The Jan. 27th issue of The Economist has an interesting article, "Billion Dollar Pills," about the problems affecting the pharmaceutical industry. Industry profits are declining amid generic competition and pressure from large purchasers (including the government). New therapies are becoming more costly, and capital spending has been funnelled from R&D to sales and marketing. The bill for bringing a new drug to market is inexorably rising. Estimates run from $500 million to $2 billion, with one expert pegging it at $1 billion.

So what to do? Disaggregating the model is one suggestion, whereby pharma companies focus on a few areas they specialize in--discovery, developing, and marketing are mentioned. They could then contract out to specialist firms other parts of the business they need to add to their core strengths to have a viable product, or perhaps develop joint ventures.

The article mentions that Big Pharma has had profit margins of around 20%, double that of Big Oil. The oil and drug businesses are supposedly "self-liquidating," uniquely among big industries. An oil firm has to find new oil, and a drug company has to produce a new drug. The article says that Coca-Cola can just continue peddling sugar water (thank you, Steve Jobs). (Well, no, Coca-Cola has two problems, one called Pepsi, and another consisting of a bunch of newer and sprite-lier beverage firms that are rolling out new varieties of bottled waters and power drinks. Hansen Natural's stock went from $0.55 in 2003 to over $50 in 2006 while Coke's stock went from, well never mind. Let's face it: the company is being out-innovated by its smaller rivals.)

Big Pharma's lawyers continue to defend their patents, as if that will somehow make the industry more innovative.

A Wharton researcher, Patricia Danzon, thinks the industry is resting on its laurels from past successes. Joseph Fuller, head of consultancy Monitor, points out that drug labs are still the big and bureaucratic behemoths they were in the 1970s. Big Pharma has become Enormous Pharma. A better innovation killer can't be scripted.

Meanwhile, smaller pharmaceutical firms are discovering new methods of finding new drugs, such as the use of molecular imaging techiques being pioneered by the British drug company GSK. This will allow personalized drug therapies available for smaller and more segmented markets, which can still be profitable. The blockbuster approach is unable to fill an emptying pipeline. R&D spending is up, but "the number of new drugs has still to grow." Actually, today's Investor's Business Daily (no link available, but there is an online edition) carries an article, "Pharma Industry Lags on Research Efficiencies," citing a recent GAO report that points out that from 1993 to 2004, U.S. drug R&D investment increased 147% while drug approvals rose by 38%. Only one-third of FDA-approved drugs were new; the others were "me-too" drugs. The former president and chief operating officer of Abbott Laboratories says that the "top 100 drugs developed since 1950 targeted only 50 conditions."

Jeffrey Kindler, the new CEO of Pfizer, has slashed costs (including giving pink slips to 10,000 sales people) and wants the firm to become less secretive and to reach out to partners. Bravo, Mr. Kindler, and how about kicking the patent habit to jump start this initiative?

Pharma should reinvent itself by kicking its blockbuster habit and by looking for innovative methods and drugs that target new markets and smaller groups of patients. It should also zero in on treatments tied to the unfolding of the human genome.

The old blockbuster model based on the trial-and-error method is being replaced. Drug firms can either seize the opportunities or be swept into the dustbin of economic history.

So, here's the issue we have not addressed yet, at least not clearly.

Assume all we say is correct, especially about big pharmas having become prisoners of their patents and of the patent system, the me-too drugs waiste, and so on. Apparently, as we also claim, most innovative new drugs come from small companies, labs, and similia. They are probably financed, at least in part, with federal research money, as many of these labs are connected to or spinoffs of university labs. They come up with the chemical or biological idea and prototype, test it a bit and then approach the big company to get it developed into a marketable medicine. Carrying out clinical trials, II and III is expensive and long, one needs to witn FDA approval, market the medicine world wide, etcetera.

In thi system big pharma is just the legal and marketing department of an "integrated industry", where most R and part of D is done by small companies, which then sell their innovative products to the big ones. The main thing being traded is know-how, the form in which it is traded is a patent, or a collection of patents.

If we take away patents, will small companies still come up with the drugs? And how do they "sell" them to the big ones? And how do these exploit their purchases? Are small labs capable of credibly transferring valuable know-how to big companies in the absence of a patent? What if the "secret" leaks and other take advantage of it?

I guess that's the issue. Obviously, one can think at a change in the organization of the industry, with the disappearance of big pharma once patents are abolished. Because patents are gone, the big marketing and legal departments are no longer needed, neither to the firm nor to the industry.

These are good questions and cry out for answers. Federal research money funds a considerable portion of pharma R&D. Venture philanthropy also funds an increasing component of it. Sharon Begley's science journal column, "Why Nonprofits Fund For-Profit Companies Doing Drug Research," Wall Street Journal, Jan. 26, 2007, mentions several charities that are writing checks, such as the Juvenile Diabetes Research Foundation, which is supporting MacroGenics Inc., a Maryland biotech firm involved in phase-2/3 clinical trials of an antibody that might slow type-1 diabetes. JDRF is also funding some other firms' clinical trials. The Michael J. Fox Foundation and the Myelin Repair Foundation are also funding drug development. The numbers are small, but growing.

In a world without patents, will small drug firms make new drugs? This is an empirical question, but I think the answer is yes. How will they "sell" them to the big ones? Perhaps they will do more joint ventures, which might be blocked by patents and the secrecy promoted by the patent system. Certainly removing the rent seeking and litigation fostered by the patent system would take out a huge cost.

Would joint ventures enable developers to scale up their investment in various parts of the development chain from R&D to development to clinical trials, etc., while limiting their profits but also limiting their risks (think of the patent-free development of the polio vaccine, which involved a consortium of six drug firms).

Would an end to patents further the development of an open source model of drug development?

What role would pharma benefit managers (e.g., McKesson, Cardinal Health, Medco, the spinoff from Merck) play in a world without patents?

Open source biomedical research is already happening. I am not sure they have found their Linux yet, but it is there. Probably there is no Linux in this area, as it is very decentralized and heterogeneous. Anyhow, www.thesynapticleap.org is an example and the model is clearly OSS, as they rely heavvily on computer simulations to carry out research.

I am also positive that small firms will continue to be born and innovate even without the option to sell the patents to the big ones. They will probably go on and produce the drug as well, or sell it to some other firm that would specialize in just producing for the mass markets drugs invented elsewhere, and possibly competing with each other. Like publishers publish different books for different audiences and even competing ones, I see no reason why a chemical company could not produce dozens of anti-biotics, one the partial substitute of the other, one invented by one small lab and the other invented by a different competing small lab. To the extent big pharmas are now, basically, the legal, marketing and "manage the FDA" departments of the drug industry, a pharma industry without patents may do without such a large legal and marketing departments. As for handling the FDA, that's another story, I am afraid, which needs another discussion.

I think open source biomedical research has found their Linux, they just need to embrace it. Another, perhaps better, example of collaborative research is distributed computing. Distributed computing, if you are uninterested in reading the Wikipedia article, is using your computer's spare computing processes (when it is idle) to be put towards something you find meaningful. The most popular biotech related distributed computing project is folding@home, where people use their computers to analyze how proteins folds to discover cures for Alzheimer's, Cancer, Parkinson's and other diseases. In the non-biotech area, Seti@home is a project where people can use their computers to analyze radio telescope information in the Search for Extraterrestrial Intelligence. I have read that there are companies using distributed computing as a business model; they pay people for their spare computing power and then sell it to companies that can't afford supercomputers but need supercomputing power.