by Adam Hartung | Oct 9, 2013 | Current Affairs, In the Rapids, Innovation, Lifecycle
In 1985 there was universal agreement that investors should
be heavily in pharmaceuticals.
Companies like Merck, Eli Lilly, Pfizer, Sanofi, Roche, Glaxo and Abbott
were touted as the surest route to high portfolio returns.
Today, not so much.
Merck, once a leader in antibiotics, is laying off 20% of
its staff. Half in R&D; the
lifeblood of future products and profits.
Lilly is undertaking
another round of 2013 cost cuts. Over
the last year about 100,000 jobs have been eliminated in big pharma companies,
which have implemented spin-outs and split-ups as well as RIFs.
What happened? In the old days pharma companies had to demonstrate
their drug worked; called product efficacy. It did not have to be better than existing drugs. If the drug worked, without big safety
issues, the company could launch it.
Then the business folks took over with ads, distribution,
salespeople and convention booths, convincing doctors to prescribe and us to
buy.
Big pharma companies grew into large, masterful consumer
products companies. Leadership’s view of the market changed, as it was
perceived safer to invest in Pepsi vs. Coke marketing tactics and sales warfare
to dominate a blockbuster category than product development. Think of the marketing cost in the
Celebrex vs. Vioxx war. Or Viagra
vs. Cialis.
But the market shifted when the FDA decided new drugs had to
be not only efficacious, they had to enhance the standard of care. New drugs actually had to prove better in clinical trials than existing
drugs. And often safer, too.
Hurrumph. Big pharma’s enormous scale advantages in
marketing and communication weren’t enough to assure new product success. It actually took new products. But that meant bigger R&D investments,
perceived as more risky, than the new consumer-oriented pharma companies could
tolerate. Shortly pipelines
thinned, generics emerged and much lower margins ensued.
In some disease areas, this evolution was disastrous for
patients. In antibiotics,
development of new drugs had halted.
Doctors repeatedly prescribed (some say overprescribed) the same antibiotics. As the bacteria evolved, infections
became more difficult to treat.
With no new antibiotics on the market the risk of death from
bacterial infections grew, leading to a national public health crisis. According to the Centers for Disease
Control (CDC) there are over 2 million cases of antibiotic resistant infections
annually. Today just one type of
resistant “staph infection,” known as MRSA, kills more people in the USA than
HIV/AIDs – killing more people every year than polio did at its peak. The most
difficult to treat pathogens (called ESKAPE) are the cause of 66% of hospital
infections.
And that led to an important market shift – via regulation
(Congress?!?!)
With help from the CDC and NIH, the Infectious Diseases
Society of America pushed through the GAIN (Generating Antibiotic Incentives
Now) Act (H.R. 2182.) This gave
creators of new antibiotics the opportunity for new, faster pathways through
clinical trials and review in order to expedite approvals and market launch.
Additionally new product market exclusivity was lengthened an additional 5
years (beyond the normal 5 years) to enhance investor returns.
Which allowed new game changers like Melinta Therapeutics
into the game.
Melinta (formerly Rib-X) was once considered a “biopharma science
company” with Nobel Prize-winning technology, but little hope of commercial
product launch. But now the large
unmet need is far clearer, the playing field has few to no large company
competitors, the commercialization process has been shortened and cheapened,
and the opportunity for extended returns is greater!
Venture firm Vatera Healthcare Partners, with a history of investing in game changers (especially transformational technology,) entered the picture as lead investor. Vatera's founder Michael Jaharis quickly hired Mary Szela, the former head of U.S.
Pharmaceuticals for Abbott (now Abbvie) as CEO. Her resume includes leading the growth of Humira, one of
the world’s largest pharma brands with multi-billion dollar annual sales.
Under her guidance Melinta has taken fast action to work
with the FDA on a much quicker clinical trials pathway of under 18 months for
commercializing delafloxacin. In layman’s
language, early trials of delafloxacin appeared to provide better performance
for a broad spectrum of resistant bacteria in skin infections. And as a one-dose oral (or IV)
application it could be a simpler, high quality solution for gonorrhea.
Melinta continues adding key management resources as it
seeks “breakthrough product” designation under GAIN from the FDA for its RX-04
product. RX-04 is an entirely
different scientific approach to infectious disease control, based on that previously
mentioned proprietary, Nobel-winning ribosome science. It’s a potential product category
game changer that could open the door for a pipeline of follow-on products.
Melinta is using GAIN to do something big pharma, with its
shrinking R&D and commercial staff, is unable to accomplish. Melinta is helping
redefine the rules for approving antibiotics, in order to push through new,
life-saving products.
The best news is that this game change is great for investors.
Those companies who understand the
trend (in this case, the urgent need for new antibiotics) and how the market
has shifted (GAIN,) are putting in place teams to leverage newly invented drugs
working with the FDA. Investment timelines and dollars are looking
far more manageable – and less risky.
Twenty-five years ago pharma looked like a big-company-only
market with little competition and huge returns for a handful of companies. But things changed. Now companies (like Melinta) with new
solutions have the opportunity to move much faster to prove efficacy and safety
– and save lives. They are the
game changers, and the ones more likely to provide not only solutions to the
market but high investor returns.
by Adam Hartung | Nov 5, 2012 | Defend & Extend, In the Swamp, Innovation, Lock-in, Science
Many people equate spending on R&D with investing in innovation. The logic goes that R&D spending is lab spending, and out of labs come innovations. Hence, those that spend a lot on R&D are innovative.
That is faulty logic.
This chart shows R&D spending from the top 20 companies in 2011:
Chart reproduced with permission of Business Insider
Think of your own list of companies that are providing innovations which change your work, or life. Would you include Apple? Amazon? Facebook? Google? Genentech? (Here's the link to Fast Company's 50 most innovative for 2012). Note that none of these companies appear on the list of top R&D spenders.
On the other hand, as you look at the big spender list some things might be apparent:
- Microsoft is #5, spending $9B and nearly 13% of revenue. Yet, for this money in 2012 the world received updates to their aging operating system and office automation software. Both of which failed to register favorable reviews by industry gurus, and are considered far from innovative. And Nokia, which is so floundering some consider it a likely bankruptcy candidate soon, is #7! Despite spending nearly $8B on R&D Nokia is now completely reliant on Microsoft if it is to even survive.
- Autos make up a big part of the group. Toyota, GM, Volkswagen, Honda and Daimler are all on the list, spending a whopping $36B. Yet, even though they give us improvements nobody considers them (especially GM) very innovative. That award would go to little Tesla Motors. Or maybe Tata Motors in India.
- Pharmaceuticals make up the dominant industry. Novartis, Roche, Pfizer, Merck, Johnson & Johnson, Sanofi, GlaxoSmithKline and AstraZeneca are all here – spending a cumulative $54B! Yet, they have all failed to give the world any incredible new drugs, all have profit struggles, and the industry is rife with discussions about weak product pipelines. The future of modern medicine increasingly is shifting to genetic solutions, biologics and more specific alternatives to the historical drug regimes from these aging pharma R&D programs.
Do you see the obvious pattern? Most big R&D spenders are not really seeking innovations. They are spending money on historical programs, following historical patterns and trying to defend and extend the historical business. In other words, they are spending vast sums attempting to sustain (or recapture) historical success. And, as the list shows, largely doing a pretty lousy job of it.
If you were given $10,000 to invest would you select these top 20 R&D spenders – or would you look for other, more innovative companies. From a profitability, rate of return and trend perspective, most of these companies look weak – or downright horrible.
Innovators don't focus on what they spend, but where they spend it.
The companies most known for innovation don't keep spending money year after year on their old business. Instead of digging deeper into what they already know, they invest laterally. They spend money putting the pieces together in new, unique ways. They try to find new solutions to old problems, using new – even fringe – technologies. They try to develop disruptive solutions that actually change the marketplace, rather than trying to make something that already exists better, faster or cheaper.
Lots of people like to think there is "scale" in research. Bigger is better. What's more important, for investors, is that there is "diminishing returns." The more you research an area the more you have to spend to find anything new. The costs keep escalating, as the gains shrink. After investing for a while, continuing to research an area is not a good investment (although it may be very intellectually interesting.)
Most of the companies on this list would be smarter to scrap their existing R&D programs, cut the budget in half (at least,) and then invest it somewhere very different. Instead of looking deeper, they need to look wider – broader. They need to investigate alternative solutions, rather than more of the same. They need to be putting more money on fringe opportunities, and a lot less into the core.
Until they do, few on this list are very good investment bets. You'll do better investing like, and in, the real innovators.
by Adam Hartung | Mar 12, 2009 | Current Affairs, General, Leadership, Lock-in
What do you think of when someone says "The Dow"? Most people think of the Dow Jones Industrial Average – a mix of some roughly 30 companies (the number isn't fixed and does change). But very few people know the names on the list, or why those companies are selected. As time has passed, most people think of "The Dow" as "blue chip" companies that are supposed to be the largest, strongest and safest companies on the New York Stock Exchange. For this last reason, it's probably time to think about killing "The Dow." It's certainly clear that what the selection committee thought were "blue chip" a year ago was off by about 50% – with many names gone or nearly gone (like AIG, GM, Citibank) and many struggling to convince people about their longevity (like Pfizer).
Quick history: "The Dow" is named afrer the first editor of the Wall Street Journal Charles Dow (co-founder of Dow Jones, owner of the Journal) who wrote in the late 1800s. Building on his early thoughts about markets, something called "Dow Theory" was developed in the early part of the 1900s. Simply put, this said to get a selection of manufacturing companies, and average their prices (the Dow Jones Industrials). Then, get a selection of transportation companies and average their prices (the Dow Jones Transportations [see, you forgot their were 2 "Dows" didn't you]). Then, watch these averages. If only one moves, you can't be predictive, but if both moves it means that businesses are both making and shipping more (or less) so you can bet the overall market will go the direction of the two averages. So it was a theory trying to predict business trends in an industrial economy by following two rough gages – production and transportation – using stock prices. [note: the first study of Dow Theory in 1934 said it didn't work – and it's never been shown to work predicatably.]
Don't forget, in this most quoted of all market averages the third word is "Industrial." The reason for creating the average was to measure the performance of industrial companies. And across the years, the names on the list were all kinds of industrials. Only in the most recent years was the definition expanded to include banks. But that was considered OK, because above all else "the Dow" was a measure of leading companies in an "industrial" economy and the banks had become key components in extending the industrial economy by providing leverage for "hard assets".
Marketwatch.com today asked the headline question "Is the Dow doing its job?" The article's concern was whether "the Dow" effectively tracked the economy because so many of its components have recently traded at remarkably low prices per share - 5 below $10 – and even 1 below $1! Historically these would have been swapped out for better performing companies in the economy. Faltering companies were dropped (like how AIG was dropped in the last year) – which meant that "the Dow" would always go up; because the owners could manipulate the components! [the owners are still the editors at The Wall Street Journal now owned by News Corp.] But even the editor of the Dow Jones Indexes said "While we wouldn't pick stocks that trade under $10 to be in the Dow [Citi and GM] are still representative of the industries they're in, and their decline in the recent past is part of the story of the market recently."
Recently, "the Dow" has taken a shellacking. And the reasons given are varied. But one thing we HAVE to keep in mind is that any measure of "industrial" companies deserves to get whacked, and we should not expect those industrial companies to dramatically improve. In the 1950s when the thinking was "what's good for GM is good for America" we were in the heyday of an industrial economy. And that phrase, even if never really used by anyone famous, made so much sense it became part of our lexicon. But we aren't in an industrial economy any more. And the failure of GM (as well as the struggles at Ford, Chrysler and Toyota) shows us that fact. If "the Dow" is a measure of industrial companies - or even more broadly, companies that operate an industrial business model – it is doing exactly what one should expect. And to expect it to ever recover to old highs is simply impossible.
The industrial era has been displaced, and in the future high returns will be captured by businesses that operate with information-intensive business models. Google should not be placed on the DJIA. We need a new basket – a new index. We need to put together a collection of companies that represent the strength of the economy – where new jobs will be created. Companies that use information to create competitive advantage and high rates of return — like how in an industrial economy businesses used "scale" and "manufacturing intensity" and "supply chain efficiency" to create superior returns. If we want to talk about "blue chip" companies that are more likely to show economic leadership, gauge the capability to succeed and the ability to drive improved economic output, we need a list of companies that are the big winners and demonstrate the ability to remain so by their superior understanding of the value in information and how to capture that value for investors, employees and vendors.
This index is not the NASDAQ. It would include Google, currently leading this new era as Ford did the last one 100 years ago. But other likley participants would be Amazon for demonstrating that the value of books is in the content, not the paper and that the value of retailing is not the building and store. Apple has shown how music can eclipse physical devices, and is leading the merger of computer/phone/PDA/wireless connectivity. Infosys is a leader in delivering information systems in 24×7 global delivery models. Comcast is leading us to see that computers, televisions, gaming systems, telephones and all sorts of communications/media will be delivered (and used) entirely differently. News Corp. is blurring the lines of media spanning all forms of content development as well as delivery in a rapidly shifting customer marketplace. Nike, or maybe Virgin, is showing us that branding is not about making the product – but instead about connecting products with customers. Roche for its ownership of Genentech and its deep pool of information on human genetics? What's common about these companies is that they are not about making STUFF. They are about using information to make a business, and capturing the value from that information.
RIP to the Dow Jones Industrial Average. It's future value looks, at best, unclear. What we need to do now is redefine what is a "blue chip" in this new economy. What are your ideas? Who should represent the soon to be exploding marketplace for biotech solutions based on genetics? Who will lead the nanotech wave? Who would you put on this new "blue chip information index"? Send me your ideas. And in the meantime, we can recognize that even those who created and manage the venerable "Dow" aren't really sure what to do with it.
