Ourania Koumi, The Open University Business School MBA student
A rich pipeline of potentially marketable drug compounds is the lifeblood of the pharmaceutical industry and the first thing that used to come to mind, when as student, I was applying to companies for jobs. When I was labouring day and night against a lab bench playing paper chase, the thought never occurred to me that one day I would be following the advice of my academic teachers, that is to swap a career in academia for one in a drug company. They warned me that any new ideas I had would have to mould into more restrictive and complex norms, depending on company size. I would have to adapt to corporate culture less forgiving to sudden bursts of innovative trial and error approaches to decision making. But, the magic world of reinvested profit back into research for new drugs could have put the worries of any researcher for funding to rest.
Of course, in my mind, innovation was only synonymous to successful drug development.
I later discovered only part of this held true. It is not enough that a company needs to invest in a costly 15 years of research to decide on a potential new drug. Marketing a newly developed compound is a bumpy road, not for the faint-hearted. It involves many issues; an increasingly demanding regulatory approval process, and a short five-year period in which the compound needs to render profit for the company before patent expires. All bets are on, in a rapidly changing external market which pushes for more at a lower cost, driven by growing generics competition.
Thus, examples of innovation are contingent on dynamic market demands.
- Optimising Research & Development (R&D) spending: The industry has been blamed for falling behind on drug design innovation1. Small biotech companies, which are beginning to take over from big corporations in producing high quality, innovative compounds targeting niche disease areas, do so due to their focus on science, agile decision making processes, inspired talent management and rigorous financial restraint1. As one example, Vertex is on its way to marketing yet another compound shortly after the launch of a first innovative therapy for cystic fibrosis in Europe, while partnering with GSK and Jansen to market new Hepatitis C compounds2.
At the same time, bigger companies seem to be in a state of constant regrouping, where there is room for improvement in communication and in the development of the right mixture of metrics, which can boost productivity and reduce costs. As Knott hints at in her recent HBR article last May3, one reason why ‘R&D spending does not correlate with market value or growth’ lies in the way companies fail to measure productivity of the R&D. Even with universal, uniform and reliable metrics based on Edwards Demings’ TQM system, Knott points out that big companies will have to reduce R&D costs to make up for patent erosion, while simultaneously managing for increased R&D productivity. But for most, the new metrics system may actually justify greater R&D budgets3. While R&D spending optimisation seems to be work in progress3, there are still some successful open innovation strategies like Merck’s initiative of employee idea crowd sourcing to encourage such transformational innovations 3,10.
Is continuous innovation key to success within the pharmaceutical industry?
Companies that are doing better, tend to follow a mixture of strategic imperatives coupled with optimal risk averse financial management in continuous innovation, e.g. polypill design or administering an existing compound in a new drug delivery system, like Ceglene’s Abraxane approved to treat breast and lung cancer4.
- Technology boosts productivity at less cost: Business analytics also present a hot new technological innovation, useful in contributing to cutting costs and improving productivity across the value chain of new product development and marketing. For example, Vertex designs clinical trials in record time using analytical business tools to help minimise errors in trial design and consequently cut costs, optimising the probability of high quality end trial outcomes5.
- Organisational restructuring to offset patent erosion: The more successful companies have followed what Christensen calls disruptive innovation strategy in organising a separate business unit, or independent subsidiary company, to continue marketing their own branded generics, e.g. Novartis’s Sandoz6. In that way, although the subsidiary is functionally and organisationally separate from the mother company, the profits are kept in house6. A hybrid of that strategy is to flexibly diversify business activity according to the needs of the market, as Abbott did after buying Piramal to start selling cheap, generic drugs in India7.
- Marketing strategy optimisation: Fast and effective new customer segmentation and targeting can also be achieved by the use of social media platforms, an effective way of bringing the company closer to its customers and consumers. A social media platform developed to inform, educate and interact with patients was developed by Lilly & Co, which combined YouTube, Facebook and Twitter and was launched in September 20108, despite regulatory impediments that the company faced. Over the last 3 years, more than 74%9 of companies have adopted this addition to their communication strategy, thus bridging the gap between the company and its end-users, in the hope of drawing marketing and competitive intelligence insights and improving corporate image.
Pipelines may have helped thus far6, but investors are not optimistic that results may be as encouraging in 2013. It may be that under extreme pricing pressures the innovation imperative for drug companies in Europe and the US seems impossible to tackle, while sales of new products hardly cover losses from patent erosion in a competing generics market and an external environment driven by regulatory and pricing pressures. Rather than a deviation from the classic Ansoff framework, Nagji and Tuff10 suggest that a winning strategy may be a combination of innovative approaches at the right equilibrium. Managing existing drug/expiries, expanding adjacent ‘new to the company’ business, and developing new drugs covering the ever growing epidemiological needs, especially in the emerging markets, within the same company, may be mandatory.
Total innovation management has worked for Technology and Telecommunications’ markets10. It may be the right survival tactic for pharmaceutical companies, as just having a pipeline of new drugs, just maintaining existing customers with face-to-face sales calls, just relying on marketing to cover for R&D delays, or selling in just Europe or the US, does not seem to cut it in today’s drug market.
1. ‘Pharma 2020: Which Path Will you Take?’, (2007) PricewaterhouseCoopers Pharmaceuticals: ConnectThinking: 1-48
2. Vertex Q3 2012; http://investors.vrtx.com/releases.cfm
3. Knott A., (2012) ‘The trillion dollar R&D fix’, HBR, May: 77-82
4. Abraxane SPC; http://www.abraxane.com/hcp/
6. Novartis Q3 2012 Results; http://www.sandoz.com/media_center/news/2012/press_releases/2012_10_25_Q3_results.shtml
7. The Economist (2012) ‘Battling borderless bugs: Western and emerging-market drug firms are invading each other’s turf’, 12 Jan: Business print edition; http://www.economist.com/node/21542410
8. Ghinn, D. (2012) ‘Pharma gets social’, Jan: http://www.pharmaphorum.com/2012/07/17/pharma-social-lillypad-provides-platform-lillys-corporate-engagement/
9. Cognizant Report (2012) ‘74% of Pharma companies have adopted Social Media…’; Jan: http://www.cognizant.com/InsightsWhitepapers/Adaptive-Social-Media-in-Life-Sciences.pdf
10. Nagji, B. & Tuff, G. (2012) ‘Managing your Innovation Portfolio’, HBR May: 5-11
Photo credit: Micah Taylor via photopin cc
Disclaimer: The views posted in this article are the result of personal reflective thinking on the already published articles, analyses and reports stated in the References; the current conclusions hypothetical and subject to change in light of new, openly published evidence. The author is currently an MBA student at The Open University and bears no relationship, commercial or otherwise, with the companies mentioned, which she has used randomly to exemplify innovation strategies.