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February 2, 2023

Innovation in Pharma: Friend or Foe? (Part 2)

Jeremy Sohn

The last blog of our three-part series centered around Digital Health 3.0 talks about Innovation in Pharma. This blog is divided into two parts. You can read part one of this blog here

In part two, Jeremy Sohn, Managing Partner at P74 Ventures, continues to explore why the wave of innovation in pharma happened too quickly and the primary forces driving the need for change.

The Wave of Innovation Enthusiasm Happened Too Quickly

The wave of innovation enthusiasm in the healthcare industry sprouted across global organizations like wild-flowers. Many teams tried a variety of projects – both small and large projects, incremental and bold -  with little controls over these efforts. 

This led to duplication of efforts, projects with little to no ROI, efforts that had limited ability to scale and investments where the ROI would only emerge in 5+ years and required expertise or a mindset that was not present within these organizations. 

These challenges were part of the learning process. After all, in digital communities, we embrace the idea of “failing fast”. But, given the number of digital initiatives that were spawned in many pharma companies in a short period of time, the noise of each of these tiny failures compounded and had the threat of being deafening. 

4 Key Challenges Faced by Pharma

Organizational Readiness and Know-How 

For many teams and people in pharma, their main focus and experience set were not specific to implementing technology and business innovation. As a result, many teams were innovating for the first time. Or they outsourced their innovation efforts to third-party consulting firms. Initially, even IT organizations needed to be taught agile development models. And with annualized budgeting and partner contracting processes and guidelines, any ambitious program becomes challenging to launch and manage. Add constantly changing business ownership and leadership to the mix and it is bound to cause friction in the system.

Understanding that “Cool” Technology ≠ a Business Case

Technologies such as blockchain, AI/ML, big data mesmerized teams which resulted in programs being led by technology, not value creation. In the venture space, we often refer to this as ‘technology chasing a solution’. While exploring these technologies can have tremendous value, they can also be a distraction for an emerging and/or resource constrained innovation engine. 

Programs Built for the Benefit of Pharma and Not the Patient

Many of the digital initiatives launched by pharma over the last decade are what we might call “around the pill” technologies, i.e., products designed to support and advance one of our drugs. These can be intrinsically conflicted between their desire to create value for the consumer / patient and the interest of the product team to create direct and exclusive value for their product alone. Initially, they were designed with the consumer’s interest in mind, but from a pharma-centric perspective. As these solutions got closer to addressing patients' real needs, the further the solutions diverged from the brand. 

Organizational Structure, Budgeting and Competition for Scarce Resources

In many large corporations, cross-divisional, platform technologies frequently require the combined support of one or more business units, the innovation organization, and the IT organization. Such organizational complexity would stymie even the best of intentions.  This is further exacerbated by the unintentional competitive dynamic that invariably emerges between business leaders across the organizations.

But, despite all the challenges we should be optimistic - Why? Because the traditional business model of pharma has hit its breaking point and pharma has no choice but to change.

4 Primary Forces Driving the Need for Change in Pharma

Immensely Competitive Markets

Most therapeutic areas (TAs) are now highly competitive while TA exclusivity is rare and shorter than ever. First mover advantage is gone - meaning pharma companies are required to work harder than ever to maintain and grow their market share. Additionally, shorter exclusivity periods mean shorter periods before slightly better drugs enter the market. Time to market is more critical now than ever before. Furthermore, many mid-size pharma companies and biotechs have demonstrated that they can compete effectively against big pharma. Pharma must fully embrace innovation to help solve these challenges in order to maintain their competitive advantage.

Healthcare Costs and Pricing Pressures are at Breaking Points

Reportedly, half of the American adults have difficulty affording healthcare costs. This can often prevent people from getting the required care or filling their prescriptions. With the recent introduction of the Inflation Reduction Act, Medicare recipients will now be protected from exuberant drug costs, thus alleviating the pressures felt by most Americans. Pharma margins are shrinking and they are now entering a period of a more cost-conscious environment where innovation to BOTH expand revenue while reducing costs across the business will be key to survival. 

Struggle to Maintain the Productivity of Drug Discovery Efforts

To put things in perspective: Thirty years ago, it took 7 years and $700M to bring a drug to market. Today, it takes 12-15 years and $2B+. This protraction is no longer acceptable. Public markets today are rewarding those pharma companies that demonstrate both R&D efficiency and commercial performance. Those who are struggling are not being valued with the same multiples. And mere margin expansion alone, i.e., via cost reduction, does not appear to satisfy investors. This challenge cannot be solved using the old field force and marketing spend strategy. It’s now time to embrace the only other option available to us – change.

Proof that Biotech’s “Tech-First” Approach can Innovate Faster and Better 

For pharma and the biotech industry, COVID-19 created the opportunity for testing novel technologies and business models. The successes of BioNTech and Moderna in leveraging technology and business model innovation across every aspect of drug discovery, development (clinical trials), commercial outreach, and real-world evidence are hallmarks for the necessity of a tech-first approach. Pfizer’s CEO, Albert Bourla, is publicly vocal that tech-driven drug discovery is critical to the future of Pfizer and the pharma industry. 

Now, most big-pharma companies have no choice - either innovate or be passed by those that do. Standing firm to traditional models will be more risky than leaning forward and trying new approaches. And, this time around, innovation will be targeted and focused on higher-value ROI and KPIs. 

Conclusion: The Time to Change is NOW! 

As much as I refuse to advocate exclusively for a ‘fast-follower’ strategy, it does have its merits - as a tactical advantage. The second wave of innovation is upon us and it learns from and builds on the successes and wreckage of the past. Fast followers are almost always faster, more deliberate, efficient, and exponentially more successful than the predecessor efforts. This doesn’t negate the benefits of first-mover advantage, but when the first mover has already failed, the fast-follower has a high probability to succeed. 

The high-value targets are clear. The teams have been culled. And the kinks in the system have been identified and, in some cases, worked out. 

We are at an exciting inflection point and the time to change is NOW!

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