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Nic S.Terblanche
is Professor and former Chair of the Department of Business Management, University of Stellenbosch, South Africa. Dr Terblanche’s
teaching and research interests include new product development, customer retention and customer experience in retail settings.
He was President of the Southern Africa Institute of Management Scientists for two terms and served for ten years as Editor and
Editor-in-Chief of Management Dynamics: Contemporary Research, an accredited management journal. Dr Terblanche has published
in Harvard Business Review, International Journal of Market Research, International Journal of Retail & Distribution Management and Journal
for Studies in Economics and Econometrics.
Abstract
The pharmaceutical industry experienced an unprecedented rate of increase in the cost of developing
new drugs while the number of new drugs that were approved and accepted in the marketplace has
reached a very low level. Various factors are responsible for this state of affairs. One of the major
opportunities available to the pharmaceutical industry to improve this situation is to collaborate with
the biotechnology industry. The future solutions to a host of current diseases as well new strains of
existing ones lie in the cooperation between these two industries. The pharmaceutical industry will,
however, have to carefully manage challenges such as increased governmental control and the damaged
image of the industry. There are many opportunities offered by offshoring, advanced application of
information technology, climate change and a new approach to sales and marketing, all of which the
pharmaceutical industry can exploit. Should the pharmaceutical industry manage to address the issues
responsible for the high costs prevalent in the industry, its role as partner with the biotechnology
industry could prove to be very beneficial for both these industries.
Journal of Commercial Biotechnology (2008) 14, 201–212. doi:10.1057/jcb.2008.11;
published online 29 April 2008
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www.palgrave-journals.com/jcb
Terblanche
biotechnologies.1 In 2004, it was estimated the press, a total number of 334 mergers and
that biotechnology and genomics companies acquisitions were completed in 2001 and this
performed about one-fifth of all was only seven less than the number
pharmaceutical research and development completed in 2000.5 This consolidation trend
(R&D).2 The dynamics of the pharmaceutical was fuelled by a number of factors such as
and biotechnology industries, primarily driven achieving economics of scale, getting access to
by technological changes, have led to and operating in important geographic and
knowledge and value creation being moved to therapeutic markets, reducing surplus capacity
a network of firms.3 In the past, knowledge and concentrating market share.6 In 2000 the
and value creation took place in the top 20 companies, in terms of revenues, were
individual firm. The eventual ‘partnership’ responsible for 64.6 per cent of global sales.5
between biotechnology and the Recent pressures to turn out new products
pharmaceutical industry has been obvious in reduced time periods have led to advances
from the first developments in biotechnology in new processes of new product development
and is now regarded as one of the top eight that are less streamlined and rigid in
health industry issues for 2008.4 Over the past comparison with conventional new product
decade, various events have not only development processes. The pharmaceutical
complicated the development of new drugs in industry has particular unique characteristics
the pharmaceutical industry, the cost of that dictate the development of new products.
developing a new product has also escalated at It is highly regulated by governments, spends
an alarming rate. This hampers to a large much more than the average of all industries
extent the potential number of good drugs on research and development and new
that the combination of biotechnology and product development is largely determined by
the pharmaceutical industry can produce. the discovery of new clinical entities. The
focus of product assessment has also
BACKGROUND undergone a significant shift towards
The value, significance and role of the consumer acceptance. On the one hand, this
development of new products vary from one is the result of better-informed consumers
industry to another. For some firms their who accept responsibility for decisions
whole future depends on producing new concerning their health and medical care. On
products while others could carry on as much the other hand, pharmaceutical companies
as they have done in the past without now understand the genetic composition of
developing anything new. patients and this enables these companies to
For most firms new products are essential segment patients on the basis of
for the progress of the firm. Intensified global pharmacogenomic descriptions.
and local competition, better-informed and
educated consumers, governmental regulations PURPOSE OF THE PAPER
and controls, adverse economic conditions, The purpose of this paper is to provide an
fast changing technology and the ever overview of the pressures experienced by the
decreasing life span of products are typical pharmaceutical industry in producing new
motives justifying the development of new drugs. These pressures at times almost
products. The pharmaceutical industry was debilitated the industry and entreated it to
subjected to extreme financial constraints in partner with and benefit from
the late 1990s and this led to a large number biotechnological expertise. There are,
of mergers and acquisitions with the major however, a number of promising
aim to improve profitability. Although it was developments taking place from which the
mainly the big firms such as Hoechst, Zeneca pharmaceutical industry can benefit and regain
and Glaxo Wellcome that made headlines in its earlier respectability and profitability. The
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New pharmaceutical product development
Idea screening
THE NEW PRODUCT
Business analysis
DEVELOPMENT PROCESS
Development
To highlight the complexities and their
Test marketing
accompanying cost implications of new
Commercialisation
product development in the pharmaceutical
industry, I will briefly compare the new New product
product development process in the
pharmaceutical industry with that found in Figure 1: The conventional new product
most other industries. Table 1 and Figure 1 development process10
illustrate the typical aforementioned processes.
Over time the new product development industry as a host of regulations that govern
process in nonpharmaceutical industries has the expensive clinical trials in respect of safety
also experimented with ways that do not and efficacy (and nowadays cost-effectiveness
conform to the sequential process illustrated in as well) of a drug they have to be adhered to.
Figure 1. One such approach followed by the Clinical trials are responsible for the major
Japanese (which they termed rugby) involved proportion of the development cost of a drug.
the simultaneous operationalisation of various Some new products developed in other
new product development activities with the industries, for instance, do not have to
purpose to speed up the new product undergo test marketing if the product concept
development process and make it more and business analysis indicated the product to
flexible.7 Apart from a focus on customer be financially viable and accepted by
needs and wants, the other component that customers. A recent survey also found that a
these two processes share is that the closer the firm’s spending on R&D does not necessarily
product/drug is to finalisation, the more translate into corporate success; in fact, no
expensive the processes become. This is significant relationship was found between a
particularly true for the pharmaceutical firm’s R&D spend and corporate success.8
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Terblanche
diseases are increasing all the time – when the America on R&D of pharmaceutical products
effects of global warming on diseases is taken reached an all time high of $55.2bn.11 In the
into consideration, one realises the enormous same year the FDA only approved 22 new
challenges the pharmaceutical industry is molecular entities and biologics. The
confronted with. significance of these figures only comes into
perspective when it is compared with that of
1996 when the FDA approved 53 new entities
WEAKNESSES WITH REGARD and the amount spent on R&D for 1996 was
TO THE DEVELOPMENT OF less than half of the money spent in 2006.
NEW DRUGS Figure 2 illustrates these figures.
The pharmaceutical industry’s record of the DiMasi et al.12 analysed 68 randomly
past two decades is one of hardship and selected new drugs from ten pharmaceutical
mounting challenges. firms and found that the total pre-approval
cost estimate for a drug was US$802m (in
Development costs of new 2000 US$). The amount of US$802m is the
medicines total of pre-clinical and clinical period cost
Over the past 20 years the development costs estimates. The out-of-pocket cost per
of new drugs have increased at an approved new drug is US$403m and the
unprecedented rate, while the number of new capitalised total cost is US$802m. These
drugs that were approved and accepted in the amounts indicate that the cost of time
marketplace has reached a very low level.12,13 represents almost 50 per cent of the total cost.
The seriousness of this situation has attracted The aforementioned figures, as well as those
attention of the FDA who published a ‘Critical from two earlier comparative studies are
Path’ document in which the problems illustrated in Figure 3. Figure 3 illustrates that
encountered in drug development are spelled the total capitalised cost per drug in 2000 was,
out.14 The aforementioned document also respectively, 2.3 and 2.5 times higher than
appealed for novel approaches to enhance those in the two previous studies.
current drug development procedures. In 2002 The pharmaceutical industry is very aware
the FDA approvals of new chemical entities of the numerous expectations that have to
(NCEs) were the lowest for the 1996–2006 be met. A recent study by Skrepnek and
decade; only 17 NCEs were approved.13 In Sarnowski17found that regulatory and capital
the year 2006, the amount spent in North requirements, in addition to investor
50 000 60
R&D Spending NMEs & New Biologics Apprived
45 000
No. of MMEs & Biologics Approved
50
R&D Spending (US$ Millionms)
40 000
35 000
40
30 000
25 000 30
20 000
20
15 000
10 000
10
5 000
0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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New pharmaceutical product development
900
800
802
700
500
467
400
200
214
100 138
104
84
54
0
Hansen DiMasi et al. Current Hansen DiMasi et al. Current Hansen DiMasi et al. Current
(1979) (1991) (1979) (1991) (1979) (1991)
Figure 3: Trends in capitalized pre-clinical, clinical and total cost per approved new drug12,15,16
expectations, were diligently adhered to during knowledge of the human genome has become
the clinical phase trials. To ensure that new available, it also became increasingly clear that
drug development meets all the diverse the human genome was much more complex
expectations, a range of decision-making than any initial indications.
techniques such as prior experience/intuition/ Despite a host of opportunities available to
human judgment, net present value, internal the pharmaceutical industry, the industry will
rate of return and pharmaeconomic methods not be able to benefit from these
(defined as ‘the description and analysis of the opportunities unless it changes the way it
costs of drug therapy to healthcare systems and operates.11 The major obstacle inherent to the
society’) are utilised at every stage of R&D.17 pharmaceutical industry appears to be a lack
of innovation that makes it ineffective at
The pharmaceutical industry’s producing new therapies for the wide range
inability to capitalise on of medical needs that exist all over the world.
opportunities An often cited statement in a 2000 study
Towards the end of the previous century, a states that it took 17 years on average to
number of exciting prospects were on the translate original research to benefits in
horizon for the pharmaceutical industry. At patient care.18 Knowledgeable observers
that point in time there was an acceleration in identified the following three aspects to be
the progress in genetic understanding that was the challenges that require addressing in
seen as a means to empower firms to segment order to enhance innovation:19
patients on the basis of pharmacogenomic
descriptions and to tailor patients’ therapies to • The slow pace of adoption of the best
their specific needs. The use of such innovations.
knowledge of an individual’s genetic • Lack of evidence-based research regarding
composition to tailor drugs and significantly which innovations are the best.
enhance the safety and efficacy of drugs • Failure to achieve transforming systemic
within sub-populations showed great innovations necessary for a sustainable
promise.9 Unfortunately, as more and more healthcare system.
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New pharmaceutical product development
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Transparency
The public will demand
independent verification of all pre-
and post-marketing clinical data
submitted by Pharma
reported that up to 75 per cent of malaria thus make it possible for parasites to fully
cases occur in children, and over 3,000 grow fast enough to be transferred.
children die from malaria each day.25 Population relocations, deforestation, drug
The extent of malaria transmission is and pesticide resistance, and the deterioration
generally restricted by climate conditions, of the public health infrastructure in many
while floods (and sometimes droughts) are countries are changes that take place all over
ideal conditions for epidemic outbreaks. the world. The severity of these changes is
Favourable warm conditions enhance biting amplified by changes in the climate which in
and reproductive rates, extend breeding turn promote the spread of malaria.28,29 It is
seasons and reduce the maturation of microbes highly likely that warming and weather
within mosquitoes. Malaria transmission take extremes are going to increase their role in
place when a mosquito take a blood ‘cocktail’ spreading malaria.30
from a person suffering from malaria, The West Nile Virus (WNV) and Lyme
incubates the parasite and then infects a disease are two further diseases that are
person by injecting the parasite when it bites particularly susceptible to changes in the
that person. In warmer temperatures the rate climate. It is suspected that an increase in
of maturation of the malarial parasites inside asthma rates among developing and developed
the mosquitoes is quicker.26 McArthur27 countries is due to the combined effect of air
found that at 20 °C (68 °F) the incubation pollution and allergen exposure. In a
time of the Plasmodium falciparum malarial comprehensive study of the effect of climate
protozoa is 26 days. At 25 °C (77 °F) the changes by the Harvard Medical School it was
incubation time is halved. Anopheline found that ‘changes in atmospheric chemistry
mosquitoes transmit malaria and they only and climate that tend to increase the presence
survive for a few weeks: warmer temperatures of pollen and fungi in the air therefore
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prescriptions whereas the future focus should well as correlating marketing inputs with
be on the retention of existing patients and prescription writing are further possibilities of
acquisition of new patients. low-cost labour. One can thus conclude that
cost-oriented offshoring enables a firm to
Possibilities offered offshore access higher value processes that go further
One of the promising possibilities for the than costs.32
pharmaceutical industry to simultaneously
harness cost savings and increase the speed at A greater role for information
which new compounds are developed is to go
technology
offshore. Some of the major pharmaceutical
Information technology has already made a
firms, namely Novartis, Merck and Pfizer for
valuable contribution to speed up the clinical
instance, have already conducted clinical trials
trial process.33 The first wave of information
in India and China.32 A major concern for
technology used electronic data capturing to
firms that consider moving some of their
accelerate the collection and analysis of data.
business overseas is the poor protection of and
Marhawa et al.34 suggest that the second wave
the lack of respect for intellectual property in
of information technology offers even greater
some developing countries that offer labour
savings if a firm implements an end-to-end
and other cost savings. Two areas in the
perspective where the planning process for a
operations of a pharmaceutical firm are
number of clinical trials are integrated using
suitable to benefit from the unique
modular and reusable tools in the planning
possibilities offered by offshoring. These two
process. Despite the culture of independence
areas are clinical trials and improvement in
among clinical trial designers, it has also
the effectiveness of the sales force.32 Clinical
become clear that the advantages of
trials are responsible for 50–60 per cent of the
standardisation and reuse all the way through
development cost of a new drug. Going
the design process offer meaningful benefits.
global with clinical trials could save costs and
Three factors are responsible for this
improve productivity. A large percentage of
reconsideration.34 First, it is accepted that
clinical trails miss deadlines because patients
integrated planning utilises all the firm’s
are not recruited quickly enough. The broad
resources across trials. Reusable models save
base of patients in lower-cost countries has
time in subsequent designs. Secondly,
attracted the attention of a number of major
electronic data collection offers incentives for
pharmaceutical firms and these firms are
trial designers to modularise the process and
recruiting physicians and patients in India and
thus reduce the development and integration
China and countries in eastern Europe. The
costs of electronic case reports for every trial.
creation of data-management hubs in lower-
The third factor, following logically from the
wage regions is another possibility to reduce
first two, is that the standardisation of data
the cost of clinical trials in offshore locations.
collection enhances the ability to perform
Novartis established a data-management hub
analyses early in a trial.
in India, while Pfizer and Wyeth have
launched similar operations.32 As far as the
sales and marketing operations are concerned, CONCLUSIONS
low-cost labour makes it possible to increase The pharmaceutical industry is facing
the gathering and analysis of sales and numerous challenges as far as new product
marketing data. Low-cost labour also offers development is concerned. Events of the past
other advantages such as analysing smaller decade have left the pharmaceutical industry
geographic markets and noncore brands in the with a dented image. Investors regard the
‘evening’ of their lifecycle. Early identification industry as too risky for investment and other
of markets trends and competitor’s activities as stakeholders such as consumers and healthcare
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New pharmaceutical product development
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product development principles in the
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Management, University of Stellenbosch.
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Terblanche, N. S. (2004). Marketing, Oxford, Cape
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