How Pharma’s Business Model for Innovation Can Unleash Tremendous Value for Products All Around Us
In the pharmaceutical industry, new products are often conceived of and prototyped by small innovators that subsequently partner with an incumbent leader to commercialize, manufacture, and sell a final offering. This balance is efficient and has led to a system which promotes more innovation, more capital at work, and more products reaching the market. Applying this model to other industries with similar opportunity and constraints could unlock tremendous value and is necessary to consider due to the pressures faced by many physical product companies. Specifically, materials-enabled products that exist all around us, including everything from transportation, to cooling, to computing, to energy storage devices, can be revolutionized with this approach and bring our world closer to the future.
What is the business model for innovation in the pharmaceutical industry?
Developing a new pharmaceutical product takes a very long time; by many accounts more than fifteen years from original conception to market introduction. Adding to the complexity is that vastly different skill sets, competencies, and even organizational cultures are required at different points along the journey. In the early stages innovative thinking and rapid prototyping are most important; at later stages adherence to a strong project plan and risk mitigation mindset are critical. It is rare for any single entity to possess all these characteristics and as such the market has generally settled on splitting the value created between small innovators and incumbent leaders. Even in cases where an incumbent generates early stage projects, it is typically cordoned off from the larger organization to yield the same desired result of a small innovator’s speed and culture.
In addition, for almost all pharmaceutical products, specific levels of government approval are also required. There exists today a strong understanding of the market value of drug development projects based on the stage of development as benchmarked against the U.S. Food and Drug Administration (FDA) trials. This market is largely private, but very liquid, with billions of dollars’ worth of companies acquired before products reach the market, i.e. “pre-revenue”. This acquisition activity signals to early investors that they will not have to wait until products are on the market to see a return, which increases the financing available for early stage projects at small, innovative firms in the first place. This virtuous cycle has fueled a gold rush in drug development in the past two decades that is changing our future as humans.
How could this apply to materials-enabled products?
There are many parallels between the commercialization challenges of materials-enabled and pharmaceutical products: long timelines, huge potential outcomes, multiple required disciplines, and an opportunity for long term differentiation and brand building in successful cases.
In contrast, there is a dearth of funding for early-stage materials-enabled products from private investors, it is not typical for materials-enabled products to be commercialized by a mutually beneficial partnership between nimble innovator and powerful incumbent, and there is no common market or valuation standard for materials-enabled projects. These differences are interrelated and support a vicious cycle where materials-enabled products are harder to launch, have less likelihood of reaching a market successfully, and have few viable pathways to demonstrate a lucrative return for investors or entrepreneurs. The world may be trapped in this cycle today but fortunately we can move forward and build a system with massive incentives to create products that improve the lives of billions of humans.
To build this new cycle, we can start by normalizing the process of creating strategic partnerships between innovators and incumbents with a goal of delivering to or creating huge markets. This requires strong leaders on both sides of the table that are willing to solve the challenges associated with pioneering a business model new to the industry. We’ve begun this work at Nelumbo, and are joined by many outstanding companies including Zymergen, Checkerspot, and other pioneers focused on delivering powerful materials-enabled products through strategic partnerships.
Then we can build on these successes as a market emerges for materials-enabled projects at all stages, where incumbents compete to partner with innovators developing enticing new products. It will be a natural evolution for incumbents to generate valuation frameworks — likely borrowing from prior experience — as they consider how to put large amounts of capital to work and seek the greatest risk-adjusted return. In a time when chemicals and materials companies are increasingly viewed by shareholders as failing to differentiate and develop new specialty (high margin) products, an accessible market that can stock pipelines full of breakthrough new materials-enabled products that represent billions in new potential revenue is an attractive proposition.
From here, human nature will tip the scales. Where there is increasing demand, increasing supply will follow: with a greater chance of liquidity and more certainty on investment returns from prior examples, entrepreneurs and investors will have increased confidence to try their hand at this approach. Not all will succeed, but the successes that occur will create a large story that many will want their part in. When there is significant individual appeal to join this effort the vicious cycle will be replaced with a system where there is no shortage of new products, capital available to build, or liquidity opportunities for those that emerge successful.
Skeptics at this point may identify the risk of competitors entering and commoditizing materials-enabled products relative to novel pharmaceutical products. It is true that materials-enabled products can typically be re-created on a quicker timescale, and thus present less defensibility and potentially a lower return on investment over the full lifespan of a project. However, doesn’t this simply increase the need to reduce development costs, increase likelihood of success, and most importantly increase the rate of new projects developed and brought to market? Forgoing investment altogether in commercializing a field of technology because it may be replicated in the future isn’t a sustainable strategy — it’s a fear-based decision and a delay tactic. If we don’t advance the capabilities of our products through new materials, eventually other industries will become limited by these products. Electric vehicles can only go as far as the energy stored in their batteries, computers can only process as fast as their semiconductor chips can transport electrons (even with quantum computing this will remain the same, a materials-limited problem), and cooling devices (one of the largest climate challenges of our time) are only as efficient as the materials they are made of.
To create the products that will be the backbone of our society tomorrow, let’s borrow from an industry that has exploded in the past two decades. Let’s create massive opportunities with materials-enabled products by changing the game and promoting a system where building these products is an achievable and rewarding dream for a generation of inventors.
