Diseconomies of scale

Another interesting piece by James Surowiecki, 'the pipeline problem' explains the new industry structure in life sciences. Large pharmaceutical firms may have branding and sales power, but encounter diseconomies of scale when it comes to R&D or innovation in general. As a consequence, their 'pipelines' have been drying up, and they have become to rely on smaller, more flexible and more entrepreneurial biotech firms to deliver efficient research.

The traditional pharmaceutical research model harks back to processes developed by German and Swiss chemical firms in the late nineteenth century, when chemists synthesized and screened thousands of compounds in search of a few potential new drug candidates. Although the methodology is more sophisticated now, success is still in many ways thought to be a matter of brute force: throw hundreds of scientists at a problem and hope for the best. It’s crapshoot economics; a few great successes can pay for myriad failures. So bigger has always been seen as better.

Today, though, 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.” Now, as the founder and the C.E.O. of a little biotech called VGX Pharmaceuticals, Kim has a novel type of aids drug in clinical trials and a promising drug for cancer in development.

It turns out that research and development doesn’t scale—that bigger may be worse. That’s why the engines of pharmaceutical innovation have for some time now been smaller biotech firms like VGX, which 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.