Successful product innovation requires a continuous evolution of a company’s organizational model

In a series of short pieces I will focus on one such approach at a time, starting in the next one with integration of an acquired smaller company and culminating in experimental hybrid setups with virtual organizational aspects. Throughout this journey I invite you to comment and participate.

Historically, pharmaceutical companies have experimented with different approaches to ensure continuous innovation, and now during this global pandemic, it may be more important than ever.

During Medical School, one subject held a particular challenge for me biochemistry. I remember being told during one of our first lectures, that we will have to simply learn and accept the first 10 axioms before we will be able to conclude axioms #11 and #12 ourselves. I am simplifying here, of course, and do not intend to trigger a discussion on biochemistry. The point however, is that I will have to briefly touch upon several high-level axioms around pharmaceutical product innovation first before I can get to what I really want to focus on – innovative and agile organization models.

Besides directly delivering patient care, I have worked in Big Pharma and as a healthcare entrepreneur, and each of these experiences provided me a particular perspective on this topic.  

Let’s begin:

#1) Continuous innovation is THE key success principle for industries like pharmaceuticals whose  blockbuster business model are directly impacted and related to a product’s patent life.

#2) At first glance, the average patent life of 20 years for a compound may not immediately reveal the business challenge for this industry, however, the time during which such a compound actually can be commercialized under patent protection is in fact a lot shorter, almost half. Due to the long development and regulatory times required to approve a new medication (on average 10 years), the real time left to commercialize the compound is on average 12 years.

#3) Apart from this specific timing element, there are additional factors to account for with respect to the growing complexity of this industry’s immediate challenge. Namely, the ease to discover the ‘next blockbuster’ (i.e. a drug with annual sales of at least USD 1 billion). It’s not that we face a shortage of unsolved riddles or treatments that could and will be improved, it’s in reality, the opposite. But the advances in technology and science often result in higher specialized products, which are more difficult to discover, develop, produce and commercialize.

#4) One result of those changes is that innovations today are being discovered more often outside the corporate R&D departments than in-house, even though the money spent on R&D in-house is constantly rising (e.g. 15+% of annual sales).

#5) Many innovations today are originated in start-up company environments with the constant need for funding; this is very much different from a corporate discovery ecosystem.

#6) And the funding situation is not the only difference when comparing the two research setups  (i.e. start-up and corporate). In fact this very phenomenon has been studied extensively itself and still a corporate cannot simply replicate what makes a start-up successful.

#7) As a consequence, the following dynamic has become a well-accepted new normal over the past decade, in which larger corporate pharmaceuticals insource an increasing part of their product innovation from start-ups.

#8) Innovation is crucial for Big Pharma, at the same time being a successful innovator is expensive (eg. on average the full development cost of a new drug is USD 2billion and more) and also pretty risky (eg. in a simplified description it takes 10.000 compounds to identify the one that makes it all the way to market launch).

#9) Big Pharma is on a learning curve and constantly refining this approach to innovation, from initially directly acquiring a promising small company at a high price and even higher investment risk (i.e. a simple yes/no) to a current stepwise process. Today, many corporates have venture capital like entities in-house or strong financing partners to help them consistently screen markets and assist them to make many smaller seed investments in promising research projects. As these projects progress scientifically and achieve distinct milestones, the pharmaceutical enterprise will provide additional funding at various stages, eventually taking ownership entirely through structured agreements that help balance their investment risk even further.

#10) Identifying and getting access to innovation is one challenge, as previously highlighted, a subsequent one is to decide what to do next.

And if you were waiting for the biochemistry effect that all following points (#11+) would be logical and self-explanatory, we are not quite there yet, as the organizational model aspect is still under development.

Clarifying the scope of what constitutes an innovation is crucial. Is it just data and intellectual property that are of interest and hence the development baton for an innovative product could be passed on easily from one group of people to another? Or is there more to capturing the value of a particular innovation? How can a large corporate enable the acquired start-up to continue operating in a way that made it successful in the first place?

It is at this point exactly where corporate agility is currently needed the most. Namely, which organizational setup going forward is best suited for a given innovative small company to continue on a successful trajectory and to deliver the value assumed in a transaction. There is certainly no one size fits all approach, let alone are all possible options fully known yet for how to setup the organizational model going forward – from full integration to loose affiliation there is a wide space of opportunities.

Several Big Pharma corporates are experimenting with very different approaches to identify the right balance in order to come up with a tailored solution for an individual situation that allows to best capitalize on the strengths of both parties involved.

Elements to think of are: culture, incentives, processes and ease to operate, decision timelines, etc.

Not to forget the current pandemic and its impact on new ways of working.

Let me conclude with a few words on my motivation for this experiment: Besides the many negatives of this pandemic it also bears some positive aspects – like the common urge to develop an innovative cure in record time for which no one appears to be best equipped alone. This triggered agility and flexibility by many involved – the prerequisite for transformation.

What is there to learn from, to preserve and/or to adapt?

#researchanddevelopment #pharmazie #innovation #venturecaptial #AMon #mergerandacquisitions