New research suggests it’s time industry took a radically different approach to drug development, leaving compound innovation to others while mobilizing its global scale and promotional muscle to drive timely acceptance in the marketplace.
The biggest strategic issue confronting Big Pharma today is balancing that legacy of ”big” — maintaining the capacity to invest in the advantages of size and scale while innovating to meet a tighter customer definition of value in an era of demographic challenges, fiscal pressures and slowing economic growth.
A largely unquestioned assumption in thinking through this issue is that Big Pharma should continue to invest heavily in internal R&D capabilities as the best way to fuel increased organic growth. Even with the current interest in external collaborations, all of the major players are bound to a model that still relies on significant in-house investments in new product discovery and development, linked to a globalized network of brick and mortar facilities committed to achieving company leadership in major designated areas of unmet medical need.
But is this necessarily the best way for Big Pharma to position itself for an uncertain future: given its emphasis on size and scale, can it remain an entrepreneurial innovator — or do the pressures of globalization require it to reposition itself as an efficient implementer? In other words, should Big Pharma continue to invest in basic science and costly in-house research or focus on the service platform skills that can achieve higher margins by building big markets for the best new ideas in medicine?
Some new insights from the thought practice community are beginning to suggest there are merits in this latter approach. This is where Big Pharma acknowledges its best contribution may lie in executing the ideas of others, leveraging its strengths in financing, distribution and marketing much like the major Hollywood studios do in transferring words and pictures to film and then finding an audience willing to pay for a “personalized” experience. It is still a heretical concept in many parts of the industry, which believes that a transition to status as a giant distribution platform rather than as an originator of innovations will lead to a decline in its reputational weight in society: from Wellcome Trust to Wal-Mart.
Bain & Company has now weighed in on the debate with a provocative new survey study, Changing Pharma’s Innovation DNA, based on interviews with key R&D leadership in the 20 top biopharma companies. It concludes that current efforts to redirect the R&D process are unlikely to transform a discouraging ROI profile, and that a strategy seeking to supplement internal innovation with the fruits of external partnerships will not compensate for a yawning revenue gap in excess of $100 billion facing the industry through 2014 due to patent expirations and other external pricing challenges. Of 6,000 biotech projects currently available for late-stage licensing, the Bain survey found less than 100 showed much potential for commercial success. Even if all of these found a ready acceptance in the marketplace, the estimated revenue potential would be less than a third needed to replace these lost sales.
The study also notes a disconnect between capabilities deemed critical for fostering internal innovation and the industry’s current strengths. In the former case, “managerial autonomy” and “flexible organizations” were highlighted, while what the industry does best is funding projects and building scale — skills that actually inhibit the innovation process by promoting centralization at the expense of delegation, flexibility and speed.
To improve Big Pharma’s R&D performance, the report advocates a “radical transformation” of the internal R&D function around what is in effect an investment portfolio management approach, where compounds largely imported from outside the company are commercialized selectively, on the basis of “proof points” focused on financial metrics linked to specific investment goals. It thus places less emphasis on traditional clinical performance indicators of success, such as the number of compounds advanced into late stage trials.
Instead, all projects must be evaluated through an investment lens, where the head of R&D becomes in effect the organization’s lead venture capitalist, allocating resources based on these pre-determined proof points; delegating authority on a project by project basis; and increasing autonomy through increased outsourcing. Ultimately, this means the company will need to morph into a drug financing and commercialization platform, in which traditional R&D activity will be re-purposed around late-stage development and marketing activities. The overriding goal of the organization will be to ensure that any new product hits the ground running rather than waiting for sales momentum to build over time.
One other aspect of the report: it is one of the first surveys to highlight how critically important the human resources, talent and organizational development functions need to become in moving companies out of the hole on R&D productivity. It’s not rocket science, but the message is that “people matter.” Bringing in more people from the outside is seen as very important in creating a better internal culture to promote innovation.