The pharmaceutical industry is undergoing asignificant transformation. Multiple forces arechanging the face of healthcare. Despite thesechanges, I believe the fundamental skills need-ed to succeed in the industry remainunchanged. A company’s success will stilldepend on “R”, “D”, and “M”—research,development, and marketing. Bioentrepre-neurs have an opportunity to take a significantrole in this process, but only if they recognizehow these three skill sets must evolve, and ifthey enhance the work of expert managers inR and D. The importance of new therapeuticsin healthcare will continue to increase, whichin turn will allow selected biotechnologyactivities to benefit handsomely.

R, D, M fundamentalsDespite my belief that the three critical fac-tors will remain the same, a shift in focus willallow bioentrepreneurs unique opportunitiesfor commercial success. What will emerge isthe sophisticated management of these threeaspects, especially of Research, which shouldresult in efficiencies never before dreamed of.In the old days—let’s say a decade ago—Rwas unmanageable. The research necessary todiscover new drugs was more or lessserendipitous, and therefore there was notmuch to manage. Yes, you needed to find thebest people, determine the amount of moneyyou could afford to lose, and encourage thebrilliant scientists you hired. But other thanthat, about all you could do was pray.

Development was driven by this same lackof knowledge. Since the definition of the tar-get the drug was acting on was crude, youcould hope for nothing better than the devel-opment of a product that treated the symp-toms—hopefully without side effects. As aresult, regulators dominated the develop-ment process. Because their job centered onprotecting society, this often became anadversarial relationship. Regulators foundthat one of the best ways they could do theirjob was to sit on the data—or worse, ask formore data—until they detected a drug’s

sometimes-fatal flaw. The process was laborand time intensive, as well as costly.

If you were lucky enough to get past Rand D, you finally entered the somewhatfamiliar territory of marketing products. Notsurprisingly, in the old days, it was the mar-keting people who were kings. They were thepeople who carried the bag, pounded thepavement, and understood what worked andwhat did not work, thereby qualifying for theboardroom seats. From their perspective,once the money was in the bank, R and Dwas not considered a very significant part ofthe process.

Drug development’s shifting focusThings began to change in a fundamental waywith the advent of recombinant DNA tech-nology. For the first time we got a glimpse ofwhat it means to go beyond the symptomaticunderstanding of a disease to comprehendingdisease-causing malfunctions at the molecu-lar level. By comparing how an organismfunctions normally with what goes wrongwhen a disease befalls us, we are realizing thatwhat we call a “disease” is really a collection ofsymptoms that may have a variety of molecu-lar causes.

In the past, we lacked the understandingthat one day may allow us to differentiatesubcategories of a patient population basedon underlying molecular mechanisms. Thisis why, in the past, drugs that healed manywere toxic to some. This kept what could havebeen important medicines for many off themarket because of a few unfortunate patients.

As a result of this understanding, research,for the first time, is becoming manageable.But management of this process is still an art,not something one can learn at a business

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school. Managing this kind of researchrequires pioneering instincts because it islikely that the more one fails in this processthe greater are one’s probabilities of success.This is not the kind of management that lendsitself to large bureaucracies and decisions bycommittee. Rather, it requires small groups ofindividuals working together toward a com-mon goal. They must be led by someone whocan nurture constructive failures and has aknack for knowing when to carry on andwhen to abandon ship. This is not a strengththat everyone can bring to the role of researchmanager.

Development is also being transformed.The fact that we are now able to start with aknown target means that we will also be ableto understand how a particular moleculemight be influencing that target.

As we achieve a certain critical mass ofdata, there is a high probability that the roleof regulators will change. As molecular path-ways become defined and rules for interven-tion are demonstrated, this body of knowl-edge will deliver a greater comfort level tothose charged with protecting the public.Instead of being adversaries, regulators willincreasingly become partners in the drugdevelopment scheme, ensuring that the pub-lic gets the best drugs in the least amount oftime with the greatest safety, and hopefully, ata reasonable cost.

One important byproduct of thesechanges will be further declines in the prod-uct life cycles. International registration ofnew drugs will become routine. For example,I can envision the day when global phase IIIstudies will be initiated after chip-based eval-uation carries a drug through phase II clinicaltrials. The market forces that currently pre-sent economic barriers to developing some ofthe most innovative therapies will be reduced.This means many more drugs are likely to beaimed at narrower and narrower patient pop-ulations because they can be developed costeffectively and command premium pricing.Their lower peak sales potential will be justi-fied by the efficiencies in R&D.

Marketing dethronedMarketing is similarly poised for a major newparadigm. Just as the financial industry is

MANAGEMENT

Biotechnology’s future and the art of managing R&DSmall, sharply focused biotechnology companies will have an edge in discovery and development.

Viren Mehta

Viren Mehta is managing member of MehtaPartners, 584 Broadway, Suite 1206, NewYork, NY 10012 (mehta@mpglobal.com).

Research, for the first time,is becoming manageable.But management of thisprocess is still an art, not something one can learn at a business school.

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likely to be revolutionized by IPOs throughthe Internet, so the marketing function will betaken over by the consumer. We have alreadyseen how advertising directly to the consumerhas reduced the power of the physician in pre-scribing drugs. Increasing transparency in thedevelopment of drugs and a nearly instanta-neous flow of information about a drug’seffects are making everyone—not just man-aged-care buyers—an educated consumer.The implications are clear. Only a real value-added product will have any sustainableacceptance. In the same manner that con-sumers are now bidding on airline tickets inreal time, consumers will ultimately decidethe real worth of a therapeutic.

This is a very different business modelfrom what the large pharmaceutical compa-nies need today, as they remember our historyof low-tech, low-cost products and aim forthe high-tech, low-cost future. While this maysound utopian, the current pace of progressjustifies optimism that we may get there in ageneration or two. However, this journeyfrom the low-tech, low-cost past to our des-tiny of a high-tech, low-cost future takes abell-shaped path, with half-tech, high-cost asthe intermediate point on this journey (seeFigure 1). As we are probably just coming upto the peak cost structure, the large pharma-ceutical companies must knowingly continueto invest heavily in what is currently an ineffi-cient, but will one day become a more effi-cient R and D process to maintain their posi-tion. The synergies resulting from consolida-tion will provide the cash flow to afford suchinvestments, especially during the dry patchesof research productivity.

Biotechnology’s critical roleWhile R, D, and M are being transformed,biotechnology, with its quarter-century ofexperience in risk management and venturefinancing, is ideally suited to meet these chal-lenges. The business plans of “research bou-tiques” justify taking the risk of managing fail-ure that larger organizations rarely can accept.

I expect the biotechnology industry toundergo changes that will enable it to fulfillthese critical roles. I expect that only thosecompanies with a proprietary technology thatis leading them to exclusive targets or prod-ucts will remain attractive to both investorsand the large pharmaceutical companies. Intoday’s market we can readily identify thesecompanies. When you examine their financialsituations they represent the “haves.”Companies that sell nonexclusive commodi-ties are also readily identifiable. Today, as inthe future, they are likely to represent the“have-nots.” They have a role in fulfilling theoverflow needs of the larger companies, butotherwise will eke out a meager living.

Because these two categories are alreadyfairly well defined, there have been sugges-

tions that the have-nots should considermerger and acquisition activity in order toobtain the critical mass that would makethem favorable candidates as haves. I do notsee any logic in this proposal. Three money-losing organizations bound together as onenot only quadruples the number of internalproblems, but poses nine times the challengein fund raising. Alternatively, should one ofthese organizations either have the cash or aproprietary asset it would be diluted to one-third the value.

Smaller biotechnology companies, by def-inition, lose their creativity and their edge indiscovery if they try to imitate the consolida-tion strategies of the big pharmaceuticalcompanies. While selected complementaryconsolidation may be beneficial, there is acritical need for small, sharply focusedbiotechnology companies that can managethe risk associated with the managing ofR&D. Because there will be a fair amount offailure before there is success, biotechnologymust necessarily be made up of a large num-ber of these organizations. It is likely that notall these companies will succeed. In fact,many will fail. But for every one that fails,new companies will be founded to take onthe challenge. Venture capital will continue tofund this innovation process because thewinnings will more than repay the losses.

ConclusionsCombining small companies, for whateverreason, is taking them away from their prin-cipal strength at a time when this is an over-whelming opportunity. To meet the emerg-ing opportunities head on, new enterprisesfrom the outset must ask themselves twoquestions. First, “Where is the proprietaryinterest?” Without an exclusive niche mostcompanies will never be able to prosper,though some may survive. And second,“How can we create an efficient developmentplan that demonstrates proof of principle?”Companies that can achieve these two goalswill produce valuable products that can besold to a shrinking population of ever-largerpharmaceutical companies. These rewards,in turn, will enable them to go on to the nextbrilliant possibility. ///

Figure 1. The journey from the low-techpast to a high-tech future.

Cost

Low tech Time HIgh tech

Half tech

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