Disruption in the C-Suite

Jun 01, 2012

Pharm Exec: What is your message to CEOs on how to revive medicines innovation and restore the industry's credibility?


Clayton Christensen (Photo credit: Evgenia Eliseeva)
CC: I think I know the right questions, but I don't know the answer. I would love to get together with deep thinkers in the industry to sort it through. As a general rule, when other industries face a strategic crossroads, it happens because one stage of the value-adding stack in the industry has become commoditized, and you can no longer make money at that level. The whole industry doesn't become unprofitable; rather it's the activities above and below that original [product or service] is where the money is made. And this is what seems to be happening in the pharmaceutical industry, but I can't see exactly what the trend is yet.

PE: How can big pharma companies foster a culture of innovation in the context of a large, lumbering bureaucracy?

CC: Rarely is the development—or absence—of a product the problem in a company. Almost all companies are awash in ideas for new products. What companies don't do—and they could, but they choose not to—is to create new business models tailor-made to the characteristics of the new product. Why? Because even though you may come up with a great idea, you can't do anything with it unless you get it funded. To get funded, you have to, little by little, shape and modify your business plan so that it fits the current business model. If it doesn't fit the business model, key decision-makers won't perceive that it will be successful. So what comes out of the process is incremental innovation followed by more me-too innovation. It's not that the original idea wasn't innovative, but in order to get it funded, you have to change your strategy so that it ultimately conforms to your company's internal drivers, rather than to the problem or unmet need in the market.

PE: Are current US public policies toward the industry harming or helping innovation?

CC: I don't think government is the core problem. I think finance and hedge funds and private equity funds are the big bad actors in the system. Investors like hedge funds and private equity funds and venture capitalists have a measure of performance called internal rate of return [IRR}. The way you get IRR up is that you only invest in things that have a very short time horizon. If you just invest more and more for faster and faster quick wins, IRR goes way up. And you think that you're innovating, because of the quick returns you're getting. But what that means is that you can't invest for the long term, because the truly disruptive commitments don't pay off to the business for a long time—typically five to eight years.