March 15th, 2007
Biotechnology firms constitute a subsector of the larger pharmaceutical industry (“drug companies with needles,” we call them), but to date have been spared from the blood sport of American health punditry, pharma-bashing. While drug firms routinely are castigated for their sins, real and imagined, biotech firms have been appreciated as innovative and entrepreneurial startups (rather than, say, rapacious dinosaurs with me-too molecules that overmedicate teens, overmedicalize social problems, and prostitute the Food and Drug Administration). But, given the free-floating hostility in health care, where everyone feels he is paying too much and getting too little and that someone else is to blame, biotech’s 15 minutes of fame is coming.
While there is no avoiding some biotech-bashing, and a thorough bashing of any antisocial behavior is to be applauded, it would be nice if the industry were blamed for what it has done wrong rather than for what it has done right or not done at all. One problem is that there is so little good reading material concerning profitability; extent of research and innovation; capital financing; mergers and acquisitions; contractual relationships with larger pharmaceutical firms; and that most euphonious of neologisms, “value-based pricing” for biopharmaceuticals. Into this quasi-void steps Gary Pisano, a professor at Harvard Business School (HBS), who in Science Business describes the technologies of biotechnology, the business imperatives for the industry (risk management, systems integration, organizational learning), the failures to date in developing organizational models in light of those imperatives, the consequent thirty-year record of financial losses (making this sector the worst investment ever), and what he sees to be the strategic alternatives facing firms whose core competency is the creation of new knowledge and whose core concern must be how to get paid to do it.
Are Biopharmaceutical Prices Too Low?
Science Business is a bit of a tough read for anyone who cannot combine “vertical integration” and “monoclonal antibody” in the same sentence. But it is head and shoulders above anything we have on the topic. The book pays for itself just with the chapter on (lack of) profitability. While Amgen, Genzyme, and Genentech are bestowing employees with stock options that actually are worth something, the overall record of the industry has been one of absorbing huge sums from angel investors, venture capitalists, pharmaceutical partners, stock market enthusiasts, and convertible bond purchasers without returning it (much less giving it back with something called “return on investment”). This alone should complicate the bashing of biotech firms that price their products at ungodly levels. Is America ready for the idea that biopharmaceutical prices have been too low?
But Pisano’s interest is not primarily in profitability, product development, or pricing. Indeed, it is curious how little he has to say on pricing. He does not seem to have connected with the world of consumers, employers, taxpayers, insurers, and others who actually pay for these things, as distinct from the scientists, managers, and capitalists who create them.
Pisano brings to bear on the biotech industry the analytic framework of institutional economics and organizational sociology, for which a central question is whether entities with a competency in one domain (here, drug research and development) should be linked with the other related domains (here, drug manufacturing and marketing) through ties of ownership, complex and long-term contracts, or short-term and nonexclusive contracts. The author describes the efforts pursued by some biotech firms to become “fully integrated pharmaceutical companies.” (Do we need another acronym? How about FIPCO?). He describes efforts by a second category of firms to remain focused on out-licensing analytic tools and genomic databases. He describes efforts by a third category of biotech firms to pursue drug development and then create joint ventures for manufacturing and marketing with big-pharma conglomerates, cementing the ties with stock swaps, up-front payments, milestone contributions, and complex financial instruments that only an investment banker could love.
The biotech industry gets plenty of love but not much respect from our author in this survey of organizational strategies. “Make” versus “buy” versus “partner”: all three options have been tried and all have failed (see chapter on profitability).
Is Japan The Answer Again? Invoking the Genentech-Roche/Keiretsu Model
Pisano is an HBS professor, and for HBS professors books are consulting platforms. A strong consulting platform must demonstrate knowledge of the sector (check), stroke the egos of industry leaders (check), profess a cataclysmic view of the sector if things go on the way they have been going (check), and then offer a simple-to-grasp solution. For Pisano, the solution is experimentation with the “quasi-public corporation” structure, in which research-oriented biotech firms are publicly traded (and hence entrepreneurial) but with a large, controlling block of stock held by a big pharmaceutical partner (who is patient financially and offers complementary competencies in manufacturing and marketing). The relationship between Genentech and Roche is the leading (and only, it should be added) example of this relationship, and it was worked very well for them. The structure is also to be found in the Japanese Keiretsu business model, which was the solution to the ills of all American business until that economy went into a tailspin a decade ago.
It is heartening to see the application of institutional analysis to this technology-driven and policy-relevant industry. Time will tell whether the quasi-public corporate form will outperform full vertical integration and contractual promiscuity as the best corporate strategy for the biotech sector. While waiting, we can focus on how the biotech industry packages, prices, and distributes its products (revenue being a prerequisite for profitability). This gets us to coverage and reimbursement policies by Medicare and private insurers and to pricing strategies (value-based or otherwise) on the part of biotech firms. Whatever happens, remember this: Whenever anyone suggests that you invest in the science-based industry of the future, hold onto your wallet.Email This Post Print This Post