GUILLERMO WECHSLER

February 6, 2007

Scaling Innovation in Biotech

The Berkeley HAAS School of Business did very interesting work at their annual Business of Health Care Conference. In one day, they pass you through a variety of interesting topics, with super speakers on the future of biotech, VCs and innovations in healthcare, healthcare policy, IT or HCP strategies for improving health, as well as a panel on universal health care, which opened a discussion about Schwarzenegger's health proposal. Dr. Craig Parker, head of Biotechnology Equity Research at Lehman Brothers conducted an interesting conversation with Suzy Jones from Genentech, Erik Bjerkholt from Sunesis Pharmaceuticals, Ajay Bansal from Tercica, and Mark McDade from PDL BioPharma, on the topics of scalability of innovation. He framed the discussion with simple questions: What is innovation? How do your companies promote innovation? How can we measure innovation?

Overall, the obvious consensus was that innovation is any new offer that increases value to patients. So innovation can come from basic science, improved business models, or new services, but the test unvariably will be differential value-added to customer. The other interesting consensus is that the biotech industry is already a mature industry. This means that there isn't much room for disruptive changes. Only innovative products will drive growth and revenue. So the challenge for the biotech companies will be to expand product and service innovations with shorter life-cycles of development and more efficient processes. Producing innovation with an efficient operating model becomes a key issue.

Perspectives on Innovation

Dr. Parker pointed out that, after reviewing the industry, he discovered that the innovations per employee are significantly lower in biotech companies that have grown based in acquisitions in comparison to biotech companies that have grown organically. A key example of this is Genentech.

Suzy Jones' story about Genentech was simple and powerful. She said “We're innovative because we know how to partner with scientists, the academic community, and with other interesting small companies doing good research. We are just starting our Genentech Fund to promote interesting research with our network of partners. There are a few design principles that are relevant to expand these collaborations:

• First, Genentech is not willing to buy patents and then to dispose of the scientists' teams that produced them. Genentech is recognized as a respectful partner willing to enhance good research and good scientists' teams.


• Second, Genentech is very reluctant to establish formal processes that can rigidify relations between institutions and produce contractual straight-jackets in relations and conversations that should remain vital and creative.

The model has paid off. They invariably receive the first call of their partners informing them about potential interesting ventures. High quality networking, based in what Yochai Benkler could articulate as the best traditions of collaborative production, has been leveraged by this not-too-young company which has this unusual mix of scientists in top business positions.

Another angle was brought by Erik Bjerkholt, who plays in a smaller company. One of the points that caught my attention is that he is trying to build a business model in which he can leverage expertise in the basic components of the biotech business by building global partnerships. One of the strengths of his company is a manufacturing facility that, instead of being coupled with the research department and headquarters like in Genentech's South San Francisco facilities, is being built in India where they have an extremely talented and vigorous partner. So, he brought up the subject of decentralization, major partnerships, and focalized innovations. His approach has resemblances to Michael Dell's early discovery that the computer industry was mature, that vertical integration is a dangerous liability, and that the horizontal, flexible organization of the supply chain was a fundamental dimension of a new business model.

Ajay Bansal and Mark McDade somehow reinforced Erik's perspective in the sense that they made two or three important assessments. One is that the opportunities for them are not in basic research but in discovering niches in the industries in which they can develop innovations that enhance treatments or services that were created by the big players of the industry, or in co-investing or buying patents from the big players that have been postponed by strategic priorities in the portfolios of the major players.

The charismatic Kevin Young from Gilead Sciences, a keynote speaker of the event, added a new perspective, claiming that in order to keep Gilead's super performance and innovation, the company should focus on leading the social networks that support their business, and adjust their research, products, and services as much as they need to to increase value to the customer. They are actively involved with a wide variety of constiuencies promoting price reductions based in scaled market needs, payment capacities, and aggressive prevention. One example he gave was an HIV program in the prison system -- requiring tests upon entrance and exit from the jail -- which puts some responsibility on the prisons to prevent the spread. Another example he gave was they opened up an operation in Turkey to prevent Hepatitis B. Young claims that innovating to promote change in practices in vast social networks is a fundamental capacity.

I left that discussion with a feeling that the spirit of science and academics, which fueled the emergence of the collaborative culture of the Internet, is also renewing critical dimensions of our health care industry.

Labels: business of health care conference, genentech, health care