Pisano’s research bears this out. His analysis of financial reports from publicly held biotech companies shows that the industry as a whole has lost money, even though revenues grew exponentially over the course of the 20-year period that he studied. Given that public companies in a particular sector are generally in better financial shape than their private counterparts, the industry’s results as a whole have probably been even bleaker.
But his analysis yielded a bigger surprise: Biotech’s R&D productivity was nowhere near what was expected. Experts watching this industry have assumed from the beginning that biotech R&D productivity would outpace that of pharmaceuticals. After all, most biotech firms are still entrepreneurial and agile, unencumbered by the bureaucracies of large pharma companies. Pisano found that, in fact, biotech R&D performance was no better than that of pharma.
Understanding why biotech has failed to reach its potential has become Pisano’s mission. His first book, The Development Factory: Unlocking the Potential of Process Innovation (Harvard Business School Press, 1996), examined strategies for improving development performance in biotech and pharmaceuticals. His more recent book, Science Business: The Promise, the Reality, and the Future of Biotech (Harvard Business School Press, 2006), examines the biotech industry’s inherent dissonance and proposes ways to reconcile its business goals with its scientific goals. He posits that the field will hit its stride only when it engenders companies with a new capacity for alliances, big-bet investments, and long-term planning. On a blustery December morning in Boston, Mass., Gary Pisano, Harvard University’s Harry E. Figgie Jr. Professor of Business Administration, sat down in his office to discuss his insights with strategy+business.
S+B: Describe the promise of biotech as an industry and why you say it has fallen short.
PISANO: Biotech opens up opportunities for different kinds of businesses to enter the pharmaceutical industry, essentially disrupt it, and become very profitable enterprises. But that promise has not yet been fully realized.
There are a couple of reasons for this. One is that expectations were way too high. Investors and entrepreneurs failed to understand what’s really required for a science-based business to take off. More specifically, the business’s structure and certain long-term assumptions about it have led to an industry anatomy that is inconsistent with the requirements of the science. In any science-based business, the nature of the science should determine in large part the design of the business models, organizational structures, and institutional arrangements. But in biotech, that’s not the case. Look in depth at the science of biotech — I use that term broadly to mean the whole constellation of new tools, technologies, and techniques for drug discovery that have evolved over the last 30 years — and consider the business problems that science creates.
Let’s start with the first: risk. Drug development is hampered by profound and persistent uncertainty. Developing a drug involves coming up with a component that goes into the human body. But drug development is different from the many other processes that develop components to go into systems. A chip maker, for example, knows all about the system his product has to fit. But our knowledge of human biological systems and processes is limited; we understand pieces of the system but not the entirety of it. Unlike chips and computers, the human body’s operating system is not well specified and not yet fully documented. Furthermore, every body’s “system” is different. And there’s no way to adjust related subsystems — the way chip designers do — to accommodate the component in question. Certain things work; certain things don’t. The drug development process is still very much trial and error. We’re dealing with constraints that you just don’t see in other kinds of businesses.