Asymmetrical Information - Megan McArdle

10.18.1210:53 AM ET

The Seen and the Unseen

Pharma fails a lot, expensively. How come no one knows it?

Every six months or so, someone with a string of credentials after their name pens an extended complaint about pharmaceutical companies for some magazine or newspaper.  Big Pharma doesn't really do original research--they just take stuff that was developed in academic or government labs or maybe biotech firms and monetize it.  Or they produce a bunch of stupid me-too drugs.  They medicalize things which are just part of the normal human condition so that they can sell you a drug you don't need, and which probably doesn't work anyway.  They spend too much money on marketing instead of R&D. And so forth.  

As you can tell from reading the above links, I think that these arguments are mostly nonsense, written by people who don't grasp even the very basics of how either pharmaceutical research, or markets, work.  The targets discovered by academics are obviously absolutely essential, but they are very far from a working drug.  Biotechs are complementary to Big Pharma, not a replacement for it--they often don't have the capacity to take a drug through clinical trials, and an exit through a sale or licensing agreement with Big Pharma is one of the main ways that VCs expect to get their money back.  Me-too drugs are often the product of parallel development, not copying--and anyway, in what other industry do we think it's desirable to have only a single product available?  Incontinence, impotence, insomnia, and depression are terrible whether or not they're medicalized. And so on.  

Derek Lowe had a recent post that may explain why people have such odd ideas about pharma: we can see the successes, but not all the failures: 

But, except for articles like these in journals like Nature Biotechnology, or mentions on web sites like this one, no one really hears about this sort of thing. We've talked about this phenomenon before; there's a substantial list of drug targets that looked very promising, got a lot of attention for years, but never delivered any sort of drug at all. Negative results don't make for much of a headline in the popular press, especially when the story develops over a multi-year period.

I think it would be worthwhile for people to hear about this, though. I once talked with someone who was quite anxious about an upcoming plane trip; they were worried on safety grounds. It occurred to me that if there were a small speaker on this person's desk announcing all the flights that had landed safely around the country (or around the world), that a few days of that might actually have an effect. Hundreds, thousands of announcements, over and over: "Flight XXX has landed safely in Omaha. Flight YYY has landed safely in Seoul. Flight ZZZ has landed safely in Amsterdam. . ." Such a speaker system wouldn't shut up for long suring any given day, that's for sure, and it would emphasize the sheer volume of successful air travel that takes place each day, over and over.

This is the problem of the unseen: we focus on what makes the news, which by definition, is the stuff that isn't normal.  No one gets on the television screen--or even the phone--to report "Yup, just another boring day in which not much happened.  Gravity is still working, 99.99% of the cars in America didn't crash, and almost everyone who was alive and employed this morning is still in the same condition this evening!"  

In Pharma, unfortunately, failure is very normal.  And costly. You see a lot of numbers thrown around, but a post last winter from Matthew Herper at Forbes suggested that all the estimates are too low--that for every drug Pharma puts on the market, it will have spent somewhere between $4 billion and $11 billion on research, both for the drugs it's selling, and for all the candidates that didn't work well enough to clear FDA hurdles and go to market.  

Consumers, though, only see the inhaler or syringe or little pill in front of them, and don't understand why on earth it should cost hundreds of dollars a month.  They don't know that part of the price of having that pill was finding out which pills that didn't work.  

And they probably will never know, because it's a devilishly hard thing to explain.  Pharma often gets criticized for its poor PR, but I suspect there's a good reason: there's no good sound byte that explains how many failures it takes, and how much money, just to get one drug to market.  Humans are very bad at accounting for the unseen, and they don't get better at it just because you tell them they should.

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