As many of you who know me are aware, I am keen watcher of the pharma and biotech sector. I am of the opinion that the global drug value-chain is morphing. Part of the change taking place is that specialist firms are stepping in place of in-house teams and as a result the value chain is going global. This industry change is directionally favorable for the Indian pharma and biotech firms and enables them to be a bigger part of the action.
I came across a fascinating Harvard Business Review article in the October issue. The article is: Can Science Be a Business? by Gary P. Pisano (subscription required). Its main assertion is that biotech has not delivered on its promise because the industry’s structure—much of it borrowed from Silicon Valley —is flawed. It suggests that the businesses engaged in advancing basic science as a core activity need a new design.
Here is the article summary…
In 1976, Genentech, the first biotechnology company, was founded by a young venture capitalist and a university professor to exploit recombinant DNA technology. Thirty years and more than $300 billion in investments later, only a handful of biotech firms have matched Genentech’s success or even shown a profit. No avalanche of new drugs has hit the market, and the long-awaited breakthrough in R&D productivity has yet to materialize. This disappointing performance raises a question: Can organizations motivated by the need to make profits and please shareholders successfully conduct basic scientific research as a core activity? The question has largely been ignored, despite intense debate over whether business’s invasion of basic science–long the domain of universities and nonprofit research institutions–is limiting access to discoveries, thereby slowing advances in science. Biotech has not lived up to its promise, says the author, because its anatomy, which has worked well in other high-tech sectors, can’t handle the fundamental challenges facing drug R&D: profound, persistent uncertainty and high risks rooted in the limited knowledge of human biology; the need for the diverse disciplines involved in drug discovery to work together in an integrated fashion; and barriers to learning, including tacit knowledge and murky intellectual property rights, which can slow the pace of scientific advance. A more suitable anatomy would include increased vertical integration; a smaller number of closer, longer collaborations; an emphasis by universities on sharing rather than patenting scientific discoveries; more cross-disciplinary academic research; and more federal and private funding for translational research, which bridges basic and applied science. With such modifications, science can be a business. (Emphasis is mine: Sharad)
This article acknowledges that the pharma industry value chain has been going through modularization where vertical integration is giving way to specialist firms interacting with each other. This modular architecture of the value chain calls for complex interactions to be managed across the boundaries of what firms provide. But this doesn’t happen well and this is the core reason why the R&D productivity of the biotech firms hasn’t lived to the promise.
Prof Gary Pisano then goes on take a position that company management is the only force capable of coordinating these interdependencies. Therefore he calls for a rollback of the value chain modularization and a return to vertical integration.
For Prof. Pisano venture capital industry has no role to play in the biotech sector. He believes that biotech is different; “it’s not just another high-tech industry”. Unlike semiconductors, software, computers, and communications, biotech needs long time horizons, and the goal is to make a therapeutic difference, not to return a profit to limited partners within three to five years.
Now I don’t have the deep industry knowledge to fully appreciate Prof. Pisano’s arguments. But I must admit that I am skeptical. It sounds too much like a case for status-quo by old pharma. The reality is that the pharma/biotech sector has to figure out a way of making money on drugs that net only $200-300m a year. Right now the threshold for profitability is at $800+m a year. To me it doesn’t appear that this change will come by tweaking the old pharma model. Something more radical is needed. If modularization of the value chain is the not an answer, then what is? This article doesn’t point to a substantive answer.
Last week’s Economist picks up the debate. It points out that a new business model is needed, but it seems to gravitate back towards nimble specialist firms as the panacea. It talks about how new approaches to drug funding are coming in that work to the advantage of these nimbler firms. Apparently smarter venture capital (from Kleiner Perkins, Care Capital and Symphony Capital) and support from more results-oriented charities are making bets on risk-taking innovative approaches. This doesn’t appear like a return to vertical integration to me. This is an important industry debate that one needs to watch.
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