Innovation: The Moneyball Test - Pharmaceutical Executive


Innovation: The Moneyball Test

Pharmaceutical Executive

Insights From Process

Under this scenario, significant innovation can and must come from areas other than new drug development: sales model innovation; commercial model innovation (including positioning, branding, and merchandising); and business model innovation. These other kinds of innovations ('Innovation 2.0') can be competitive differentiators, and even shift the basis of competition. The textbook example is Apple, which in its early years as Apple Computer always had innovative products, but by the late 1990s nearly had to declare bankruptcy. In the 2000s they introduced a string of category-establishing product innovations (iPod in 2001; iPhone in 2007) and business model innovations (Apple Store retail chain in 2001; iTunes Store online in 2003). The combination was powerful, and Apple's results took off.

In an example of 'non-product' innovation closer to home, TKA recently did some modeling of the effects of patient non-adherence to pharmaceutical regimens. According to our figures as much as 37% of potential industry revenues (or $188 billion annually in the US alone) are lost to non-adherence caused by various factors. Solving this problem—which has little to do creating with new drugs—would be a huge boost to the top line across many diagnostic categories.

Given the lack of clear consensus on whether there even is an 'innovation crisis', companies predictably are responding in a range of ways. Some are undertaking wide-ranging retrenchments, but most firms who are cutting are doing so surgically. Pfizer, hit by the patent loss of Lipitor and generic challenges to Viagra in Europe, recently slowed cuts in R&D spending that began in 2011. BMS recently announced that it is cutting development in hepatitis C, diabetes, and neurological disorders, and will lay off about 1% of its R&D workforce.

Others are continuing to invest. Lilly leads the industry in R&D investment among the majors, spending over 23% of revenues despite upcoming patent losses on Cymbalta and Evista. It now claims to have thirteen products in late-stage development or awaiting approval. Roche is continuing to invest in biologics, where it is the worldwide market leader. Biologics are expected to garner 25% of industry sales by 2018, up from 21% last year.

Time For A New Approach?

However, all these seem like largely tactical responses to a strategic challenge, where maybe a big-picture rethink is indicated. I'd propose that the industry give itself the 'Moneyball test'. The key lesson of Moneyball is not only that metrics should be used in making decisions—which is true enough—but rather that sometimes the metrics that 'everyone uses' are not those that best describe the 'value essence' of a situation.

The Moneyball example comes from professional baseball, but its lessons of aligning metrics with strategic value priorities are being applied in a range of businesses. It is especially relevant in industries undergoing significant change like pharma.

When measuring the productivity of an 'input' metric (like R&D spending), too often we rely on 'output' measures—like drug approvals. But what really defines value is 'outcome' measures—in this case, individual patient outcomes, costs saved, and overall population health. These latter are the kinds of value-based metrics that payers are beginning to move toward under the US Affordable Care Act, and that will increasingly guide most health care sectors.

Perhaps the pharma industry needs to recalibrate its own R&D metrics in light of these sea changes in the overall economic environment for health care. The recent improvement in raw drug approval numbers may give us a false sense of hope, since they don't speak to the relative 'value-added' by each new molecule. One wonders whether these innovations address the optimal disease categories, in terms of the number of patients affected, and the length of time treatment is typically needed. The criterion that we recommend is lifetime value—incremental revenues/profits (to the seller) or savings (to the payer)—not just raw approval numbers.

The current move seen in some companies toward a 'value-weighted' R&D budget is a positive step. The discovery cuts recently announced by BMS, for example, were positioned as allowing it to 'focus opportunities on where the value is greatest'.

Tim Powell is President of The Knowledge Agency. He can be reached at:


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