Do Small Biotechs Really Produce More AND BETTER Drug Candidates?

...and if so, why?

This is a crucial question for the U.S. economy since (until recently anyway) pharmaceuticals were one area where the U.S. wasn't running a massive trade deficit.

It's a cliche that Big Pharma can't find its own leads and has bought its pipeline from biotech for the past 10-15 years, which serves effectively as free-range R&D (until the eventual round-up.) Having spent most of my time before medical school consulting at smaller biotech companies, and several times finding myself with unexpected free time because one of those companies was bought for its portfolio and closed, I've spent my fair share of time wondering about this question. However I actually can't recall seeing an analysis of biotech vs big pharma output, or in particular, of the quality of drug candidates judging by ROI or absolute annual sales. But let's assume that the disparity is real. Big pharmas certainly assumes the disparity is real - they sometimes try to duplicate the perceived success of small biotechs by putting together small entrepreneur-like groups, like Glaxo. So what is it, exactly, that is more productive about small biotechs?

1) The most obvious: small biotechs have a much greater incentive to get their (usually lone) drugs into clinical trials - if they don't, they disappear. Big pharma management is not so incentivized, and timelines of individual drugs are sometimes adjusted to fit the portfolio. What's being maximized is completely different for a start-up biotech and a multi-drug big pharma. Overall sales is what's being maximized in big pharma, while speed to first-in-human and to market is being maximized in biotech (it equates to survival and therefore financial incentive.)

2) Small biotechs may produce more candidates, but on average lower quality candidates. Because of money and therefore time limitations, they're willing to push through the first lead where the Glaxos of the world have the cash to keep tweaking the skeleton. You would think this would necessarily mean that the big pharmas then wouldn't be interested in these low-quality candidates, but a) not all decisions are rational, and hype and groupthink have effects in the real world ("We have to buy them to get the first XYZ inhibitor!") and b) the first-in-humans candidate of a given class is often "lower quality" than what might have been the second-in-humans candidate, which as mentioned above the biotech won't wait around to discover. The perception and impact of candidate quality difference is highly context-dependent in this regard.

3) At biotech start-ups, scientists have the greatest influence on senior management or are senior management. At companies in general, typically the management of the group closest to revenue generation is the one that has the most influence over the CEO. In contrast to biotechs, at big pharmas, this means sales, not drug discovery. In a company that doesn't yet have any sales, this means clinical, or (if even earlier in the cycle) chemists and biologists. Once sales obtains this position, the amount of time the CEO spends thinking about new drug candidates decreases and development plans tend to be de-emphasized (until everyone panics and it's too late.) I had long suspected that Genentech owes its productiveness to keeping its scientists in key decision-making positions (including at the very top) and after having consulted there I'm more convinced that this is the case.

4) There are scale-dependent effects that would be present in any organization but are exacerbated by the uniquely long product development cycle in pharmaceuticals. Amplifying this is the level of government oversight in the industry and the consequences of regulatory transgressions, leading to what are referred to in politics as Olsonian veto blocs inside the company, large groups of people who have a say in the process and have nothing to lose by saying "no" but everything to lose by saying "yes" at an inappropriate time. In the pharmaceutical world this is legal, regulatory, and QC - absolutely necessary to the industry, but their influence on timelines seems to be strongly scale dependent. In my own experience in the industry, some of the most focused "how do we get this done" people I've worked with were in QC at the biotech level. Some of the most obstructionist were in QC at the big pharma level. In general a company with a large revenue stream should be expected to be much more risk-averse than a company with no profits. In the same vein, once a drug is approved, any new investigations could potentially yield a new indication that would either provide some new revenues for one indication, or new safety findings that would diminish revenues across the board for the whole molecule, for all indications. Consequently post-marketing investigations are usually done with kid gloves.

5) Free-riders are proportional to company size (again we see scale-dependent effects.) At a smaller company, free-riding is obvious to all, more immediately detrimental to the future of the entire company, and more quickly punished. This is not the case at large companies with deeper pockets, many of the employees of which seem to be benefiting from a kind of corporate welfare state. This situation often arises at low surface-area-to-volume companies, where a greater fraction of employees interacts only with other employees rather than with customers, vendors, or industry contacts outside the company. It would be worth seeing whether there's a sweet spot for company size in terms of a relationship between number of personnel vs. first-in-human clinical trials per person*year, including outlicensed compounds. (My prediction is that this drops with increasing company size, with a curve that steepens around 250 head count and starts leveling out a little at a thousand.) Anecdotally, I have also noticed an odd scale-dependent increase in the proportion of employees at a company who have ever worked in government - not from related agencies like FDA, but from local governments or other areas. Larger companies are more government-like.

[Story time - and if you know me personally, you know which company I'm talking about. I couldn't help but reflect that the strategy of employees of one big pharma subsidiary company where I worked was exactly that of a parasite in the gut of a large, warm mammal that can afford to miss a few calories here and there. They downside to the strategy is that they're super-specialized to thrive only in that environment; that is, their skillset degenerates into "how to stay employed at ABC Big Pharma". Consequently sometimes they have to transfer between mammals of the same species (i.e. subsidiaries) to survive. They day it was announced this particular subsidiary was being shut down by the parent, I saw groups of people openly weeping as if Princess Diana had died all over again.]


CONCLUSION

If you didn't get enough speculation already, read on. Plus this part also has colorful analogies that I think are nonetheless still useful.

- Though I haven't been able to find the papers, from my undergraduate classes in anthropology I learned that there was research done on Amazonian hunter-gatherers showing that there are village sizes beyond which there tend to be fission events. It's not that the village hits 150 and everyone draws straws to determine who moves, but there are dynamics that invariably take advantage of a trigger event to cause the split (the chief and his brother have a fight, there's a food shortage and some families move to find better hunting areas, etc.) This suggests that there are in general optimum sizes for human social organizations. This research may have a direct bearing on the productivity of small vs. large companies.

- The biotech industry in each part of the country where there is an active scene (the Bay Area, Seattle, San Diego, and Boston) is a notoriously small world. People often end up working together in different combinations at different companies, merely being re-sorted based on skillsets. In Edward Bellamy's 1888 utopian novel Looking Backward, he describes a system where workers have general industrial skills and are (centrally) resourced to new factories based on need. Of course Bellamy was arguing from a socialist standpoint but in biotech it seems that the free market has already generated exactly this arrangement.

- The pharmaceutical industry is not the only one that is dominated by deep-pocketed century-old behemoths that present barriers to entry and snap up competition. If biotechs are as everyone expects more productive than big pharma, this is bad for patients and bad for the economy, and yet there is no check on the growth of the largest companies. It's as if we're at the end of the Cretaceous (with animals so large they need second brains to coordinate their movements) or in the middle of the Second World War (where the incentive to build ever-bigger battleships yielded the monster Yamato.) In both cases, conditions changed (climate and aircraft, respectively), and selection no longer favored the most massive, but it's hard to see how this trend will ever reverse itself, since it's hard to see how capital accumulation can ever be economically selected against. That is, I don't know what would be capitalism's equivalent of Chicxulub or P-51 Mustangs that would obviate the uneven accumulations of capital, so for now we're stuck with biotech serving as free-range R&D for big pharma. (Unless tax burdens on the largest corporations goes up to make those accumulations into liabilities. Even so, this would be a dangerous game for small biotechs to want the government to start playing.)

An older version of this article is cross-posted at my science and philosophy blog, Cognition and Evolution.