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Pharmaceutical companies outsource innovation to Biotech firms

Pharmaceutical companies have great strengths in the marketing of medicines but tend to outsource the uncertain business of early stage innovation to small Biotech firms. For creativity and radical innovation is difficult to do in very large organizations. There are just too many processes, and many of them are not very clear in the first place. On the other hand, a small Biotech has comparatively few staffers that are highly qualified and very highly motivated. The motivation comes from the possibility of inventing a blockbuster drug and the windfall that could arise upon FDA approval. 

However, here are some numbers to think about to get a sense of the odds of innovation success from page 3 of this brochure from innovation.org a Pharmaceutical research and industry organization: It takes between 9-15 years to come up with one approved drug starting with five to ten thousand (yes 10,000) compounds. It is not uncommon to find Pharmaceutical scientists who have spent 20 years in the lab working on some stage of the process, and having not seen a single product make it to the market!

At the marketing end of the pharmaceutical business one keeps hearing of blockbuster drugs or those drugs that sell over $1 Billion  a year. But it turns out that there are only 125 of these drugs and these too face the "patent cliff" when patents expire and cheaper generics take over much of the market. For example, the blockbuster cholesterol drug  Lipitor from Pfizer saw a sales decline of 42% in the first month of coming off from patent.

Another piece of older research by Grabowski and Vernon (1990) reports that of  those prescription drugs that made it to the market 4 out of 5 or 80% made less than $250 million dollar after reckoning the R&D costs for the drug. In other words, those 125 blockbusters do have a very long tail of low selling drugs that all went through the travails of the drug innovation process.

Thus, it does makes sense for big Pharmaceutical companies to outsource early stage development to biotech companies and have multiple alliances to ensure that there is a very thick pipeline of products under development. By doing so, the Pharmaceutical company can focus resources and processes around later parts of innovation like clinical trials and marketing. These activities can be made into an efficient routine that delivers results far more easily with a large organization than the uncertain endeavors of creatively coming up with initial ideas that small biotech firms can do well. Contact StratoServe.

Apple vs Samsung: the link between innovation,intellectual property and US jobs

Innovation is hard, it needs fanatical dedication and focused innovators like Steve Jobs to come up with blockbuster product ideas like the iPad and iPhone. And although there was one Steve Jobs, he inspired thousands if not millions to try their own stuff.

Capturing value from your innovation efforts depends on protection of intellectual property and the recent award of $1.05 Billion to Apple was decisive and quick action by jurors in San Jose,California. Velvin Hogan the Jury Foreman probably knew how hard it is to come up with intellectual property because Hogan has a patent of his own.

American innovation works because courts move quickly and jurors understand the importance of giving credit for innovation to the innovator by recognizing intellectual property. When firms innovate, prices do go up as Samsung says in the video alongside from CNET. However,you do get products like Lipitor , the cholesterol blockbuster drug from Pfizer, now out of patent and available much cheaper. American innovation leads to American jobs.

In most emerging markets intellectual property law is weak. As is the enforcement and it does not appear likely that things will improve soon enough for accelerating American innovation for global markets and more American jobs. Contact StratoServe.

Outsourceability : an example from the US doctor's office

Since the recession-outsourcing and outsourceability- a taboo topic is now being discussed much more openly in America. Most people agree that if your job can be outsourced to a cheaper location or to technology - it will be outsourced. Thus young people, mid and late career folks are all thinking again about outsourcing and its impact on their professions. So here is an example from the doctor's office for  the patient facing folks. We exclude back office tasks like medical transcription now outsourced to technology etc.Here is how an annual  visit to the ophthalmologist works out:

• The appointment is taken over the phone and the receptionist also seems to be a nurse  or at least someone experienced enough to categorize and schedule the patient. This task is pretty contextual, does require at least an associate degree and an understanding of the medical procedures  that occur in that office. Is key to getting the patient into the practice and thus corresponds to a front-line sales /service role. There is probably a small segment of tech savvy patients who can fix their appointment online and bye pass the receptionist/nurse. These tech adopters will rise as will the clarity of insurance payments so the job at the reception  desk will get increasingly outsourced to technology.
• The patient arrives and a series of optometrists who are both skilled and qualified go through a bunch of measurements. Your eye and the machine both are present and someone needs to manage the test and the patient. Both skill and physical presence of the optometrist/technician is essential. Naturally the pay and skills of the optometerist/technician is higher than that of the receptionist/nurse and this is a job that is difficult to entirely outsource to technology or overseas.
• The MD and specialist finally sees the patient for a few minutes along with all the piles of data that have been gathered. Technically it is possible to outsource routine un-complicated patients records and review to a cheaper qualified ophthalmologist . All the data gathered in the previous steps can and will be available digitally eventually and appropriate doctors at different locations (and costs) might be able to review test results and decide about the need for the actual consultation with the specialist.  In other words, even at the highest levels of medical skills outsourcing is possible and is being done for expensive skills like radiology.

Does this mean that only jobs that require a physical presence and contact (as the optometerist/technician) are the only jobs that are not outsourceable? Yes and these physical presence jobs include at the lower pay end food preparation and serving. At the high pay  end , it includes the surgeon who performs urgent surgery.  I say urgent because non-urgent surgery can be moved overseas at low cost to health insurers.

Just as a  doctor's office can have different outsourceability levels for the patient facing folks so goes for every other professional work context. Contact StratoServe.

Globalization & Technology is why 28% US workers may remain in low paying jobs in 2020

According to the Economic Policy Institute 28% US workers will remain in low paying jobs in 2020 which is the same as in 2010. Globalization & technology is the reason as some previous blog posts have indicated and this post gets into some more details. But first let's  understand the different levels of skills and pay that is involved in a service ecoonomy.

• Low-skill physical presence jobs: These are the jobs that make up the 28% The jobs include retail salespeople,  store clerks,cashiers and food service workers. But set to grow are occupations such as farming, personal care, building and grounds maintenance andhealthcare unskillled support. And these occupations pay less than the hourly poverty wage, which is why it is so hard to attract local apple pickers in Washington State, for example. These jobs don't really need a college degree and yeat there are large numbers of employees in retail for example, who have college degrees just because they can't find better paid jobs.
• Mid-Skill-Middle Class jobs: These started disappearing from the early 2000's with the onslaught of technology and globalization. Manufacturing moved overseas and many services moved to technology (eg. tax software) or when it was routine it was outsourced overseas. And this was before the recession.
• High Skill-Physical Presence Jobs: As the CNN report points out, there are simply not enough jobs in this category. For example an advanced plastic prototype making plant, or involved in biotechnology can employ only an order of dozens of  employees. A very much lesser number than the old steel plants. Even in this category high skill high pay work can be outsourced to low-cost locations. A famous example is of radiologists reading x-rays from Bangalore India. And even in radiology, routine stuff is being handled by technology. 

Low-skill and low pay is likely to stay but overqualified college educated folks in low-skill, low-pay jobs need to be able to find better opportunities. Contact StratoServe.

GlaxoSmithKline 3B$ fine - balancing innovation and ethical marketing

GlaxoSmithKline is to pay a 3B$ fine, the largest ever for healthcare fraud in the US. In the past, numerous big pharma companies including Abbott, Pfizer have been fined and this is something the industry seems accustomed to. It's important to understand why pharma marketing becomes unethical, if the unethical sales practices are to stop while innovation continues. Here is  how the pharma NPD (New Product Development) process plays out:

1. Drug discovery and patent - no sooner than an invention occurs patent applications are submitted. The patent is good for 20 years when competitors cannot produce the same drug.
2. Drug development, testing and FDA approval can take upto 10-12 years involving several phases including testing with animals,healthy subjects, patients etc.
3. Euphoria with FDA approval:The pharmaceutical drug development is so difficult,expensive and uncertain that it is common to find scientists who have worked 20 years and yet not seen a single product make it to market. Naturally when FDA approves a drug there is euphoria amiong shareholders and the stockmarket, expectation and hope among patients and their doctors. But by now only 8-10 years remain on the patent, by which time the pharma company must earn what it can.
4. Prescription drugs paid by insurance: Once prescribed insurance companies including Government programs like Medicare and Medicaid pay for the medicine. Generally over the counter (OTC) drugs are not covered. Between a generic and  a branded, under patent drug- patients,doctors and insurance companies prefer the less expensive generic.
5. Off Label use- expanding the  use of a drug involves using it for applications other than what it is approved for. Think of the many uses of baking soda beyond baking. Not a huge problem in medicine  if you think about using a body pain medicine for a headache and doctors do keep trying out drugs for different ailments. But this can be a big problem when a psychiatric drug for adults is used on children without FDA approval as in the GSK case. Apparently  the pressure to sell on the sales force is very high.

Beyond off label use there were numerous instances of trying to influence doctors to prescribe particular drugs through inducements such as free holidays,golf, expensive gifts etc. The sales force behavior is consistent with the pressures of pharmaceutical marketing where the pharma sales force is chasing large sales quotas against rapidly expiring patents.

Ideally pharma NPD should involve much more focus at the early stages of the NPD  process so that the FDA approvals are quicker and as off label applications become known, the FDA process to include off label use  should be made easier. The balance between high speed innovation-----> safety and efficacy by FDA-----> earning money by the company within patent periods is a tough task. Doing so is essential if innovation is to continue for big pharma. Contact StratoServe.

Innovation needed: Healthcare Exchanges that make people want to buy

The Affordable Care Act  (also Healthcare Reform, Obamacare) was upheld  yesterday by the US Supreme Court and now the focus for the Insurance Industry, States, Federal Government and the Healthcare supply chain should be to make it all work. Easier said than done if you see the enormous material that exists on the FAQ pages of the CCIIO or Center for Consumer Information and Insurance Oversight. And this is when most folks had doubts about the Supreme Court allowing the law to stand. Chief Justice Roberts has provided a great  marketing clue in his brilliant summary of the majority opinion. Justice Roberts said that the Government does not have the right to force people to buy something by imposing a fine if they do not. However, the Government can impose a tax on those who do not buy. If people don't want to buy then they are slapped with  a  fine (now a tax) that neither insurance companies, healthcare providers or Federal and State Governments really want. What all organizations, healthcare B2B and B2G want is that everyone buys insurance. Here are some suggestions to make this happen:

• Think early stage Insurance market:  The insurance market (including life, property or health insurance) at early stages needs a lot of effort,explaining and US Insurance marketers went through this launch experience  at least two generations ago. Ask the sales folks in developing country insurance markets for ideas that work and explore how insurance pioneers sold insurance products initially in the US.
• Segment through big data: Data exists on all the 30 Million who are un-insured. Make it easy for them to get insurance. Remember at least 6 million (20%) of these uninsured do not have Internet access. This estimate given that Internet penetration in the US is about 80% and the less affluent is unlikely to have Internet access. Something different from an Internet portal for this segment needs to happen.
• Exciting Sales Promotions and Point of Sale: Reaching and communicating with the uninsured is a challenge and exciting sales promotions might help. Those using only emergency rooms can be provided with free insurance  sign-up so that some costs shift to the less expensive primary care stage.
• Insurance as Risk Cover for BOP :  Insurance covers risk and risk is felt least at the bottom of the pyramid (BOP), because there is so little to lose. To motivate the young healthy but poor to buy insurance will need some novel marketing ideas that are being used in multiple categories in the developing world. Small packages of offerings at very low cost works well and gets the market primed to buy more as they can afford it.
• Keeping  it simple for the consumer is essential despite the huge length of this law and its complications. Think iPhone!

All in all , exciting times for all folks involved in making the Healthcare Exchanges work. Contact StratoServe.

Innovation: finding Lead Users from the Internet using forums,blogs and social media

One of the neatest innovation sources is the concept of "Lead User" introduced by Eric von Hippel of MIT in 1986.Finding Lead Users on the Internet using forums,blogs and social media is a great possibility , but first about the concept of lead users.

The video alongside explains the concept in von Hippel's own words. To explain further: if you have a problem and your existing suppliers are unable or unwilling to help and you are a pioneering type of entity  that sees huge opportunity if you solve the problem, you will find a solution. A famous example is of scientists finding lab equipment that does not perform all they want the equipment to do. So the scientists try to ask the sales folks of the supply company and they are friendly but clueless as they are just trying to sell what they have ( remember this is the 1970's... ). So the scientists devise the solution and it works! So they scale up and modify all the equipment they have. The next time the equipment salesperson visits, they proudly explain their significant innovation. Sales folks understand solutions and customer excitement when they see it. So they bring back the innovation  and prototype to their own manufacturing and R&D. This product is now something that is already proven to work at the customer's site: a sure recipe for new product success !

The trouble was finding the lead user in any category. A huge amount of legwork or at least phonecalling was involved. Following a snowball type of technique you had to call all sorts of people who might have vague connections to the the type of problem you were trying to solve in your industry. Such "solutioneers," could be from a different industry as ABS brakes from the aerospace industry that reached the automobile industry.

Today however, with the Internet, lead users are very open to sharing their success online via forums,blogs and social media. This sharing is mostly for  for non-confidential information from the point of view of the lead user. Thus a scientist who studies microbes and diseases  and modifies a microscope is not talking about the science surrounding the microbe ( a secret)  but rather about the modification of the microscope that will help other scientists who are not getting solutions from the microscope suppliers.

Given that identifying lead users has become so much easier and cheaper today, it does seem to be an innovation idea to pursue vigorously, no matter what your industry. Contact StratoServe.

B2B Innovation market success needs credibility,opportunity and competitive advantage says Alcatel-Lucent

Alcatel Lucent is about to make the Internet 5 times faster with its new core router 7950 XRS. According to CNN that is 16 Terabits of data per second or 2.5 Million HD videos streamed per second! But Alcatel had tried to break into the CISCO-Juniper stronghold of this market that consists of all manner of wired and wireless Internet providers. The earlier attempt by Alcatel, to enter this market ten years ago, failed. This was before Alcatel acquired Lucent and in the meanwhile CISCO has been setting the technical standard so how does Alcatel-Lucent believe that it can break in to the market now?  According to Lindsay Newell the Marketing VP of Alcatel-Lucent's IP business for this B2B market you need credibility,opportunity and competitive advantage. Kinds of things that are really needed to succeed in marketing to the upstream supply chain,particularly in high-tech fields. Here is how Alcatel-Lucent hopes to break into the market:

• Credibility Alcatel-Lucent had entered the edge router business in 2003. Think of the edge router  as similar to providing the ramp to the information highway. Staying with the highway analogy,the edge router takes individual requests from the main street and puts them onto the highway. This market is now worth 2B$ to Alcatel-Lucent and it is no. 2 with 24% share having edged out Juniper networks from the second spot after CISCO. And gained great credibility in the process.
• Opportunity: This blog had discussed the band-width crunch in wireless in the wireless space where AT&T has been buying bandwdth or building more highways and getting ahead of Verizon. What if you could drive five times faster on the highways you own? When B2C demand is zooming for video,gaming and cloud computing ? Besides this market is estimated at 4B$ and growing at 10%.
• Competitive Advantage: The competitive advantage is in the capacity and quality of the 7950XRS, that took three and a half years to develop. It is claimed to be 5 times faster than the 2010 offering of CISCO the CRS-3. And through the edge router market entry Alcatel-Lucent has a 450 customers base many of whom are already using their edge routers. A bit like having the ramp installed and just putting in the highway!. Potential customers like Verizon are are excited about the possibilities just as B2C customers complain about caps in usage.

As CISCO and Juniper ramp up their offerings, Internet users should feel some relief coming their way while upstream B2B marketers get some cues from the Alcatel-Lucent strategy of introducing high cost innovations in B2B markets.Contact StratoServe.

Pfizer Nutrition acquired by Nestle: Baby food for emerging markets

Nestle has reached an agreement to acquire the Pfizer Nutrition business for $11.85 Billion. A big focus of the merged enterprise will be serving emerging markets in Asia,Latin America and Africa where baby birth rates are not declining as in the developed world. Dual earner families want the best for their infants and the Pfizer pharmaceutical pedigree coupled with Nestle's grocery marketing prowess should help both organizations as the deal seeks regulatory  approval. Pfizer would like to focus on prescription drugs and try and replace the revenues of the blockbuster cholesterol drug Lipitor that has gone out of patent. With sales of $2.4 Billion the Pfizer Nutrition portfolio of brands (see ad alongside) is a wonderful addition to the  lineup of Nestle baby foods and its great distribution channel in emerging markets. Nestle has access to tiny villages and retailers in far-flung corners of emerging markets where it takes its dairy products. The depth of Nestle's distribution channel is certainly more than Pfizer's reach into pharmacies in these markets because very often the pharmacy might not be a viable business in a small village and yet the small grocery store will need milk powder. It will be interesting to see how Nestle changes the medicine like positioning of the Pfizer Nutrition brands as it integrates the Pfizer supply chain and distribution channel to its own. Contact StratoServe.

Innovation : top management need to get involved in the first three stages

It's sort of amazing when top management in a variety of industries from high tech aerospace to comparatively low tech outer packaging seem to be disengaged and "hands off" in the first three stages of  of innovation (see  previous post on the 5 stages). Top leaders start taking interest when the product is in serious development(Stage 4)  and many top managers become alert and awake as the product is getting launched(Stage 5). At this time things are too far ahead to change except at high cost. These include airfreight when sea freight might have worked on the supply chain side, customer apathy in the market because concept testing was not done well and there was no time to do product and market testing because top management was  so un-involved that the budgets were not approved when the New Product team had put them up.

It is as if top leaders got to know of the new product just as the media plan and budget was being approved.  A paradox because these top managers are experts with years of experience in the industry and sometimes the company and would have spotted the problems far in advance and then the New Product team would have devised solutions to these obvious problems.

Therefore leaders  from the top management team including  chief officers from marketing,supply chain, production and finance  need to review projects tightly at the early parts of the process and here are some questions to ask:

1. Opportunity or idea generation Top managers don't need and should not be responsible for ideas to encourage well -innovation.  Leaders should encourage and ask their teams as to how the portfolio of new products are shaping up. Merely asking helps a great deal. The executive team should have a brief in every monthly meeting about the status of projects in this stage.
2. Concept generation tries to articulate multiple concepts that tap into the same customer needs. Merely asking each New Product Team to provide a brief on how concepts are shaping up to the executive team will allow some discussion. And this converstation will build strategic consensus and provide guidance to the New Product teams.
3. Concept evaluation has two parts as mentioned in the previous post  (a) marketing evaluation  that involves market research and concept testing with potential customers and (b) a number crunching sales and financial forecast of the concept.  Top leaders sometimes do not demand some form of market insight as in (a) and do not vigorously question the numbers in (b) at Executive review meetings. After all money is not spent yet - so why upset a colleague to whom one of the New Product team reports?  Not to suggest that executives understand the flaws and keep quiet- its just that  the individual  mental bandwidth is not deployed at this time.

Yes not much money is spent in the first three stages and that is the point. Because as you slip into the stage 4 Development and 5. Launch and Commercialization suddenly large amounts of money are involved. After all it is in the launch stage you start advertising and for consumer products this can be in millions.

Thus,  at the risk of being "spoil-sports" top managers must be critical at the first three stages of  innovation projects. If you stop one project be sure to ask for a new one and your New Product team will be glad to oblige. Contact StratoServe.