Open Innovation in Pharma: Defining the Dialogue

Sep 01, 2012

There are a number of highly innovative US companies, many of them in the information technology (IT), electronics, and software industries. What is interesting is that these companies were at one time fully-integrated entities—companies that made mainframe computers, wrote the software, and sold you the paper on which to print. Essentially, they did everything from soup to nuts. That model in the IT and electronics area has changed dramatically over the last 30 years. Many of the biggest names in those fields claim that their adoption of an open innovation model led to this result and saved their businesses. So, what is open innovation?

Open innovation can be categorized three ways:
Type I is pure outsourcing, often touted as open innovation, or R&D activity pursued by external entities, such as contract research organizations (CROs) and universities. Type II consists of licensing and its variations—collaborations, joint ventures, even in some cases technology transfer, and perhaps what is called "crowd sourcing;" where a number of innovators come together to address a problem and solve it. Type III is R&D in the space beyond IP—an interesting concept, but which doesn't really help us much with what this means as applied to pharmaceutical innovation.

Rather than digging further into the jargon, we need to ask what caused certain companies to adopt what is called an open innovation model. Did it just dawn on those companies to decide "Oh, we need to create common platforms and technologies to arrive at new products, and thus must collaborate with others?" Or did companies deliberately embrace it as a behavior they should adopt, a culture they should push forward? Or was it vice versa—did the external environment intervene to force their hand? The answer appears to be that because the high tech environment changed over the past 30 years, companies had no choice but to adapt.

What happened in the electronics industry is instructive. By the early 1990s, IBM was on the verge of bankruptcy. The Taiwanese and the Japanese manufacturers in the 1970s and 1980s began making chips that were competing with IBM's products. IBM had to do something with the last few million dollars in its bank account to bring the company back to viability. Its solution was to open up its patent portfolio to outsiders in a systematic way, as a means of generating income.

Today we are enjoying the fruits of a dizzying number of collaborative endeavors started decades ago that have resulted in the launch of many new products in the last few years. The products combine the strengths of a number of different independent companies coming together to create an innovative array of handsets, tablets, GPS devices, and computing devices. A fact worth noting is that the intellectual property environment for these business sectors remains very vibrant. Successful open collaborative frameworks were not the death of IP. Patents were and continue to be actively sought, licensed, sold, and litigated by these industries—probably more so than ever.

Are there similar dynamics at play in the pharmaceutical sector that will push our industry toward an open innovation framework? If so, what can we expect these frameworks to look like?

A key influencing issue is the volume of R&D assets that are not being pursued simply because of the enormous risks and costs of developing new drugs. Are too many companies all chasing the same target drugs or the same cures? Should the industry collaborate more to get to a more efficient outcome? Would this be considered a cultural change? Or is it a question of at what point does the competitive balance lower the cost for new entrants and we are forced to collaborate? It is worth noting that the pharmaceutical sector remains more fully integrated than many of the other industry sectors.