R&D has long been
perceived as the holy grail of the pharmaceuticals, diagnostics, and medical
devices industries, and rightly so. While improvements in processes such as
distribution and customer service can create incremental value for companies,
it is the "quantum leap" innovations in products and technologies
that yield the huge growth and profitability improvements demanded by
shareholders. And while many factors are necessary for success, the companies
who best manage their innovation process tend to enjoy differential returns:
Pfizer, who has invested heavily in innovation and is renowned to have one of
the strongest R&D pipelines in the industry, outperformed the Dow Jones
pharmaceuticals index by 48% over the period 1991 to 1997, even before the
introduction of Viagra.
But the hurdle is
rising for companies seeking to develop new products. Despite the adoption of
new techniques like combinatorial chemistry and high through-put screening that
have greatly improved the productivity of drug discovery, the average R&D
investment required to bring a new drug to market has more than doubled in the
past decade, rising from $230MM to $500MM or more. In the medical devices
industry, the cost to develop just one product can exceed $100MM. Furthermore,
R&D investments are still extremely risky, with only 2-7% of all
pharmaceutical innovation projects ever making it to market.
A number of factors are to blame for these spiraling innovation costs. First, the "low hanging fruit" of the health care industry has in many cases been harvested. Advances in treatment and technology have brought under control many of the better understood diseases and conditions, and companies are now focusing on indications that are increasingly complex, some of them targeting even narrower patient populations.
Innovation as Strategy: The Importance of Process
innovation strategy, and R&D need to be explicitly connected, and in the
best-run organizations they are indeed tightly linked. The enormous sums
invested in R&D, the lengthy time- to-market for pharmaceutical, medical
devices and diagnostics products, and the high risk of development failure make
it critical that innovation strategy, resource allocation, and ultimately, the
activities of the R&D department are carried out with the broader corporate
strategy in mind.
The goal of the
innovation framework presented here is to create a structured approach to the
innovation process, ensuring that the most promising research projects are
invested in and eventually brought to market, and that the innovation strategy
is carried out in concert with the broader corporate strategy.