Constructing Innovation Supply Chains for the Pharmaceutical Industry

6/26/13Follow @FlagshipVenture

Competition via innovation has been recognized as essential for mid- to long-term success and even survival of science-based corporations such as pharmaceutical and biotechnology companies. As such, understanding how best to innovate, and how to do it more often and efficiently, is top of mind for executives at many large corporations.

Traditionally, the approach for pharma companies has been to dedicate a large portion of spending on R&D, in the hopes of generating a steady internal stream of innovation to fill pipelines with new, differentiated, and competitive products. However, as is now widely known, these costly efforts have been disappointing at best, resulting in major reductions in R&D expenditures at many of the leading pharma companies. AstraZeneca, Pfizer, Sanofi, to name a few, have made headlines recently for their reductions in R&D. Though many acknowledge that the majority of R&D cuts have been completed, this trend still exemplifies the major shakeup that has caused the industry to reevaluate its focus on innovation and examine the productivity of R&D. A recent study conducted by consulting firm Oliver Wyman concluded that “the value generated by $1 invested in pharma R&D has fallen by more than 70%.” From 1996-2004 drug companies produced $275 million in five-year sales for every $1 billion spent on R&D, and from 2005-2010 it was $75 million.

Many recognize that most breakthrough innovations increasingly come from the startup world, and as such, large corporations have established or are establishing their own external-facing instruments for sourcing innovation. These external-facing instruments include corporate venture capital (CVC), business development groups, and more recently, open or external innovation teams tasked with finding innovation externally and fostering partnerships and collaborations with academia and the startup community. These efforts, although properly motivated, have not reliably filled the innovation pipeline because they do not go far enough in getting large pharma involved early in an innovation’s development. In the case of Biogen Idec, among the reasons they decided to get out of the CVC business was that it did not provide an opportunity to access the novel technologies they were seeking.

Even though there are various external-facing instruments available, there appears to be an over-reliance on scouting and diversification, in hopes of serendipitously unearthing innovations that meet the strategic objectives of the corporation. More specifically, these efforts face challenges because:

  • There are too many startups and academics to meaningfully interact with, making it very hard to discern signal from noise.
  • Inevitably there is information asymmetry between buyer and seller, leading to a systematic “lemons” problem; specifically, attrition rates for externally sourced drug programs are reportedly higher than internal ones.
  • Corporations end up settling for what’s on the market or overpaying for what everyone else already knows about and wants.
  • By getting involved too late, pharma companies have little ability to shape the clinical development program for externally sourced compounds.

In contrast, one could look at innovation as we do any other valuable resource at a company and think across the entire life cycle of an innovation (from conception to inception and beyond) in the form of an innovation supply chain. This would force us to not only better define requirements (unmet needs and problems, technological hurdles, etc.) but also foster the development of innovations at the earliest stages (without outright vertical integration or ownership). This can be achieved through active and formal collaboration with startups, prior to or at the time of founding, and throughout company and technology development. Furthermore, creating an innovation supply chain would require a methodology for assigning value to intermediate forms of the final innovation, demand forecasting, ensuring that the supply network remains economically viable and properly rewarded, and securing redundancy through alternate supply.

A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Here, innovation simply refers to a new product, service, or business process that may deliver value to a potential customer. The concept of an innovation supply chain aims to capture the diverse participants and organizational linkages involved in the ultimate delivery of an innovation’s value to its end customer. Ultimately, we can imagine innovation supply chain managers focused on the cost, efficiency of supply, predictability, flow of information and other resources, optimal linkages, incentives, and many other means to maximize realized value.

The concept of supply chains has been closely tied to manufacturing and therefore dismissed as a framework for a creative and dynamic process such as innovation. No doubt, supply chains tend to become static and orderly over time; however, we can still envision a supply chain for innovation that can accommodate the uniquely vibrant nature of innovative products and their development. Furthermore, there are other industries—for example, the movie industry—where preformed networks allow for creative products and phases to coexist with the benefits of an organized sourcing mechanism as well as orderly transitions of assets of intermediate value and state of development.

An effective way for market leaders to begin forging innovation supply chains is through “extrapreneurship” —collaborating with external entrepreneurial entities that produce innovations that are in line with the company’s needs, deep technical know-how, and market understanding. The recent Moderna Therapeutics and AstraZeneca agreement points to an early example of how collaborations could move further upstream in the innovation supply chain. (Disclosure: Moderna is a Flagship Ventures portfolio company founded by its VentureLabs unit.) In exchange for a significant capital outlay, AstraZeneca is not taking an ownership position in the company, but instead will have exclusive access to a number of Moderna’s potential products in specific therapeutic areas, and this is being done at the pre-clinical stage. As such, both companies are aligned on maximizing the value of the platform and collaborating from early development through commercialization.

While only part of the solution, agreements like the one between Moderna and AstraZeneca point to a shift that could lead to collaborations earlier and earlier in a startup’s development. Ideally this approach would result in a more optimal supply of innovations in terms of quality, cost, and reliability/continuity, and would allow a corporation to establish a sustainable competitive advantage. By linking with the entrepreneurial innovation ecosystem as a partner, collaborator, and ultimately customer, as opposed to simply an “occasional buyer,” corporations can foster meaningful interactions throughout the innovation process, participate in company/product design, and not just focus on later-stage transactions.

Considering the many resources large corporations have at their disposal (scientific and market knowledge, technology, funds, distribution networks/global reach, etc.), their involvement throughout the supply chain would be invaluable to the small company partners and could dramatically alter the speed and efficiency of an innovation coming to market. One key to the success of this paradigm will be long-term funding and value-sharing mechanisms that preserve upside incentives and drive entrepreneurial innovation while providing early access, involvement, and a more predictable supply. Another key will be ensuring that duplication and competition across an established innovation supply chain is avoided, thus allowing the innovation supplier to operate without fear of being eventually replaced by an in-house clone.

Amidst the diverse approaches being currently tried, a natural, next evolutionary step is for large companies to establish and actively manage robust innovation supply chains that can become critical to filling their product pipelines and ensuring long-term viability. These supply chains will in the future include not only established startups, but also academic institutions, entrepreneur-innovators, as well as institutions that specialize in new venture creation and investment. Operating with pre-formed linkages and clear governing rules, such networks will enable greater translation of scientific breakthroughs and ultimately improved healthcare, as the most viable innovations emerge and become commercially accessible.

The future will no longer be about corporations primarily dedicating millions of dollars to internal research, but instead directing significant resources and efforts to collaborate with proven innovators. Big pharma and large biotech companies will continue to perfect what they excel at (translational research, clinical development, regulatory and medical affairs, and product distribution), while a formalized supply chain of innovation partners augments internal programs and provides a reliable source of new products.

Noubar Afeyan, PhD, is Founder, Managing Partner and CEO of Flagship Ventures and leads its VentureLabs venture creation unit. A technologist, innovator, entrepreneur, and venture capitalist, Noubar has co-founded and helped build 26 life science and technology startups during the past two decades. In addition, he is a Senior Lecturer at MIT's Sloan School of Management where he has taught courses on technology-entrepreneurship, innovation, and leadership since 2000. Follow @FlagshipVenture

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  • Tom

    Excellent article

  • Kyle Serikawa

    Nice post, continuing the supply chain discussion. I like several things about this essay, including the concept of pharma sharing knowledge to help startups become more successful earlier–since so much of drug development is lore that is often gained through experience. This is a more active view, as opposed to pharma VC arms which seem like more passive instruments. I also appreciate a decrease in information asymmetry, which this kind of arrangement should encourage.

    Some questions regarding how this would work:

    –How to ensure companies do not get too locked in to their predefined criteria, to make sure they don’t miss the serendipitous discovery a la Viagra?

    –What funding mechanisms will be in place in addition to VCs and pharmsa partners? Or will that level of funding suffice to create a large enough ecosystem?

    –How to companies find and pick the innovation partners to work with? As you mention above, that’s one of the key challenges–finding signal above noise. Unless by the act of partnering with an innovation group, you expect that group to raise above the noise due to better resourcing and information?

    –How to deal with the unknown unknowns–truly novel discoveries that aren’t in any pharma’s business plan but which nevertheless should be quickly capitalized upon?

    The analogy with the movie industry is interesting. Big studios are known for producing me-too offerings (anyone else getting tired of superheros?), while at the same time scouring the independent film market for the next Little Miss Sunshine. Although there the analogy breaks down, since I don’t think the big studios are telling independent film makers what to make.

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

  • Bob

    How is the Moderna/AZ deal different from, say the VRTX/Novartis kinase arrangement, in which NVS outsourced, or “extrapreneured” kinase discovery science? This could be viewed as a success or failure depending on your employer or view, but it did not deliver any drug, or even an acceptable candidate for NVS. AZ’s ability to manage its disparate portfolio will be a challenge, especially as senior management responsible for deals moves on to greener pastures.

  • GT Nexus

    Sustaining business growth, especially with the tidal wave of blockbuster branded pharmaceutical products coming off-patent is top of mind for many pharmaceutical CEOs. Pharmaceutical companies need to re-imagine their supply chains in order to better align them with the CEO’s growth agenda. The two areas we identify that will drive greater supply chain alignment are reliability supplying all markets served and improving patient outcomes. Additional information on both topics is available in our recent blog post “What’s Brewing in the World of Pharmaceutical Supply Chains?” http://www.gtnexus.com/blog/cloud-supply-chain/whats-brewing-in-the-world-of-pharmaceutical-supply-chains/