The Innovator’s Dilemma in biopharma part 1. Framing the industry’s position

All opinions are my own and do not necessarily reflect those of Novo Nordisk

h/t to @Frank_S_David, @scientre, and the LinkedIn Group Big Ideas in Pharma Innovation and R&D Productivity for links and ideas

Joe Nocera’s recent column in the New York Times provided a nice dissection of how Blackberry tumbled from the position it once held at the top of the handheld phone/PDA business market.  In a nutshell it encapsulates how Blackberry fell victim to the Innovator’s Dilemma, the paradigm put forward by Clay Christensen about how and why established companies within an industry often fall victim to disruptive technologies.  This happened even though they were aware of the danger and made efforts to circumvent the dilemma.  In the case of Blackberry, one aspect of their fall was a lack of appreciation for the technology creeping up behind: the iPhone and other mobile devices using touchscreens.  For Blackberry one of their advantages and selling points was a physical keyboard which allowed rapid typing and emailing by business customers.  They couldn’t see why anyone would want something less effective for emails and messaging.

In addition, Blackberry felt both secure in and beholden to their customer base, the businesspeople who used Blackberries strictly as tools for work.  Blackberry (Research in Motion at the time) seemed both unable to conceive of the possibility of other markets and, frankly, had no incentive to reach into those markets until it was too late.  By then other phones and operating systems had grown and matured to the point of essentially overtaking the market of smartphone users, of which businesspeople make up just a small fraction.  Too little, too late, and now Blackberry has been trying to sell itself, although recent reports suggest that strategy is also failing.

From Blackberry to biopharma

In this post I’d like to explore the concept of the Innovator’s Dilemma as it might apply to the biopharmaceuticals industry.  Where I’d like to start is why I think biopharma is vulnerable to disruptive technologies–why it’s where Blackberry has been the last few years.  So let me begin with the Value Network within which drug development functions.  The Value Network essentially describes how different elements of a given industry’s production process are valued by the principal market. I’ll start with a few assertions:  first, that what the biopharma industry is selling is not drugs specifically, but rather specific mechanisms to create changes to a biological state.  Second, that the market for biopharma is primarily the regulatory agencies, and to some extent the payers, to whom biopharma companies look for approval and reimbursement when marketing their drugs to clinicians and patients.

This may sound incorrect to some, since I firmly believe every biopharma company has its core mission to make medications that will alleviate patient suffering.  But my interpretation is that since the ability to market a drug hinges entirely upon acceptance of a research package by various regulatory agencies, on a practical level those agencies have replaced patients in terms of how biopharma companies think about their product pipelines.  One might say patient health is viewed through the lens of regulatory requirements, and if the regulatory agencies do not require a specific quality or characteristic in a New Molecular Entity application, biopharma will not go out of its way to provide it.  While many other industries have gating regulation, I think few if any have the same degree faced by biopharma, and therefore I feel okay with using the regulatory bodies as the de facto market.  Payers also play a clear role in this, especially in terms of the movement towards requiring evidence of “better” on top of “different” before payment can be reimbursed.  I often think of NICE in the UK as the most visible example of this role.  Of course, feel free to disagree with me on this, these are just my own thoughts.

Given the premise that regulatory agencies and payers are the market, however, we can apply the Value Network framework to drug development and ask: What are the qualities of drugs that are valued by that market, and how do the biopharma companies hope to meet those demands?  The regulatory environment over the past few years has moved towards the concept of comparative effectiveness, efficiency, novelty and personalized treatments.  The creation of the FDA Breakthrough designation program, for example, is a policy effort geared toward incentiving biopharma companies to create drugs that “may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.”  In other words, drugs that either meet an unmet need or that meet a current need with markedly greater efficacy.

This is certainly good for patient health in that more effective treatments will more greatly alleviate suffering and improve quality of life.  However here I would call out a specific parallel to the Blackberry story:  the market is, using the terminology of Clay Christensen, moving Northeast on the value graph (see Figure) Biopharma strives to provide higher quality products that also have a correspondingly higher profit margin.  The industry is not looking for and probably wouldn’t bother with any kind of approach to affecting human health that would provide a poorer patient outcome relative to current treatments, and/or lower profit margins, just as Blackberry was not interested in and couldn’t conceive of a market that would want a phone upon which it was more difficult to type.  Possibly everyone at Blackberry has very large fingers.

Figure 1

Figure 1: Placing drugs on the Value Network

The effects of the regulatory environment on the biopharma industry are many and quite strong.  We are seeing the beginning of head-to-head comparative effectiveness trials for new molecular entities.  We are also seeing heightened awareness of safety issues, which has translated into longer Phase 3 trials as well as greater post-approval monitoring.  Another movement we have seen is pharmaceutical companies starting efforts into orphan indications–the meeting of unmet medical needs in small populations, and the expected higher profit margins that can be realized for these indications.  The industry is seeking innovation, but sustaining and incremental innovation rather than disruptive innovation.  This is innovation that supports and accelerates the current business model relative to the current market, not innovation that has no immediate application in mainstream drug development.

To add to the difficulties for adoption of disruptive technologies, many biopharma companies are very large.  This is not a trivial thing, and is also related to the Value Network.  As biopharma companies grow larger and more profitable, they suffer from a need to increase revenues accordingly.  Clay Christensen made the observation that the larger and more successful a company becomes the harder it is for that company to envision, much less support, investment in any technology or approach that does not promise immediate, high-margin profits and a readily identifiable market.  Indeed, one reason large companies need these revenues is because so much money must be spent to satisfy the regulatory agencies and the sales, marketing and legal arms that act to sustain revenue.  Kind of a vicious circle, yes?

So, to end this section, it seems that biopharma is very much in a position of being vulnerable to disruptive innovation.  It is an industry trying its best to create new and better drugs to appease the regulatory agencies and payers that are requiring the very things we want of our medications–that they be safe and more effective than what’s come before.  It is also, however, unlikely to support in any substantial way any disruptive, innovative technology that does not come with an already defined and predictable effect on the success of the regulatory approval process.  And that, based on conventional business and managerial thinking, is the correct way to do things.  Indeed, given the pressure that shareholders exert on publicly traded companies to keep share prices high and provide continual positive growth numbers, any company daring to take a longer term view could find itself facing a shareholder revolt.

Coming in Part II: What could the markets be for a disruptive technology?

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