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How to achieve pharmaceutical innovation

Posted on 01 July 2013

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Pharmaceutical innovation has been recognized as essential for mid- to long-term success and even survival of science-based corporations such as pharmaceutical and biotechnology companies.

As such, understanding how best to innovate, and how to do it more often and efficiently, is top of mind for executives at many large corporations.

Traditionally, the approach for pharma companies has been to dedicate a large portion of spending on R&D, in the hopes of generating a steady internal stream of innovation to fill pipelines with new, differentiated, and competitive products. However, as is now widely known, these costly efforts have been disappointing at best, resulting in major reductions in R&D expenditures at many of the leading pharma companies.

AstraZeneca, Pfizer, Sanofi, to name a few, have made headlines recently for their reductions in R&D.

Though many acknowledge that the majority of R&D cuts have been completed, this trend still exemplifies the major shakeup that has caused the industry to reevaluate its focus on innovation and examine the productivity of R&D. A recent study conducted by consulting firm Oliver Wymanconcluded that “the value generated by $1 invested in pharma R&D has fallen by more than 70%.” From 1996-2004 drug companies produced $275 million in five-year sales for every $1 billion spent on R&D, and from 2005-2010 it was $75 million.

Many recognize that most breakthrough innovations increasingly come from the startup world, and as such, large corporations have established or are establishing their own external-facing instruments for sourcing innovation.

These external-facing instruments include corporate venture capital (CVC), business development groups, and more recently, open or external innovation teams tasked with finding innovation externally and fostering partnerships and collaborations with academia and the startup community.

These efforts, although properly motivated, have not reliably filled the innovation pipeline because they do not go far enough in getting large pharma involved early in an innovation’s development. In the case of Biogen Idec, among the reasons they decided to get out of the CVC business was that it did not provide an opportunity to access the novel technologies they were seeking.

Even though there are various external-facing instruments available, there appears to be an over-reliance on scouting and diversification, in hopes of serendipitously unearthing innovations that meet the strategic objectives of the corporation. More specifically, these efforts face challenges because:

  • There are too many startups and academics to meaningfully interact with, making it very hard to discern signal from noise.
  • Inevitably there is information asymmetry between buyer and seller, leading to a systematic “lemons” problem; specifically, attrition rates for externally sourced drug programs are reportedly higher than internal ones.
  • Corporations end up settling for what’s on the market or overpaying for what everyone else already knows about and wants.
  • By getting involved too late, pharma companies have little ability to shape the clinical development program for externally sourced compounds.

Read the full article at Xconomy

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