Friday, April 22, 2011

In Search Of A Golden Mean: Balancing Innovation And Execution In Biopharma

Guest post by Dr. David Shaywitz

As the biopharmaceutical industry looks to revitalize itself through innovation, a lot of companies have started to think deeply about what it means to be more innovative. In today’s WSJ, I review an interesting new book by Peter Sims called Little Bets that discusses the importance of deliberate experimentation in innovation and highlights the role of thoughtful improvisation in driving progress.

The difficulty, as I see it, isn’t that most people fail to appreciate the value of trying new things, and more generally, pursuing a portfolio of options. Rather, it’s that almost everyone wants to be the one doing the diversifying, and often wants the entities within their portfolio (companies, programs, people) to execute in a lean and focused fashion.

For example, growth investors generally want their companies to relentlessly pursue a specific thesis, often high risk/high reward; for these investors, each company in their portfolio is a small bet. But most companies prefer to diversify and hedge their risk – statistically safer for them, but not necessarily what their investors had in mind. The pattern extends down through project teams even to the level of an individual employee, who must balance pursuit of promised objectives with the ability to pivot if something changes. In each of these situations, everyone understands the value of small bets – the issue is that each person wants to be the one holding the cards.

From a management perspective, the dilemma is that in the short term, investing in game-changing “disruptive” innovations are a drag on the balance sheet. Organizations are always seeking ways to cut costs; this is especially true these days for pharma companies, as they anticipate patent expiries. Without a serious long-term commitment, and mandate, from senior management, pursuit of such so-called “non-core” activities face serious, even prohibitive, challenges. (See this thoughtful HBR piece by Clay Christensen and colleagues for an excellent discussion of how the financial value of disruptive innovation is systematically underestimated.)

It’s also critical to recognize the very real limitations of constant experimentation – the success of any innovation requires not just a promising idea, but also focused and determined execution. I imagine someone could write a parallel volume to “Little Bets” (and probably several exist already) arguing that it’s all about execution, and that in practice, the actual limitations on innovative success are the fortitude to stay with a difficult idea, grinding through the sweat and tears to ensure it becomes a reality.

Such perseverance is as vitally important in academia as it is in business – I can think of many graduate students who were brimming with potentially interesting ideas, but were never able to muster the focus needed to shepherd any individual idea through the necessary period of unglamorous, gritty exploration, and would instead constantly jump to something new.

By contrast, the most successful academics I know are relentless about following up promising ideas, ensuring they are adequately developed and successfully published. (I suspect there are actually far more academics whose career success results from the dogged pursuit of mediocre ideas than from the tepid pursuit of great thoughts.)

The obvious answer, of course, is that it’s all about balance – both exploration and execution are essential, and you need to know when to do each. But therein lies the rub. Consider this disturbing thought: perhaps it’s not really possible for anyone to know, for any particular situation, just what the right balance is. Arguably, “the right balance” is largely dependent upon randomness, externalities that are impossible to foresee despite one’s best guesses, and potentially out of one's control.

Nevertheless, the success stories will be captured in business books, case studies,and on the “analog” slides so popular among consultants and bankers; the wins will be attributed to brilliant thinking (and implicitly, to great advice), while the failures (though frequently the result of similar advice and a similar strategy) will quickly be forgotten. (See The Halo Effect by Phil Rosenzweig, or Fooled by Randomness by Nassim Taleb for a more complete discussion of these issues. Additional books recs can also be found here.)

I continue to believe -- strongly – that good management matters; while you may not always be able to make good decisions, you can certainly avoid making some very bad ones. In biopharma, specifically, I deeply believe in the value of--and absolute requirement for--effective execution, but I remain passionate about the primacy of good new ideas, the value of R&D, and the importance of innovation. I’ve witnessed the “innovation dissipation” that can occur in large corporate structures that kill new ideas not by fiat but through stultifying bureaucracy, onerous processes, and falsely precise spreadsheets and modeling, as previously discussed here.

It’s not surprising that some of the most innovative leaders carefully protect nascent ideas from institutional antibodies, especially those associated with productivity metrics. Sims writes that at Amazon, “when trying something new, Jeff Bezos and his senior team (known as the S Team) don’t try to develop elaborate financial projections or return on investment calculations.‘You can’t put into a spreadsheet how people are going to behave around a new project,’ Bezos will say.”

Similarly, Mark Fishman, head of R&D at Novartis, has reportedly banished the use of sales forecasts from early research, and (in a stimulating 2008 HBR article by Amabile and Khaire) has derided Six Sigma as “one device that has destroyed more innovation than any other,” adding that efficiency-minded management “has no place in the discovery phase.”

Steve Jobs’s dictum, “People don’t know what they want if they haven’t seen it” seems especially relevant for drug development, as huge resources are spent trying to figure out what patients and physicians want, yet the ability of such market research to anticipate the value of a novel product is notoriously poor, as discussed in this JCI article by former pharma VP Jose Cuatrecasas. (I’ve yet to meet a senior pharma commercial executive who will acknowledge this limitation.)

Overconfidence in forecasting turns out to be a more general problem, as concisely summarized by noted University of Chicago behavioral economist Richard Thaler in this NYT piece.

Innovation continues to matter for Big Pharma. But, as Anthony Nicholls notes, simply restructuring themselves in the image of biotechs may not be the magic answer. It's worth noting there’s little evidence that biotechs are any more productive than big pharma. It’s just that they often evaporate when they fail, and their losses tend to be invisible, rather than accounted for on a balance sheet, as HBS professor Gary Pisano discusses in his book Science Business.

I’ve seen so many people within big pharma who were attracted by the opportunity to make important new medicines, and who still, despite everything (including the formidable internal challenges as well as the relentless attacks of the pharmascolds), maintain this worthy ambition.

The challenge for top pharma leaders -- a challenge that I’m not sure most big pharma execs either fully appreciate or deeply believe -- is to recognize this potential, engage these aspirations, and support and enable these latent innovators, before it is too late.

Dr. Shaywitz is a strategist at a biopharmaceutical company in San Francisco and an Adjunct Scholar at the American Enterprise Institute. He is a regulator contributor to Science Business at Forbes.

(Image courtesy of flickrer Digitalnative used with permission through a creative commons license.)

1 comment:

John D Waddell, RPh said...

Thanks, Dr Shaywitz for an interesting and thought-provoking piece. You’ve certainly raised many valid and insightful points.

I’d suggest that the core reason that our reason our industry has found itself in its current predicament is a very simple one. We’ve behaved in complete contradiction to our stated mission. Over the last decade, virtually every firm has exhausted us with some perfunctory but disingenuous vision statement along the lines of ‘putting patients first’. While in reality, anyone with any reasonably holistic understanding of healthcare delivery can see the obvious - we’ve done anything but ‘put patients first’.

A quick look at IMS’ 2010 drug sales report bears witness. It’s dominated by me-too drugs providing very little incremental, clinical benefit and burdened with very high selling costs and discounts for meaningless middle-men and agencies offering little value for the patients we pretend to ‘put first’. This perversion of purpose is often advanced with nebulous concepts like consumerism and empowered patients, etc.

What was once the world’s highest margin industry has been converted to one where most P/E ratios trail those of successful packaged goods companies.

To really put patients first, we must do the obvious - put resources and talent towards science as opposed to costly and obfuscatory, marketing practices.

This will only become more true as an increasingly wired world gains ever greater, ever quicker access to information allowing patients and providers to be authentically empowered.