Section 18.2. Intellectual Property and Growing Challenges

18.2. Intellectual Property and Growing Challenges

Biotechnology now touches on virtually every facet of human culture and technological achievement and is a rising economic force throughout the world. All Western countries (and many developing ones) have specifically targeted life science as an engine of long-term economic growth. The public and scientific expectation for what biotechnology can or will accomplish has yet to peak, in part because the technology is still relatively complex and confined to professional circles.

Life science research has enjoyed healthy expansion within academia, supported in part by the NIH, whose annual budget increased from $3 billion in 1980 to over $27 billion in 2003. Reflecting this growth, the primary result of researchscientific publicationscontinues to mushroom. Pubmed, a journal database service maintained by the National Library of Medicine, adds 7,000 new science and medicine citations each week and now indexes more than 15 million listings from 18,000 journals. The volume of scientific data has driven scientists into increasingly fine specializations in an effort to remain current with recent literature.

The biotechnology industry has also enjoyed rapid expansion, fueled by pharmaceutical research and development (R&D) spending that climbed from $1.5 billion in 1980 to more than $20 billion in 2002. More than 1,450 companies now operate in the U.S.; those publicly traded have a market capitalization of about $300 billion. Industry revenues have increased from $11 billion in 1994 to almost $39 billion in 2003, mainly from the sale of drugsa consumer market that continues to expand. The Congressional Budget Office (CBO) reported in 2003 that prescription drug expenditures rose at an inflation-adjusted rate of 14.5% between 1997 and 2002 to surpass $160 billion annually, outpacing all other health spending categories.

Yet, despite these strong results, biotechnology is not the picture of perfect health. In defiance of R&D spending trends, drug output has slowed over the last decade. Applications to the Food and Drug Administration (FDA), the agency responsible for evaluating new pharmaceuticals, fell from a high of 131 in 1996 to only 72 in 2003, while approvals of new molecular entities (NMEs) fell 60% over the same period, dropping from 53 to 21. Even with the growth observed in drug sales, the biotechnology industry as a whole remains in the red, recording $50 billion in losses since 1994. The top 50 companies account for the bulk of the industry's market capitalization and revenues.

While research seems to be thriving, developmentin life science, a process exclusive to the commercial domainis struggling. Although often grouped together as "R&D," research and development are actually very different processes. Research tends to be relatively unstructured and produces new observations, often summarized in scientific publications. It attracts free thinkers, explorers, and risk takers. In contrast, development attempts to transform a research discovery into a finished product, ready for sale. Drug development can take years to advance a molecule through the series of phased clinical trials (ranging from I to III) meant to determine basic safety, dosages, and efficacy necessary before seeking the FDA's approval for sale. Most drugs never exit this "pipeline." If they do, they enter an ongoing postmarket analysis (Phase IV) that in part monitors for rare or long-term effects. Development thus attracts careful, detail-oriented, process-driven individuals intent on minimizing risks.

Pushing a drug through development requires massive investment and commitment. Wyeth R&D president, Robert Ruffolo Jr., estimated in 2003 that R&D charges now range between $1.2 to 1.4 billion, while others place this figure anywhere between $400 million and $800 million. There is no way to be sure of the true cost, as companies closely guard these figures, which are used to justify new drug pricing. Whatever the exact numbers, the cost of drug development continues to rise at about 12% to 14% each year, well in excess of inflation. Given finite financial resources, the increasing cost of developing a new drug is the main bottleneck between promising research and new therapeutics. Only a small fraction of research, public or private, will ever enter the development pipeline.

IP practices contribute to this constriction. Only heavily protected molecules are likely to be backed by investors and developed. Competitive pressures have also fostered a secretive mindset and produced a mass of patent claims renowned for its complexity. This "thicket" impedes collaboration and materials transfer with other companies and universities, slowing R&D. IP sculpts the overall form of biotech companies. In an effort to reduce intellectual friction while retaining proprietary control, companies are driven to bring outside groups "in-house" through purchase or hire. In part, this has resulted in successive waves of merger and acquisition (M&A) activity, consolidating the biotech and pharma industries to produce giant, global organizations.

While sales and marketing efficiencies may result from consolidation, little proof that size only can yield R&D efficiencies remains scarce. Research cannot be mandated, at any price. Meanwhile, candidate drugs in developmentalthough selected with the utmost caremay fail at any point in the pipeline. Given these risks, the ability to remain flexible and make unbiased decisions would seem crucial, but large R&D organizations can display considerable inertia and be hard to steer. Research may be slow to transfer to development, while failing projects in development may linger in the pipeline, burning cash. Industrial scientists also face intellectual isolation, with little exposure to ideas or peers outside company walls. Finding the right balance for successful research and development has been difficult for companiesone factor in why life commercial R&D has yet to demonstrate any clear economies of scale.

Meanwhile, expanding corporate bulk narrows the range of development choices that make economic sense. Large companies often set their sights on blockbustersmolecules with the potential to bring in $1 billion or more in annual sales. This makes the choice of what candidates to advance into development criticala multibillion-dollar, multiyear commitment with risks and rewards different for each molecule. Even FDA approval for sale does not eliminate risk exposure, since drugs can be withdrawn if serious complications are discoveredan outcome certain to produce a flurry of class action lawsuits. Accordingly, the industry lobbies that strong IP is necessary for companies to recoup R&D costs, have cash to expand R&D activities, and also accumulate defensive legal reserves.

At the other end of the corporate spectrum, small biotech companies also struggle with IP. Nimble and highly motivated, most struggle to manage cash "burn" just to survive among the big industry players. They face not only high R&D costs, but also substantial legal fees, as they work to create new products or technologies. With limited cash and only a small number of patents in their IP portfolios, they produce little competitive pressure in the industry. Most remain speculative investments with almost no opportunity to independently market drugs. To persist, many companies form a symbiosis with big pharma, while others offer themselves as preyinnovative fodder for those with the resources to consume them.

Meanwhile, the richest and most plentiful source of low-cost innovation for companiesacademic researchis fast drying up. Universities, while still friendly to commercial interests, better understand the value of their IP and have become shrewd negotiators. Technology transfer negotiations require more timeand end up costing much more money. In response to these complications, deals and collaborations with individual researchers have fallen out of favor, in preference to comprehensive "blanket" alliances. These sweeping arrangements, however, are much less attractive to the universities, particularly in the face of mounting reports of conflict of interest. The ideal economic balance for IP transfer from the public to private domain remains to be found.

The present drug development paradigm thus appears to suffer from economic challenges that have yet to be solved. Perhaps the most worrisome of these problems is the industry's failure, despite great internal effort, to decrease drug development costs. Without a turnaround in this metric, no reversal of drug output or consumer pricing trends can resulta mounting concern as Western society ages and demands more healthcare. Increasing tensions is the recall of several heavily marketed drugs that may have shown dangerous side effects even in early testing. Not only has this damaged consumer trust that companies will make safety the top priority, but it has also called in question the FDA's practices and relationship with industry. It has even forced a reevaluation of the financial risks and liabilities associated with large-market blockbuster drugs.