A New Business Model for Pharma Innovation

If the pharmaceutical industry is to design a more optimal R&D model for the future to improve productivity, it needs to look beyond its own boundaries to other IP-rich technology environments. Big Pharma traditionally has been characterized by a ‘closed innovation’ culture where intellectual property (IP), secrecy and corporate silos dominate; it can benefit, therefore, by examining industries that have successfully established a more open way of working to achieve innovation.

The roots of the problem

The problem of generating innovative products to feed the market, while achieving appropriate profits, is not unique to the life sciences industry; it affects virtually every IP-rich industry. The root of this problem can be explained in terms of intellectual capital (IC) generation. IC is the raw material of innovation; the intangible collective know-how, intelligence and creative energy captured by an organization. IC is diminishing within Big Pharma relative to the external scientific environment.

True innovation is expensive, time-consuming and risky. During the blockbuster years the industry could ignore the challenge to be truly innovative focusing on known drug targets and me-too products for common conditions. In the post-genomic era, there are a plethora of new targets being researched by Big Pharma, biotech, start-ups and academia in the hope of developing innovative therapies for unmet medical needs in therapy areas such as oncology and CNS.

Big pharma is now experiencing “innovation competition.” Today, talented scientists are exiting Big Pharma and plying their trade in more creative, flexible companies that understand disease mechanisms better. In addition some of these companies have attracted the necessary funding and utilized the capabilities of outsource providers to exploit their IC.

However, all research entities are facing the same two challenges in their programs; firstly, is this new target involved in the disease; and secondly, is this target druggable? Big Pharma needs to access the IC outside its four walls to address these challenges and develop innovative, targeted best-in-class therapies in areas of unmet medical need.

The studio model

A new R&D model can help solve Big Pharma’s challenges. In fact, there is already a time-tested industry framework that addresses many of the fundamental issues and it comes from an unlikely source: the film industry studio model.

The studio model:

• Captures the essence of “open innovation”
• Has a strong risk management capability that embraces shared risk and leveraged investment
• Operates well with a diverse portfolio
• Provides for a flexible organization
• Maximizes use of IC.

The structure of today’s film industry results from a single legal decision: the judgment in the Paramount antitrust case, which back in the 1940s ended the major studios’ stranglehold on film production and distribution. As a result independent and partially- owned studios now play a large part in meeting the large studios’ insatiable need for creative materials (Figure).

In this model, the preferred (but not exclusive) route to the marketplace is through a studio. With its emphasis on ROI, the studio model quickly muddies the issue of ownership. Movie credits often mention multiple production groups. Large studio ownership is diverse often a mix of other studios, end users (e.g., cable operators) and a consortium of financial entities.

Big Pharma and large studios share other similarities:

• They have a strong need for creative materials
• They brand by product, not company
• Companies compete by product line (e.g., not Pepsi and Coke)
• Projects require large amounts of funding
• Projects have a low probability of success
• Development times are long.

Similarities like these make the studio model an excellent template for the pharmaceutical industry to use in adopting a more open approach to R&D.

Adapting the studio model

Many industry readers may now be saying: “We are doing all these things — so we have adopted the studio model.” This thinking would be wrong. Most pharmaceutical companies have bloated R&D organizations that offer little empirical data to support their costs. The industry as a whole is still relying more on internal funding and less on external financing to increase the number of potential candidates. Finally, there is still a strong mindset that the sole business of pharmaceuticals is discovering drugs. It is not. The business of pharmaceuticals is to achieve a responsible return-on-investment for shareholders in the life sciences space. While drug discovery is an important component, it is not the sole component.

The essence of the studio model is distributive creativity coupled with complex risk management and leveraged financing to ensure maximum returns, hence the vast number of different business relationships. Furthermore, because the studios have internally become stronger at marketing as opposed to creativity, they have been exceedingly adept at seeking every route to the consumer. Studios today market DVDs, films, games, Internet sites, cable channels, books, magazines, theme parks, concerts and other novelties. They cover all consumer channels for content.

From a pharma perspective, the studio model has three components that need translating into the language of pharma: (1) open innovation engine, (2) finance engine, and (3) new markets. The new markets group does not dovetail with the classic pharmaceutical R&D model but is necessary for a sustainable model.

OPEN INNOVATION ENGINE — In addition to internal Big Pharma R&D, IC is generated at universities, at venture-driven start-ups, at suppliers, and what might be called “complementors,” or companies whose product enhances your product if both products are owned by a customer (a manufacturer of diagnostics would be a complementor).

While collaboration between these groups is already industry practice, it is not the studio model. For the most part, the traditional industry model has been to go it alone or in-license and then go it alone. Examples of multiple partners sharing and developing ideas together are rare. The studio model requires a new emphasis on shared-risk and open innovation which in turn requires Big Pharma to conduct expanded risk management, portfolio management and actual management of its collaborations.

FINANCE ENGINE — In a volatile market, where the probability of successfully bringing a new drug to market is small, a portfolio needs a large number of diverse projects to achieve a reasonable expectation of success. Increasing R&D costs make it difficult for individual companies to fund so many projects.

To date, Big Pharma has usually sought to fund projects or in-license drugs on an exclusive basis, but there are instances where two competitors have jointly funded new drugs (co-development programs), and this should happen more frequently in future. In addition, we should see drug consortia made up of a number of large companies and venture groups investing jointly in a project in return for a share of the rewards — a similar model to high-risk movie financing.

NEW MARKETS — Much of the scientific R&D activity within the industry is well beyond just developing drugs. Disruptive solutions may be non-drug solutions to disease that have faster times to market and create added value. For instance, genetically modified insects are being created to fight dengue fever. Similarly, our food supply is coming under scrutiny as a potential means of controlling some autoimmune diseases (an example being gluten-free diets for celiac disease). Big pharma cannot afford to ignore technologies and markets like these, particularly as they may have valuable applications beyond healthcare. Recently, a startup looking at using an algae technology platform to express monoclonal antibodies was sold to a company that is creating gasoline from algae.

Start the journey

The studio model basically says: ‘I’m in the business of bringing films to the marketplace to achieve a maximum return on investment.’ There is no restriction on how this is done. The parallel for the pharmaceutical industry is simply: “I’m in the business of improving people’s health through science and medicine to achieve a maximum return on investment.” How this is done is of little consequence as long as the risk/return is favorable, regulations are followed and the company remains true to its vision.

ABOUT THE AUTHORS

> Gary Liberson, PhD, is a Member of the PA Consulting Management Group. Gary is a PhD statistician that specializes in risk assessment and risk management. Dr. Jim Andrew PhD, a consultant within PA Consulting Group’s Life Sciences and Healthcare practice, holds a PhD in Biochemistry.