The pharma of tomorrow

(FORTUNE Magazine) – William Haseltine, founder and ex-CEO of Human Genome Sciences, sees the future of the drug industry. His prescription calls for nothing less than a disintegration of the modern pharmaceutical company. That's disintegration not as in ka-boom but as in dismantling, shrinking, and streamlining. "Big Pharma's problems are mostly the consequence of bigness," says Haseltine. "Companies have to place an enormous focus on control at every level of their business--from drug development to manufacturing to marketing. But that tends to stifle innovative research."

Like most radical departures from the status quo, Haseltine's ideas are born of frustration. A cancer and AIDS researcher obsessed with speeding the laborious process of drug discovery and development, he helped spark the biotech boom of the early 1990s when he founded Human Genome Sciences to parlay the mapping of the human genome into a new class of breakthrough drugs. Yet the boom went bust, few drugs emerged, and Haseltine, now 60, retired from HGS last fall. The problem, he says, wasn't science but organization: "I see great inefficiencies in pharma and biotech firms. We have all these opportunities but insufficient structures to pursue them." Rather than tilt at windmills, he is now out to create a model company that will show Big Pharma and Big Biotech how to evolve.

Everyone knows that pharma is crying out for new ideas. In recent years the cost of ushering a drug to market has grown to nearly $1 billion while the stream of novel medicines has slowed to a trickle. Industry giants face growing price resistance from a disgruntled public, greater competition from generic rivals, and, in the wake of Merck's recent Vioxx recall, higher regulatory hurdles. Drugmakers' strategy has long been to merge and acquire in order to achieve ever-greater economies of scale. The tactic succeeded brilliantly for decades, but now vast, vertically integrated drugmaking bureaucracies look more and more like dinosaurs.

The giants, Haseltine argues, will soon give way to smaller, fast-moving companies of scientists, physicians, and project managers that outsource much of the crucial work and thrive on income from patents and royalties. In recent months Haseltine has been racking up frequent-flier miles jetting to Eastern Europe, South America, India, and Southeast Asia, assembling the building blocks of what he calls a semi-virtual startup. Through government investment, India and China have made major strides in the field of drug discovery, he says. Brazil, as a result of a fruitful generic-drug industry, has emerged as one of the best locales for superior yet inexpensive manufacturing. Russia and Eastern European nations, with their surpluses of highly trained scientists, are vying for world leadership in conducting clinical trials.

Trends in science also help make Haseltine's vision a real possibility. Until recently only corporate giants could afford the vast "libraries" of chemical compounds necessary for drug discovery, not to mention the sophisticated technology needed for complex chemical synthesis and so-called high-throughput screening for promising molecules. Now universities and small biotech firms possess similar expertise and technology. It's not such a huge leap, insists Haseltine, to create a company that outsources just about everything. "These skills can now be purchased across the globe," he says. "The screening for active molecules can be done by contract. Animal testing can be done by contract. Process development and manufacturing should be done in Asia, and initial clinical trials and marketing of drugs can be done where the drugs are developed. Only after efficacy has been proved do you have to fund clinical trials in Europe and the U.S." The new drugs would ultimately need Western regulatory approval, he says, but the outsourced approach would yield vast savings of money and time.

Haseltine's nascent company doesn't yet have a name. And while some drugmakers have begun to farm out endeavors such as toxicology testing, none has embraced outsourcing on the scale he envisions. "I want to lead by example. I don't expect Big Pharma to agree. Their job is to say everything's fine. You have to show large companies that something new works. Then they'll adapt." Is there a role for Big Pharma in the world he foresees? Yes, says Haseltine--as a salesman: "Big drug companies will stop spending vast amounts of money on R&D with little return. Instead, they'll become very good at scouring the world for proven compounds and marketing them."