A value chain is a widely used method of industry analysis. It refers to the activities a company does to create economic value and deliver a good or service. While it originally referred to activities within one company, it is often used now (sometimes in conjunction with the term “supply chain”) to refer to all economic activities directly leading to delivery of the product. In product development, this means the value chain starts with invention or discovery.

Modern drug development relies on laboratory science and clinical trials (experiments with people). As science has revealed more about the biological underpinnings of disease, the value chain has extended backward to the very molecular code.

There are 3 main steps in finding and developing a new drug:

• Preclinical research, which is when the drug is found and first tested
• Clinical research, which is when the drug is tested in people
• Post-clinical research, which takes place after the drug is approved

There are ways to define and segment the pharmaceutical value chain. Here is one:

• Gene sequencing
• Target identification and validation
• Lead discovery
• Animal testing
• Clinical Trials (Phases I, II, and III)
• Manufacturing
• Distribution

We could call the first three elements “drug discovery.”

Gene sequencing involves creating a database of DNA sequences. Target identification means finding proteins or nucleic acids expressed when the disease is present.

Lead discovery is what most people think of when they mean drug development. It is a series of activities where scientists try to find a way to combat the cause or symptoms of a disease, including ways to stimulate the body to make missing proteins, creating antibodies and nucleic acids to prevent the protein from being expressed in the first place, and even gene therapy.

It is not necessary that one organization do all these activities. If one did, we would call it a vertically integrated pharmaceutical company. But some companies focus only on drug discovery. They hope to sell the rights to their products to larger companies to finish development or to market and sell.

Companies that make generic drugs usually do only the final two elements. For a new drug, the final two elements may be called “commercialization” but for older drugs that are off patent no one speaks of commercialization. There are still business activities needed to make these medicines safely and get them to consumers.

Except for the final two elements, the value chain revolves around creating and using information. If this information is developed inside a private company, that company may keep it private to get a competitive advantage. Basic research is often funded by a government agency and information generated is public. The sequencing of the human genome is an example. The information is useful only to people with the right kind of knowledge, but it is not proprietary. Drug development inside companies is usually hush-hush, but some information is published in scientific journals. And patent filings are public. The results of clinical trials sponsored by pharmaceutical companies are owned by the company, but if they want to file for drug approval, they must make the results public in an attempt to convince regulators they have shown the medicine is safe and effective. Clinical trials that show undesirable results – ones where treatments are not shown to be safe and effective – are often more-or-less buried. Industry observers know about them – the company has mentioned them in communications to shareholders and has registered the trial with public agencies – but the details are sometimes not made public.

Why might pharmaceutical companies team up in bringing new medicines to the market?

• Capital – small companies that develop NMEs (new molecular entities) might not have the resources to go through clinical trials and expensive down value chain activities
• Access to distribution networks
• Combined expertise – some companies are better than others at different activities