a product in-licensed by Vanguard after its discarding by a major pharma, as the nth in class triptan only serves of a useful example of how virtual companies can bring drugs to market!

  8. Robert Paci says:

    I second Peter Norman on his evaluation of frovatriptan and Vernalis. Having studied the migraine market 6 years ago for a US virtual company that was considering in-licensing an (n+1)th in class triptan, I was quite surprised to see the drug mentioned again.
    The promise of funding development of its pipeline with the profits of frovatriptan read just like back in 1999, except that the company was then called Vanguard.
    I didn’t take the liberty of reading the Nomura analyst’s reports on Vernalis, but, if they intend to fund lots of R&D with it, I hope he had a big hockey stick for frova sales growth because it’s only expected to do$50M or so in the US in 2005 (and Vernalis will only get about 20% or so of that since they’ve licensed the product to Endo).
    Even if this business model works for Vernalis in the short term (Forest did pretty well on an nth in class SSRI), it would hardly herald a resurgence in Euro pharma, just a lucky (finally) one-product company.
    Someone should, however, hire their PR person.

  9. Derek Lowe says:

    I was a little surprised to see Vernalis brought up as a great example myself, because I never had a picture of them as a great success story. There aren’t many of the new European companies that have done well, when you get right down to it. There are some smaller older ones that have risen in stature (Ares-Serano), but the new breed hasn’t been a big success. Yet.

  10. Rob Cyran says:

    Facts tend to be a bit different than the common wisdom here.
    In 1988, five of the top ten drug makers worldwide were American. An equal number were European. The names may be different (and longer) now, but the proportions are still the same. Five of the top ten groups are European
    And for what it’s worth, the European groups are expected to grow faster than the American ones over the next five years according to analysts. That’s why European drug makers’ stocks trade on higher valuations than their US peers.
    Granted, it is easier to raise capital in the US. So the biotech sector tends to be more developed in California than it is in Switzerland. But biotech is still rather small in economic terms compared to the big drugs makers (and don’t forget that Genentech is owned by the Swiss 😉
    The size of a market for drugs has nothing to do with where companies operate. To use an interesting example, why don’t Italian luxury shoe makers move to Japan? That’s where their best customers are!

  11. Derek Lowe says:

    You know, I just looked up P/E ratios for a number of drug companies on Yahoo. For US companies, I get:
    Wyeth: 46.3;
    Lilly: 31.6;
    Abbott: 22.4;
    J&J: 22.0;
    BMS: 20.2;
    Pfizer: 17.5;
    Merck: 12.2;

    And for European companies, I get:
    Bayer: 31.7;
    GSK: 27.8;
    Novartis: 23.8;
    Novo Nordisk: 22.5;
    Sanofi/Aventis: 19.9;
    AstraZeneca: 18.3;
    Overall, I don’t see a dramatic difference in valuation. These aren’t all apples-to-apples, of course, since some of these companies have significant non-pharma components (and Merck’s a bit depressed these days), but there it is.

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