The Road to Nowhere?

More effective drugs? Another dead end. But patients open their wallets when a "good enough" drug gets better...
Apr 01, 2006

Big Pharma´s new agenda for above-average growth
PHARMACEUTICAL COMPANIES ARE MASTERS of innovation—at least they say they are. And with their business models based almost entirely on innovation, they ought to be. Pharma should be one of the most innovative industries in the world, but this is not the case—new drug launches are down, even as R&D costs have risen sharply. The industry suffers most because, on the whole, it aims at only one kind of innovation. When pharma sets out to make drugs "better," it usually tries to make them more effective. And while this sort of incremental innovation is key to developing new treatments or improving existing ones, it achieves little when the target market is already full of satisfied customers. In a marketplace increasingly crowded with good products, companies need disruptive innovations—new products that are more convenient, simple, affordable, and accessible than existing offerings—to achieve new growth.

The most successful companies of the past 50 years—from Apple to Wal-Mart—have devoted significant resources to disruptive innovation. Typically, disruptive innovations either create new markets by bringing new features to non-consumers, or they trade off traditional measures of performance in a way that appeals to existing customers. Measured against established metrics, disruptive innovations may provide worse performance than best-in-class solutions. But these innovations still appeal to customers on the basis of convenience, simplicity, price, or accessibility—as long as they are good enough to meet the customer's need.

During the 1980s, Lilly, working with Genentech, spent about $1 billion to make a purer form of insulin than the animal-derived product many diabetics injected every day. As the largest supplier of insulin, Lilly viewed improvement of the product's purity as a critical platform for revenue growth. Key opinion leaders told the company repeatedly that this would reduce occasional side effects. Physicians and researchers, like Lilly's management, assumed that the market would embrace the purer insulin. However, the new formulation, called Humulin (human insulin injection [rDNA origin]), was a major disappointment. Instead of switching to the "better" product, users were largely satisfied with the pork-derived insulin that they had used for years. Most patients greeted the product with closed pocketbooks.

A successful disruptive innovation was achieved at about the same time by a then-small Danish company called Novo. Novo—not yet Novo Nordisk—developed an insulin-injection pen that users found much more convenient than the common syringe. Even though Novo's pen offered no improvement in terms of treatment efficacy (and sold for a price premium), the product took off rapidly because it was simple and easy to use. For Novo users, "better" had nothing to do with Lilly's billion-dollar improvement in insulin purity.

Lilly tried to improve its product along well-established measures of performance—we call this "sustaining innovation"—without considering whether the product was already good enough for most customers. The company listened to the input of leading physicians, who are often the doctors who focus on the most challenging cases. The leap in performance may have been a technological breakthrough, but most patients were already satisfied and saw no reason to change to the more expensive Humulin.

We have seen this tight focus on sustaining innovation in more than 50 industries during 15 years of research. Companies—from AT&T to Woolworth's—have stumbled when they failed to take a broad enough view. A company's drive to innovate backfires when it is unwilling to invest in innovations that depart from its well-established business model. Insted of investing resources in disruptive innovation, companies let competitors seize these growth opportunties.

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