MLS SUMMARY
LECTURE 2 – Innovating in large life sciences companies
College notes
Innovation in big pharma → starting point
They present themselves as innovative, because they want to improve things. At the same
time there are problems with regard to being innovative.
Drug R&D process is a common way of representing innovation.
Stimulating innovation through internal R&D organization (small cases) is done by large
companies. They do their own basic research, very strongly knowledge based. An example:
Philips Nat Lab model.
Effectiveness of big pharma
Not all entrees are as innovative as others. Biopharmaceuticals need a lot of research, need a
bit more time to study. Steady output as you look to the total, but there are differences
within organization. Bigger problem: they are not looking
at the input (R&D investments), only at output
→ High investments, low total of NME’s causes a pharma
innovation gap
Eroom’s law → output struggling in comparison to input
→ Effectiveness
Become more expensive even though there is
improvement with regard to technology
You have to innovate at a constant speed (constant
pressure for large companies to innovate to keep on
growing) due to patent cliff, I guess?
Causes for struggles
Adding to student lecture:
1. Science input problem
Potential candidate drugs are decreasing. Low-hanging fruit are
already picked. By picking fruit at all, you decrease the value of
the total tree → better than the Beatles problem (it’s hard to be
better than a drug that is already on the market).
In order to make money, you have to go to area’s where the is not ‘Beatles’. High risk
though…
2. Cautious regulation
Why can regulation stimulate innovation?
→ Companies need to get creative
→ It steers (stuurt)
→ Only the good drugs survive
3. Throw money at it
Spending in R&D in some cases not the right choices
4. Basic research-brute force
Focusing on discovering new improvements such as high-throughput-screening (HTS) does
not cause directly improvements with regard to innovation/efficiency.
Solution? Re-organize R&D, working together at different specialists in the same team, being
careful with customization.
Solutions
,Re-organizing R&D
• Smaller vs. larger R&D units
• Outsourcing
• Management metrics
• Making scientists more entrepreneurial
Co-location of skills sets
Quick-kill strategies… obstacles
• Progression-seeking behaviors
• The language of failure
• Lack of assay specificity
• Insufficient numbers of alternative projects
Mergers are not really a solution to become more innovative. Input as well as output is not
growing through this process.
Large companies
• Large in-house R&D skills and resources
• Relate to external R&D (public science, biotech)
• Organize in-house R&D (different models, compartmentalization, protected spaces
(exploration vs. exploitation), projects)
Candidate drug medicine can you see as a project
Articles
Article 1 – Munos (2009)
The number of new drugs is not greater in comparison to
,50 years ago. The rate of production of new drugs, namely, is held constant. Poisson
distribution – average annual NME (new molecular entities) output of drug companies is
constant. If this is the case, the only way to increase the overall industry output is by
increasing the amount of companies. However, it is unlikely that the output will be much
greater than the current one. The companies have been able to increase efficiency by
meeting increase in costs per NME with a less increased R&D spending. This did not cause an
increasing discovery of new treatments though. Moreover, more regulated countries were
more innovative due to the fact that regulations force companies to be more selective in the
compounds that they aim to bring in the market. Small firms are able to explore in far more
directions, investigating more areas, in comparison to large firms. They are a much less
reliable source of NMEs but large firms could work with them to increase the output and
lower their costs.
For the future it is important to look at patient cliffs, because it looks at the survivors after
patent expiration (more competition, not exclusive anymore). Moreover, they have to choose
a course. Four points with regard to redesign:
1. The industry needs to change its innovation dynamics to move beyond constant NME
output
2. There are radical and successful experiments that can be used as building blocks or
for inspiration
3. Organizations that depend on breakthrough discoveries need a separate, protected
area the sole purpose of which is disruptive innovation
4. The industry must rethink its process culture
Article 2 – Scannell et al (2012)
R&D efficiency, simply measured as number of new drugs brought to the market per R&D
spending, has declined over the years – Eroom’s Law. Some think that simple things such as
greater management attention, re-organizing R&D structures into smaller focused units,
outsourcing, by management metrics or making scientists more entrepreneurial can solve
this. We think, however, that those not address the core of the productivity problem.
Explaining Eroom’s Law has to be done by looking at the progressive nature of the decline of
the number of new drugs per R&D spending and the scale of decline. Four primary causes
Eroom’s Law:
1. The better than the Beatles problem – fruit that has been picked reduces the value of
the fruit that is left on the tree.
2. The cautious regulator problem – the availability of safe and effective drugs to treat a
given disease raises the regulatory bar for other drugs for the same indication.
3. The throw money at it tendency – add human resources and other resources to R&D
leads to a rise in R&D spending in major companies. Some will argue that these have
to be reduced so the costs are lower. However, this does not always lead to an
increase in productivity.
4. Basic research-brute force - the tendency to overestimate the ability of advances
in basic research and brute force screening methods to show a molecule as safe and
effective in clinical trials.
The cautious-regulator problem and the basic research-brute force have been forced most of
the drug industry towards a narrow clinical research strategy: if the drug does not has the
effect that the trial designer anticipated, the trial fails. The clinical trials have become bigger
due to the better than the Beatles problem (clinical trial size should be inversely proportional
, to the square of the effect size) and the multiple constraints in Phase III trials (messy mixture
of science, regulation, public relations and marketing). Due to a lot of factors, the outcome is
a narrower indication and more clinical trials per drug.
Idea: CDDO (Chief Dead Drug Officer) → focuses on drug failure at all stages of R&D, aims to
explain the causes of Eroom’s Law in a report that eventually is submitted to the board of the
company. Several reasons to like this idea: CDDO has no incentive to be irrationality
optimistic, R&D costs are dominated by the cost of failure and an expertise in drug failure
should qualify the CDDO to produce a good explanation of Eroom’s Law.
Flat to declining R&D costs, more orphan drugs and biosimilars might put an end to Eroom’s
Law at an industry level.
Article 3 – Lo and Pisano (2016)
Even investors with a high tolerance for risk are deterred by the uncertainty of the risk –
‘unknown unknowns’ associated with a lack of well-defined indicators of day-to-day
performance. Undertaking the long-term, high-risk, highly capital-intensive R&D programs
can be done by PFO (project-focused organization). These entities are created with the sole
purpose of conducting a specific R&D project. Firms in this industry have to overcome two
challenges: they need to raise sufficient capital to fund a long-term, highly risky, and very
expensive project and they must have a governance mechanism for allocating capital (human
and financial) and conducting projects. The innovation happens at the project level:
enterprises take responsibility for allocating resources across projects and managing
individual projects. We propose that a form of governance centered on the project rather
than the company may be more efficient. In this way, projects can contract out for resources,
hiring people for a particular project of phase of project and investors choose the project
they want to invest in.
Major difference between movie industry model and buyout of a startup is that the startup
keeps its intellectual property rights until the project is complete. If successful, the project
sells its rights to the studio and receives a structured compensation.
PFOs benefits: for investors, they can pick out of multiple projects and for companies, they
can keep overhead to a minimum with only the core team in-house and other capabilities
added as needed. Challenges due to two absent core elements:
• Standardized platform – project originator and development partner must go through
a learning curve together. To enable ‘plug and play’ integration, there has to be a lot
of transparency, which requires a different business model.
• Liquid market – negotiations and internal approvals can drag on for many months
due to valuation that is highly subjective, information asymmetry causes a difficulty to
reach a compatible valuation decision.
A shift to third parties and transparent processes that use clearly stated standards and well-
defined methods can create a more efficient market for proofs of concepts, and thus a more
efficient drug R&D process.
Article 4 – Edmundson (2001)
Adopting new technologies is essential to sustained competitiveness for many organizations.
Routines are thought to provide a source of resistance to organizational change. Successful
implementation has been defined as the incorporation or routine use of a technology on an
ongoing basis in an organization. Organizational routines refer to the repeated patterns of
behavior bound by rules and customs that characterize much of an organization’s ongoing
