Rolling The Dice

Glaxo Smithkline has a problem.  It’s not creating enough blockbuster drugs.  Its share price lives and dies by its ability to create the next Avandia.  It’s a tough process as it takes, on average, 90 months (that’s 7 years!) and $802 million to get a drug to market (that includes the cost of all the failed drugs).

GSK spends about $4-5 billion a year on R&D and they’re trying to figure out how to make it more effective.  As a result, they’re taking $1 billion of it and scientists are going to have compete to explain why they deserve that money for those projects.  They’ll get money for 3 years and have to pitch to a panel including a venture capitalist and the CEO of a biotech company.  Read more in the FT.

There are two things that I find interesting about this.  First, will the incentives be there for the employees?  If I was a research scientist, I’d go to GSK because I would get a huge budget to try and make fundamental advances in science and save lives.  If I knew that I was going to have to compete against a bunch of other scientists for funding, why wouldn’t I go to a startup?  Also, the upside would be better at the startup; I’d still get my salary and a tonne of equity.

The second thought I had is “I hope they pick the right VC”.  I know why they’re bringing on board a venture capitalist – the mythical VC is able to see the future and select highly profitable winners.  The problem is, there are a whole lot more bad VCs than good ones.  Check out this report from Focus Ventures – during the Dot Com boom, 4% of the firms created 66% of the value.  I really hope that VC is from one of the top 50 firms.

Will be interesting to see if 10 years from now this experiment will be a success or failure.

PS On a side note about incentives, think about how weird the incentives to change this system are for GSK’s CEO.  By the time this project either delivers its first blockbuster drug or fails miserably, he will be long gone.  What thoughts influence him as he’s trying to set up a system where all the return is going to come well after his tenure.  Kind of interesting to play around with.