Roosevelt Institute | Cornell University

The Plight of the Drug Industry

By Seth KimPublished February 28, 2019

Pharmaceutical companies are moving towards a business model of mostly in-licensing deals, which has been increasing profits at the cost of decreasing innovation.
Pharmaceutical companies are moving towards a business model of mostly in-licensing deals, which has been increasing profits at the cost of decreasing innovation. In order to increase the rate of novel drug development, the FDA should reconsider its policies to be more accomodating of complex technologies and methodologies.

Pharmaceutical companies have always looked towards their research and development to find the perfect combination of chemistry, time, and money that will result in the next blockbuster drug. In recent years, however, pharmaceutical giants have moved even further away from science to corporate wealth and business through a process called in-licensing. This new avenue for business development allows for companies to expand on profits while mitigating risks.

For example, consider two companies, A and B. Company A is a large corporation with footing in several different countries. Company B, on the other hand, is comprised of a small group of scientists who have developed a relatively successful bone disease treatment that shows promise over drugs already on the market. As Company B has neither the funds nor expertise to test and commercialize the drug, it will give Company A the rights to both manufacture and sell the novel treatment.

Company A, with its decades of experience running drugs through clinical trials and receiving FDA approval, will then pay a premium upfront for the rights to the drug, another bonus if the drug receives federal approval, and royalty for every purchase made in the future. Therein lies the problem – In-licensing is a mutually beneficial scenario that creates conglomerates and monopolies in certain sectors.

After an in-depth study in 2010, professionals from Morgan Stanley concluded that focusing all resources on in-licensing would increase returns three-fold. In their research article, titled "Pharmaceuticals: Exit Research and Create Value," they propose a model that eliminates small molecule research and grows stakeholders' equities. While this shift presents obvious problems to the general public and scientific community, it points to a bigger, more stagnant problem in healthcare – regulation.

Perhaps the issue at hand is federal regulation. FDA regulation has always been every pharmaceutical company's worst nightmare. Spending millions, if not billions, of dollars in research, development, and clinical trials can go to waste with a single "unapproved" notice from the FDA. With the growing complexity of drug development and safety risks, many companies are veering away from defenseless investments and thus into the realm of in-licensing.

The FDA should thus re-evaluate both its selection and approval process. It should also consider financial compensation in the form of tax reimbursements or benefits for companies that are finding the cures of tomorrow. While the FDA holds a responsibility in guaranteeing the safety of drugs that patients consume, it should also aim to strike a healthy balance between risks and benefits, especially when dealing with orphan diseases that patients would otherwise have no way to manage. Without change occurring first in the government, America loses its leading stance in the promotion of innovation and drug discovery.