Open Innovation For Pharmaceutical Industry

How to develop more products with a smaller budget

Open Innovation New R&D Paradigm for Pharmaceutical Industry

Contents  Open Innovation ......................................................................................................................................... 1  New R&D Paradigm for Pharmaceutical Industry ................................................................................. 1  Introduction ............................................................................................................................................. 2  Forecasting future strategies for success .......................................................................................... 2  Do we approach the new R&D paradigm for pharmaceutical industry? ........................................ 4  Proctor & Gamble – Case Study ......................................................................................................... 6  Pfizer – Case Study ............................................................................................................................... 7  GlaxoSmithKline Consumer Healthcare – Case Study .................................................................... 8  Wants - Area of Interest.................................................................................................................... 9  Open Innovation Pathway at GSK .................................................................................................. 9  Conclusion ............................................................................................................................................ 10 

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Introduction Over the next decade, the life sciences industries will be faced with sweeping demographic shifts, energy and environment threats, increasing globalization, mounting health care costs, the rise of emerging markets, and accelerating convergence between industry sectors. The life sciences industries are clearly poised for a period of massive shifts, and the most successful players in 2015 will be those whose strategies not only reflect these trends, but also adapt to them and take advantage of them. To do so, life sciences companies must first clearly understand the forces that are changing the industries, and the issues that they will need to overcome in order to be successful in 2015.

Forecasting future strategies for success In March-April 2006 the Deloitte Touche Tohmatsu - Life Sciences and Health Care Industry Group and the Economist Intelligence Unit has conducted the survey of 193 senior executives and managers within the life sciences industriesi. The participants in the survey came from companies with annual incomes of more than US$500m to less than US$15bn. Survey participants were located all over the world. The online survey asked executives to predict how rapidly and in what ways their business would change by 2015 and what strategies their companies would adopt to secure success. The executives surveyed overwhelmingly indicated that developing a robust R&D pipeline (74%), forming alliances and partnerships (52%), talent management (41%), developing closer relationships with customers (37%) and streamlining commercialization processes (36%) are key strategies for success in 2015. Since their inception in the 1920s, following the discovery of penicillin, the modern life sciences industries have looked to R&D as its engine for success. This remains true today. Senior executives who took part in the 2006 DTT/EIU survey are certainly banking on the development of a robust R&D pipeline. They went so far as to say that the future of the life sciences industries will depend on products and services not yet found within their portfolios. No less than 52% of respondents expect at least half of their 2015 corporate revenue will be generated from products and services that are not available from their companies today. Yet in 2005, research productivity—in pharmaceuticals, at least—had fallen to an all-time low. Life sciences companies recognize that they must improve their ability to translate research ideas into products. Nearly two-thirds of the senior executives participating in the survey say this ability is extremely important for speeding up the processes between discovery and taking a product to market. This is essential if firms are to change their product portfolios as radically as respondents say they need to. For these reasons, survey participants place great emphasis on recruiting top-tier scientists as well as establishing long-lasting R&D partnerships and networks with firms, NGOs and the academic community, to provide the means for improving R&D productivity. And

attendees at the roundtable agreed that by 2015, networking is set to become the hallmark of life sciences activities. Since the market for top-tier talent is a global one, not all such skills will be in the regions that are regarded as scientific hotspots today. Therefore, life sciences companies will have to develop the ability to conduct R&D in remote and far-flung parts of the world.

From Big Pharma’s perspective, the financial rewards for developing medical breakthroughs are obvious. According to Dr.Vasella, “The levels of sales generated by some blockbusters have gone up substantially. For example, Lipitor (the cholesterolreducing drug produced by Pfizer) brings in an annual income of US$12-13 bn.” But health care systems will have to find ways to pay for the new therapeutics. Policymakers and health care payers remain aghast at the cost of developing just one drug—about US$1bn—assuming the cost of dead ends and blind alleys is included in the price. Life sciences companies are being forced to find ways to reduce their R&D costs, thus far with limited success. Executives of life sciences companies balk at such demands. “I would love to get my costs down, but it is easy to say and hard to do. We are trying to get the attrition rates lower. But we are in a risk-taking business. If you take fewer risks you are accused of not being innovative enough. There are conflicting forces,” says Dr. Patterson. Risk is only one of the reasons, however. Another is the lack of proficiency noted earlier in discovery activities and drug development. Hiring a larger number of talented people is not the complete solution for this; companies will also have to improve their processes and their governance in order to increase efficiency. There are other aspects of the high cost of drug development. For example, Dr.Vasella maintains that one of the reasons for the increased spending on drug discovery and development is larger trials. The cost of health care, by contrast, is driven by the changing demographics. “The market is growing. The issue is not drug costs, but an escalation in the need for treatment of conditions such as dementia, which has translated into increasing costs for health services. Health services now account for

80% of the total health spend versus just 10%-20% for drugs. In fact, you could argue that the health care expenditure is partially contained by effective treatments. It is inevitable that increased demands will lead to increased costs for health care systems. With rising need, you can’t have a society where expenditure remains flat or you have to limit access,” he says. In an environment where cost-cutting seems to be the order of the day, companies will have to find a way of balancing the imperative of fiscal prudence against the need to make investments that improve quality and safety, be it data-mining or early detection analyses. 69% of respondents say that increased spending and staffing on quality and safety activities will be needed. Much of this spending will be done not just in the developed world but in emerging markets also.

Do we approach the new R&D paradigm for pharmaceutical industry? Open Innovation is a term promoted by Henry Chesbrough, a professor and executive director at the Center for Open Innovation at Berkeley. The concept is related to (but distinct from) user innovation, cumulative innovation and distributed innovation. The central idea behind open innovation is that in a world of widely distributed knowledge, companies cannot afford to rely entirely on their own research, but should instead buy or license processes or inventions (i.e. patents) from other companies. In addition, internal inventions not being used in a firm's business should be taken outside the company (e.g., through licensing, joint ventures, spin-offs). In contrast, closed innovation refers to processes that limit the use of internal knowledge within a company and make little or no use of external knowledge. Some companies promoting open innovation include Procter & Gamble, GlaxoSmithKline and IBM. Prior to World War II, closed innovation was the paradigm in which most firms operated. Most innovating companies kept their discoveries highly secret and made no attempt to assimilate information from outside their own R&D labs. However, in recent years the world has seen major advances in technology and society which have facilitated the diffusion of information. Not the least of these advances are electronic communication systems, including the internet. Today information can be transferred so easily that it seems impossible to prevent. Thus, the open innovation model states that since firms cannot stop this phenomenon, they must learn to take advantage of it. It is the business model of the firm that determines what external information to bring inside, and what internal information to take outside. Open innovation needs a different mindset and company culture than traditional or closed innovation. Open Innovation assumes firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology. Under open innovation, both external and internal ideas are used to create value, and internal mechanisms are defined to claim some portion of that

value. Open innovation assumes that internal ideas can also be taken to market through external channels, outside the current businesses of the firm, to generate additional value. Ideas can also start outside the firm’s own labs and can move inside. Open innovation allows the recovery of overlooked innovations. Now there’s a greater chance the projects will find value in a new market or be combined with other projects, because everything is more open and flexible. According to Dr. Chesbrough, “Not all the smart people work for us. We need to work with smart people inside and outside the firm. External R&D can create significant value; internal R&D is needed to claim some portion of that value. We don’t have to originate the research to profit from it. Building a better business model is better than getting to market first. If we make the best use of internal and external ideas, we’ll win. We should profit from others’ use of our knowledge, and we should buy others’ knowledge whenever it advances our own business model.” Closed innovation Principles

Open innovation Principles

The smart people in our field work for us.

Not all the smart people work for us. We need to work with smart people inside and outside our company.

To profit from research and development External R&D can create significant value; internal R&D is (R&D), we must discover it, develop it needed to claim some portion of that value. and ship it ourselves. If we discover it ourselves, we will get it to the market first.

We don't have to originate the research to profit from it.

The company that gets an innovation to Building a better business model is better than getting to the market first, will win. market first. If we create the most and the best ideas If we make the best use of internal and external ideas, we in the industry, we will win. will win. We should control our innovation process, so that our competitors don't profit from our ideas.

We should profit from others' use of our innovation process, and we should buy others' intellectual property (IP) whenever it advances our own business model.

Some industries have been in open innovation mode for a long time. The Hollywood film industry, for example, has innovated for years through a network of partnerships and alliances among production studios, directors, talent agencies, actors and scriptwriters. The big production studios were closed long ago. The major players are focusing their resources to core competencies of global promotion, sales and distribution of new movies. Many industries are in transition between the two paradigms. The locus of innovation in these industries is moving beyond the confines of the central R&D laboratories of the largest companies to start-ups, universities and other outsiders. In so doing, the company can renew its current business and generate new business. For an innovative organization/company in a world of abundant knowledge, this can be the best of times.

Could pharmaceutical industry learn from the Hollywood film industry? Our opinion is positive. They are both in creative, innovative business and dedicated to creation of blockbusters.

Proctor & Gamble – Case Study In the recent article published at Harvard Business Reviewii, Larry Huston and Nabil Sakkab made the analysis of Procter & Gamble’s radical strategy of open innovation which produces more than 35% of the company’s innovations and billions of dollars in revenue. Nabil Sakkab, Senior VP for Corporate R&D at Procter & Gamble in Cincinnati, is explaining their business concept with one real life example: “Procter & Gamble launched a new line of Pringles potato crisps in 2004 with pictures and words — trivia questions, animal facts, jokes — printed on each crisp. They were an immediate hit. In the old days, it might have taken us two years to bring this product to market, and we would have shouldered all of the investment and risk internally. But by applying a fundamentally new approach to innovation, we were able to accelerate Pringles Prints from concept to launch in less than a year and at a fraction of what it would have otherwise cost. Here’s how we did it. Back in 2002, as we were brainstorming about ways to make snacks more novel and fun, someone suggested that we print pop culture images on Pringles. It was a great idea, but how would we do it? One of our researchers thought we should try ink-jetting pictures onto the potato dough, and she used the printer in her office for a test run. (You can imagine her call to our computer help desk.) We quickly realized that every crisp would have to be printed as it came out of frying, when it was still at a high humidity and temperature. And somehow, we’d have to produce sharp images, in multiple colors, even as we printed thousands upon thousands of crisps each minute. Moreover, creating edible dyes that could meet these needs would require tremendous development. Traditionally, we would have spent the bulk of our investment just on developing a workable process. An internal team would have hooked up with an ink-jet printer company that could devise the process, and then we would have entered into complex negotiations over the rights to use it. Instead, we created a technology brief that defined the problems we needed to solve, and we circulated it throughout our global networks of individuals and institutions to discover if anyone in the world had a ready-made solution. It was through our European network that we discovered a small bakery in Bologna, Italy, run by a university professor who also manufactured baking equipment. He had invented an ink-jet method for printing edible images on cakes and cookies that we rapidly adapted to solve our problem. This innovation has helped the North America Pringles business achieve double-digit growth over the past two years.” Most mature companies have to create organic growth of 4 to 6 percent year in, year out. How are they going to do it? For P&G, that’s the equivalent of building a $4 billion business in one year alone. Not long ago, when companies were smaller and the world

was less competitive, firms could rely on internal R&D to drive that kind of growth. For generations, in fact, P&G created most of its phenomenal growth by innovating from within, building global research facilities and hiring and holding on to the best talent in the world. That worked well when P&G were a $25 billion company; today, P&G is almost an $80 billion company. In 2000, newly appointed CEO A.G.Lafley saw that P&G couldn’t meet its growth objectives by spending greater and greater amounts on R&D for smaller and smaller payoffs. So he dispensed with the company’s age-old “invent it yourself” approach to innovation and instead embraced a “connect and develop” model. By identifying promising ideas throughout the world and applying its own capabilities to them, P&G realized it could create better and cheaper products, faster. Now, the company collaborates with suppliers, competitors, scientists, entrepreneurs, and others (that’s the connect part), systematically scouring the world for proven technologies, packages, and products that P&G can improve, scale up, and market (in other words, develop), either on its own or in partnership with other companies. Thanks partly to this connect-and-develop approach, R&D productivity at Procter & Gamble has increased by nearly 60%. In the past two years, P&G launched more than 100 new products for which some aspect of development came from outside the company. Among P&G’s most successful connect-and-develop products to hit the market are Olay Regenerist, Swiffer Dusters, the Crest SpinBrush, and the Mr. Clean Magic Eraser.

Pfizer – Case Study It seems that Pfizer is the first in-between big pharmaceutical companies reorganizing the R&D function and moving toward open innovation model. The multiple mergers that created Pfizer, currently the world's largest pharma company, certainly created challenges from an R&D perspective. Following two acquisitions in 5 years, Pfizer ended up conducting R&D at 25 laboratories in 10 countries (20 million square feet), splitting therapeutic areas between sites. "That buys you diversity of thought and a small competitive element," says Martin Mackay, Pfizer's Senior Vice President of Worldwide Research and Technology, "but in the end the coordination is just too difficult." According to John La Mattina, President of Pfizer Global Research and Development, targets of transformation were: • • •

Create smaller, more agile research units Drive the growth of our bigger pipeline with no increase in our budget Generate more products from a smaller, more productive organization

The company's solution was to close several of its R&D and manufacturing sites — including its very successful research laboratories: Ann Arbor, Kalamazoo and Esperion — to reduce costs spent on 'bricks and mortar' and to better use the scale of the company. Second step was focusing on research on specific therapeutic areas, on each site, which resulted in more robust interactions with key opinion leaders, commercial colleagues, and external third-party partners. Pfizer has recognized the need for Therapeutic Area Discovery working with Business Development to source the compounds from the outside. Further leverage of third-party collaborations was also recognized as one of the investment priorities. They target over 500 academic collaborations per year. The following were highlighted as the best science partners outside the company: • • • •

Pfizer External Research Network – The California Incubator (To gain rapid, broader access to the science underlying the disease and to enable technologies). Foundation for National Institutes of Health – GAIN (Genetic Association Information Network) program TransTech – Strategic collaboration in Alzheimer’s disease Scripps Research Institute – To advance scientific knowledge of uncured diseases and novel ways to treat them

At the meeting with analysts in New York City on March 5th 2008, Pfizer CEO Jeffrey B. Kindler defended his moves to "change the DNA" of the world's largest drug company in order for it to take advantage of growth opportunities. Having downsized the company through a series of plant and research site closures, Kindler claimed Pfizer is moving forward with a more entrepreneurial management structure and leveraging outside expertise through R&D partnerships and small acquisitions.

GlaxoSmithKline Consumer Healthcare – Case Study In a video presentation, Kevin James, Senior VP in Global R&D of GSK Consumer Healthcare, is explaining their open innovation strategy at their newly launched “innovation” web siteiii: “With an ever-changing global consumer marketplace demanding better quality, better value and improved performance, innovating our products is key. We know the importance of bringing in external ideas and recognize that the best ideas often come from innovators like you. That’s why GSK Consumer Healthcare wants to partner with you. We offer research, resources and resolve to make your product innovation a success. We combine your product innovation with our scientific expertise and world-class marketing to deliver innovative Consumer Healthcare brands around the world. It’s all part of helping your ideas grow.” They are looking for potential partners with unique innovative technologies to meet changing needs of global consumers. GSK is the leading research-based pharmaceutical and healthcare company, employing over 100,000 people in 117

countries. External product innovation combined with our scientific expertise and worldclass marketing can help them deliver innovative Consumer Healthcare brands around the world.

Wants - Area of Interest GSK follows the Want – Find – Get – Manage model of Open Innovation. Their ‘Wants’ represent technologies or innovation that will significantly contribute to the growth of our global brands, and are the result of extensive research by their commercial and R&D teams. They actively Find these wants by building networks with innovators. They then work with them throughout the development process to Get technologies and effectively Manage relationships with external innovators. The result is market-leading products that meet consumer needs. GSK Consumer Health's main areas of interest are: • • • •

oral healthcare pain management respiratory & congestion healthy living

Open Innovation Pathway at GSK The Open Innovation pathway begins with the submission of an innovative technology. Open Innovation is our process for linking external ideas or innovative technology with R&D and Commercial team members responsible for the growth of GSK global brands. Once submitted, the innovation idea is assigned to an Open Innovation Manager to guide the idea through the early stage assessment by key R&D and Commercial team members. The Open Innovation Manager will keep the innovator informed throughout the process and provide feedback on their innovative idea. The ultimate goal is to inlicense and commercialize innovative technologies matching seeker strategic wants. Through appropriate legal agreements, seekers hope to link external innovative technology to their global brands – a process that can result in a win for the product/technology seekers and a win for the innovators.

The pathway outlined above provides a general guideline of what the innovator might expect once he/she submits a technology or product idea. The time associated with each step is determined by the complexity of each specific project, and the time periods above represent the general guidelines rather than guaranteed timing.

Conclusion Most companies are still clinging to a bricks-and-mortar R&D infrastructure and to the idea that their innovation must principally reside within their own four walls. Until they realize that the innovation landscape has changed and acknowledge that their current model is unsustainable, top-line growth will elude them. A lot of people misunderstand licensing for open innovation. Open innovation is a more advanced business concept where WEB 2.0 and WEB 3.0 technology is used for: - Development of broad networks to coordinate innovation activity (’creation nets’) - Development of virtual research institutes - Scanning the globe for ideas - Crowd sourcing the globe for creative research talents and experts - Reaching out to a specialist on a contract basis to solve a particularly vexing research problem - Co-developing products with suppliers - Co-marketing products with distant competitors However, open innovation could be just another trendy phrase for some people. In the recent private discussion, this danger was pointed out to the author by Steve Poile, former CEO and Founder of Pharmalicensing.Com. Mr. Poile saidiv: “I think 'open innovation' can be whatever you want it to be. It is just a phrase used by people to create a trendy approach to what individuals and organizations should be aspiring to in partnering for mutual success. At the end of the day both parties to a deal wish to benefit. You will never see the words 'open innovation' in a legal contract, only in a PowerPoint presentation. Therefore, there is a distinction between what 'open innovation' means with respect to marketing and PR and what it really means when it comes down to putting a contract together. A good example of this is the term 'partnering' which was coined a few years ago to provide a warm, comfortable feeling to licensing which was seen as an arms length relationship. It has always been the case that for a deal to work the parties need to work closely together to maximize the outcomes. I am not against the phrase open innovation; I just look for recognition that it is a trendy phrase for what open minded people have been doing for a long time already.”

From this point it is hard to predict the future of open innovation. Anyway, it seems that the key words of innovative drug development will continue to be “open mind”, “networking” and “partnering”.

i

The future of the life sciences industries: strategies for success in 2015, DTT Life Sciences and Health Care Industry Group, ii Connect and Develop: Inside Procter & Gamble’s New Model for Innovation, by Larry Huston and Nabil Sakkab, Harvard Business Review, March 2006. iii http://innovation.gsk.com/ iv Discussion with Mr. Poile