In its 30 years of life, the biotechnology industry has attracted more than $300 billion in capital. Much of this investment has been based on the belief that biotech could transform health care. The original promise was that this new science, harnessed to new forms of entrepreneurial businesses that were deeply involved in advancing basic science, would produce a revolution in drug therapy. Unencumbered by the traditional technologies and organizations of the established pharmaceutical giants, these nimble, focused, science-based businesses would break down the wall between basic and applied science and produce a trove of new drugs; the drugs would generate vast profits; and, of course, investors would be handsomely rewarded.
So far, the promise remains largely that. Financially, biotech still looks like an emerging sector. Despite the commercial success of companies such as Amgen and Genentech and the stunning growth in revenues for the industry as a whole, most biotechnology firms earn no profit. Nor is there evidence that they are significantly more productive at drug R&D than the much maligned behemoths of the pharmaceutical industry.
This disappointing performance raises a question: Can organizations motivated by the need to make profits and please shareholders successfully conduct basic scientific research as a core activity? For 30 years, debate has been intense about whether business’s invasion of basic science—long the domain of universities and other nonprofit research institutions—is limiting access to discoveries, thereby slowing scientific advance. But the question of whether science can be a profitable business has largely been ignored.
As always, the prevailing outlook in the industry itself is that the revolution in drug creation will succeed; it will just take a little longer than anticipated. That may be wishful thinking. Over the past 20 years, I have conducted extensive research on the strategies, structure, performance, and evolution of the biotechnology and pharmaceutical sectors. I learned that the “anatomy” of the biotech sector—much of it borrowed from models that worked quite well in software, computers, semiconductors, and similar industries—is fundamentally flawed and therefore cannot serve the needs of both basic science and business. Unless that anatomy changes dramatically, biotech won’t be able to attract the investments and talent required to realize its potential for transforming health care.
By “anatomy,” I mean the sector’s direct participants (start-ups, established companies, not-for-profit laboratories, universities, investors, customers); the institutional arrangements that connect these players (markets for capital, intellectual property, and products); and the rules that govern and influence how these institutional arrangements work (regulations, corporate governance, intellectual property rights). For biotechnology to fully succeed, its anatomy must help the players collectively to excel in three ways: managing risk and rewarding risk taking, integrating the skills and capabilities that reside in a range of disciplines and functions, and advancing critical knowledge at the organizational and industry levels.
The parts of an industry’s anatomy should support one another in meeting these challenges. In biotech, they work at cross-purposes. For example, the way the industry manages and rewards risks—how businesses are funded—conflicts with the long R&D timetable needed to create new drugs. The fragmented nature of the industry, with scores of small, specialized players across far-flung disciplines, is a potentially useful model for managing and rewarding risk, but it has created islands of expertise that impede the integration of critical knowledge. And biotech’s market for intellectual property, which allows individual firms to lock up the rights to basic scientific knowledge, limits the number of scientists who can advance that knowledge by learning through trial and error.
While all this sounds pretty gloomy, it does not mean that the industry is doomed. It does not mean that science cannot be a business. It does mean that biotech’s anatomy needs to change—an undertaking that would have a major impact not only on drug R&D and health care but also on university- and government-funded scientific research, other emerging industries engaged in basic science, and the U.S. economy. The purpose of this article is to provide a framework for such an undertaking and to offer some ideas about the new organizational forms, institutional arrangements, and rules that will be required.
The Biotech Experiment
Science-based business is a relatively recent phenomenon. By “science-based,” I mean that it attempts not only to use existing science but also to advance scientific knowledge and capture the value of the knowledge it creates. A significant portion of the economic value of such an enterprise is ultimately determined by the quality of its science.
So friends how was it? What is your opinion about the business model adopted by the biotech industry? Does it need a change? If yes what could be that change?
