Blockbusters are key to innovation.

Major pharmaceutical companies are built upon and driven by blockbuster drugs. At this point, that’s defined as a product with sales of above a billion dollars a year. All the “Big Pharma” companies have some of these very big drugs anchoring their portfolios, and most have grown by developing or acquiring a series of them over the years.

Blockbusters tend to be highly innovative drugs, often breakthroughs. They are big because they represent the first or best treatment for a major medical need.

At the same time, they are very elusive, very rare. No company has ever found a way to produce big, innovative drugs efficiently, economically, or even predictably. For all its technological sophistication, the business model centered on innovation is pretty primitive.

Think of a funnel, with the wide end representing the discovery stage and the narrow end representing the launch point of a new product. Thousands of compounds enter the top of the funnel and begin to undergo testing. A large percentage fail very early. More fail at each stage of development. But ultimately a few do make it through. You’ve probably seen the attrition statistics before–for every 5,000 entering the top, one comes out the bottom. This is part of the reason why it costs $800 million to $1 billion to produce a new drug.

Of those that make it to market, not all are big drugs by any means. In fact, only one in three makes back its cost of development. So the true blockbusters are a fraction of the fraction that survives the journey.

And yet these few throw off enough value to make the innovation model work. Among other benefits, they pay for all the failures, but also for the lesser innovation that occurs along the way. These discoveries may have smaller markets and thus represent lower return to the companies. But they are critically important to those who suffer from these diseases, and, as long as we can continue to find some big new drugs, we can afford to bring these lesser ones to market as well.

Most importantly, blockbusters finance the search for more breakthroughs, which makes our innovation engine run something like a breeder reactor, the nuclear energy system that produces fuel even as it consumes fuel.