A Brief, Economic History of the Pharmaceutical Industry
From Reactive Over Disruptive to Digital
Today, the German/American company Biontech has published that their lead vaccine candidate against the virus SARS-CoV-2 shows promising results. The vaccine is in a so-called clinical phase 3 trial.
The novel virus was identified and sequenced in late 2019. Almost a year later, the world is on the dawn of a novel vaccine. A process that previously took about 5 to more than 15 years sped up to 12 months.
It is easy to take all the great inventions of our time for granted. In reality, not so long ago, it would have been impossible for the human race to develop anything helpful against this virus.
Join me for a brief recap of the economic history of the pharmaceutical industry.
How did the unique value chain evolve?
The five significant phases plus a disruptive pandemic
After 15 years in the pharmaceutical industry, I have divided the development of the sector into five major steps:
- Before 1870: Natural remedies
- 1870–1930: From pharmacies to wholesale and industrial production processes
- 1930–1980: The golden era
- 1980–2015: Genentech — a networked economy
- Post-2015: The digital revolution hits pharma
- Response to the Coronavirus
Let’s have a look at each phase:
Before 1870: Natural remedies
“Let food be thy medicine, and medicine be thy food.” -Hippocrates
I have spent years quoting Hippocrates. The wonderful Internet has taught me that he never made such a statement. Yet, he often refers to nutrition and exercise as a potential cure for illnesses in his work.
Hippocrates lived around 470 B.C. The only possibility to look for a cure was nature. Science, as we know it, didn’t exist. It was an agricultural society that fought endless wars in Europe. The human race in the rest of the world didn’t look better.
Especially warriors, aristocrats, and monks documented their achievements in maintaining health and curing diseases. One of my martial arts trainers during a “Warrior medicine” seminar once said with a grin on his face: “Young men, you are learning the secrets of warriors, kings, and high priests.”
Up to the 19th century, there was not much more. No pharmaceutical industry did exist. Through the turmoil of history, our developing human society needed to entirely rely on observing what kind of foods positively affected humans.
Two significant changes were the scientific revolution of the 17th century and the re-organization of the production of goods — the industrial revolution of the late 18ths century.
1870–1930 The establishment of Wholesaling
Amid the 19th century, the first pharmacies started using the beginning of industrialization. The first drug developed was morphine. It was extracted from Opium.
Merck was one of the first pharmacies that married science with industry. And started building the first factories to produce drugs.
Local people organized the value chain from natural remedies to patients over the centuries—pharmacies or medicine. From the 1870s onwards, the value chain started its reorganization.
The wholesaling part branched out. Also, in the pharma industry, goods were manufactured in scientific factories and distributed to physicians and pharmacies.
Many new inventions were made
- Epinephrine,
- norepinephrine, and
- amphetamine,
- barbiturates,
- insulin,
- penicillin and
- vaccines
To name a few.
1930–1980 Pharma teams up with research
Research is what I’m doing when I don’t know what I’m doing.
Wernher von Braun
Before the 30s, the patient, physician, and researcher were very close—most of the time, they lived in the same community, often being united in one person. In the early 1800s, a physician had to do his research to improve his patients' lives.
Colleagues very often were miles away; the means of communication by letter. Even the telephone and telegram were not yet invented and rolled out.
As the value chain also developed, the means of communication became better. Thus, people and organizations tend to specialize and focus on the part of the problem.
Pharma started to build its research facilities and teamed up with academic institutions as well as physicians.
In parallel, the sales and marketing organizations grew bigger and bigger with the world's growing population. The peaceful times after World War 2 also helped that the industry evolved and thrived.
It created a new environment and value chain.
1980–2015 The Genentech Business Model Era
Big companies have trouble with innovation. Innovation is about bad ideas, or ideas that look like bad ideas. That’s the fundamental thing.
Ben Horowitz
The two worlds had more and more problems in communicating with each other. If you ask them, they act like a married couple. They wouldn’t confess their problems.
Yet, it is pretty clear why these problems occur. Basic Research and the end stages of researching novel drugs, medical devices, or diagnostics are relatively unstructured creative processes.
Mostly, the research is done in research entities. Their core value driver is publications.
The pharma industry historically was the one who brought the products to the pick-up points of the patients:
- Medical Practice,
- Hospitals and
- Pharmacies
These activities need many sales and marketing personnel and profound logistics, manufacturing, and administration.
This part of the value chain is exceptionally well structured and regulated.
The same applies to late-stage development before a drug, diagnostics, or medical device can enter the market.
Creative minds mostly do not combine well with structured corporate processes.
Genentech was the first company that picked up a research idea, got it funded by investors, and sold it to pharma. The company created the first synthetic insulin and licensed the innovation to Eli Lilly.
In the 70s, Genentech's later founder — Herbert Boyer — made a scientific invention with his colleague Stanley Cohen. 1976 Robert Swanson from Kleiner&Perkins gave Herbert Boyer a ring. Long story short, Boyer and Swanson founded Genentech. Kleiner &Perkins is THE venture capitalist involved in the most promising StartUps that emerged from Silicon Valley.
Back in the 80s, Genentech was the first biotech company that was able to do an IPO. It was the proof of concept of an existing business model between research and the pharmaceutical market.
Since then, the pharmaceutical companies have started to pull out of the research and early-stage development.
2015 to today: Disrupted by digital technology
We live in a digital world, but we’re fairly analog creatures.
Omar Ahmad
The digital revolution became popular from 1994 onwards. Jeff Bezos created Amazon and developed it to a huge success.
Pharma mostly was unaffected. A bit of smartphones usage, eMails, Websites, some conferences were digitally enhanced, and of course, logistics and finance got a resource planning makeover already in the 90s. But, compared to other industries like Movies or Music, fundamentally in the value chain, nothing changed much.
Since 2015 I was approached by entrepreneurs who wanted to change the pharmaceutical industry with digital technology.
Yet, neither pharma was interested nor investors. For life science investors, digital products were too much internet technology, and on the contrary for tech-savvy internet investors, it was too much pharmaceutical industry.
In between these two worlds, nothing existed. Slowly the funding industry changed. I remember the panel discussion I was part of in 2019 when one of my pharma investors stated:
“Up to now we were happy when we got a few hundred to a few thousand datapoints to evaluate the safety and efficacy of a drug. Now, Fitbit conducted a sleep study. They got 6 Billion datapoints for analyzing the sleep patterns of their customers. Just imagine, if drug developers could get access to 6 billion datapoints to better understand the development of diseases in the first place. The internet will disrupt also our industry.”
And right he was. More and more traditional life science funds moved to digital health. New funds emerged that solely focus on driving digital health applications and tech forward.
The transformation of the industry and the entire healthcare system has just begun.
2020: The Pandemic
The next phase came abruptly. Nobody planned for it. The world sees viruses with pandemic potential every few years. So far, no government has made a big fuss around it.
It doesn’t mean that the world was blind and ignorant. It just means that nobody turned up the volume and voiced the apparent threat we have to face every couple of years very loudly.
Until Chinese scientists sequenced SARS-Cov-2, all of a sudden, the whole world went crazy.
China shut down an entire city. The WHO warned the World. When the virus hit Europe, Italy was the first to lockdown, followed by Austria and other countries.
This happened in March 2020. And it affects the organization of the entire pharmaceutical industry tremendously.
Usually, the development of a novel vaccine or therapeutic took at least five years. Mostly, it was more than 15 years. And it costs more than 2 billion dollars to bring one drug to the market.
This week, Pfizer and Biontech announced that the first results of the ongoing clinical phase 3 trials look promising. The companies are confident in bringing a novel vaccine to the market in the first quarter of 2021.
In only 12 months, Pfizer and Biontech completed a development that previously lasted 5 to 15 years.
What speed.
In phone calls with manufacturers, I learned to tackle these production needs they needed to build fully automated production sites.
The pandemic has helped the industry to streamline the entire value chain and speed up a process from 15 years down to 12 months.
And it has just begun. Who knows what tomorrow brings. The pharmaceutical industry will exist as long as humans live. The wish for a painful free healthy life is part of our genetic code. The body wants to survive. This is one of the most robust programs for human beings.
There is still a massive chance for digital companies to help the industry transform for humanity's betterment.
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Reader:
https://www.researchgate.net/publication/279163946_The_evolution_of_the_pharmaceutical_industry
https://www.sciencedirect.com/science/article/pii/S0014299918303595