The New Yorker claims biotech success means drug development now less risky: Say what?

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Biotech researchers and investors – to say nothing of the patients waiting desperately for new medicines – may conclude from the latest New Yorkerthat their problems are over.

According to a new, otherwise thoughtful piece about drug pricing by James Surowiecki, the recent run-up in biopharma stocks (preceding the even-more recent sell-off of same) belies the industry’s assertion that aggressive pricing is required to justify the risk of drug development.

“Biotech companies claim that prices need to be high to reward risky and expensive innovation, but the fact that they’re churning out drugs and profits so consistently seems to undermine that claim.” (emphasis added)

It’s unclear how stock market fluctuations, coupled with a few prominent successes, change the basic, and very brutal odds of drug development.   The vast majority of candidate compounds fail, and the vast majority of biotech startups struggle to gain traction, and achieve profitability.

In his 2006 book Science Business, HBS professor Gary Pisano discussed how few biotechs (at the time) achieved profitability, and made the important point that biotech can seem more successful than it is because of ascertainment bias – the winners are obvious, while the losers (and there are many of them) tend to fade away.

It’s also why it’s easy to miscalculate the cost of drug development when comparing big companies versus small ones, as many biotechs tend to be.  The cost of failure shows up on the books of big companies, while a drug development failure can kill a startup, effectively burying the cost if you don’t remember to account for it.

Unfortunately, biology remains complicated, discovering new drugs remains a profound and risky challenge, and as Merck ’s Roger Pearlmutter told my colleague Matt Herper last year, “it’s a bloody miracle” when you find something that actually works.  If anything, industry experts worry that the low-hanging fruit has been picked, and the search for new therapeutics has become progressively more difficult — and more expensive.

To suggest that suddenly biotech companies have stumbled upon a way to overcome historically brutal odds misrepresents the current state of drug development, and the underestimates the profound challenges drug developers (and recall that I am one) face when trying to create new medicines, and that investors wrestle with when deciding whether to fund this vital but exceedingly high-risk endeavor.

Note: For a more thoughtful perspectives on issues around drug pricing, I’d suggest Bernard Munos take in Forbes, David Grainger’s Drug Baron pos there, and Megan McArdle in Bloomberg View here.

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