Innovating at the speed of the 21st century in pharmaceuticals
The CEO of Eli Lilly offers perspectives on
accelerating change in the industry.
Eli Lilly and Company is an
innovation-driven biopharmaceutical company that aspires to make a significant
contribution to humanity by improving global health in the 21st century. In
this article, part of our Biopharma Frontiers series on how the pharmaceutical industry is evolving and how
leaders can adapt, David A. Ricks, the chairman and CEO of Eli Lilly, discusses
the opportunities and rewards for innovation and the implications for industry
business models. This article is an edited summary of his conversation with
McKinsey.
By any measure, pharma is better off today than it was five years
ago. Theoretical advances are being turned into biomedical research and then
into products that transform patients’ lives. But ideas can take as long as 15
years to play out because most advances—genomics, mass-produced antibodies, new
drug platforms, and clinical insights—are highly iterative. For those excited
about mRNA therapy or the next new thing, it’s a reminder that we need to
invest wisely and be confident. The past three or four years have been very good,
but they reflect effort over a long period.
Today’s industry is undergoing a shift
toward specialty medicines for acute diseases and away from primary care for
big populations with less-severe conditions. That’s partly because of the
problem in demonstrating a meaningful difference for patients relative to
standard of care. If you have melanoma and a PD-1 inhibitor improves your life
expectancy from six months to three years, everybody gets it; we don’t have to
develop a lot of real-world evidence about quality of life and patient-reported
outcomes. But when improvements are more incremental, people struggle to see
the value—even though it’s not incremental at all if you add it up over
millions of people.
Accelerating
innovation and product life cycles
One of the reasons we like our industry is
that it’s sustainable: you invent something, and then you have a decade to plan
the next thing. But now we’re entering an era where the biopharma innovation
machine is working at a pace that outstrips the life of the patent. For the
first time, we’re seeing technical obsolescence in pharma, where the product
life cycle is shorter than the intellectual-property cycle. That’s already
happening in virology and beginning to happen in oncology. The losers will be
those that can’t innovate fast enough.
Paradigms can be changed, as we’ve seen in
oncology. When you don’t have off-target toxicities—adverse effects on targets
other than those intended as part of the treatment—you can think differently
about regulatory review. And when you’re treating an acute disease such as
cancer, you don’t have the long-term risks. Regulators have adapted, and so has
drug development.
Now we’re looking at something like five
years from the first human dose to approval for targeted therapies in oncology.
A couple of years ago, the average was ten, so that’s a profound change. If you
consider the industry’s current carrying costs and running costs and R&D
infrastructure, cutting development times in half would be fundamental. The
question is, can you reduce development times in areas beyond oncology?
There’s potential for highly targeted
therapies for infectious diseases, but chronic diseases will probably come
later, because predicting long-term side effects is still very difficult and
it’s a regulatory issue. Even so, we’re seeing things speed up, especially in
patient-recruitment times. Lilly’s average prelaunch period is about nine years
from the first human dose to approval and marketing. On average, about three
years of that is spent recruiting people into the study. If we could organize
everyone at the beginning, we’d go from nine years to six, which would create
profound advantage and get therapies to patients faster.
Rethinking
portfolio management and strategic focus
Therapeutic areas are getting so large
that we’re seeing pure-play companies of real scale in segments such as
oncology. There’s enough value in some segments to focus on them exclusively,
with markets of $30 billion to $40 billion or more. This specialization will
speed up learning curves and timelines, but it also creates new risk because a
disruptive innovation or a change in government policy can change your business
model overnight. This takes pharma companies back to the age-old debate on
focus versus diversification.
At Eli Lilly, we’ve chosen to tighten our
focus but not become a pure play in anything. That’s a hard path, but we think
carefully about how we stack up against the companies that specialize in a
segment, such as diabetes, and what role is played by portfolio effect. It’s
not just about products but expertise. There’s only so many people in a given
field who can do world-class drug development; do they work for you or someone
else? The war for talent is escalating, particularly in hot areas such as
immuno-oncology.
Getting
rewarded for innovation
Once you’re past drug development, you
need to think about how you launch your drug. I think the industry, regulators,
and payors all have an opportunity to get more sophisticated about what it
takes to launch a drug in a given therapeutic area and get it reimbursed. We’ll
see more of a value-pricing concept in which pharmaceutical companies get paid
for the value they deliver to patients. You’ll probably lose out if you don’t
meet the innovation threshold that gets rewarded, but there are benefits, too.
You can develop a big data package in a sample size similar to your population
so that you can say to a payor, “If you pay $10 a day for this therapy, you’ll
save money. Let’s measure it together, and you can decide whether or not to
renew.”
The next evolution is saying, “We believe
in our data, and what we want to get paid for is the value created in your
population.” A lot of healthcare reform is about shifting risk around in the
system. This new step will shift risk to the innovator on delivery but remove
the bigger risk of uncertainty, driving down pricing. That’s exciting, and it
will help our business model if we can manage to execute and build trust with
payors.
Being able to use data in this way will
also shift the burden of proof to other parts of the healthcare system. People
will be forced to measure how efficient a hospital visit is and how effective
primary care is at maintaining chronic diseases. Whenever we go out and measure
these things, we see how high the bar sometimes is for medicines relative to
all this other stuff. And we know a lot about medicines from controlled
experiments.
The risk companies have to consider: Will
our trial results extrapolate? Did we run a tougher test than the general
population, or an easier one? People will have to think about making their
Phase III design robust enough to scale. But more relevant data is something
that could change the industry and make it grow in a static healthcare market.
At Lilly, we need to tell a story of pure
innovation that creates step-change improvements in patients’ lives, such as
insulin that takes effect immediately so people with diabetes don’t have to
measure what they eat. But then you have the competition between pure
innovators, incremental innovators that take off-patent products and make them
more convenient, and mixed models. We believe the market needs to sort that
out. The rules of engagement globally aren’t good at recognizing these
differences, and as a result we’re probably under rewarding innovation and over
rewarding other things.
Externalizing
in R&D and beyond
At Lilly, if we see a new technology where
we can supplement our know-how with a partner’s, it can be very powerful. We’ve
had a lot of success in our external portfolio by taking options in
product-focused companies that are set up and run with a single purpose. It’s a
crisp, fast, capital-efficient model. We look at the opportunities and get to
an answer, and if it’s no, we don’t waste our time and money. But if it’s yes,
we’re happy to invest because we’d still be working on the problem ourselves if
we didn’t.
Recently, pharma has seen a lot of deals
of one kind or another, and they will continue. In the preclinical and early
phases, all the evidence shows that biotech has been much more productive than
Big Pharma, and trades have rocketed as a result. But Big Pharma has a huge
advantage in getting capital in the late and go-to-market phases. Outside a few
specialty markets, we still don’t have enough new breakout companies, and
they’ve yet to show they can take a beginning-to-end approach that’s different
from or better than what the old familiar names are doing. But some leaders
have said, “Let’s tap into that improved productivity in early R&D.”
Capital allocators and venture capitalists and even early IPO players are much
more stringent than Big Pharma has been with its assets, so they get the
productivity.
When I go to my research team, I don’t
talk about which therapeutic areas (TAs) we want to get out of; others do, but
you risk becoming an uninformed buyer and losing your core capability in this
new TA-focused world. Instead, my vision is to compete in a much more
transparent way so that your internal teams think they’re competing for your
resources with a venture-backed company, and vice versa. But there’s a
frictional cost to deal making, though the productivity advantage on externally
sourced assets has so far been enough to overcome it at the scale of the
overall industry. Hence you see all the Phase I and Phase II asset sales going
on. We’re probably finding a market equilibrium.
So what’s next? Maybe more early investing
in options and rights by Big Pharma and making the membrane between internal
and external teams more permeable. The other place where companies could be
more aggressive is later in the life cycle. Because of the stickiness of
everything we do, there has been less commoditization than perhaps there should
be, whether in manufacturing or services such as pharmacovigilance. Some
activities, particularly those late in the life cycle and at launch, are too
strategic to trade out. But in early phases, you have expertise gaps, and
post-launch, when things are stable, our cost structure is probably not as
competitive as it could be. By pooling resources, we might be able to develop a
shared model that creates value for everyone.
Today’s industry is more volatile than
before because of competitive pressure, the innovation cycle, and companies
responding to margin demands from investors. But the gains for winners are
bigger than ever, and so too will be the downside for those who lose. Being
nimble, fast, and attuned to the outside world and having the right people—all
these basics matter more than ever.
By Martin Elling and Dan Tinkoff
https://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights/innovating-at-the-speed-of-the-21st-century-in-pharmaceuticals?cid=other-eml-alt-mip-mck-oth-1710
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