Spin-outs and venture capital won’t fill the pharma R&D gap

Now that Pfizer has, for the moment, been rebuffed in its attempt to take over AstraZeneca, it’s worth reflecting on the broader issues this story raised about the pharmaceutical industry in particular and technological innovation more generally. The political attention focused on the question of industrial R&D capacity was very welcome; this was the subject of my last post – Why R&D matters. Less has been said about the broader problems of innovation in the pharmaceutical industry, which I discussed in an earlier post – Decelerating change in the pharmaceutical industry. One of the responses I had to my last post argued that we shouldn’t worry about declining R&D in the pharmaceutical industry, because that represented an old model of innovation that was being rapidly superseded. In the new world, nimble start-ups, funded by far-seeing venture capitalists, are able to translate the latest results from academic life sciences into new clinical treatments in a much more cost-effective way than the old industry behemoths. It’s an appealing prospect that fits in with much currently fashionable thinking about innovation, and one can certainly find a few stories about companies founded that way that have brought useful treatments to market. The trouble is, though, if we look at the big picture, there is no evidence at all that this new approach is working.

A recent article by Matthew Herper in Forbes – The Cost Of Creating A New Drug Now $5 Billion, Pushing Big Pharma To Change – sets out pharma’s problems very starkly. Continue reading “Spin-outs and venture capital won’t fill the pharma R&D gap”

Why R&D matters

The takeover bid for the UK/Swedish pharmaceutical company AstraZeneca by US giant Pfizer has given rare political prominence to the issue of UK-based research and development capacity. Underlying much opposition to the deal is the fear that the combined entity will seek to cut costs, and that R&D expenditure will be first in the firing line. This fear is entirely well-founded; since Pfizer took over Wyeth in 2009 it has reduced total R&D spend from $11bn to $6.7bn, and in the UK Pfizer’s cost-cutting reputation was sealed by the closure of its Sandwich R&D facility in 2011. Nor is the importance of AstraZeneca to UK R&D capacity overstated. In the latest EU R&D scoreboard, of the top world 100 companies by R&D expenditure, only 2 are British. One of these is AstraZeneca, and the other GSK. And, if the deal goes ahead and does result in a significant reduction in UK R&D capacity, it wouldn’t be an isolated event. It would be the culmination of a 30 year decline in UK business R&D intensity, which has taken the UK from being one of the most R&D intensive economies in the developed world, to one of the least.

My recent paper “The UK’s Innovation Deficit and How to repair it” analysed this decline in detail and related it to changes in the wider political economy. One response I’ve had to the paper was to regard this decline in R&D intensity as something to be welcomed. In this view, R&D is a legacy of an earlier era of heavy industry and monolithic corporations, now obsolete in a world of open innovation, where valuable intellectual property is more likely to be a brand identity than a new drug or a new electronic device.

I think this view is quite wrong. This doesn’t mean that I think that those kinds of innovation that arise without formal research and development are not important; innovations in the way we organise ourselves, to give one example, can create enormous value. Of course, R&D in its modern sense is just such a social innovation. Continue reading “Why R&D matters”

The economics of innovation stagnation

What would an advanced economy look like if technological innovation began to dry up? Economic growth would begin to slow, and we’d expect the shortage of opportunities for new, lucrative investments to lead to a period of persistently lower rates of return on capital. The prices of existing income-yielding assets would rise, and as wealth-holders hunted out increasingly rare higher yielding investment opportunities we’d expect to see a series of asset price bubbles. As truly transformative technologies became rarer, when new technologies did come along we might see them being associated with hype and inflated expectations. Perhaps we’d also begin to see growing inequality, as a less dynamic economy cemented the advantages of the already wealthy and gave fewer opportunities to talented outsiders. It’s a picture, perhaps, that begins to remind us of the characteristics of the developed economies now – difficulties summed up in the phrase “secular stagnation”. Could it be that, despite the widespread belief that technology continues to accelerate, that innovation stagnation, at least in part, underlies some of our current economic difficulties?

G7 Real GDP per capita plot
Growth in real GDP per person across the G7 nations. GDP data and predictions from the IMF World Economic Outlook 2014 database, population estimates from the UN World Population prospects 2012. The solid line is the best fit to the 1980 – 2008 data of a logistic function of the form A/(1+exp(-(T-T0)/B)); the dotted line represents constant annual growth of 2.6%.

The data is clear that growth in the richest economies of the world, the economies operating at the technological leading edge, was slowing down even before the recent financial crisis. Continue reading “The economics of innovation stagnation”