changing pharma’s innovation dna - bain & company · 2018. 5. 30. · benefits for big...

Changing pharma’sinnovation DNA

By Nils Behnke and Norbert Hueltenschmidt

A new framework forradical change in pharma’sR&D organization and decision making—and a practical approach forachieving the transformation

Copyright © 2010 Bain & Company, Inc. All rights reserved.Content: Manjari Raman, Elaine CummingsLayout: Global Design

Nils Behnke is a partner with Bain & Company in San Francisco in the GlobalHealthcare practice. Norbert Hueltenschmidt is a partner in Bain’s Zurich officeand leads the Global Healthcare practice.

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Bringing innovation to life: Changing pharma’s discovery DNA

A new framework for radical change inpharma’s R&D organi-zation and decisionmaking—and a practicalapproach for achievingthe transformation

It’s no secret that Big Pharma’s traditionalresearch and development (R&D) engine needsa complete overhaul. What’s surprising is howlong the industry’s taking to fix the problem.Despite a number of bold efforts to bringpharma R&D back to higher productivity levels,the pace of innovation remains anemic: thelong-term average lags at one new molecularentity (NME) a year per company. Despite R&Dspending at a high 18 percent of revenues,Big Pharma’s R&D productivity declined by20 percent between 2001 and 2007¹. The costof bringing a new drug to market currentlyruns at more than $2 billion, clearly an unsus-tainable level. Mergers and acquisitions and thecreation of mega-companies have not com-pensated for the slowdown in innovation. As aresult, analysts lowered expectations and nowhope the global pharma industry will at leasteke out a compounded annual growth rate of1 percent in revenues over the next five years.

Faced with patent expirations, rising expenses,competition from generics and pressure onbranded drug prices, Big Pharma’s revenuegap could balloon to almost $100 billion by2014. For the top 20 biopharma companiesin the world, this represents an annual earn-ings decline of 8 percent. Most companiesfind that even shopping for innovation exter-nally cannot help close the gap. Recent Bainanalysis of 6,000 biotech projects, availablefor late-stage licensing, shows that only about200 are likely candidates for a large pharmacompany. Of these, fewer than 100 show poten-

tial to become top-sellers and taken together,they account for only about $30 billion inpotential revenue.

Pharma companies are striving hard to staveoff the R&D crisis through mergers and acqui-sitions, geographic expansion, and diversifi-cation into new areas like consumer health.But they recognize that while these effortsyield more predictable sales in the future, theyhave limited impact on the profit gap. The US,Japan and Western Europe still account for80 percent of the global market and recentgrowth in emerging markets cannot replacelost revenues or profits. Diversification intoother healthcare businesses does not help fillthe profit gap either, as over-the-counter med-ications have much lower margins comparedwith prescription drugs.

With the innovation burden hanging heavyover the industry, many companies havestarted to experiment with new R&D models.GlaxoSmithKline (GSK) restructured its R&Dcenters to emulate biotech R&D principles.Still a work-in-progress, GSK hopes to replicatean entrepreneurial culture in a large pharmaorganization. Eli Lilly acquired ImClone tosource innovation from outside the companyand then left it as a stand-alone unit operatingindependently. Pfizer and GSK broke downcorporate barriers to share intellectual propertyand assets to develop new drugs for diseaseslike HIV. Several pharma companies are part-nering with leading academic institutions topromote innovation from basic research.However, the jury is still out on whether theseefforts prime the innovation pump enough.

Instead, our analysis as well as a survey byBain & Company of 20 leading global inno-vators—responsible for some of the greatestbreakthrough medicines in the last few decades—suggests that Big Pharma needs to do evenmore. The efforts made so far point the industryin the right direction; now companies mustpress ahead to go much further. They need to

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break through the barriers that currently holdthem back. To raise innovation returns backto the level in the era of blockbusters, pharmacompanies need transformational change: changethat renews R&D but also cuts across the entirecompany. Such radical change goes to the rootof the problem and explores what holds backinnovation—and identifies what can be doneto create a vibrant new culture of innovationacross the organization. It requires hard deci-sions to give up entrenched legacy behavior,but also it requires an openness to bring backwhat worked in the past.

By nature, such change is difficult and takestime to implement. Inevitably, it pre-supposesstrong leaders who persevere. In the followingpages, we share the findings of our research,develop a new framework for radical changein pharma’s R&D organization and decisionmaking—and offer an approach on how toachieve the transformation.

The innovators’ perspective

To understand what ails pharma we spoke toinnovation leaders with a proven track recordof creating breakthrough medicines. Theybrought to the discussions a deep knowledgeof academia, venture capital and the currentstate of biopharma discovery and developmentcapabilities. We conducted in-depth interviewsto probe for what they considered key successfactors for innovation. We then asked them torate each factor on its importance. Finally, weasked them to identify the strengths and weak-nesses of biopharma companies compared withthese factors (see Figure 1).

First, the good news: These innovators stronglybelieve in the potential for future innovation.They see no set limit to how many new productsbiopharma companies can develop per year.Nor do they believe the industry has run outof technological advances required to developnew products. They identify two critical areas

Set cleargoals and

priorities forresearch

Prioritize basedon commercialand scientific

potential

Access breadthof disciplines

Ensure communicationbetween disciplines

Leadership to enable diversity of skills and capabilities within the scientific team

Ability to attract talentIncentives aligned with research goals

Fundingresources

Managerial autonomy

Minimal bureaucracy

Flexible organization

Low High

Leastimportant

Mostimportant

Importanceto innovators

Pharma’s capabilities

Figure 1: Feedback from innovators: Pharma’s current strengths lie in areas that matter less,comparatively, for innovation

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for the success of new product development,in which pharma excels: raising funds andproviding access to technologies. They alsocredit Big Pharma with superior skills in strategyand pipeline management—but herein liesthe rub: They rank these two skills as leastimportant for success in innovation.

According to the innovators, the other pressingareas of improvement for pharma companies,in order of importance, are: increasing mana-gerial autonomy; aligning research goals withincentives; attracting and retaining the right,creative talent; minimizing bureaucracy; andcreating flexible organizations. In addition, whenpressed to identify why in recent times pharmacompanies struggled to innovate successfully,the innovators identified some common themes.

• Scale crept into every aspect of the business.In the 1980s, when Big Pharma producedblockbusters with much greater frequency,internal champions often led innovation.These leaders could rally the troops acrossfunctions and shift the focus of R&D effortsnimbly. Then began the industry’s questfor repeatability and efficiency—an indus-trial manufacturing approach focusedon “throughput” and “risk mitigation.”Repeatable processes delivered a host ofbenefits for Big Pharma. For example, theindustry found a steady source of revenuein marginally-differentiating products andmaking them “evergreen” through extendedreleases or co-formulations. But innovationsuffered when eventually, pharma companiestried to industrialize even the non-scalable,truly creative steps in product generation.

• The vision of success in drug discoveryand development got diffused by averagesand probabilities. Investment decisions inpharma companies shifted to a “numbersgame.” As ideas for drug innovation fun-neled through several stages, pharmacompanies measured success in terms ofprogression from one gate to the next. Atthe level of the organization, increasingly,

incentives got aligned with annual through-put. Subtly, that shifted the pressure onnumerical outcomes: Getting the projectto the next phase became as important asgetting it right.

• As they grew more complex, pharma com-panies became risk-averse. As the stakesrose, at every gate, research projects gotmore input and feedback from variousfunctions across the pharma company: Themarketing department weighed in, thestrategy team pitched in with a portfolio-management lens, and cross-functionalcommittees became routine. Over time,this created a bias to minimize risk. Trulygame-changing projects, with a perceivedlower probability of success, struggled tosurvive the funnel. The more the systemrewarded the same way of doing things,the more the odds stacked against rule-breakers. In a world of scientific break-throughs, however, pharma companiesneeded more discontinuities and disruptiveideas for successful innovation.

• Many pharma companies grew too big to beeffectively managed as one organizationalunit for innovation. Today, pharma pursuesscale on several dimensions: a global foot-print, a diversified product portfolio, influ-encing new stakeholders and dealing withstricter regulatory requirements. Most ofthis requires building additional internalcapabilities—and a large part of pharma’srising expenses now go to supportingscale, rather than innovation.

For most innovators, a “broken innovationculture” lies at the core of pharma’s problems.The rest they cited as symptoms: the lack ofdedication to deeply understand the diseasebiology; the inability to engage in “true” part-nerships with academia and biotech; the sub-stantial turnover at the R&D executive level;and a lack of passion to explore new ways toundertake R&D. A majority of the innovatorsbelieve that to stoke innovation, biopharma

For most innova-tors, a “brokeninnovation cul-ture” lies at thecore of pharma’sproblems.

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must rethink how to reward the right behaviorsand create the required flexibility within theorganization structure. Says a biopharma headof research, with two successful biotech ven-tures to his credit: “It all goes back to incen-tives. If you do that well, you wipe away thered tape.” Another successful biotech entre-preneur adds: “Leaders in R&D should havethe autonomy to make decisions on how to usefunds and allocate resources between programs.They should be able to hire the right numberof right people, and not have to staff researchprojects with whoever is available.”

New approach to innovation

It goes without saying—but it also bears repeat-ing—that only leaders can bring about trans-formational change. Over the next few years,Big Pharma leadership will face two tests: First,reigniting innovation such that it leads to thecreation of new, discontinuous technologies.Second, morphing the current organizationstructures into new forms that nurture discoveryand development—and result in new businessmodels. Speed will be important as most leaderswill not have the luxury of coming into anorganization and learning how things are done.Successful leaders will need to recognize theright moment and grasp it to launch suchradical change. In the case of one mid-sizedEuropean pharma company for example, thetiming coincided with its acquisition of anotherEuropean pharma company.

The acquiring company used the integrationprocess as a proxy to fully redesign its R&Dapproach. It set itself a new goal: to achieve anoptimal balance between portfolio assets andfixed operating costs. Its new R&D approachwas not just highly selective—the company nowonly pursues opportunities with real medicaldifferentiation—it was also purely priority-driven,so that only valuable projects got resources.To achieve these goals, the acquiring pharmacompany took nothing for granted while cre-ating a lean, scalable and flexible organization.It retained in-house critical core capabilities

in select areas of discovery, development andlife-cycle management. In other areas it part-nered with contract research organizations.Today, the combined company’s fixed assetsaccount for less than 50 percent of its totalresource needs—which, compared with competi-tors, leaves much more available for research.

Of course, no one innovation model will fit allpharma companies. However, we believe inthe future, successful pharma innovators willshare three common fundamental principles.

1. They will pursue medical differentiation

As a generic standard-of-care settles in formany diseases, pharma companies will needa higher degree of medical differentiation tosuccessfully introduce new products into themarket. This isn't a new idea. In the 1990s,the pipeline for cancer treatments got crowdedwith pharma companies developing newchemotherapies, most with little therapeuticdifference. However, instead of becoming a“me too,” Genentech concentrated on changingthe way cancer is treated. With the help ofPDL’s humanization technology, it developedtreatments based on humanized monoclonalantibodies—a technology that most pharmacompanies considered too complicated. Thecompany’s researchers focused on understand-ing tumor biology and set goals to take patientoutcomes to a new level. Genentech’s reward:Its innovative approach helped it gain marketleadership. In addition, Genentech was ableto price its therapies several times higher thanpharma’s marginally improved options.

In today’s market, differentiation is moreimportant than ever. Now, increasingly, BigPharma’s customers are payers (very oftengovernment customers) and patients who careabout two criteria: health outcomes and afford-ability. Further, it’s a much more transparentmarketplace. Government agencies developcost-effectiveness studies; private payers investin health technology assessments and analyz-ing real-life medical data; and most information

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is available on the Internet. This new realityhas a number of implications for innovationin biopharma companies. First, servicing thenew customer requires an innovation enginethat produces cost-effective, tangible improve-ments in healthcare. That, in turn, requires awhole new decision-making process, especiallyin the early stages of R&D. For example, toensure that a drug is priced right at the timeof its launch, a pharma company might explic-itly include early-stage hurdles to test forcost-effectiveness.

Second, pharma companies will need to reviewportfolios to identify opportunities where theyare better off collaborating versus investingin differentiation. Already, the market is lesswilling to pay pharma companies to developsimilar, marginally different products thatrequire a huge amount of competitive market-ing spending for promotion. Some pharmacompanies have taken steps to pool resources—more such collaborative models will evolve inthe future. And third, pharma companies willneed new criteria and processes for evaluatingtheir pipeline. As companies consciously shifta significant portion of their R&D budget topotential game-changers, by definition, theywill take on more risk. To buffer against risk,companies will need to adapt their currentapproach of treating all projects in the pipelineas equals. Instead, they will move closer to theway investors manage a portfolio: balancinglow-risk, low-return assets with high-risk,high-return assets.

2. They will invest in building flexible organizations

Leading pharma companies will be the first toadmit that often, decisions suffer death bycommittee. The malaise is not uncommon:As organizations grow and expand, they adoptmore complex structures and processes. Overtime, complexity becomes a drag on the qualityand speed of decision making. Ineffectivedecision making can stifle innovation. Pharmacompanies need to test early and consistently

for what really matters in a drug-developmentproject. For this, they need to have incentivesin place to get to the right answer and set theright research goals. While killing a projectearly—especially for mediocrity—is hard formost organizations, in pharma it’s critical forcontinuous, successful innovation.

In our survey, industry experts stressed thatBig Pharma must develop incentives that rewardrapid learning, testing and adaptation frompilot projects. But that requires delegation indecision making, which is hard to do if a pharmacompany is dependent on centralized processes.To get around the issue, a pharma companycan view all projects through an investmentlens: allocate resources based on pre-determinedproof-points; delegate authority down the lineto people running the innovation processes;and increase autonomy in areas like outsourcingor staffing decisions.

To make the approach work, a good first stepwill be to dismantle the pharma company’sfunctional staffing model and replace it witha more flexible human resource model. Undersuch a structure, empowered project championscan freely use their budget to find the rightskills and resources, which might come fromwithin the organization or outside. Some com-panies like UK’s Vernalis or Big Pharma-backedinitiatives like Chorus have established virtualdevelopment as a viable and often more effec-tive and efficient development model.

Such companies don’t just manage costs betterby limiting full-time employees, reducing fixedassets and clamping down on overheads; theirflexibility and lean structure helps them honein on successful innovation or quickly moveon to the next promising idea. Chorus, whichwas set up by Eli Lilly as an autonomous divi-sion, advanced more than two dozen moleculesthrough candidate identification and Phase I,at median cycle times that were 40 percent to60 percent faster than the industry average.According to one innovator we surveyed, out-sourcing became a learning tool for the organ-

A good first step will be to dismantle thepharma com-pany’s functionalstaffing modeland replace itwith a moreflexible humanresource model.

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ization. Says he: “Large, readily available inter-nal resource pools dull the mind and drive thedecision to action rather than thought. Withoutsourcing, the process is reversed.”

3. They will balance the use of scale

While scale can be an enormous commercialadvantage, it can be kryptonite for innovation.That raises a challenge for pharma: Where doesa company draw the line? Clearly, scale has aplace in pharma development in late stages ofdevelopment, particularly for very large-scaletrials, as well as manufacturing. In fact, anyprocess innovation that is repeatable can beindustrialized, not just in later-stage develop-ment, but even in early research or areas likemedicinal chemistry. Where scale often doesn’twork is in areas of true product innovation,where ingenuity matters. In such instances,pharma companies need milestone-basedprocesses where progress in projects can bereviewed on an individual basis.

To unleash innovation, Big Pharma will needto revisit its singular approach to R&D anddifferentiate between activities: One, activitiesthat warrant process innovation and two, thosethat should not be over-engineered but allowedautonomy in order to fuel creativity. Somepharma companies such as Roche have alreadybegun this process by separating research andearly-stage development from later-stage devel-opment into two organizations.

An emerging new R&D model

Seeking medical differentiation, building flexi-bility in an organization and revisiting processesto identify the ones best suited for scale versuscreativity—each goal is challenging by itself.Taken together, they can radically transform apharma organization. In practical terms, whatwould this degree of change entail? While eachcompany will want to find its own uniquesolution, consider one hypothetical model fora large, innovation-led pharma company (seeFigure 2).

Externalinnovation

Prioritized franchises for diseases

IC

Oncology

IC

Alzheimer’s

IC

MS

Internalinnovation

Oncology projects MS projects Alzheimer’s projects

Low priority programs todivest/out�license/spin�off

About 80–90% of innovation is externally sourced

Shared service technology platforms

Investment board,payer and provider panels

HQ –innovation

Businessdevelopment

Scientificadvisory boards

Figure 2: New innovation model: Innovation Centers (ICs) with an external focus and ahigh degree of scientific and entrepreneurial freedom

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At the core of this company’s new innovationmodel are Innovation Centers (ICs) focused onspecific therapeutic or disease areas. Dependingon the stage of the innovation and the natureof their work, these ICs are based on differentcriteria such as more internal or externalresources; unique milestone or success defini-tions. The ICs share only a few internal servicetechnology platforms—those that are trulyproprietary, like RNA interference—but theyhave some common characteristics:

• The ability to attract and retain the best talent,especially scientists and innovation managers(two very distinct roles that are often con-joined in today’s pharma organizations);

• The expertise to identify and access the bestscience within their disease area, be itinternal or external;

• The ability to conduct limited internalresearch for validation;

• The allocation of the IC budget amongprograms, such that there is an adequatebalance between the internal and externalsources of innovation; and

• The ability to flexibly hire the right stafffor specific projects, and maintain verylimited permanent staff, mostly functionalmanagement. In particular, this fluidorganization structure should encouragethe creation of more “dual staffing” roles,where academic researchers are invitedto work full- or part-time on commercialpharma projects.

• The flexibility to create ICs at a regionalor global level, based on ensuring thatthey attract the best talent, with the rightcultural fit.

To make the model work, the pharma companyputs in place the right incentives for each IC team.While incentives vary substantially from IC toIC, they are always multi-year, aligned with thespecific business plan and linked to milestones.

Just as in biotech, key contributors get signif-icantly rewarded for real success; but insteadof being tied arbitrarily to the annual stage/gateprocesses, their success is measured in NDAs/BLAs² or any other dollar-related exit criteriathe company chooses.

ICs are tested on their progress against businessplans regularly in a peer review with external sci-entific advisory boards. The process goes beyondchecking off metrics to a more qualitativeassessment that asks questions like, “Is thescientific progress strong enough to meet unmetmedical needs and is it sufficiently differenti-ated from alternatives?”

The pharma company’s business developmentteam works closely with ICs to enable access toexternal science. The skill set required for busi-ness development requires substantial flexibilityin contracting and deal-structuring abilities.Once again, this is about making things happenrather than checking lists for in-licensing cri-teria. The team drills down on how to maximizethe value of assets, identifies low-priority pro-grams to be shed in disease areas that are nolonger a priority, and actively nurtures itsnetworks in academia and biotech.

The role of the R&D chief is no longer to coordi-nate processes in a prescriptive manner for early-stage R&D, but to be a strategic architect andportfolio investor. In concrete terms, the R&Dteam becomes the organization’s headquartersfor innovation. It sets the R&D vision andprovides strategic direction (which TA/DAs³,underlying biologic mechanisms and newtechnologies should the pharma company investin?), objectives (what are the right multi-yeargoals for the company?) and budget allocation(how do we allocate resources among the var-ious ICs?). While these decisions need to sup-port the overall R&D business case, this is nolonger a one-size-fits-all approach with annualthroughput (how many programs did youadvance into the clinic?), but rather a processsimilar to venture capital investment in biotechs(in the next round, what are the proof-pointswe need to continue investing?).

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Those innovation investment decisions are chal-lenged regularly by an investment board thatincludes internal executives (except those, such asthe heads of the ICs, who might have a conflict ofinterest) as well as outside members. This boardprovides more than scientific advice—andtherefore, includes “customers” such as payersand healthcare providers. They review IC busi-ness plans with an eye on return on capitalinvested and set specific metrics and milestones.

The model pre-supposes the separation of late-stagedevelopment (III and IV) into one developmentorganization that spans all therapeutic areas andgeographies: a veritable global “innovation mar-ketplace.” This organization takes into accountthe perspectives of the customer and the marketand excels in providing the necessary regula-tory proof for the molecules developed by theICs as quickly and cost-efficiently as possible.

The challenge ahead

We believe Big Pharma can build just such aninnovation-led organization—if its leadershave the appetite and patience to embracechange. Like all metamorphosis, transforminga large pharma company will be a slow, some-times uncomfortable process. Leaders willneed to probe deep before embarking on themission. What are the concrete unmet medicalneeds the company can target? Which improve-ments in patient health will justify an attractiveprice point that governments, payers and patientsare willing to pay for? How does the company’sproposed solution compare with what is cur-rently available in-house, what the competitionis doing and what the R&D team believes istechnically feasible in the near future?

The burden will fall on Big Pharma leaders topersonally set a new course—even as one handsteadies the helm. In order to be successful,leaders will have to rise above the competitionand establish new rules of innovation-ledproductivity and then get down to the nitty-gritty of transforming the organization. It’s atall order for most organizations, but not

unprecedented. Apple reinvented itself bymaking a conscious decision to focus on dis-continuous products, like the iPod, iPhone andiPad, versus investing in yet another updateof the Apple operating system. The companyrepeatedly outsmarted the industry by success-fully challenging the status quo and question-ing “how things are done.”

Pharma also requires that level of decisiveleadership in order to launch a new era of inno-vation. For once, the timing couldn’t be better.Externally, investors realize pharma innovationneeds to be fixed. Currently, they attach littlevalue to discovery and early-stage developmentin their valuation—and therefore, even in theworst case, the potential negative impact of anew innovation strategy on price-to-earningsratios is likely to be low. Internally, as in allorganizations on the cusp of transformation,employees already know what’s not working.They await bold leadership and an inspiring,energizing mission—or at least, for a start, apromise of change. As one executive vice pres-ident of R&D says: “The only thing I know forsure is that we can’t keep doing the same thing—and expect a better outcome.”

1 New molecular entities/biologic license application per dollar of R&D spending

2 New drug application/biologic license application

3 Therapeutic area/disease area

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changing pharma’s innovation dna - bain & company · 2018. 5. 30. · benefits for big...

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