Innovation: Why is Pharma Scared to Death?

Jan 01, 2012

Bill Drummy
It's a disturbing irony: In an industry whose entire economic value is founded on its ability to discover, develop, and market molecules that are—by definition and by regulation—innovative, there is so much discomfort with the risk required for innovation.

As I have articulated earlier in these pages, we are living in an age of revolution—specifically of digital revolution, in which the continuous doubling of computer power, tripling of bandwidth, and the algorithmic spiraling of network effects are transforming all industries where information is a fundamental ingredient.

While the end products of the pharma industry are not (yet) 'information' per se, the dexterous application of knowledge affects every phase of the business—from drug discovery and design, to clinical trials, to FDA submissions, to the delivery and marketing of those (finally) approved products.

And yet despite the fact that pharma cannot continue to flourish without knowledge-based innovation, it has been measurably among the worst industries in applying the new power of knowledge dexterity to its innovation business. Indeed, rather than being energized by the possibilities and promise of Speed of Change, the industry seems to have been paralyzed by it.

The proof: According to a new report published by Deloitte, the 12 largest pharma companies saw their ROI drop by 29 percent in the last year. The average internal rate of return for R&D dropped to 8.4 percent from 11.8 percent a year ago. "We continue to see a level of late-stage drug failures," says study author Julian Remnant. "That's something that should not be happening to the extent it still is."

Make no mistake: Drug discovery and development is difficult work, made more difficult by an obdurate FDA and increasingly elusive science (the easy molecules have all been taken). But there's something else involved, too.

The Bigger They Are ...

Over the last decade or so, with toes dangling over patent cliffs, companies choose to strap themselves together, in the hope that sheer size would cushion the fall.

Consolidation has made pharma slower, more risk averse, less innovative. John Lechleiter, CEO of Eli Lilly (one of the few companies that hasn't gone on an acquisition binge, by the way) put it like this in a November 2011 Wall Street Journal interview: "The wave of consolidation leaves only about a dozen multinational pharma companies that have global reach." And that's actually slowed the pace of innovation. "There's an innovation ecosystem," says Lechleiter, "and like any ecosystem, it can get out of balance."

It's not that size necessarily hampers innovation; certainly Apple has maintained its breathtaking pace despite its $100 billion size. But in the pharma industry, size seems to have obscured (or trampled) ways of thinking and being that are the true drivers of innovation.

For those who say that innovation in high science can't be rushed, consider this: Why were Craig Venter and Celera Genomics able to sequence the human genome at a fraction of the time and cost of Francis Collins and his team at NIH? We're not talking about a matter of months faster, but years faster. And not marginally cheaper, but an order of magnitude cheaper. Why?

Because Venter understood the dynamics of Speed of Change, and applied them boldly in his 'shotgun' sequencing approach.

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