A business model that is built for an external focus will become increasing important as technological complexity increases.
Having spent the majority of my career to date in the biopharmaceutical industry across multiple roles spanning from sales and sales management to commercializing university basic research, I am curious about the possibility of developing a “better” business model. That is, I am interested in exploring the opportunities to bring life changing therapies to market less expensively and in less time than it typically takes.
The benefits of innovation in this area could be substantial. As it currently can take over ten years and a billion dollars to successfully bring a promising idea from its initial laboratory stages all the way to your local pharmacy’s shelf, innovation in this area could be important to millions of patients. The challenge however is that this industry is the most complex and research intensive in the world and is becoming even more so as biotechnologies are increasing in their complexity and breadth. With current models in this complex and diverse environment, companies struggle in this regard. As an example, Prof. Ray Hill, a former executive director and head of licensing and external research at Merck, on the subject of partnering externally says in a 2008 interview with Nature Biotechnology, “According to how you calculate it, it means that even with about 10,000 people in research and development for Merck, we can still only do about 1% of the research that we need to know about. For context, last year we looked at around 5,000 potential opportunities and ended up doing 53 deals across the board—partnerships, acquisitions, licensings.”
Moreover, due to trends in demographics and globalization, biopharma companies will face increasing pricing pressure from governments to pay for these expensive technological innovations.
Therefore, in the first of three cumulative papers researching this issue that is now available in the Journal of Commercial Biotechnology (see below), I find that opportunities for business model innovation appear to lay in five important areas:
- An external orientation for innovation – A firm’s innovation survival lays in its ability to discover, retain and utilize ideas external to the firm.
- Developing learning capabilities –the ability to recognize, absorb and utilize opportunities that are found externally is driven by many structural and human factors that a firm must optimize in its business model.
- Cluster participation—Embedding a firm’s activities in a geographic cluster of technologically relevant peers is important for greater awareness of opportunities and resource efficiency.
- Maintaining a qualified business management team – Technology adept business managers are critical to cultivating a successful company in this complex environment. Unfortunately, there is a shortage of them.
- Strong organization controls. Though flexibility is important, stable and efficient guidelines and feedback mechanisms are needed to drive efficiency in the nested network of routines in this often chaotic environment.
In sum, the opportunities for business model innovation in a highly knowledge intensive industry like biopharmaceuticals lies in a business model’s ability to maximize these five levers. Companies that do so open themselves to opportunities that can both drive their innovation success and most importantly make a difference in human lives. Consider, for example, the success story of the antibiotic daptomycin. After its discovery in the late 1980s, Eli Lilly abandoned and shelved the compound in 1992 due to it having a dangerously small therapeutic window. However, at a scientific conference in 1996, scientists from Cubist, a newly formed biopharmaceutical company at the time, unexpectedly became aware of daptomycin. Recognizing its potential, after follow-on negotiations with Eli Lilly to acquire it Cubist successfully developed the compound. It has since become one of the most commercially successful and therapeutically important IV antibiotics ever launched in the United States.
Thus, as the knowledge base of biopharmaceuticals expands and grows more complex with the sources of expertise becoming increasingly dispersed in thousands of companies and universities around the world, innovation will increasingly require an external focus. We need business models that are well aligned to this.
If interested in reading more on these findings, you can find the study on which this article is based at:
Downs, J. B., & Velamuri, V. (2016). Business Model Innovation Opportunities for the Biopharmaceutical Industry: A Systematic Review. Journal of Commercial Biotechnology, 22(3), 19–63.
James B. Downs is a doctoral candidate at HHL Leipzig Graduate School of Management in Leipzig, Germany. He has over 15 years of experience in various management positions in the biopharmaceutical industry including Pfizer Inc. in the USA and multiple biotech startups in Germany. His research focus is on management and business model innovation in the biopharmaceutical industry.
Jun.-Prof. Dr. Vivek K. Velamuri is the Schumpeter Junior Professor for Entrepreneurship and Technology Transfer at HHL Leipzig Graduate School of Management, Germany. He holds a doctoral degree from Friedrich-Alexander University of Erlangen-Nuremberg, Germany. His current research focuses on business models, open innovation, and servitization strategies. www.hhl.de/entrepreneurship