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From the Editor: Attack from Below


Pharmaceutical Executive

Pharmaceutical ExecutivePharmaceutical Executive-04-01-2006
Volume 0
Issue 0

Safety advocates want to make it tougher for new drugs to win FDA approval. Consumer advocates want to make it legal to import drugs from abroad. Put those ideas together, and what have you got?

Elsewhere in this issue, Harvard business professor Clay Christensen and a pair of his colleagues from Innosight, his consulting business, discuss what pharma companies need to do to become innovative. Those who have followed Christensen's career will find some familiar concepts—for example, the idea that companies tend to lock into a standard of value that may or may not have anything to do with what customers actually want, or that a "lower-value" product can sometimes push aside an established competitor that on the face of things is "better."

Patrick Clinton

Christensen has pursued this sort of analysis for more than a decade, and he's especially strong in showing how mismatches in companies' perceptions of value—for themselves and for customers—can lead to major disruptions of industries. The classic example, described in his 2002 book The Innovator's Dilemma, is the disk-drive industry. At a crucial moment in the 1970s, manufacturers of high-price, high-margin drives for mainframe computers couldn't understand why they should develop lower-capacity, lower-margin drives aimed at the then nonexistent personal-computer market. It's not that they didn't listen to their customers. They did listen—and their best customers said forget it.

Wrong move. Within 20 years, the "lower quality" disk drives ruled the marketplace. Of the 17 companies that had manufactured drives in 1976, 16 were gone, and with them, more than 100 companies that entered the market later, not to mention a few of the computer customers they used to sell to.

The lesson of Christensen's research: The fiercest competitors attack from below. They make crap. They accept ridiculous margins. They ignore the important customers. But they bet right on where the world is going next, and they use their bad business as a platform to build a better one.

It's tough to predict where this sort of "disruptive innovation" will come from—that's what makes them disruptive. The trick is to look for the places where you're vulnerable because you don't perceive value. Where is that? In the case of pharma, I'd suggest that we start paying attention to the growing market for unapproved medicines.

Think of it: Over the past decade, we've started to develop a pretty open pharmaceutical marketplace. Customers who want drugs can get them, often from abroad, often with no prescription. In some cases they're aided or encouraged by local governments eager for cost savings. For many patients today, FDA approval is a kind of bonus, not a prerequisite. Companies have to value it—but patients don't.

Already, patients are traveling abroad to be treated with Gendicine, the Chinese-approved gene therapy for cancer. The drug currently couldn't be approved in the States—but is apparently attractive enough to get patients to travel thousands of miles and shell out $20,000 or so for two months of therapy. As an exception to the rule, that's not bad. But if we hit a point—as we could—where the most advanced drugs in the world all go gray-market, we'll have truly lost.

This isn't much of an issue yet, but it will be, and perhaps soon. The answer isn't clear. FDA shouldn't roll over just because some patients are willing to take large risks to use unapproved drugs. On the other hand, we really don't want to see key drugs successfully opt out of approval. As we battle over drug safety in the coming months, both sides need to keep that in mind. Some innovations do no one any good.

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