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The biotech sector's growth-innovation paradox

Published on 09/10/03 at 04:53pm

The biotech sector is facing a paradox. Traditionally, the strength of the sector has been based on the ability of companies to innovate while its future success will be based on the ability of companies to grow. Innovation and increasing size, however, do not always go hand in hand. In fact, in recent Accenture research, almost 50% of pharma and biotech executives believe that biotechs become less innovative as they grow, while 72% believe that the traditional pharma operating model may not be the best one for biotechs to emulate.

So what options do biotechs have if they need to grow but must remain nimble and flexible? One option, highly favoured by the investment community, is for biotechs to move beyond dependence on revenues generated by technology platforms alone and instead become product-driven companies. For companies that choose to become product-driven, the winners will be those that can distinguish themselves from the crowd at the earliest possible stage and grow without sacrificing the very things at which they are best. They will be the companies that:

  • demonstrate the capability to deliver repeat innovation
  • generate value early and quickly
  • spread risk by developing multiple products
  • minimise operational inefficiencies
  • are expert at managing investor relations.

But what would this nimble, product-driven biotech company look like? To truly enable innovation, flexibility and rapid delivery of value, the model would have two main elements - an innovation centre and a capability network.

The innovation centre, embedded within discovery, would be separate from other activities associated with bringing products to market in order to enable it to focus on fostering and delivering continued innovation to drive growth. In addition to its internal activities, the innovation centre would proactively identify new technologies outside of the parent company and apply them to increase the speed, effectiveness and efficiency of the discovery process.

The capability network is the second element of the proposed operating model for biotechs. In this network, third parties (capability providers) supply the elements of the pharma value delivery chain such as development, manufacturing and sales. Lean, in-house co-ordinating departments manage the capability providers. These departments are expert in strategy development and implementation, alliance and contract management. They are responsible for planning and forecasting future demand and anticipating potential bottlenecks.

Combined, the two elements of the proposed model can allow biotechs to gain rapid access to the capabilities required to bring products to market while retaining key attributes of innovation, scientific excellence, entrepreneurial spirit and flexibility. By adopting this model, biotechs will be better able to foster repeat innovation and enhance operational efficiencies.

Our research shows that 71% of pharma/biotech executives believe this operating model could be a success and 72% of biotech executives believe their company would consider adopting the model. Biotechs adopting this model will need to focus on four core competencies to deliver the benefits of innovation, speed and flexibility.

Fostering and capturing innovation

Companies will need strong skills in the identification and internalisation of critical external innovations.

Portfolio management

Companies will need to be adept in picking winning products very early in the drug development process. They must also become expert in deciding which aspects of their business to outsource to other companies, which to divest and which to take to market on their own. These portfolio assessments must include evaluating capabilities and resources available in-house.

Alliance management

Companies must be astute in how they broker deals. They must pay particular attention to the way these deals are structured, ie, whether capabilities are accessed from the capability network on a transactional fee-for-service basis or whether they are offered in return for a proportion of the value of the product once it reaches the market.

Investor relations

Given that the proposed operating model breaks with the traditional approach, biotechs will need to ensure that they thoroughly communicate the models benefits to investors and explain how it assists them in evolving rapidly to become product-driven companies.

Adopting this model is likely to have a significant impact on the relationship between biotechs and pharma companies. In fact, 68% of executives responding to the Accenture survey believe it will place biotechs in a more dominant position. Biotechs will be able to preserve and foster their ability to innovate while gaining rapid access to the capabilities needed to deliver innovation to the market.

Traditional pharma companies may need to structure different types of deals with biotechs. They may need to offer access to capacity in their own value chains in return for targets, drug candidates and discovery technologies. Companies that have invested heavily in drug development and commercialisation capabilities will have the opportunity to generate additional revenues by offering outsourced services to biotechs through the capability network. They may also find increased opportunities to link resources and capabilities with other groups, thereby sharing costs and skills.

While biotechs today face a growth-innovation paradox, being open to exploring and creating a new operating model could turn that paradox into a profitable opportunity. The broader vision for the pharma and biotech industry includes those companies able to virtualise their organisations. The leaders will be those that use the new model to focus on core activities that allow them to grow but keep the flexible, innovative spirit that first made them successful.

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