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 / Summer 2007 / Issue 47(originally published by Booz & Company)


Gary Pisano: The Thought Leader Interview

By the mid-1980s, as the financial risks of biotech became more apparent, the second generation of biotech startups focused on research and collaborated with established drug companies to develop the products and bring them to market. This allowed the startups to focus on early-stage research, where big pharma was at a disadvantage, and they could form alliances with a number of partners on a number of projects. But this model started running out of steam in the late 1980s, as the pharma companies lost their appetite for early-stage research and looked for programs that were at or near the clinical testing stage.

The third wave followed the launch of the Human Genome Project in 1990. To map all the genes in the human cell, researchers had to process unprecedented quantities of data. This kind of industrialized R&D required all kinds of new software, equipment, and computational horsepower. So the next generation of biotechs were research factories, selling access to their technology platforms, such as genomics, rather than to specific product technologies or therapeutic applications. That approach was wearing itself out by 2001, and now we’re back to companies trying to develop products again. We’ve come full circle.

Integrating for the Future

S+B: Is vertical integration the right model for now?
The biotech sector still isn’t functioning right. After 30 years of mitigating risk, we need business models that focus more on integration — bringing together the disparate scientific fields, approaches, and skill sets needed to bring a concept to market. I want to see more integrated organizational forms and fewer firms with a broader array of capabilities. They can gather all the relevant technological pieces within their own boundaries, or they can collaborate with outsiders — but very closely, rather than through “alliances” at arm’s length. You don’t have to have giant, fully integrated firms, but you can’t have an industry largely made up of scads of new firms.

The sector needs both large and small companies. Big ones have the means to invest in the science and take on longer-term risks. (Of course, as big firms like Pfizer come under heavier financial pressure, they tend to think in the shorter term, which is a problem.) Think about how great science has been done in corporate settings: It’s always at the large companies, like IBM, General Electric, Xerox, and Bell Labs, because science is a long-term proposition and you need excess cash flow to fund it. Larger firms have to be on the vanguard of science. We’re seeing that sort of vanguard emerge with firms like Novartis and Merck, which are investing heavily in R&D facilities with the goal of being on the leading edge of something very important for the next 20 to 30 years.

And we’ll still need the smaller, independent firms because they provide the entrepreneurial environment and the focus to push the envelope of drug discovery. But they will be much more closely allied with larger companies in terms of their research and development activities. That in itself will require a cultural shift.

S+B: What kind of shift?
We have to have recognition among industry leaders and investors that there’s a need for more integrated structures and that there are many kinds of viable business models. Some are service businesses — companies that do screening, for example — but they shouldn’t become drug developers.

The industry needs to foster lots of collaborators. It might emulate the loose networks of the construction industry and the movie industry, with constantly shifting alliances. Or it might be tighter, like Toyota’s network of suppliers. The players form a few long-term alliances that promote knowledge sharing and value creation. If you look at a research area like cancer, hundreds of trials are going on at any given time, and millions of data points are being generated. How can you bring some of that together? Right now they’re all separated, and we’re squandering a lot of potential for understanding. Yes, people will publish papers on some of the work, but it’s not comprehensive.

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