Last year’s announcement that scientists had sequenced the human genome highlighted both the potential of genomics-related technologies and the speed with which they are evolving in the biopharmaceuticals industry. Most observers and analysts have been banking on the "new biology" to create innovative new drugs, and quickly. Yet far less attention has been paid to the enormous business challenges these new technologies pose for the industry. Recent research conducted jointly by McKinsey and Lehman Brothers suggests that over the next five years, the new biology could raise R&D costs substantially—in some cases to twice their current annual levels. Since pharmaceuticals companies spend as much as 20 percent of their annual sales on R&D, these potential budget increases may put substantial pressure on earnings.

Why the coming cost squeeze? To put the problem simply, attempts to use today’s relatively immature technology to explore the novel drug targets that genomics is uncovering will raise failure rates for drugs further down the development pipeline—during the most costly phase of the R&D process. These higher failure rates are also likely to stretch out the arrival timetable for the flood of new drugs that genomics is expected to yield.

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