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Summary:

The temperature’s heating up on the Web, but one advisory group suggests the state of suggests technology could have plenty to learn from the challenges currently facing the pharmaceutical industry.

dna-teleport

With the rapid pace of events on the web and the information revolution sparked by the Internet, it’s very easy for the technology industry to think it’s unique: constantly breaking new ground and doing things that nobody has ever done before.

But there are other sorts of business that have already undergone some of the same radical shifts, and have just as great a stake in the future.

Take healthcare, for instance.

We often think of it as a huge, lumbering beast, but in truth, medicine has undergone a series of revolutions in the past 200 years that are at least equal to those we see in technology and information.

The first stirrings of modern chemistry and biology were only just beginning in the 19th century, but by 1967, Christiaan Barnard started transplanting hearts. Similarly, it was only in the 1950s Watson and Crick discovered DNA. Less than 50 years later, the first draft of the human genome was produced. If that’s not rapid, world-shattering change, then what is?

Pharma has also faced other challenges the web industry is only now starting to realize. Products are slow to make, and drugs can take years to design, test and manufacture. Accordingly, R&D spending in pharmaceuticals is very high overall; according to the European Union (PDF), five of the world’s top 10 companies by R&D spend are in drugs or biotechnology (among traditional technology companies, only Microsoft, Nokia and Samsung feature in the list). And it’s a far greater proportion of total turnover (Pfizer spends around one seventh of revenues on research, Apple spends around one dollar on R&D for every 13 it brings in).

And where the planet’s electronics giants spend billions attempting to end piracy and patent infringement, pharmaceutical companies are rapidly adjusting to the fact that they only get 12 years before patent protection ends and other companies can introduce generic drugs. Imagine a situation where Windows 98 was already old enough to be forcibly open-sourced, and you get the idea of how disruptive that might be.

So, what does the pharmaceutical industry have to teach us?

First, be careful. Your property and ideas won’t be yours for long.

Second, while new discoveries are important, revolutions can be reliably predicted, most of the time. From the outside, Barnard’s transplants were a radical shift in surgery. From inside the profession, it was the next obvious step after previous organ transplants.

Third, the way money is being spent will inevitably change. It’s already happening: an issue addressed by the latest VC bulletin from Go4Venture, a London-based advisory group for European entrepreneurs and investors (you can sign up here). Their latest dispatch outlines the state of deal-making in Europe (more of them, but less valuable, as reflected in figures we wrote about last month), and they also point out Europe’s technology financing system is undergoing a significant shift:

[there is a] major structural change in European venture capital financing where corporates will play a more prominent role going forward. Corporates are facing a lasting ex-growth market environment (courtesy of debt-laden Western economies) and realise that internal R&D is rather expensive and just cannot cover the whole front of innovation.

For corporates, investing in start-ups has the added advantage of encouraging a more entrepreneurial culture inside and creating a stream of acquisition opportunities.

Pharma has been there before, in an early move precipitated by proprietary drugs coming off patent, and we are now seeing the pharma model spreading to other IP-driven sectors.

Spending more of the R&D budget on other companies doesn’t just mean acquisition, of course — although the startup world is very familiar with the process and it’s clearly the most common option. Just yesterday, Google spent $60 million making the slightly odd move to buy British price comparison website BeatThatQuote. It could also mean more early investment in small companies, like the $100,000 Microsoft is putting into Moscow-based anti-piracy startup Pirate Pay.

But what it does mean is, ultimately, the growth in the number of deals we’re seeing is going to get faster, and there will be more opportunities for innovative startups and smart entrepreneurs. Twinned with the aggressive, high valuation investing strategy of a company like Russia’s Digital Sky Technologies, it seems more likely than not we’ll see things explode, in Europe and elsewhere, over the next year or two.

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  1. to counter point one very shortly (and also because i am short on adderall hence my ADHD will soon kickin), FDA patents on pharma aren’t items you lose very quickly.. having been working with The Medicines Company, they’ve been litigating in the supreme court a 10 year patent re-application. 10 effin years long.

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  2. Bobbie Johnson Wednesday, March 9, 2011

    It’s true that a lot of companies fight losing ownership, but it’s clear that off-patent drugs are changing the landscape. The Obama administration, among others, seems keen to push those timescales down. They’re also moving into new territory instead, with companies patenting naturally occurring genes — the USPTO has a very strange approach on that in my opinion… way more messed up than software patents!

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  3. A couple of comments on both technology and pharma… First, pharma/health also has quite a precedence or buying companies for very specific types of products. The health ecosystem, so to speak, supports such products with high stakes and high payouts for valuable tools. Secondly, pharma can learn from tech. The value of infomatics relative to prescriptions is going to exponentially increase with the rise of mobile and monitoring.

    The value of drugs is measurable results. We need to measure these results. There are plenty of people in the industry who believe that such information will become more valuable than the drugs themselves.

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    1. Bobbie Johnson Wednesday, March 9, 2011

      Good points. I suspect there’s something in the way pharma acquires products in order to make them more productive and profitable — the formula (literally and metaphorically) rarely gets messed with. So much technology M&A activity is about buying companies that then get lost inside the machine.

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  4. very good article.

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  5. And the fact that antibiotics have run their course and is on the verge of being defeated by super resistant bacterias .. is there anything to learn from it?

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    1. Subhash –

      Two lessons: In a war, one manages your strategic assets. Antibiotics were a strategic asset that was both literally and figuratively “dumped into the streets and fields” – partly due to the capitalist system (which I support.) However strategic assets should be owned or controlled by a longer-view process or organization. If antibiotics were managed with care, we would have held off resistance evolution for decades.

      On the other hand, a distorted economic system allowed us to make antibiotics to such extreme volumes that it became mostly unprofitable to sell, let alone spend $1B to develop a fundamentally new and resistant drug. Now society is raising up the value and crying out for it, but it is still not apparent R&D investment will be recovered, so those programs are slow to start. Finally today’s new idea for a “miracle antibiotic” will not launch before 2021, since the process and approval takes that long. We face another decade of worsening infections that cannot be easily treated – if at all. Not sure what can be done to the underlying system that took us down that path.

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  6. Lew Glendenning Thursday, March 10, 2011

    A major difference is that Pharma has one customer, the FDA. The FDA’s regulations produce the major costs of developing a new drug : the safety and clinical efficacy trials. Once past those hurdles, any company can charge any price.

    Technology companies don’t generally have such a huge regulatory burden nor a price ceiling that guarantees a profit, given a product.

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  7. Excellent points made. I have been comparing other industries to Pharma since the early 1990′s, mostly looking to bring new and improved practices into a “dullard” R&D process there. Reversing that is smart and you might take a look at this one page I posted on learnings from that year, given your point that “Your property and ideas won’t be yours for long”: http://www.randdreturns.com/a-history-of-time-to-market-thinking-in-pharma/ Take a look at the first and third graphic.

    About five years ago, I saw leaders of these R&D-driven firms recognize they would lose control of their business or go out of business unless they changed course. As a result, R&D in BioPharma is undergoing a sea-change unlike anything I have seen in thirty years. Excellent points again that tech as well as biotech/Pharma can learn from one another, not just in operational excellence, (e.g., six-sigma) but in examining the paths others have taken.

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