In this week's New Yorker, there is an extraordinary business story: the pipelines of new drugs of the big pharmaceutical companies have run dry.

James Surowiecki reports: "Merck is one of history’s most innovative corporations. It devotes three billion dollars a year and ten thousand people to the research and development of new drugs. So here’s a question: How many drugs for diabetes do you think all these men and women, this army of scientists, managed to come up with in the past four years? None. How many anti-cancer drugs? Zero. How many drugs that fight infectious diseases? Zero. Since 2000, in fact, Merck has introduced just three new drugs. Drug development is hard, but, by any measure, eking out less than one product a year is no way to make a living in the major leagues.

"Profitable as 'big pharma' remains—Pfizer made twelve billion dollars last year—a deep sense of anxiety prevails in the industry. That’s because Merck is no exception: most drug companies have what’s known as a pipeline problem. That is, the patents on the drugs that are now making money for them are about to expire, and they don’t have enough new drugs in development."

The story that has driven the decisions of the drug companies is that they could solve their problems by buying other drug companies and so inheriting their pipelines of new drugs. And so Pfizer bought Warner-Lambert and Pharmacia, Glaxo merged with SmithKline Beecham, and Astra merged with Zeneca. The French drugmaker Sanofi is bidding for Aventis, as analysts speculate that its pipeline has run dry. As Surowiecki puts it, "When the going gets tough, the tough go shopping."

Surowiecki however sees the story of solving their problems through acquisitions as an illusion. His story is that "the advantages of size are trumped by what are called “diseconomies” of scale: inertia, bureaucracy, risk aversion, clock-watching, office politics. Joseph Kim saw a lot of this firsthand, as a scientist at Merck for nine years, and now he likes to compare Merck to the Titanic. 'Companies like Merck have fantastic scientists working for them, but they also have these middle and upper layers of managers who are just taking up space,' he said last week. 'I like to call them ‘anti-bodies,’ because they just sit there being anti-everything. No one ever gets fired for saying no to a new idea.'"

For Surowiecki, small is beautiful, when it comes to drug research. Smaller companies "can concentrate on a few promising avenues of research and can offer enterprising scientists the freedom—and the potentially enormous rewards—of working as entrepreneurs. Just as, in the seventies, the locus of innovation in the tech business shifted from Goliaths like Digital and I.B.M. toward the smaller, more narrowly focussed start-ups of Silicon Valley, so it is shifting now from big to little pharma."

What strengths do the big companies have? According to Surowiecki, they have "a powerful brand, experience with regulators, and, not least, a legion of salesmen adept at “detailing” doctors about the virtues of new drugs."

The solution for the big companies? According to Surowiecki, "they need to rethink, radically, the way they do R. & D., or else get out of R. & D. entirely and focus on what they do best: marketing and distribution." To some extent, this is already happening, as the big drug companies already have licensing agreements with the smaller bio-tech companies. Surowiecki sees a future where the big companies market the successful research of the smaller companies.

Is smaller better? Whether the smaller companies will have the capacity to replenish dry pipelines of big pharma remains to be seen. Surowiecki's analogy with computer industry is less than perfect. Digital may have vanished, but IBM is still going strong. The problem with Digital was not its size, but its failure to adapt to some very obvious developments in the marketplace, such as the advent of the PC. By contrast, IBM did adjust - after facing a near-death experience in the early 1990s - and has continued to grow and innovate very successfully in the last ten years. Innovation does occur in small companies, but if they are successful, they grow big very fast: e.g. Dell. What one sees in the computer industry, as in any ecology, is a mix of large and small organizations, some flourishing, some dying, some forming partnerships, all in a state of constant flux.

A more likely scenario (or story) is that the drug industry will follow the same pattern as the computer industry. There will be some deaths among the big companies, particularly those who stick to the current model which is yielding declining returns. There will be some partnerships with smaller companies. Some big companies may manage to survive - for a time - by getting out of R&D and relying on these partnerships. Some smaller companies will grow very big, very quickly. But some of the big companies will figure out how to change their story by radically rethinking R&D and learning how to innovate: they will be the survivors. 

Read the New Yorker story

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