By Suraj Mathew, Partner, Tefen USA
Vic Dhanecha, Senior Project Manager, Tefen USA
Think of a number. Any number. How about 23 Billion? Big, right? That’s how much Roche, Sanofi-Aventis, and GlaxoSmithKline spent on R&D in 2008.
Think of another number. Any number. How about 50? That’s the percent that Roche increased its R&D spend in the past 3 years. 
If you’re still interested in playing the numbers game, here’s the last number – 532 Billion. That’s the amount that the 1,000 largest publicly traded companies spent on R&D in 2008, and that’s not all; R&D spend increased by 5.7% for these firms in the same year. 
Impressed? Of course you are! Do you know what this money was spent on? Or how it was accounted for? Of course you don’t. Do you think the companies that spent this money know the answers to these questions? Decide for yourself at the conclusion of this paper.
Where has all the money gone?
The question with R&D spend continues to be, “where has it all gone?” And, the answer continues to be: “who cares where it’s all gone? We’re making a profit!”
That said, pharmaceutical firms still measure their R&D spend, and they do this by applying well trusted, well tried metrics. However, you still can’t walk into a pharmaceutical company and ask the CFO or the CMO what it cost the firm to discover its last drug.
Why is this? Is it because drug discovery is overly complicated? Is it because drug discovery takes too much time? Is it because drug discovery involves a lot of moving parts? Is it because drug discovery involves intangible deliverables? The answer to all of these questions is a resounding, yes; but the problem lies not in the inherent nature of drug discovery, but the metrics used and the things that are measured.
For many years, pharmaceutical companies have applied operational metrics when in fact they should be applying process metrics. Take a look at the following table of metrics that pharmaceutical companies use to measure their R&D. Recognize any of these? You should. They haven’t changed much since 1998.
Is there something obvious that we’re missing here? Does anyone see a metric that says anything like “Total amount spent on Drug Discovery”? Isn’t it odd that a pharmaceutical company, whose main business is not getting patents approved, releasing new products, or sales, should measure these items and ignore what they really do: discover drugs!
Of course pharmaceutical companies need to get patents approved, release new products, and sell, but without discovering new drugs, none of these things would matter, and they would certainly not exist. A bit like a professional swimmer measuring the number of people that come to watch him as a barometer of his swimming abilities, instead of measuring his lap time.
So, the question remains, why has the industry been struggling to account for the billions that it spends each year? Why does it continue to apply operational metrics to measure and report “success”?
Here are some reasons:
- There is a misperception that their core business of drug discovery is overly complicated.
- There is little incentive to measure drug discovery as long as their operational metrics look good.
- R&D in the pharmaceutical industry is treated like R&D in many other industries; “Leave those guys in the white coats alone”. They know what they are doing, and they’ve already told us: “you can’t measure creativity”.
- R&D does not have a seat at the table. For those that feel that a CMO is held accountable for drug discovery spend, you will be surprised to learn that a CMO is held accountable for items like patents issues, FDA approvals, Lab Costs and other operational expenditure. Very seldom are metrics around drug discovery brought to the table.
- Finally, many drugs that are developed use government funding . We pay the government. They pay the drug companies. We then buy back what we’ve helped the companies to develop.
Measuring the process, not operations
So what should be done about it? Pharmaceutical companies need to measure the process behind drug discovery and not the operation that supports it.
Companies need to stop “measuring R&D” using traditional metrics, and they need to start to measure R&D using metrics that make sense. Metrics that measure the process behind the core of what they do: discover drugs.
This is not to say that operational process measurement should be discarded. Operational measurement is critical and it has its place. That said, it doesn’t give us the tools we need to improve drug discovery, and drug discovery is, after all, what makes or breaks a pharmaceutical company.
Motives for measuring the drug discovery process
There is a very simple rule that goes something like this:
Profit = increase in share price = shareholder value = demand for shares = increase in capitalization = increased investment = more profit = you get the gist.
That said, the motivation for a pharmaceutical company to measure its drug discovery process is to improve efficiencies in this process, therefore get drugs out to the market quicker, therefore reap profits quicker, therefore increase share price quicker, therefore, therefore, therefore…
Consequences for not measuring the drug discovery process
The consequences for not measuring the drug discovery process, however are very minimal for a pharmaceutical company. For a start, a company will generally hold the patent to any drug it is developing. That said, there is very little fear that another company will get the same drug out to the market much quicker.
In addition, drug discovery generally only starts after exhaustive/comprehensive market research; it is very rare for a drug to be a “flop” or for a drug not to exceed its revenue and volume targets.
That said, pharmaceutical companies know that once they get a drug out, not only will it sell very well, but they will also have the monopoly for a very long time.
Drug discovery process efficiency
Let’s start with dispelling a myth: drug discovery is no more complicated then discoveries in manufacturing, aerospace, and energy. The fact that it takes 8-10 years to discover a drug has more to do with the inherent waste that is within the process and not with the natural timeline of the drug discovery process. The old adage “you can’t improve what you don’t measure” comes to mind.
Once we agree upon this, we then need to remind ourselves of a pretty generic (pardon the pun) drug discovery process in the USA and for that matter, around the world 
You will note that the process is multi-faceted, iterative, resource intensive, and collaborative. Not unlike any process, in any company, for anything.
Having understood that the drug discovery process is not as unique as pharmaceutical companies would like us to believe, we can rightly assume that it can be measured, and “costed out” in the same way as we would measure and cost out any other process. The downside is that it takes the mystique out of drug discoveries. The upside is that Pharmaceutical companies can get a clear understanding of where those billions of dollars are being spent. So, at last, we have an answer for “where has it all gone?”
So where do we begin? We start with measuring the process behind discovering drugs!
Process measurement in drug discovery should be conducted in exactly the same manner as process measurement in any other type of industry and operation and process measurement must allow us to identify waste, so that we can eliminate it and thereby eliminate the additional spend.
All of a sudden, pharmaceutical companies will have reliable metrics around how much they actually spend on their core business.
The steps to measuring a process are shown in the diagram below.
Re-engineering the process
Once we measure the process, we can reengineer it. The key is to ensure that the company focuses on drug discovery and nothing else. For example, when we look at R&D spend, we should exclude spending on obtaining patents as this moves us into operations and away from pure drug discovery.
An example for illustrative purposes:
Once this picture is built for each process, pharmaceutical companies can then use the right metrics for the right items in order to identify R&D spend. They can then focus on ways to decrease the waste in the process, thereby also decreasing the spend.
This becomes more imperative in today’s economy where competition from China, Mexico, and Canada is fierce. It is only a matter of time before the FDA starts to realize that drugs from overseas can play a viable role in the USA, as do items such as cars, TV’s, furniture and a whole host of other items that are shrouded in a little less “mystique”.
To measure R&D spend in pharmaceutical companies, we must first recognize what it is and what it is not. R&D spend is the money that is being spent on the drug discovery process and not the money that is being spent on the number of patents, sales, R&D headcount, or any of those very “conventional” and “convenient” items that often get converted into dollars.
Once we recognize this, we must break the drug discovery process down into its “component parts” to measure it as we would any other process in any other industry. Remember, drug discovery is a process. It is not a miracle, and it is not mystique.
We then “cost it out” and eliminate the waste within the process. Remember, if we don’t first set up a measurement system, we won’t be able to figure out what is waste, and what is not. It would be a bit like trying to improve a manufacturing process without first calculating Overall Equipment Effectiveness (OEE).
Lastly, we use Lean (and other) process improvement techniques to eliminate waste and continue to eliminate it. This never stops.
Ultimately, Pharmaceuticals can then do whatever they please with the billions they will save due to being able to measure and improve their core capability: drug discovery. But one thing is for sure, they’ll be able to get their products to market much quicker, and much cheaper.
That in itself has to be a good reason to measure the mystique.
About Tefen LTD.
Tefen is an international management consulting firm that specializes in helping organizations achieve performance excellence. We have served some of the world’s largest and fastest growing businesses in the life sciences, healthcare, and general manufacturing industries. We work side-by-side with our clients throughout the implementation process to achieve operations and performance excellence. With our hands-on approach philosophy, Tefen has achieved tremendous success in delivering quantifiable and value-driven results. Tefen’s consultants employ a data-driven strategic orientation, applying tools such as Lean and Six Sigma. Tefen is committed to achieving measurable improvements in cost, quality, and service delivery for its clients.
 The Economist, November 19, 2009
 Booze Allen, Annual Analysis of Global Innovation Spending, October 27, 2009
 Goldense Group, Inc, based on 2008 product development metrics survey
 The Eight Hundred Million Dollar Pill, Merrill Goozner, 2004
 Nature Reviews, Drug Discovery, 2009
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