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Published: May 29, 2007

 
 

Gary Pisano: The Thought Leader Interview

The second problem is a basic misunderstanding about “the biotech revolution.” It’s not a single revolution. It’s a constellation of revolutions in such fields as mathematics, biology, molecular biology, genomics, bioinformatics, and software. The power to impact drug discovery lies in how you integrate the understanding and the tools. You can’t just say, “Here’s a new advance. This solves all the problems.” You have to evaluate how each new tool works in relation to all the others. You have to bring all the tools and knowledge together.

The third challenge involves the cumulative advance of knowledge. Unlike knowledge in other businesses, where the new drives out the old, in biotech the new gets layered on top of the old, and the old stuff stays relevant. In drugs, ideas and discoveries that are 100 years old are often still relevant today. And the skills you needed to develop drugs 20 years ago are still the skills you need today. So you need to keep extending the frontier of understanding.

So those are the three challenges created by the science of biotech: You’ve got to be able to manage risk to deal with uncertainty, you’ve got to be able to achieve integration across all the separate areas that constitute biotech, and you’ve got to be able to learn rapidly and keep up with the cumulative advances. How would you want the business to look to achieve those goals? You wouldn’t want it to look the way it does today. Its anatomy has not evolved to solve those problems.

S+B: Describe the disconnect. How are the three structural requirements not being met?
PISANO:
The industry has evolved essentially to manage risk — one of those problems I mentioned — and that’s given rise to three forces that shape the way the industry has developed and does business.

First, it creates a lot of new enterprises, usually by using venture capital to spin them off from universities. This approach produces numerous small, specialized companies that are very entrepreneurial. It creates high risk at the firm level but just the opposite at the full industry level. In other words, we deal with risk in this industry by running a lot of experiments, and rewarding entrepreneurs for taking risks at the expense of the longevity of their companies. We’ve reduced risk by allowing firms to go public at fairly early stages, using equity funding to diversify more uniformly across the portfolio. Although it’s important to get science out of the labs and into commercial practice, this approach is not the best way to organize R&D-centric knowledge businesses like biotech.

The problem is that every new idea gets its own firm. Venture investors are ready to write a check every time somebody comes up with a scientifically interesting concept that is at best years away from becoming a drug. That leads to a proliferation of firms and a highly fragmented industry. And every time you launch a new firm, you start the learning cycle all over again. The main downside to an industry composed of many small enterprises operating independently is that the fragmentation cuts directly against all the things we’d want to do to support integration and cumulative learning. I’m not saying entrepreneurialism is a bad thing, but it can go too far.

So by solving the first problem — dealing with risk — we make it harder to solve the second and third problems: integration and the cumulative advance of knowledge.

S+B: The industry, then, is constantly in startup mode.
PISANO:
The funding models are the problem; that’s the second force undermining the long-term interests of biotech. This industry uses the classic venture funding approach, which has worked extremely well for launching firms in software, semiconductors, and other high-tech realms. Because it provides very close governance, venture capital (VC) is great for early-stage firms. The problem is that it’s inappropriate for a business in which it takes 10 years and a billion dollars to bring a new drug to market. Most venture capitalists think in three-year time horizons and, because they need to diversify their own risks, they’d never invest a billion dollars in a single company. They need an exit strategy, and their strategy of choice has long been the public equity market because that’s where you get the big payoffs. So public equity solves one problem by paying back investors and allowing the shareholders to diversify.

 
 
 
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