Amid these dark days, a grand challenge to win a war on the pandemic has galvanized a spirit of private-sector innovation. In less than a year, biopharmaceutical companies have tested and begun developing dozens of potential vaccines for COVID-19, a remarkable feat, considering that it usually takes several years to prepare a vaccine for human trials.
Recent positive developments offer hope in a battle with this particular virus. But they also underscore the enormous hurdles to new product development that drug companies face.
According to Darden Professor Panos Markou, whose research focuses on managing the uncertainty inherent in innovation processes, the speed and mobilization to find treatments and vaccines for COVID-19 is the result of an unprecedented multiagency effort — partly financed by an infusion of more than $10 billion of federal money — in response to one of the gravest public health crises in recent history.
The High Cost of Innovation
Under normal circumstances, bringing breakthrough drugs and vaccines to patients is a long and complex process, with no guarantee of success. And the cost of drug development is absolutely staggering. On average, it can take $2.6 billion to bring a new drug to market, according to Tufts University’s Center for the Study of Drug Development.
“When you look at the pharmaceutical industry, there’s so much money poured into it, and the outcomes are uncertain,” says Markou. “Depending on how you cut it, even for projects entering clinical trials, the success rate is only between 5 and 10 percent. At the same time, there’s a huge societal impact and the stakes are extremely high.”
That, says Markou, is what drives his own latest research. In a current working paper, “Rival Signals and Project Selection: Insights from the Drug Development Process,” Markou and his co-authors Stylianos Kavadias and Nektarios Oraiopoulos of the University of Cambridge Judge Business School (U.K.), demonstrate how pharmaceutical executives can impact the success of their research and development (R&D) programs by carefully assessing and acting on information signals from their competitors.1
Learning from Competitors’ R&D Efforts
Pharmaceutical companies’ success depends in large part on their ability to consistently generate and access promising new ideas. However, that’s not enough, says Markou. “How do you select and prioritize R&D projects that deliver value? How do you effectively allocate scarce resources across different projects? Those are pressing concerns for the pharmaceutical industry.”
As Markou explains, the pharmaceutical drug development process consists of several stages. During the pre-clinical phase, the scientists identify promising compounds and determine the first safe dose for clinical trials in humans. After demonstrating safety and efficacy, the firm then faces the major decision of whether to send the compound into clinical trials. After Phase III of clinical trials, pharmaceutical companies file for regulatory approval by the Food and Drug Administration (FDA) or the European Medicines Agency.
Project selection decisions all along the way require executives to weigh multiple criteria amidst significant uncertainty. They have to consider not only possible financial returns, project risk and fit with strategy, but also the competitive environment, as rival firms constantly develop new medicines.
Fortunately, the investments of competitors may reveal potentially useful information, which the firm can then use to supplement its own knowledge and improve its own decision-making. Because all Phase II trials and beyond must be registered with the FDA, “you can get a good understanding of what all these companies are doing,” says Markou. In addition, there are companies that track early-stage projects of pharmaceutical companies, providing a plethora of new drug development data.
“If I have competitors whose projects target the same disease,” says Markou, “their development efforts give me two pieces of information: a market rivalry signal, indicating potentially heightened market competition, and a technological signal, indicating the technological feasibility of a possible solution to a problem in that market.”
Key Research Findings
Markou and his collaborators analyzed data from an industry database that tracks the histories of pharmaceutical drug developments to examine how rival project efforts inform the decision to progress a drug from pre-clinical laboratory trials to Phase I clinical trials in humans.2
Their study reveals that competitors’ early-stage projects provide weak technological signals. “At that stage,” says Markou, “very little of the technological uncertainty has been resolved, and those pre-clinical and Phase I and II signals are relatively uninformative about a project's technological feasibility in treating a particular disease.”
However, early-stage rival projects provide a stronger market-rivalry signal, indicating market entry intentions for a specific therapeutic domain. “What we found,” says Markou, “is that in response to those early-stage rival projects, companies are more likely to terminate their own projects, rather than face a lot of fierce competition down the line. What’s really interesting is that those decisions aren’t necessarily sound. Those early-rival projects are so technologically uninformative that it's not worth terminating your own project.”
Instead, says Markou, what companies should be paying attention to is information from rival projects that have successfully completed Phase II clinical trials. “Your competitors’ advanced, late-stage, clinical projects provide much more reliable information about technological feasibility: They reveal potential approaches and mechanisms to treat a disorder.”
Implications for the World of Practice
Project selection decisions represent the first big commitment by the pharmaceutical company to pursue a specific drug. Because senior executives make those decisions in an environment of high uncertainty, they try to weigh all information they can get, including the headlines that a competitor has just committed tens of millions of dollars for a Phase II clinical trial of a drug that targets the same disease.
Given the volume of available data, notes Markou, it’s important for pharmaceutical executives to know when such information can actually improve their chances of success. “There are two types of data,” says Markou. “Data you should pay attention to and data you should completely discount. In pharma, discount your competitors’ early-stage projects in terms of learning from them. Only after they’ve reached Phase III, you should really start taking that information into account.”
What’s next for Markou’s research? He and his collaborators plan to examine how pharmaceutical companies structure their R&D portfolios. “All high-tech organizations,” says Markou, “must decide how many resources to dedicate to exploring bleeding-edge technologies versus investing in further refining core competencies. We’re interested in how managers can strike the right balance between risk and reward.”
Panos Markou co-authored “Rival Signals and Project Selection: Insights From the Drug Discovery Process,” with Stylianos Kavadias and Nektarios Oraiopoulos, both of the University of Cambridge Judge Business School.
This article was developed with the support of Darden’s Batten Institute, at which Gosia Glinska is associate director of research impact.
- 1Panos Markou, Stylianos Kavadias and Nektarios Oraiopoulos, “Rival Signals and Project Selection: Insights From the Drug Discovery Process,” working paper. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3225056 (Accessed 10 November 2020).
- 2The study draws upon the Clarivate Analytics Cortellis database, which contains a near-exhaustive amount of information for the entirety of the pharmaceutical industry.