The Strategic Commercialization of
Biotechnology Innovation
Professor Scott Stern
Kellogg School of Management,
May 2009
The Gale of Creative Destruction
Capitalism, then, is by nature a form or method
of economic change and not only never is but
never can be stationary... The fundamental
impulse that sets and keeps the capitalist
engine in motion comes from the new
consumers’ goods, the new methods of
production or transportation, the new markets,
the new forms of industrial organization that
capitalist enterprise creates... This process of
Creative Destruction is the essential fact about
capitalism.
J. Schumpeter, 1942
Many industries are marked by
the “gale of Creative Destruction”…
The “S-Curve” Pattern:
Initially increasing then declining R&D
productivity within each physical
“architecture”
Old Physical limits
The Framework:
Early R&D is filled with failures,
dead ends, and competing versions.
Once key choices are made, R&D
Productivity improves -- focused and with
few physical barriers. However, market
leaders resist “shift” to new S-curve…
Technical
Metric
R&D Effort
Assumes that profiting from
innovation requires competing in
the Product Market
In the disk drive industry, changes in
technological leadership equals changes in
market leadership
Christensen, 1997, p.23
Indeed, biopharmaceuticals is currently undergoing a
significant shift in the underlying S-Curve
Performance
Maturity/diminishing returns
“Biology-based” drug
development
Take-off
“Chemistry-based” drug
development
1970s
1990s
Time/effort
And, the life sciences revolution will likely usher in key
S-curve transitions for the forseeable future
Are established firms in the
pharmaceutical industry fated to
the gale of creative destruction?
Should biotechnology firms
premise their competitive
advantage on competition with
established pharmaceutical firms?
An alternative is contracting as a start-up
commercialization strategy
R&D
Investment
Production & Marketing
Alliance
Licensing Revenues
Acquisition
Profiting from Innovation Through Contracting
with more established product market competitors
Biotechnology!


Radical Innovations
New Organizational Forms
–
–
–
Entrepreneurial Start-Ups
Smaller Firms
High-Powered R&D Incentives

University Involvement

YET….
–
–
Commercialization Achieved through Cooperative
Development and Marketing btw Entrepreneurial Start-Ups
and More Established Pharma Firms
Despite 30 years of radical innovation, biotechnology firms,
by and large, continue to commercialize through cooperation
with established pharmaceutical, agricultural products, or
medical device companies
Biotech – Big Pharma Collaborations Remains
a Central Commercialization Approach for
Biotechnology Firms!
For biotechnology entrepreneurs,
commercialization strategy is becoming an
ever more important strategic choice...

Compete in the Product Market
Versus

Cooperate via the Market for Ideas?
The Benefits of Commercialization
via the “Market for Ideas”…

Avoiding Duplicative Investments
– Costly Marketing & Manufacturing Assets
– Imitative R&D Programs

Taking advantage of “High-Powered” Research
Incentives in Small Firms
– Product Market Assets v. Entrepreneurship

Softening product market competition
– Extending product market franchises
Effective commercialization depends on translating
a technology into a value proposition which is
dependent on key complementary assets…
MANUFACTURING
MARKETING
CORE TECHNOLOGY
&
INNOVATIVE KNOW-HOW
DISTRIBUTION
COMPLEMENTARY
TECHNOLOGIES
Why is trading in an ideas market so hard?

The Disclosure Problem
–


Figuring out the “price” for an idea requires
information which intrinsically reduces its value
The Contingency Problem
– Value of Ideas depends on factors such as market
demand, existence of other technologies
The Perception Problem
– Different individuals perceive the value of an idea
differently prior to product market experience
When does the “disclosure problem” matter?
Innovation
Bob Kearn’s
Intermittent
Windshield
Wiper
DeCode Genetic’s
Gene Markers for
Heart Disease
Critical “Secret”
Knowledge
Was the secret
protected?
The concepts of variablespeed windshield wiper
Yes, but enforcement
was incredibly costly
Overproduction of FLAP
protein (which is
predicted by gene
markers) dramatically
increaseses heart
disease risk
Yes, but rights actually
belonged to Bayer AG,
rather than DeCode
The Product Market Versus the Market for Ideas….
Effective Strategy Depends on the Choosing a
Route which Maximizes Profits, Given the StartUp Commercialization Environment
The Drivers of Commercialization Strategy

To maximize both the Size and Share of the
Innovation “Pie,” technology entrepreneurs must
consider two key features of the
commercialization environment…
–
The Degree of Excludability
–
The Degree to Which Established Firms Possess
Control over Specialized Complementary Assets
The Degree of Excludability is the Ability of
Forestall Imitators from Copying your Technology

Formal Intellectual property protection
–
Patents


–
Copyrights

–

20 year length
The right to prohibit “producing”
The right to prohibit “copying”
Trademarks
Ability to Forestall Reverse Engineering
–
–
The ability to forestall competitive development
More than simply trade secrecy
There has been a dramatic rise in the rate of
patenting in the US and around the world!
What are complementary assets?
Those assets necessary to translate an
innovation into commercial returns
Competitive
manufacturing
Distribution
Core
technological
know-how
Complementary
technology
Services
Suppliers
Established firms often control the specialized
Complementary Assets necessary to translate new
technology into commercial returns
MANUFACTURING
MARKETING
CORE TECHNOLOGY
&
INNOVATIVE KNOW-HOW
DISTRIBUTION
COMPLEMENTARY
TECHNOLOGIES
Complementary assets can only be a
source of strength if they are tightly held
Innovation
Genentech’s
Synthetic Insulin
iPod / iTunes
Complementary
Assets
How tightly held?
Manufacturing,
Tightly held by Eli Lilly. Lilly
Regulatory Expertise, exploited power in initial
MD Relationships
deal, but ongoing
disagreements led to costly
litigation
Artistic Content,
including historical
catalogues
Medium, since there are
many record companies.
Jobs plays them off against
the other, while leaving
enough on the table to
achieve a comprehensive
arrangement
The inability of biotechnology academic
entrepreneurs to capture the majority of the
value associated with their innovations is a
consequence of the strong and specialized
complementary asset portfolios held by
downstream players in the pharmaceutical,
medical device and agricultural technologies
sectors
How do Biotech Entrepreneurs Choose a
Commercialization Strategy
Effective Commercialization Strategy
Depends on Assessing Two Key Questions
Do incumbent’s
“complementary assets”
contribute to value proposition
from new technology?
No
Yes
Can invention
by the startup preclude
effective
development
by the
incumbent?
No
Yes
Industry Dynamics Are A Consequence of
the Commercialization Environment
Do incumbent’s complementary
assets contribute to value
proposition from new
technology?
No
Yes
Can invention
by the startup preclude
effective
development
by the
incumbent?
No
The Attacker’s
Advantage
Reputation-based
ideas trading
Yes
Greenfield
Competition
Ideas Factories
Differences in Commercialization Strategy
Across Industry Result from Differences in
the Commercialization Environment
Do incumbent’s complementary
assets contribute to value
proposition from new
technology?
No
Yes
Can invention
by the startup preclude
effective
development
by the
incumbent?
No
Disk Drive
Industry
Cisco
Yes
Video Games
Biotechnology
Some Evidence:
The MIT Commercialization Strategies Survey
Figures represent the rate of Do incumbent’s complementary
cooperation within each
assets contribute to value
“cell”
proposition from new
technology?
No
Yes
Can invention
by the startup preclude
effective
development
by the
incumbent?
No
Yes
14%
30%
34%
56%
But...
When does a “Cooperation
Strategy” Make Sense for a
biotechnology entrepreneur?
How do I implement a
cooperation strategy?
Too early?


Embryonic technology is
often too speculative to
allow for an effective
bargaining position
Moreover, start-up
innovator cannot threaten
to be an effective and nearterm product market
competitor
Too Late?

Investing too far into the value chain
likely leads to ineffective product
development and incurring sunk
investments that are duplicative with
the resources of potential partners
–
ImClone’s Erbitux drug actually was
quite promising but led to significant
shareholder losses due to ImClone’s
insistence of managing late-stage drug
development
So, when to cooperate?
Returns to
Cooperation
Concept
Exploration /
Prototyping
Commercialization
Ideas
Generation
TIME
At each stage, consider the two key questions:
Do incumbent’s
“complementary assets”
contribute to value proposition
from new technology?
No
Yes
Can invention
by the startup preclude
effective
development
by the
incumbent?
No
Yes
The timing of cooperation is closely tied to the excludability
environment – the pace of licensing deals increases dramatically after
patent rights are granted (resolving uncertainty over scope, etc)
2.5
2
Hazard ratio
1.5
1
0.5
0
-30
-20
-10
0
10
20
30
Month window to/from patent allowance
Gans, Hsu and Stern, 2008
Final Thoughts

The promise of the life sciences and biopharmaceutical innovation
offers the promise (but not a certainty) of dramatic opportunities for
improvement in our treatment of disease and the human welfare.
–

Not simply a matter of exploiting “technological opportunity,” the
economic, social and health benefits from biopharmaceutical
innovation depends crucially on effective institutions and law
–

How can we ensure that we realize the “life sciences” century?
Shaping both the incentives to innovate and the ability to maximize the
social value arising from scientific discoveries and technological
innovation
But, in part because the underlying science and technology are
advancing so rapidly, many key challenges and controversies reflect
the need for institutions and the law to “catch up” with the life
sciences revolution
Thank You!