Business
Is the pharmaceutical industry open for innovation?
Is the pharmaceutical industry open for innovation? Fall 10
By Dr Jackie Hunter CBE
Fall 2010

Open innovation is the hot topic in many industries and this approach has the potential to make a radical difference to the costs of drug discovery and development in the pharmaceutical industry. But there are also barriers to the industry fully embracing this new way of working and adding it to other models for externalisation.

This paper describes how open innovation is different from these other models and examines some of the exploratory models adopted by companies in this area. It is very early days but there are some signs that large pharmaceutical companies are willing to move to a more flexible, open way of working. Perhaps the greatest barriers to fully implementing open innovation in the pharmaceutical industry are cultural and there will need to be strong senior internal leadership in companies to ensure the required changes in mindset and behaviour are incentivised.

Almost every article on the pharmaceutical industry in the past five years has begun with a description of the pharmaceutical industry’s slowness to develop new drugs and lack of productivity1. Despite the recent realisation that the productivity decline in the past decade is more a function of a peak in 1995-2000 (FDA data 1970-2008) than a true decline, the reality is that costs have escalated, and hence investment in R&D, with no concomitant increase in return on that investment2,3. It is also true that the biotechnology firms, upon which the large pharmaceutical companies rely for externally accessing new compounds, are also giving a relatively poor return on investment as a sector, despite the recent large sums paid by big companies for relatively early assets. Initially pharmaceutical companies followed companies in other sectors and tried to solve the productivity gap by mergers and acquisitions. Through this companies hoped to find economies of scale and to improve their efficiency and productivity. Thus 29 of the companies that existed in 1980 now have reduced to nine global pharmaceutical giants. However, this strategy did not lead to the expected increases in new product approvals, nor did they lead to a reduction in costs per approval1. The pharmaceutical industry’s current success rates are still not sufficient to sustain large internal R&D organisations, making the industry’s current operating model financially non-viable2. Therefore companies are seeking new avenues to either increase their level of innovation, cut costs or reduce risk.