I
J. A. AESCHLIMANN Hoffrnann-La Roche Inc., Nutley 10 N.
J.
Isoniazid Victim
of
a Limited M a r k e t The responsibility of a pharmaceutical company to make active drugs available to the medical profession can outweigh the desire to make every research project an economic success
BETWEEN
1944 and post-\Vorld
IVar
11, streptomycin, $-aminosalicylic acid (PAS), and p-acetylaminobenzaldehyde thiosemicarbazone had all been found to possess antitubercular activity. Unfortunately, none of these drugs could be considered as the ideal treatment. About 140,000 new cases of tuberculosis were registered each year during this period, and the number of deaths was over 40,000 annually. An adequate screening test was available for determining the effectiveness of drugs in vivo against infected mice, and in the immediate post-war years many drug firms were engaged in searching for a new drug in this field. The market for an antitubercular drug appeared to be good. Sales of streptomycin, dihydrostreptomycin, and p aminosalicylic acid totaled approximately $32 million in 1950,just before the effectiveness of isonicotinic acid hydrazide (isoniazid) and some of its derivatives in mice was discovered in these laboratories. This was followed by a successful clinical evaluation. During this time, isoniazid had also been discovered at the Squibb Institute for Medical Research.
Full Production Isoniazid production was dependent on supplies of isonicotinic acid, \vhich was made from y-picoline; the only producers were Reilly T a r and Chemical Co., who rapidly increased their production and were able to supply more than sufficient amounts of the acid during 1952. The limiting factor in the first few months was the availability of pure y-picoline from coal tar, but this is now produced synthetically in large amounts. In planning the size of facility necessary to produce sufficient isoniazid, it was estimated that around 20,000 pounds annually Lrould be equivalent to the amount of streptomycin-PAS combination then in use. As a result of exaggerated estimates when the curative effects of isoniazid were discovered, there was a rush to produce the material ;
22
INDUSTRIAL AND ENGINEERING CHEMISTRY
expenditures to cover, and the bulk price has fallen to 515 per pound. Total U. S. sales of isoniazid during 1958 kvere estimated at $490,000. I n 1952 they amounted to $2.28 million, but sales of Hoffmann-La Roche were only a fraction of these amounts. The company could not hope to equal the $30 million annual sales of streptomycin, as it only expected to need 20,000 pounds of the drug, and isoniazid is relatively simple to manufacture. Sales between 1952 and 1958 approximately covered the research costs on antituberculosis drugs during the same period. The research project cannot, therefore, be regarded as economically successful. There were about 14,000 deaths from tuberculosis during 1958 in the U. S., compared with over 40,000 in 1950. About 69,000 new cases are reported each year-less than half the number reporting in 1950. There are now only about 150>000 patients in the U. S . known to have the disease, about one third of the number in 1950. Medical results from the use of isoniazid along with other drugs have therefore been so satisfactory that only a small supply of the drug is needed, and the market is a diminishing one. The patient has bencfited greatly because the cost of the usual three months of oral medication with isoniazid can be then about 7 to 10% of the cost of the earlier streptomycin
Pharmaceutical firms do not always make a profit on drugs which perform a veluable service to the public. Returns from research expenditures are highly variable.
No valid yardstick for measuring research results has yet been proposed.
90,000 pounds of isoniazid were actually produced in 1952 of which only 30,000 pounds were sold. Although Roche and Squibb undoubtedly could have produced sufficient isoniazid to supply the U. S . market from raw materials which became available during 1952, they chose not to retain exclusive rights in their patent position on its use in tuberculosis and granted licenses to any reliable house to make and sell the tablets on payment of a moderate royalty. Today there are some 30 distributors of isoniazid, most of M hom had no research or development
R
RS
Cost of Research per Dollar of Sales of N e w Products = $ - = $ -NS N R / S . Cents, when ~~
I
-I-. 5 10 15 20 25 30 40
1
IO
‘200 100 ~
i
66.7 50 40 33.3 25
Y
180 90 60 48 36 30 22.5
8
160 80 53.3 40 32 26.7 20
e %=
6
D
4
3
2
120 60 40 30 24 20 15
100 50 33.3 25 20 16.6 12.5
80 40 26.3 20 16 13.3 10
60 30 20 15 12 10 7.5
40 20 13.3 10
8 6 5
P I T F A L L S IN COMMERCIAL D E V E L O P M E N T
This Formula ( 7 ) Provides One Basis for Evaluating the Potential Value of a Project value of research if successful X chance of success cost of research Arbitrary definition: For a new product, value of research is 3% of the sales of the product for three years.” The project should be abandoned if the index of return is less than 3. Decision reached: Index of return
=
Others have suggested using a &year base.
treatment which necessitated the additional expense of injections.
Market Research Approach In trying to establish the reasons for misjudgment, it would be helpful to apply some of the criteria of market research. T h e market was obviously limited, as isoniazid was only effective in tuberculosis. T h e company was dependent on others for the supply of raw materials, but there was a possibility of a captive market and copying could be prevented because of the patent. However, because of the company’s licensing policy, this was not enforced. Furthermore, there was a responsibility to make active drugs available to the medical profession. A formula has been proposed (7) as a means of evaluating the prospects of a research project; if it is applied here the results indicate doubt as to whether this project ought to have been undertaken. However, further examination leads to doubt of the particular formula. Application of the formula leads to the “rule” that research expenditures should be less than $50,000 per million dollars of expected annual sales. The calculations can be modified for firms spending less or more than 3% of their sales on research. I n the pharmaceutical industry, research expenditures are about 6% of sales and reach 8 to 10% in some cases. Even with the 8% figure, the “justifiable” research expenditure for any product
becomes only $133,000 per million dollars of annual sales (5-year formula). Schering Corp. recently announced that it would spend 30% of its $7.5 million research budget on developing corticoids. This corresponds to an expenditure of $2.25 million annually on this project. According to the modified formula (6.570 of sales), this would necessitate introduction after one year of research expenditure of a new product with sales of $20.7 million annually for 5 years (using the 5-year base) before it could be considered worth while. Because a new product takes two or three years from bench to market, the research expenditure would not be limited to one year; the calculated annual sales would therefore have to be multiplied by the number of years of research expenditure required, so that only a $62 million annual market would justify research costs of this magnitude for three years; few single drugs retain sales of this magnitude for several years because of the emergence of competitive products. Yet Schering’s disobedience to the formula is paying off. In the organic chemical industry too, there are further indications that few firms are being guided by this formula.
A Successful Research Department This formula was designed to estimate the allowable expenditure for each new project, whereas the problem really
Sales and Earnings Growth and Research Expenditures Company
Sales Growth,“ %
Earnings Growth,6 %
Research Expenditures, %
6.0 7.8 9 6.6 4.6 7.8 13.8 13.0 6.6 22.8 5.7 68.4 29 13.7
9.4 12.64 8.9 13.7 16 6.3 4.9
5.6 2.56 4.26 3.9 4.06 4.2 2.52 6.6 (13) 7 . 0 (8) 4.02 4.02 (5.2) 6.45 10.4 9.0
Abbott Laboratories Allied Chemical Corp. American Cyanamid Co. Atlas Powder Co. E. I. du Pont de Nemours & Co. General Aniline & Film Corp. W. R. Grace & Co. Eli Lilly & Co. Merck & Co. Monsanto Chemical Co. Parke, Davis & Co. Schering Corp. Smith Kline & French Upjohn (1957 sales - 1952 sales) , yo. a - 1952 sales 1952 earnings.
...
26 12.2 14.1 60.5 11.3 9.7
* Annual earnings increase per share as in a , % of
involves measuring the success of the research department as a whole, based on earnings from new products originating from research. A firm which has a research expenditure of 3Oj, of sales but only derives 10% of its sales from new products will actually spend 30% of its sales of new products developed, or 30 cents per sales dollar, on the research from which they result. If, however, 20y0 of the sales arise from new products, a firm spending 3y0 of its total sales will only have paid 15 cents of each sales dollar on the research for the new products. This principle can be generalized by working from the criterion that returns from successful research must be greater than the total cost of research. If these are expressed as percentages of total sales, N% of sales arises from new products, R70 of total sales is spent on research, and
RS
$-
NS
R
= $-
N
expresses research cost per dollar of sales of new products. T h e greater the research expenditure (RYo), the greater must be either the earnings from the new products or the percentage of sales (NY0) arising from new products. The table shows how research expenditure increases costs a t a hyperbolic rate. With only 10% of sales arising from new products, as much as 80 or 90% of the cost of the new products is attributed to research in a firm devoting 8 or 9% of its sales dollar to research expenditure. T h e list of chemical firms which publish research expenditures shows that there is no relation between research expenditures and either sales or earnings growth. T h e high percentage of sales of new products required to pay the research expenses a t least indicates that private enterprise is taking a big risk in spending large sums on research. But it has to take this risk or go under, and it is this incentive which is the motive for growth and survival.
literature Cited
4
(1) National Industrial Conference Board, “Studies in Business Policy,” Rept. 40, 21 (1950). 6 VOL. 52, NO. 1
JANUARY 1960
23
